Australian master superannuation guide 2019/20 [23rd edition.] 9781925894288, 1925894282

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About Wolters Kluwer Wolters Kluwer is a leading provider of accurate, authoritative and timely information services for professionals across the globe. We create value by combining information, deep expertise, and technology to provide our customers with solutions that improve their quality and effectiveness. Professionals turn to us when they need actionable information to better serve their clients. With the integrity and accuracy of over 45 years’ experience in Australia and New Zealand, and over 175 years internationally, Wolters Kluwer is lifting the standard in software, knowledge, tools and education. Wolters Kluwer — When you have to be right. Enquiries are welcome on 1 300 300 224. First published....................................August 1997 13th edition....................................August 2009 2nd edition....................................July 1998

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Preface

The regulation of superannuation in Australia and the income tax system with which it interacts are notoriously complex and changeable. The Australian Master Superannuation Guide explains the rules and answers your superannuation questions in the simplest possible way. Examples, tables, charts and checklists are used extensively. The 2019/20 Australian Master Superannuation Guide is the 23rd edition of this annual publication in Wolters Kluwer’s Master Guide series. The Guide is an invaluable handbook and essential reference on superannuation law and practice in Australia. It is designed to help trustees, accountants, auditors and other practitioners who face the perennial changes to superannuation regulation and taxation and need a clear analysis of the law. It serves as a handy first point of reference for specialist advisers and consultants who require a comprehensive and up-to-date resource. Academics and students will also find the Guide a useful text and companion. In 2018/19, as in each of the previous 22 years since the Guide was first published, numerous new superannuation and taxation measures were announced, legislated and then commenced. The 23rd edition of the Australian Master Superannuation Guide is an indispensable resource to help you understand these reforms. It incorporates all the major tax and superannuation changes up to 1 July 2019 and provides discussion on many foreshadowed but not yet implemented changes. Throughout, the Guide rests on the solid foundation of the legislation, supplemented by references to official rulings and court and tribunal decisions. Cross-references at the end of most numbered paragraphs provide links to additional information in other Wolters Kluwer loose-leaf and online services. For users who need to keep up to date with changes throughout the year, the online updating version of the Guide is the logical choice. That version is fully updated at least four times a year, with changes to the law and new developments incorporated into the relevant chapters. The online version of the Guide, in addition to having a superior searching capability via Wolters Kluwer’s CCH IntelliConnect™ platform, provides useful links to the legislation, cases and approved forms discussed in the commentary. Wolters Kluwer August 2019

Wolters Kluwer Acknowledgments Wolters Kluwer wishes to thank the following who contributed to and supported this publication: Regional Commercial Director Lauren Ma Head of Content APAC — Research and Learning Diana Winfield Books Coordinator Nathan Grice

About the Authors James Leow LLB (Hons) MTax (NSW) also writes for the Australian Master Tax Guide and the Australian Master Financial Planning Guide. He was previously the principal contributor to, and editor of, the full range of Wolters Kluwer superannuation products, including the Australian Superannuation Legislation book, Australian Superannuation Law & Practice, and the Australian Practical Guide to SMSFs. Shirley Murphy BA (Hons) LLB (Hons) has for many years lectured undergraduate and postgraduate tertiary students in the areas of taxation and superannuation. She also works as a superannuation consultant and has contributed to a wide range of Wolters Kluwer publications including the Australian Master Tax Guide, Australian Master Financial Planning Guide and Australian Superannuation Law & Practice. Author Acknowledgments

The authors would like to thank the following for their contribution to this edition of the Guide: Jacqueline Campbell, Partner, Accredited Family Law Specialist, Forte Family Lawyers; Allan Coe; and Kevin Johnson, Director, Kevdi Pty Ltd.

List of Abbreviations The following abbreviations are used extensively in this publication. AAT

Administrative Appeals Tribunal

ABN

Australian Business Number

ADF

Approved deposit fund

AFCA

Australian Financial Complaints Authority

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investments Commission

ATC

Australian Tax Cases (CCH), from 1969

ATO

Australian Taxation Office

AWOTE

Average weekly ordinary time earnings

CA

Corporations Act 2001

CGT

Capital gains tax

CR

Corporations Regulations 2001

EST

(Australian) Eastern Standard Time

FBT

Fringe benefits tax

FC of T

Federal Commissioner of Taxation

FHSA

First Home Saver Account

FITR

Wolters Kluwer Australian Federal Income Tax Reporter service

FLA

Family Law Act 1975

FSCDA

Financial Sector (Collection of Data) Act 2001

FTR

Wolters Kluwer Australian Federal Tax Reporter service

FW Act

Fair Work Act 2009

FWC

Fair Work Commission

GIC

General interest charge

GST

Goods and services tax

ITAA36

Income Tax Assessment Act 1936

ITAA97

Income Tax Assessment Act 1997

ITAR

Income Tax Assessment Regulations 1997

ITTPA

Income Tax (Transitional Provisions) Act 1997

PAYG

Pay As You Go

PST

Pooled superannuation trust

RSA

Retirement savings account

RSA Act

Retirement Savings Accounts Act 1997

RSAR

Retirement Savings Accounts Regulations 1997

RSE

Registrable superannuation entity

Sch

Schedule

SCT

Superannuation Complaints Tribunal

SG

Superannuation guarantee

SGAA

Superannuation Guarantee (Administration) Act 1992

SGAR

Superannuation Guarantee (Administration) Regulations 2018

SIS

Superannuation Industry (“Supervision”)

SISA

Superannuation Industry (Supervision) Act 1993

SISR

Superannuation Industry (Supervision) Regulations 1994

SLP

Wolters Kluwer Australian Superannuation Law & Practice service

SMSF

Self managed superannuation fund

SRC Act

Superannuation (Resolution Of Complaints) Act 1993

TAA

Taxation Administration Act 1953

TAR

Taxation Administration Regulations 1976

TFN

Tax file number

TR

Taxation Ruling

HIGHLIGHTS OF 2018/19 CHANGES ¶1 Highlights of 2018/19 changes This edition has been updated to reflect developments that occurred (or remain proposed) up to 30 June 2019. The notable developments include the following. CHAPTER 1 — SUPERANNUATION IN AUSTRALIA ▪ Superannuation fund assets and other statistics updated ¶1-100 Proposed measures ▪ Proposed legislation for objective of superannuation ¶1-000 CHAPTER 2 — QUALIFYING FOR TAX CONCESSIONS ▪ Table of income tax laws dealing with superannuation taxation and concessions updated ¶2-020 CHAPTER 3 — SIS PRUDENTIAL SUPERVISION OF SUPERANNUATION FUNDS ▪ Superannuation trustees must comply with covenants relating to annual outcomes assessments, promoting financial interests of beneficiaries and MySuper products, if applicable ¶3-100 ▪ SIS covenants are civil penalty provisions in the SISA ¶3-100 ▪ Superannuation funds can accept downsizer contributions from 1 July 2018 ¶3-220 ▪ Superannuation trustees are prohibited from providing death and disability insurance cover to choice and MySuper members whose accounts are inactive for a continuous period of 16 months, unless directed otherwise by the member ¶3-240 ▪ From 1 July 2019, a cap is imposed on administration fees, investment fees and prescribed costs charged to members by superannuation entities, and exit fees are prohibited ¶3-250 ▪ Superannuation providers are required to transfer choice or MySuper member accounts with balances below $6,000 which are inactive for a continuous period of 16 months to the Commissioner; the ATO is empowered to proactively consolidate ATO-held superannuation money into an active account for a member ¶3-390 ▪ SISA s 68, which prohibits superannuation trustees from offering inducements, is a civil penalty provision from 6 April 2019; an objective test applies to determine the intended effect of the trustee’s actions ¶3-475 ▪ APRA approval is required for a person to hold a controlling stake in a body corporate RSE licensee ¶3488 ▪ RSE licensees must hold an annual members meeting to discuss a superannuation fund’s performance and operations; the chair of the board of directors of the RSE licensee, individual trustees, executive officers and the fund’s actuary and auditor are required to attend the meeting ¶3-495 ▪ APRA may give certain directions to an RSE licensee in prescribed circumstances, including where APRA reasonably believes the RSE licensee either has or is likely to contravene its prudential obligations, or there are financial risks to members’ interests or the financial system more generally ¶3-855 ▪ From 1 July 2019, the provisions for protection of whistleblowers in the corporate and financial sector are located in Pt 9.4AAA of the Corporations Act 2001; the SISA whistleblower provisions have been repealed ¶3-880 ▪ Supervisory levies for 2019/20 updated ¶3-900 Proposed measures ▪ Trustees can only provide insurance to a choice or MySuper product member if directed by the member, where the member is under 25 years old and begins to hold a product on or after 1 October 2019, or

holds a product with a balance less than $6,000 ¶3-240 ▪ Bills in parliament (now lapsed) have proposed a wide range of regulatory and prudential measures ¶17520 ▪ Treasury has released various consultation papers on superannuation reforms, including binding death benefit nominations and kinship structures, universal terms for insurance within MySuper ¶17-600 CHAPTER 4 — FINANCIAL SERVICES REGULATION ▪ Exemption for superannuation platforms from the shorter PDS regime has been extended ¶4-130 ▪ Notification requirements to members with inactive accounts about the SISA insurance opt-out rules have been prescribed; ASIC has released guidelines on member communications in relation to insurance cancellation for inactive members or before inactive low balance accounts are transferred to the ATO ¶4175 ▪ The commencement date of the product dashboard publication and portfolio holdings disclosure rules has been deferred ¶4-250 ▪ The requirement for generic superannuation and retirement calculator to include the present value of future receipts and payments using an assumed rate of inflation has been deferred ¶4-658 ▪ Design and distribution obligations have been imposed in relation to financial products, applicable from 6 April 2021 ¶4-700, ¶4-710 ▪ ASIC has been given product intervention powers that it can use proactively to reduce the risk of significant detriment to retail clients resulting from financial products ¶4-700, ¶4-720 ▪ ASIC legislative instruments and regulatory guides affecting superannuation products and issuers updated ¶4-800, ¶4-850 ▪ ASIC Reports and Information Sheets updated ¶4-860 CHAPTER 5 — SELF MANAGED SUPERANNUATION FUNDS Proposed measures ▪ Legislation to increase the maximum membership in SMSFs from four to six members was omitted from the Bill before the legislation was passed by parliament ¶5-200 CHAPTER 6 — CONTRIBUTIONS TO SUPERANNUATION FUNDS AND RSAs ▪ From 1 July 2019, certain individuals aged 65 to 74 who wish to make superannuation contributions may benefit from a one-year exemption from the work test ¶6-320 ▪ The First Home Super Saver Scheme allows money saved in superannuation to be used for a first home purchase from 1 July 2018 ¶6-385 ▪ From 1 July 2018, individuals aged at least 65 may make up to $300,000 of non-concessional contributions from the proceeds of selling their home ¶6-390 ▪ From 1 July 2017, a reversionary income stream can be paid to a reversionary beneficiary whether or not a condition of release has been satisfied ¶6-425 ▪ The concessional contributions cap is $25,000 for all individuals from 1 July 2019 ¶6-505 ▪ Individuals with a total superannuation balance below $500,000 may make additional concessional contributions where, from 1 July 2018, they have unused cap amounts from the previous five years ¶6505 ▪ The non-concessional contributions cap is $100,000 from 1 July 2019 ¶6-540 ▪ The processes for a taxpayer to request and for the Commissioner to issue a release authority have been consolidated ¶6-640 ▪ Tax is imposed on no-TFN contributions income at the rate of 32% for 2019/20 ¶6-685 ▪ The low income threshold and higher income thresholds have been increased for 2019/20 for cocontribution purposes ¶6-700

Proposed measures ▪ The government proposes that individuals aged 65 and 66 could make voluntary superannuation contributions from 1 July 2020 without needing to meet the work test ¶6-320 ▪ A Bill proposes the inclusion of the outstanding balance of a limited recourse borrowing arrangement in a member’s total superannuation balance from 1 July 2018 ¶6-490 ▪ The government proposes that individuals aged 65 to 74 with unused concessional cap space could contribute under the concessional cap carry forward rules during a year they are exempt from the work test ¶6-507 ▪ The government proposes that that individuals aged 65 to 74 whose non-concessional contributions, excluding contributions made under the work test exemption, exceed $100,000 could access the bring forward arrangements ¶6-545 ▪ The government proposes that the age limit for benefiting from spouse contributions will increase from 69 to 74 from 1 July 2020 ¶6-820 CHAPTER 7 — TAXATION OF SUPERANNUATION FUNDS, ADFs AND PSTs ▪ CGT roll-over relief in Div 311 applies to transfers of members' accrued default balances to a MySuper product within the same fund structure or in another superannuation fund ¶7-140 ▪ The tax relief for merging superannuation funds in Div 310 has been extended until 1 July 2020 ¶7-140 ▪ The withholding tax exemption for superannuation funds for foreign residents has been restricted, subject to transitional rules ¶7-400 Proposed measures ▪ Superannuation funds with interests in both the accumulation and retirement phases will be allowed to choose their preferred method of calculating ECPI; the actuarial certificate requirement when calculating ECPI using the proportionate method will be removed for funds where their members are in the retirement phase for the whole income year ¶7-153 ▪ The non-arm's length rules will be amended to ensure that complying superannuation entities cannot circumvent the rules by entering into schemes involving non-arm's length expenditure ¶7-170 CHAPTER 8 — SUPERANNUATION BENEFITS • TERMINATION PAYMENTS ▪ The low rate cap amount for the taxation of a superannuation member benefit is $210,000 for 2019/20 ¶8-210 ▪ The untaxed plan cap amount for the taxation of the element untaxed in the fund is $1.515m for 2019/20 ¶8-240 ▪ The ETP cap amount for the taxation of employment termination payments is $210,000 for 2019/20 ¶8820 CHAPTER 9 — MYSUPER • SUPERSTREAM ▪ Authority to offer a MySuper product may be refused or cancelled if APRA considers there are one or more reasons why an RSE licensee may fail to comply with its obligations ¶9-100 ▪ The enhanced trustee obligations for RSEs covering annual outcomes assessments and promoting the financial interests of beneficiaries have been prescribed as SIS covenants which apply to all regulated superannuation funds that offer choice products or MySuper products ¶9-300 ▪ The trustee remuneration reporting requirements have been deferred ¶9-650 ▪ APRA prudential standards and prudential practice guides updated; draft SPS 515 ¶9-720 ▪ Events-based reporting using MAAS and MATs ¶9-795 ▪ APRA letters to RSE licensees in 2019 ¶9-810 CHAPTER 10 — RETIREMENT SAVINGS ACCOUNTS ▪ RSA providers can accept downsizer contributions from 1 July 2018 ¶10-110

▪ An RSA provider must be a member of the AFCA scheme (within the meaning of the Corporations Act 2001) and must have an internal dispute resolution procedure that complies with the standards and requirements prescribed by that Act ¶10-220 ▪ AFCA has replaced the Superannuation Complaints Tribunal as the external dispute resolution body dealing with RSA complaints ¶10-220 Proposed measures ▪ From 1 July 2020, individuals aged 65 and 66 will be able to make voluntary superannuation contributions (both concessional and non-concessional) without being required to meet the work test ¶10110 CHAPTER 11 — TAX ADMINISTRATION • PAYG • TFNs ▪ From 1 July 2019, an income tax deduction is denied for certain payments where the notification and/or withholding requirements have not been met. ¶11-350, ¶11-360 ▪ Single touch payroll (STP) applies to all employers from 1 July 2019 ¶11-368 CHAPTER 12 — SUPERANNUATION GUARANTEE SCHEME ▪ The Productivity Commission recommends one default fund for new members to be chosen from a shortlist of up to 10 funds selected by an independent panel ¶12-050 ▪ Defences to director penalty provisions have been tightened ¶12-395 ▪ Single Touch Payroll reporting of payroll and superannuation information is extended to all employers from 1 July 2019 ¶12-525 ▪ From 1 July 2018, the Commissioner can issue directions to employers to pay unpaid SG liabilities with penalties for employers who fail to comply ¶12-550 ▪ From 1 July 2018, the Commissioner can issue an education direction to an employer to undertake an approved course relating to their SG obligations with an employer being penalised if they fail to comply ¶12-550 Proposed measures ▪ A Bill proposes that from 1 July 2018 certain high income individuals with multiple employers would be able to nominate that income from certain employers would not be subject to SG ¶12-070, ¶12-220 ▪ A Bill proposes that from 1 July 2020 an employer could not use salary sacrifice contributions to count as being in compliance with their SG obligations ¶12-180 ▪ A Bill proposes to tighten the law to combat illegal phoenix activities ¶12-395 ▪ The government proposed a 12-month SG amnesty for employers from 24 May 2018 ¶12-415 CHAPTER 13 — RESOLUTION OF COMPLAINTS ▪ AFCA commenced operations from 1 November 2018 and started receiving and resolving complaints from that date ¶13-005 ▪ ASIC cancelled the licences of two financial service providers that failed to become members of AFCA ¶13-005 ▪ AFCA is not able to provide compensation for non-financial loss in a superannuation complaint (AFCA superannuation determination — AFCASD 610019) ¶13-010 ▪ AFCA has published superannuation determinations and statistics on the number and types of complaints it receives ¶13-100, ¶13-610 CHAPTER 14 — SUPERANNUATION AND FAMILY LAW ▪ The Family Law Act 1975 (Cth) Pt VIIIB which deals with superannuation interests was renumbered from 23 November 2018. The chapter has been updated to include the renumbered section references ¶14-005 ▪ The Full Court of the Family Court set aside a superannuation splitting order as there had not been

procedural fairness given to the trustee of the superannuation fund. The wording of the superannuation splitting order did not comply with the Family Law Act 1975 s 90XT Pandelis & Pandelis [2018] FamCAFC 66 ¶14-045, ¶14-120 ▪ The Full Court of the Family Court upheld the finding of a de facto relationship. The appellant was married and maintained that he has having an affair and was not in a de facto relationship Nord & Van [2018] FamCAFC 75 ¶14-080 ▪ The Federal Circuit Court found that the failure of the wife’s solicitor to serve the trustee with a sealed copy of the court order which included a superannuation split amounted to the splitting order being impracticable. The order was varied Dalmans & Farber [2018] FCCA 2636 ¶14-095 ▪ A superannuation splitting order was made to enforce the payment of a cash sum due to the wife under a financial agreement Cummings & Warner (No 2) [2018] FCCA 2838 ¶14-130 ▪ The Full Court of the Family Court held that the trial judge could not make a superannuation splitting order without expert evidence on the nature, form and characteristics of a defined benefit fund interest Bulow & Bulow [2019] FamCAFC 3 ¶14-240 ▪ The Full Court of the Family Court held that the wife's contributions as a parent and homemaker were possibly indirect contributions to the husband's salary and therefore to the increase in his superannuation as a result of his eligibility for a hurt-on-duty pension Perrin & Perrin (No 2) [2018] FamCAFC 122 ¶14260 ▪ Updated rates of interest applied to the base amount of a superannuation split for the 2018/19 financial year ¶14-500 ▪ The uncertainty as to the meaning of the phrase “whenever a splittable payment becomes payable” was discussed but not determined by the Federal Circuit Court Dalmans & Farber [2018] FCCA 2636 ¶14-520 CHAPTER 16 — SUPERANNUATION AND TAX PLANNING ▪ Superannuation and financial planning — practitioner articles in 2018 and 2019 ¶16-700 CHAPTER 17 — LEGISLATION REVIEW • PROPOSED REFORMS ▪ Summary of Acts and legislative instruments in 2018/19 ¶17-330, ¶17-430 ▪ Lapsed Bills in parliament and draft legislation as at 30 June 2019 ¶17-520, ¶17-540 ▪ Proposed superannuation tax and regulation reforms ¶17-600 CHAPTER 18 — INSTANT REFERENCE — RATES, THRESHOLDS AND CHECKLISTS ▪ Superannuation rates and thresholds for 2019/20 ¶18-000 – ¶18-150 ▪ Approved forms — superannuation and taxation ¶18-730 – ¶18-745 ▪ 2019 SMSF annual return — what’s new ¶18-860 ▪ AFCA information page ¶18-933 ▪ ATO and ASIC calculators and online tools ¶18-960 – ¶18-970

1 SUPERANNUATION IN AUSTRALIA Objective of the superannuation system ¶1-000 Historical background

¶1-050

Superannuation industry profile

¶1-100

Regulation of superannuation industry

¶1-200

¶1-000 Objective of the superannuation system Superannuation generally comprises compulsory employer contributions under the superannuation guarantee (SG) scheme and voluntary member or salary sacrifice contributions. It is one pillar of the Australian retirement income system, together with the age pension and other voluntary savings. Over 80% of working age Australians have superannuation savings and superannuation makes up a significant proportion of all assets held by Australian households. Superannuation is a key component of the financial services industry and of the economy more broadly, with superannuation assets having increased from $245b in 1996 to $2.8 trillion in March 2019. Context for enshrining a superannuation objective in legislation The government considers that, as the superannuation system matures and superannuation assets increase, superannuation changes should be carried out in the framework of an objective that is enshrined in legislation. This is intended to promote consistency and confidence in the superannuation system. The Superannuation (Objective) Bill 2016, which was introduced into parliament on 9 November 2016, proposes the enactment of this government policy in a stand-alone Act. The introduction of the Bill followed a recommendation in the Financial System Inquiry (FSI) Final Report issued on 7 December 2014 for a clear statement of the objectives of the superannuation system to align policy settings, industry initiatives and community expectations. The Senate Economics Legislation Committee recommended in a report tabled on 14 February 2017 that the Bill be passed and that compliance of future superannuation reforms with the legislated objective be periodically assessed and reported on. The Committee considered that the objective as stated in the Bill would “enhance the stability of the superannuation system by creating a clear framework for assessing superannuation policy”. The Superannuation (Objective) Bill 2016 lapsed when parliament was prorogued for the May 2019 Federal election and will need to be reintroduced before it can become law. Objective “to provide income in retirement to substitute or supplement the age pension” The Superannuation (Objective) Bill 2016 proposes that the primary objective of the superannuation system is “to provide income in retirement to substitute or supplement the age pension”. This objective clarifies that the role of superannuation is to assist individuals to support themselves by providing income to meet their expenditure needs in retirement. Subsidiary objectives would provide a framework for assessing whether superannuation legislation is compatible with the primary objective. The following subsidiary objectives, as set out in the Exposure Draft — Superannuation (Objective) Regulation 2016, are proposed: • to facilitate consumption smoothing over the course of an individual’s life • to manage risks in retirement

• to be invested in the best interests of superannuation fund members • to alleviate fiscal pressures on the Australian government from the retirement income system, and • to be simple and efficient, and provide safeguards. The Objective Bill requires every Bill or regulation relating to superannuation to be accompanied by a statement of compatibility with the objective of the superannuation system. The statement must include an assessment of whether the Bill or regulation is compatible with the primary and the subsidiary objectives of the superannuation system.

¶1-050 Historical background In Australia, retirement incomes are funded privately through superannuation savings (both voluntary and compulsory) or publicly through the age pension. The SG scheme underpins the national retirement incomes framework by extending superannuation coverage generally across the workforce. The policy of superannuation for all Australians is a significant part of our tax and superannuation systems. Among the concessions and benefits provided by the Commonwealth through the tax system, superannuation is the second largest expense. Tax concessions have, for many years, encouraged employers to make superannuation contributions on behalf of their employees. Individuals have also been encouraged to provide for their own retirement, although tax concessions have particularly favoured high-income earners. Historical survey Before 1983, superannuation tax concessions were extremely generous — generally, contributions were deductible and earnings on the contributions were exempt from tax as long as the fund satisfied certain conditions. Lump sum benefits paid on retirement were virtually tax-free because only 5% was included in assessable income. The 1983 amendments resulted in benefits still being taxed at a concessional rate but less generously than before. The nature of the concession changed from virtually a tax exemption to a tax deferral, in that tax on the savings was postponed until they were withdrawn from the fund. From 1 July 1986, responsibility for regulating superannuation funds was transferred from the Commissioner of Taxation to the then Insurance and Superannuation Commissioner (ISC) through the introduction of the Occupational Superannuation Standards Act 1987 (see ¶1-200). In 1988, changes designed to tax retirement savings on an accruals basis and to reduce deferral advantages were introduced. Tax was imposed on fund income and on deductible contributions, generally at a flat rate of 15%. Until the 1990s, occupational superannuation generally only existed for white collar employees. The SG scheme which was introduced in 1992 made superannuation available to employees regardless of the type of their employment. Choice of fund rules, which commenced on 1 July 2005, gave most employees the right to choose the fund to receive the SG contributions made by their employer on their behalf. The matching of voluntary contributions made by low-income earners with a government co-contribution was introduced in 2003 (¶6-700). Surcharges on deductible contributions made by or on behalf of high-income earners and on “golden handshakes” by employers were imposed from 1997. These imposts were tempered by initiatives to allow tax rebates for contributions on behalf of non-working spouses, a savings rebate (abolished, however, after 12 months), and a tax exemption for the proceeds from the sale of a small business where the proceeds are used for retirement. The surcharges were abolished from 1 July 2005. From 1 January 2006, members may split with their spouse contributions made on their behalf in the previous year. Contributions splitting allows the couple to build two superannuation accounts, and this may have favourable tax consequences. Simplified superannuation from 1 July 2007

The taxation of superannuation was significantly reformed in a package of 11 Bills that were introduced into parliament in December 2006 and February 2007 and that generally commenced operation on 1 July 2007. These Bills changed and rewrote the law on contributions to superannuation entities, taxation of superannuation entities and benefits paid from superannuation entities. All the superannuation provisions in the Income Tax Assessment Act 1936 (ITAA36) were repealed and the rewritten law incorporated into the Income Tax Assessment Act 1997 (ITAA97). The simplified superannuation laws aim to overcome the complexity of the pre-1 July 2007 taxation of eligible termination payments, which included both lump sum superannuation benefits and employer termination payments. From 1 July 2007, there are two distinct taxing regimes: • one for the taxation of superannuation benefits, whether paid as a lump sum or an income stream, and whether paid to a member or to someone else because of the member’s death, and • one for the taxation of employment termination payments. Superannuation benefits received by a member aged at least 60 are generally tax-free, whether paid as a lump sum or as an income stream. Superannuation benefits paid to a member aged under 60 also receive concessional tax treatment. The reasonable benefit limits (RBL) system, which previously limited the amount of superannuation and similar benefits that a person could receive on a concessionally taxed basis, was abolished from 1 July 2007. The RBL system was replaced by ceilings on the amount of concessional (generally deducted) contributions and non-concessional (undeducted) contributions that can be made for a member in a year. A member may be liable to penalties if contributions made for them exceed the contributions cap for the year. The current taxation of superannuation entities is similar to their pre-1 July 2007 tax treatment, although there is a new category of taxable income — no-TFN contributions income — which may be taxed at the top tax rate. The introduction of no-TFN contributions income is tied to other measures that encourage members to quote their TFN to their fund and penalises those who fail to do so.

¶1-100 Superannuation industry profile Quarterly and annual statistics published by the Australian Prudential Regulation Authority (APRA) give information that can be used to assess the overall performance of the superannuation system. Among other things, APRA publications provide data on assets held by various superannuation entities, earnings performance, fees and taxes, membership profile, the offering of investment options and the development of MySuper products. Current APRA publications relating to the performance of the superannuation system are: 1. Quarterly MySuper Statistics which contains data on MySuper products — information on the product profile, product dashboard measures, asset allocation targets and ranges, investment performance, fees disclosed for MySuper products, or where relevant, for the lifecycle stages underlying MySuper products with a lifecycle investment strategy, and MySuper URLs 2. Annual MySuper Statistics which provides detailed data for all MySuper products, and allows users to analyse APRA-regulated MySuper products across a range of measures 3. Annual Fund-level Superannuation Statistics which contains detailed profile and structure, financial performance and financial position, conditions of release, fees and membership information for APRA-regulated superannuation funds with more than four members and eligible roll-over funds, as well as profile and structure information for the trustees of these superannuation funds 4. Quarterly Superannuation Performance Statistics which provides industry aggregate summaries of financial performance, financial position, key ratios and asset allocation, and 5. Annual Superannuation Bulletin which contains statistics that provide policymakers, regulators, trustees and the community with information to assess the overall performance of the superannuation

system. Superannuation industry overview for the year to 31 March 2019 The statistics below are taken from APRA’s Quarterly Superannuation Performance Statistics, March 2019, released on 28 May 2019. Since September 2013, the statistics in this publication have generally been for superannuation entities with more than four members. In the March 2019 quarter, this captures 209 superannuation entities, comprising 190 APRA-regulated superannuation entities and 19 exempt public sector schemes. Superannuation assets totalled $2.8 trillion at the end of the March 2019 quarter. Over the 12 months from March 2018, there was a 6.7% increase in total superannuation assets. Assets in MySuper products totalled $713.3b at the end of the March 2019 quarter. Over the 12 months from March 2018, there was a 10.8% increase in total assets in MySuper products. Entities with more than four members The statistics below are based on superannuation entities with more than four members. Contributions, benefit transfers and benefit payments There were $26.7b of contributions in the March 2019 quarter, up 3.5% from the March 2018 quarter ($25.8b). Total contributions for the year to 31 March 2019 were $113.2b. Outward benefit transfers exceeded inward benefit transfers by $0.4b in the March 2019 quarter. There were $19.0b in total benefit payments in the March 2019 quarter, an increase of 8.6% from the March 2018 quarter ($17.5b). Total benefit payments for the year ending March 2019 were $75.1b. Lump sum benefit payments ($9.5b) were 49.9% and pension benefit payments ($9.5b) were 50.1% of total benefit payments in the March 2019 quarter. For the year ending 31 March 2019, lump sum benefit payments ($36.6b) were 48.7% and pension benefit payments ($38.5b) were 51.3% of total benefit payments. Net contribution flows (contributions plus net benefit transfers less benefit payments) totalled $7.3b in the March 2019 quarter, a decrease of 6.5% from the March 2018 quarter ($7.8b). Net contribution flows for the year ending March 2019 were $35.4b. Financial performance and asset allocation In terms of financial performance, the annual industry-wide rate of return (ROR) for entities with more than four members for the year ending 31 March 2019 was 6.9%. The five-year average annualised ROR to March 2019 was 6.9%. Over the March 2019 quarter, total assets increased by 5.7% (or $106.6b) to $2.0 trillion. At the end of the March 2019 quarter, 50.5% of the $1.8 trillion investments were in equities, with 22.1% in Australian listed equities, 24.4% in international listed equities and 4.0% in unlisted equities. Fixed income and cash investments accounted for 31.4% of investments, with 21.2% in fixed income and 10.1% in cash. Property and infrastructure accounted for 14.2% of investments and 3.9% were invested in other assets, including hedge funds and commodities. Superannuation industry quarterly estimates The table below shows the estimated number of superannuation entities and their assets as at 31 March 2019. Fund type

Assets ($ billion)

Number of entities

APRA-regulated Entities with more than four members 1,834.0

190

Single member ADFs

0.0

10

Small APRA funds

2.2

1,777

Pooled superannuation trusts

141.3

28

746.6

598,429

Exempt schemes

144.0

19

Balance of life office statutory funds

55.7

‐

2,782.6

600,453

ATO-regulated Self-managed superannuation funds Other

Total Retirement savings accounts

There were 117 RSE licensees and 11 retirement savings accounts with $1.7b in assets at the end of March 2019. MySuper products At 31 March 2019, assets in MySuper products totalled $713.3b, and the proportion of assets in a MySuper product was 39%. At 31 March 2019, 84 entities offered a MySuper product, and the proportion of entities offering a MySuper product was 47%. The total number of MySuper products was 98, of which 84 were generic MySuper products, 13 were large employer products and one a material goodwill product.

¶1-200 Regulation of superannuation industry Over recent years there has been considerable upheaval in the regulation of the superannuation industry. The Superannuation Industry (Supervision) Act 1993 replaced the Occupational Superannuation Standards Act 1987 from 1 July 1994, providing a comprehensive regime, administered by the ISC, for the regulation of superannuation funds and related entities. Since 1 July 1997, the Retirement Savings Accounts Act 1997 has provided a parallel regulatory regime for RSA providers. The regulatory regime was completely overhauled again in 1998, with the ISC being replaced by new regulatory authorities — the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) (from 1 July 1998) and the Commissioner of Taxation (from 8 October 1999). APRA is responsible for the prudential regulation of banks and other deposit-taking institutions, life and general insurance companies, superannuation funds and RSA providers. ASIC is responsible for consumer protection and market integrity across the financial system, including the areas of insurance and superannuation. From 1 October 2001, ASIC is also responsible for the financial services regulatory regime in Ch 7 of the Corporations Act 2001 (¶4-000). This regime has a direct impact on superannuation products and entities, imposing standards for product disclosure and for the licensing and conduct of financial services providers and financial markets. Superannuation entities must comply with the regulatory requirements imposed by the Financial Sector (Collection of Data) Act 2001 and Corporations Act. ASIC is responsible for the administration of the resolution of complaints scheme. Before 1 November 2018, the Superannuation Complaints Tribunal was the body to which most superannuation complaints could be made about the decisions and conduct of trustees of superannuation entities (other than SMSFs) (¶13-000). From 1 November 2018 the Tribunal’s role in settling complaints about superannuation has been taken over by the new Australian Financial Complaints Authority (AFCA), which is an ombudsman scheme rather than a statutory tribunal. AFCA is the external dispute resolution body for the financial services industry generally, replacing the Financial Ombudsman Service, Credit and Investments Ombudsman and the Superannuation Complaints Tribunal. Since 8 October 1999, the ATO has been primarily responsible for the regulation of SMSFs (¶5-000). These are funds with fewer than five members and where all the members actively participate in the fund’s management. Funds with fewer than five members but which do not come within the definition of

an SMSF remain the responsibility of APRA and ASIC. From 1 November 2011, the Chief Executive Medicare replaced APRA and the Commissioner in the administration of the scheme for the early release of superannuation benefits on compassionate grounds, but the regulator role has since been transferred back to the Commissioner (¶3-280). From 1 July 2004, trustees of APRA-regulated superannuation entities (registrable superannuation entities) must be registered by APRA. Trustees must apply to APRA for a licence that imposes minimum standards of fitness and propriety and requires the maintenance of risk management strategies and plans for funds under the trustee’s control (¶3-480). The ATO replaced Medicare in the administration of the Small Business Superannuation Clearing House from 20 February 2014 (¶12-010). The Fair Work Commission is responsible for the default superannuation fund process (¶12-051).

2 QUALIFYING FOR TAX CONCESSIONS SUPERANNUATION TAXATION Taxation of superannuation entities

¶2-000

Income Tax Assessment Act 1997

¶2-020

Tax Act provisions dealing with superannuation

¶2-050

SUPERANNUATION FUNDS Qualifying conditions for complying superannuation funds ¶2-100 What is a “superannuation fund”?

¶2-120

Resident regulated superannuation fund

¶2-130

Complying superannuation fund under the SIS Act

¶2-140

Notification of complying or non-complying status

¶2-150

Public sector superannuation schemes and EPSSSs

¶2-170

APPROVED DEPOSIT FUNDS Qualifying conditions for complying ADFs

¶2-300

What is an “approved deposit fund”?

¶2-320

Resident ADFs

¶2-330

Complying ADFs under the SIS Act

¶2-340

Notification of ADF status

¶2-350

POOLED SUPERANNUATION TRUSTS Qualifying conditions for PSTs

¶2-400

What is a “pooled superannuation trust”?

¶2-420

PSTs under the SIS Act

¶2-430

Notification of PST status

¶2-440

Superannuation Taxation ¶2-000 Taxation of superannuation entities Income tax legislation is administered by the Commissioner of Taxation. A table showing the principal ITAA97 and other tax provisions dealing with superannuation taxation, concessions and operations is set out in ¶2-020. Scheme for the taxation of superannuation entities Division 295 in Pt 3-3 of Ch 3 in ITAA97 provides for the taxation of superannuation funds, approved deposit funds (ADFs) and pooled superannuation trusts (PSTs) (superannuation entities) from 1 July 2007. In addition, many provisions in other tax laws (eg ITAA36, ITAA97, ITTPA and TAA) which generally apply for taxation purposes to taxpayers may also applicable in the assessments of superannuation entities.

Division 295 provides concessional tax treatment to entities which comply with the conditions specified in the SIS Act and SIS Regulations for complying superannuation funds, complying ADFs and PSTs (¶2100, ¶2-300, ¶2-400), regardless of whether they are established by an Australian law, by a public authority constituted by or under such a law, or in some other way. Superannuation funds and ADFs which do not comply with the SIS conditions are also subject to Div 295, but are taxed on a nonconcessional basis as non-complying funds, while PSTs which do not comply are taxed as trusts under the general trust provisions in ITAA36 Pt III. The concessional taxation of superannuation can be grouped under the three main areas — the concessional taxation of superannuation entities, tax treatment of superannuation contributions and concessional taxation of superannuation benefits. The Occupational Superannuation Standards Act 1987 (OSSA) and Regulations (OSSR) were previously the governing legislation for superannuation funds, ADFs and PSTs which sought to qualify for concessional tax treatment. The OSSA has been renamed three times since July 1994 — as the Superannuation Entities (Taxation) Act 1987, the Superannuation (Excluded Funds) Taxation Act 1987 and the Superannuation (Self Managed Superannuation Funds) Taxation Act 1987. The Act, as currently named, provides for the assessment and collection of the superannuation supervisory levy from SMSFs (¶3-920). Concessional taxation of superannuation entities Many tax concessions are available to complying superannuation funds, complying ADFs and PSTs. The main concession is that the income of complying entities is taxed at 15%, except for non-arm’s length income which is taxed at 45% (see ¶18-000). Superannuation funds which have commenced to pay certain types of pensions to their members (ie pension funds or funds in the pension phase, as opposed to funds in the accumulation phase) enjoy additional tax concessions by way of a tax exemption on the ordinary and statutory income derived from fund assets supporting income streams in the retirement phase and a CGT exemption when the assets supporting the income streams are disposed of (¶7-153). These income streams are generally pensions and annuities which comply and are paid in accordance with the standards prescribed by the SIS Regulations or RSA Regulations. Other tax concessions for complying entities and PSTs include modified CGT provisions and eligibility for the 33⅓% CGT discount, exemption from the trust loss and debt deduction rules, and entitlement to receive venture capital franking tax offsets for investments in pooled development funds and to claim a refund of excess franking credits under the imputation system. Commentary on the taxation of superannuation entities is found in Chapter 7 of the Guide. Tax treatment of superannuation contributions Employers and other persons (eg spouses, employees and individuals) who make superannuation contributions are entitled to tax concessions (eg a deduction, tax offset or co-contribution) where certain conditions in ITAA97 are met. Conversely, a tax or charge may be payable where excessive contributions are made in a year. Superannuation contributions are discussed in Chapter 6. Concessional taxation of superannuation benefits Concessional tax treatment applies to superannuation benefit payments (including death benefits), both lump sums and income streams, from superannuation entities. This is discussed in Chapter 8. Prudential regulation Commentary on the prudential regulation regime for superannuation entities under the SIS Act and other regulatory Acts is found in Chapters 3, 4, 5 and 9. The SIS prudential regime applies to the superannuation entities which are “regulated” under the SIS Act (¶2-150, ¶2-300, ¶2-400) regardless of whether they have satisfied the relevant conditions for concessional tax treatment under ITAA97 as complying superannuation funds, complying ADFs or PSTs in a particular year. The SIS legislation is administered jointly by APRA, ASIC and the Commissioner of Taxation (referred to in the SIS Act as “Regulators”) to the extent to which administration of the Act is conferred upon them. The division of SIS Act administration among the Regulators is discussed at ¶3-005.

[FITR ¶268-000ff; SLP ¶2-150]

¶2-020 Income Tax Assessment Act 1997 The ITAA97 commenced on 1 July 1997 and it applies to assessments of the 1997/98 and subsequent income years. Since its commencement, ITAA97 has concurrent operation with ITAA36 for assessments. ITAA97 is the result of the rewrite of the income tax law under the Tax Law Improvement Project (TLIP) to progressively replace ITAA36. The complete replacement of ITAA36 was originally planned to take place in instalments over three years from the 1997/98 year, with the law being rewritten and enacted progressively in that period. The rewrite is incomplete and ITAA36 continues to be relevant for assessments (see “TLIP tax law rewrite update” below). Under the TLIP, each instalment of ITAA97 is accompanied by consequential amendments which terminate the operation of the corresponding ITAA36 provisions and is supported by provisions of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) and regulations (where applicable) to provide for the transition of the former tax laws to the rewritten laws in ITAA97. It had been anticipated that when the final instalment of ITAA97 is eventually completed, ITAA36 will cease to have any ongoing operation except under residual rules. With the TLIP in abeyance, the ITAA36 and ITAA97 operate concurrently and neither is complete in itself. It is therefore necessary to work with both Acts. Reflecting this, the expression “this Act” is defined in each Act to include the other Act, as well as the relevant objection, review and appeal provisions of the Taxation Administration Act 1953 (TAA) (ITAA97 s 995-1(1); ITAA36 s 6(1)). However, definitions in the Dictionary to ITAA97 apply only to ITAA97, not ITAA36 or TAA (s 995-1(2)), and definitions in ITAA36 do not apply to ITAA97 unless expressly adopted. See also “Continuing interaction with ITAA36, operation of judicial precedents, rulings” below. TLIP tax law rewrite update Major instalments of the rewritten income tax law were completed under the TLIP. The first instalment established the structure and framework for ITAA97 and the second covered areas of tax law which affected a broad cross-section of taxpayers (such as the general depreciation provisions and specialist topics relevant to specific groups, eg landholders). The third instalment covered areas of tax law which are significant for a broad range of taxpayers or specialist groups (such as capital gains and losses, company bad debts, intellectual property, horticultural plants, averaging of primary producers’ tax liability, environmental protection and above-average special professional income). The fourth instalment completed the rewrite of the remaining CGT provisions previously contained in ITAA36 former Pt IIIA, covering the small business replacement assets roll-over relief and retirement exemption provisions (ITAA36 former Div 17A and 17B), and the share value shifting provisions (ITAA36 former Div 19A). The fifth instalment covered the rewrite of certain provisions dealing with imputation credits and the enactment of the simplified imputation provisions from 1 July 2002. The sixth instalment is the most significant for superannuation entities, taxpayers receiving superannuation benefits and superannuation tax concessions generally. To give effect to the simplified superannuation reforms which came into effect from 1 July 2007 (¶1-000), the sixth instalment repealed all the superannuation-related provisions contained in ITAA36 and inserted equivalent or new provisions under the simplified superannuation regime into ITAA97 (see below and ¶2-050). The ITAA97 has continued to grow in volume and coverage since, as all new tax provisions are added to the Act. At the time of writing, ITAA97 and ITTPA and their regulations already contain most of the provisions which are relevant to taxpayers and superannuation entities generally, such as the provisions dealing with general or ordinary income, statutory income, exempt income, non-assessable non-exempt income, deductions, tax offsets and CGT. Together with the TAA and other tax imposition Acts, the ITAA97 provisions provide for the tax treatment of superannuation entities, superannuation contributions and superannuation benefit payments, including assessment, collection and tax administration generally (see ¶2-050).

Structure and numbering system of ITAA97 ITAA97 is divided into “Chapters”, with each Chapter divided (in descending order) into Parts, Divisions, Subdivisions and sections (see below). The Act is specifically designed as a “pyramid-like” structure, reflecting the principle of moving from the general case to the particular (ITAA97 s 2-5). The top of the pyramid, therefore, contains the core provisions (Ch 1) and checklists, followed by the liability rules of general application (Ch 2), specialist liability provisions (Ch 3), international aspects of tax provisions (Ch 4), administration provisions (Ch 5) and a “dictionary” of defined terms (Ch 6). The collection and recovery provisions (previously contained in former Ch 4) have since been relocated to the TAA. Numbering system An appreciation of the numbering system requires an understanding of the structure of the ITAA97, represented by the constituent elements “Chapter”, “Part”, “Division”, “Subdivision” and “section”. ITAA97 s 2-25 refers to these constituent elements as “units at different levels”. The numbering system for each of these units is as follows. • Each Chapter is given a single-component identifier consisting of a number, eg Ch “2”, Ch “3” (this level, incidentally, did not appear at all in ITAA36). Each Chapter contains Parts (and their lower constituent components). • Each Part has a two-component identifier. The first component is the number of the Chapter in which the Part is contained. This is separated by a dash from the second component, which is the number of that Part, eg Pt “3-30” refers to Pt 30 in Ch 3. Each Part contains Divisions (and their lower constituent components). • Each Division has a single-component identifier consisting of a number, eg Div “295”. This number is not related to the Part or the Chapter in which the Division appears. The Divisions are numbered sequentially from the start of the Act to the end. Unlike ITAA36, their numbering does not start afresh with each Part. Each Division contains Subdivisions (and their lower constituent components) but note that not all Divisions have Subdivisions. • Each Subdivision has a two-component identifier. The first component is the number of the Division of which it forms a part of. This is separated by a dash from the second component, which is a capital letter identifying the Subdivision, eg Subdiv “295-C” is Subdiv C of Div 295. Each Subdivision contains sections (and their lower constituent components). • Each section has a two-component identifier. The first component is the number of the Division of which the section forms a part of. This is separated by a dash from the second component, which is the number of the section, eg s “295-95” is section number 95 in Div 295. Each section may itself be divided into numbered subsections (eg s 295-95(2)), which may be divided into paragraphs (identified by lower case letters, eg s 295-95(2)(c)), which may themselves be divided into subparagraphs (identified by lower case roman numbers, eg s 295-95(2)(c)(ii)). The above numbering system means that a reader who knows a ITAA97 Part number will also know the relevant Chapter. Similarly, a reader who knows the section or Subdivision number will also know the relevant Division. By contrast, under ITAA36 there was no necessary link between the numbering of any of the components. Gaps appear in the numbering sequence of Parts, Divisions, Subdivisions and sections (but not Chapters). The gaps allow for future insertion of sections, Subdivisions, Divisions and Parts. Another special feature of ITAA97 is the inclusion of “Guides” at the start of many Divisions and Subdivisions (for an example, see s 295-1). Guides often include a boxed theme statement, some simplyexpressed introductory sections, and sometimes flow charts, diagrams and other explanatory material. They are intended to provide the reader with an indication of the scope and nature of the operative provisions which follow. Although the Guides actually form part of the Act, they have limited effect in interpretation (ITAA97 s 950-150). Further assistance to readers is provided by notes and examples which accompany some sections (for an

example, see s 295-95(1)). These notes and examples (however described), but not footnotes and endnotes, form part of the Act itself. The notes commonly act as cross-references to related provisions. Section 2-35 of ITAA97 draws a distinction between the “operative provisions” and “non-operative material” which is contained in the Act. The term “operative provisions” is not defined, but would refer to the provisions which contain substantive law. The non-operative material, which includes Guides, notes and examples, is designed to help the reader identify and understand relevant provisions (ITAA97 s 2-40; 2-45). Section 950-100 to 950-150 provide an expansive explanation of what forms or does not form part of ITAA97 and the role of Guides in interpreting the Act. Numbering of regulations Regulations made under ITAA97 are contained in the Income Tax Assessment Regulations 1997 (ITAR). These regulations adopt a numbering system which is intended to link them to the specific provisions in ITAA97 to which they relate. For example, ITAR reg 295-465.01 is directly relevant to ITAA97 s 295-465 which deals with a superannuation fund’s deductible portion of insurance premiums for a financial year (¶7-147). The decimal addition “.01” indicates that it is the first regulation made for the purposes of that section. Each regulation may itself be divided into numbered subregulations (eg reg 295-465.01(5)), which may be divided into paragraphs (identified by lower case letters, eg reg 295-465.01(5)(a)). Also, a paragraph of a subregulation may itself be divided into subparagraphs (identified by lower case roman numbers, eg reg 292-25.01(4)(b)(ii)) and into sub-subparagraphs (identified by upper case letters, eg reg 292-25.01(4)(b) (ii)(C)) and into sub-sub-subparagraphs (identified by upper case roman numbers, eg reg 292-25.01(4)(b) (ii)(C)(II)). Continuing interaction with ITAA36, operation of judicial precedents, rulings Specific provisions in ITAA97 ensure that differences in the style of ITAA97 do not affect its meaning and preserve the continuing value of judicial precedents built up over years of interpreting ITAA36. In particular, ITAA97 s 1-3 provides that if ITAA36 expresses an idea in a particular form of words, and ITAA97 “appears to have expressed the same idea” in a different form of words in order to use a simpler or clearer style, the ideas are not taken to be different because different words are used. In addition, a legislative note to s 1-3 directs the reader’s attention to TAA Sch 1 s 357-85, which provides that a public or private ruling about a relevant provision (as specified in TAA Sch 1 s 357-55) that has been re-enacted or remade (with or without modifications, and whether or not that provision has been repealed) is taken also to be a ruling about that provision as re-enacted or remade so far as the two provisions express the same ideas. Notwithstanding that note, the ATO has undertaken the rewriting of existing public rulings affected by, or to reflect, provisions of the ITAA97. Note also that ideas in a taxation provision are not necessarily different because different forms of words are used (Acts Interpretation Act 1901, s 15AC). For the Commissioner’s views of the introduction of ITAA97 (and consequential amendments to the TAA) on the implications for the taxation rulings system, in particular how a ruling on an ITAA36 provision applies to a rewritten provision in ITAA97, see Rulings TR 2006/10 (public rulings) and TR 2006/11 (private rulings). Continuing consultation and review of income tax laws and issues The ATO works closely with Treasury in developing new tax policy and legislation, and may refer matters to Treasury if the tax law is not consistent with policy or produces unintended consequences or significant compliance costs. In his regard, the ATO undertakes consultation with taxpayers, tax advisers, professional associations and industry stakeholders to improve the ATO’s understanding of the business environment and current tax issues they face. The ATO’s key forums for consulting with public and international groups are the Large Business Liaison Group and National Tax Liaison Group. This consultation assists the ATO to identify the right areas to reduce red tape, minimise compliance costs, improve the administration of the tax and superannuation systems and increase willing participation (www.ato.gov.au/business/publicbusiness-and-international/transparency/engaging-with-you-to-administer-the-system). A summary of the ATO consultation framework with the tax and superannuation industry and

professionals is set out at ¶18-905. The ATO’s Program Blueprint for Change and Addendum is available at www.ato.gov.au/AboutATO/Managing-the-tax-and-super-system/Strategic-direction/Program-blueprint-summary/. [FTR ¶1-100]

¶2-050 Tax Act provisions dealing with superannuation The table below provides a quick guide to the location of key provisions in the tax Acts dealing with superannuation taxation, concessions and operations. Tax imposition, rates and related Acts are noted in a separate table further below. Superannuation taxation, concessions and operations

Provisions dealing with:

ITAA36 (generally up to 30 June 2007)

ITAA97, ITTPA, TAA and others (general from 1 July 2007 or later)

Taxation of superannuation entities generally

Superannuation funds, ADFs, PSTs ITAA36 Pt IX

Superannuation funds, ADFs, PSTs ITAA97 Pt 3-30 Div 280, 285 and 295 ITTPA Pt 3-30 Div 295

Roll-over and loss relief for merging funds (from 25 March 2010)

No equivalent in ITAA36

CGT roll-over relief ITAA97 Pt 3-30 Div 310 and 311

Look-through treatment for assets acquired under limited recourse borrowing arrangements by regulated superannuation funds (from 2007/08)

No equivalent in ITAA36

CGT and income tax lookthrough treatment ITAA97 Div 235 Subdiv 235-I s 235-810 to 235-845 ITTPA Div 235 Subdiv 235-I s 235-810

Taxation of superannuation benefits and related payments

Eligible termination payments, superannuation pensions, unused leave payments ITAA36 Pt III Div 2 Subdiv A and AA

Employment termination payments and unused leave payments ITAA97 Pt 2-40 Div 80, 82 and 83 ITTPA Pt 2-40 Div 82 Superannuation benefits — lump sums and pensions ITAA97 Pt 3-30 Div 280, 285, 301 to 307 ITTPA Pt 3-30 Div 301 to 307

Excess concessional No equivalent in ITAA36 contributions tax (from 2007/08 to 2012/13) This tax was replaced by the excess concessional contributions charge (see below)

Superannuation contributions ITAA97 Pt 3-30 Div 291 ITTPA Pt 3-30 Div 291 TAA Sch 1 Pt 2-35 Div 95 to 97 (up to 30 June 2018)

Excess concessional contributions charge (from 2013/14): – tax offset – taxpayer election to release of excess concessional

Superannuation contributions Assessable income and tax offset ITAA97 Pt 3-30 Div 291 ITTPA Pt 3-30 Div 291 TAA Sch 1 Pt 2-35 Div 95 to 97

No equivalent in ITAA36

contributions

(up to 30 June 2018) and Div 131 (from 1 July 2018) (see “Releasing money from superannuation” below)

Excess non-concessional contributions tax (from 2007/08) – taxpayer election to release of excess non-concessional contributions and earnings (from 2013/14)

No equivalent in ITAA36

Superannuation contributions ITAA97 Pt 3-30 Div 292 ITTPA Pt 3-30 Div 292 TAA Sch 1 Pt 2-35 Div 95 to 97 (up to 30 June 2018) and TAA Sch 1 Pt 2-35 Div 131 from 1 July 2018: see “Releasing money from superannuation” below

Releasing money from superannuation – to pay Division 293 tax assessments – following an ATO excess contributions determination or non-concessional contributions determination (ie releasing excess concessional contributions or excess nonconcessional contributions and earnings) – following an FHSS determination

No equivalent in ITAA36

ATO release authority TAA Sch 1 Pt 2-35 Div 131 from 1 July 2018 (replaced TAA Sch 1 former Pt 2-35 Div 95 to 97)

Division 293 tax on concessional No equivalent in ITAA36 contributions (from 2012/13)

Superannuation contributions — Division 293 tax ITAA97 Pt 3-30 Div 293 ITTPA Div 293 TAA Sch 1 Pt 3-20 Div 133 TAA Sch 1 Pt 3-20 Div 135 (up to 30 June 2018) and TAA Sch 1 Pt 2-35 Div 131 from 1 July 2018: see “ATO release authority” above

Transfer balance cap (from 2017/18) Excess transfer balance tax (from 2017/18)

No equivalent in ITAA36

Division 294 — Transfer balance cap ITAA97 Pt 3-30 Div 294 TAA Sch 1 Pt 3-20 Div 136 (Excess transfer balance — Determinations, Commutation authorities) Subdiv 303-A and 303-B (Defined benefit income, special circumstances) ITTPA Pt 3-30 Div 294

Total superannuation balance (from 2017/18)

No equivalent in ITAA36

Total superannuation balance ITAA97 s 307-230

Taxation of no-TFN contributions No equivalent in ITAA36 income and tax offset (from 2007/08)

No-TFN contributions ITAA97 Pt 3-30 Subdiv 295-I and 295-J

ITTPA Subdiv 295-I Departing Australia Superannuation Payments (DASPs)

DASPs ITAA36 Pt III

DASPs ITAA97 Pt 3-30 Subdiv 301-D

Trans-Tasman portability of superannuation (from 2013/14)

No equivalent in ITAA36

Superannuation transfers ITAA97 Pt 3-30 Div 312 SISR Pt 12A

Deductions for employer and personal superannuation contributions

Superannuation contributions ITAA36 Pt III Div 3 Subdiv AA and AB

Superannuation contributions — Deductions ITAA97 Pt 3-30 Div 290 Subdiv 290-A, 290-B (employer contributions) and 290-C (personal contributions) ITTPA Pt 3-30 Div 290

Tax offsets for superannuation Tax offsets benefits and contributions ITAA36 Pt III Div 17 Subdiv AAA, – Government co-contributions AAB and AACA and tax offsets are also available under the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (see below)

Tax offsets Spouse contributions ITAA97 Pt 3-30 Div 290 Subdiv 290-D ITTPA Pt 3-30 Div 290 Superannuation benefits — see above ITAA97 Pt 3-30 Div 301 Subdiv 301-B and 301-C

Reasonable benefit limits (RBLs) RBLs ITAA36 Pt III Div 14

No equivalent (the RBLs have been abolished from 1 July 2007)

First Home Super Saver Scheme No equivalent in ITAA36 (FHSS Scheme)

See “First home super saver scheme” below

Making downsizer contributions

Downsizer contributions and cap ITAA97 s 292-102

No equivalent in ITAA36

Other operations and concessions The ITAA97 and TAA provisions below are relevant to taxpayers and superannuation practitioners and entities generally or in a particular case: • ITAA97 Pt 3-3 Div 152 — small business CGT concessions, in particular Subdiv 152-B dealing with the small business 15-year exemption and Subdiv 152-D dealing with the small business CGT retirement exemption • ITAA97 Pt 3-35 Div 310 — superannuation business of life insurance companies, and • TAA Sch 1 Div 389 — single touch payroll (STP) reporting from 1 July 2018. Tax imposition and rates Acts Act

Dealing with

Superannuation (Excess Concessional Contributions Tax) Act 2013

Excess concessional contributions tax (repealed from 1 July 2013)

Superannuation (Excess Concessional Contributions Charge) Act 2013

Excess concessional contributions charge

Superannuation (Excess Non-Concessional Contributions Tax) Act 2013

Excess non-concessional contributions tax

Superannuation (Excess Untaxed Roll-over Amounts Tax) Act 2007

Excess untaxed roll-over amounts

Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Act 2013

Division 293 tax

Superannuation (Excess Transfer Balance Tax) Imposition Act 2017

Excess transfer balance tax

Income Tax (Fund Contributions) Act 1989

Tax on contributions to superannuation funds

Income Tax (Former Complying Superannuation Funds) Act 1994

Tax on former complying superannuation funds

Income Tax (Former Non-resident Superannuation Tax on former non-resident superannuation funds Funds) Act 1994 Superannuation (Departing Australia Superannuation Payments) Act 2007 — Withholding tax

Rates of withholding tax

Income Tax Rates Act 1986

Tax rates

First Home Super Saver Tax Act 2017

Tax on individuals under the FHSS scheme (see below)

Income tax regulations Regulations made pursuant to ITAA97, ITAA36, ITTPA and TAA are as below: • ITAA97 — Income Tax Assessment Regulations 1997 • ITAA36 — Income Tax Assessment (1936 Act) Regulation 2015 (remake and repeal of former Income Tax Regulations 1936) • ITTPA — Income Tax (Transitional Provisions) Regulations 2010 • TAA — Taxation Administration Regulations 2017 (remake and repeal of former Taxation Administration Regulations 1976). Superannuation (Government Co-contribution for Low Income Earners) Act 2003 — cocontribution and tax offset Provisions dealing with:

Co-contribution Act 2003

Government co-contribution

Part 2 – from 2003/04

Low income superannuation tax offset

Part 2A – from 2017/18

Low income superannuation contribution Former Pt 2A (2012/13 to 2016/17) First home super savers scheme Provisions dealing with:

Legislation

First Home Super Saver (FHSS) scheme (from 2018/19)

ITAA97 Div 313 — First Home Super Saver scheme TAA Sch 1 Div 138 — FHSS scheme and Div 131 — Releasing money from superannuation First Home Super Saver Tax Act 2017

First home savers accounts (FHSA) scheme (from 1 October 2008 to 30 June 2015)

ITAA97 Former Pt 3-45 Div 345 — taxation of FHSA business • First Home Savers Accounts Act 2008 (repealed) • Income Tax (First Home Saver Accounts Misuse Tax) Act 2008 (repealed)

Superannuation Funds ¶2-100 Qualifying conditions for complying superannuation funds A superannuation fund is eligible for concessional tax treatment as a “complying superannuation fund” under ITAA97 Div 295 (see ¶7-000) if APRA (or the Commissioner in the case of an SMSF) has given the fund a notice under s 40 of the SISA stating that it is a complying superannuation fund (¶2-150) (SISA s 45). Under the SIS Act, a superannuation fund (¶2-120) will receive a complying fund notice from APRA or the Commissioner if: • the fund is a resident regulated superannuation fund (ie a regulated superannuation fund that is an Australian superannuation fund within the meaning of ITAA97: ¶2-130) • the fund has met the prescribed conditions to be a complying superannuation fund for the purposes of the SIS Act (SISA s 42: ¶2-140). A fund that is, or is part of, an exempt public sector superannuation scheme is taken to be a complying superannuation fund for the purposes of ITAA97, and is entitled to concessional tax treatment as such, without having to be a regulated superannuation fund or being subject to the SIS Act (¶2-170). The taxation treatment of complying and non-complying superannuation funds is discussed in Chapter 7. A “constitutionally protected fund” is exempt from income tax (ITAA97 s 50-25, item 5.3). [SLP ¶2-160]

¶2-120 What is a “superannuation fund”? There are two similar, but different, definitions of “superannuation fund” in the tax legislation. Subject to a contrary intention, a “superannuation fund” is defined in ITAA97 to have the meaning given in the SIS Act (ITAA97 s 995-1(1)). Also, subject to a contrary intention, a “superannuation fund” is defined in ITAA36 as a scheme for the payment of “superannuation benefits” (ie individual personal benefits, pensions or retiring allowances) upon retirement or death, or a superannuation fund as defined in the SIS Act (ITAA36 s 6(1)). What is relevant for both definitions, therefore, is the definition of “superannuation fund” in s 10 of the SIS Act. In the SIS Act, a “superannuation fund” means: • a fund that is an indefinitely continuing fund and is a provident, benefit, superannuation or retirement fund, or • a public sector superannuation scheme (SISA s 10(1)). As defined, a superannuation fund for tax purposes thus covers any resident or non-resident superannuation arrangement which is formed for the specified purposes, whether funded (as in the case of private sector superannuation schemes) or unfunded (eg public sector schemes). Meaning of “indefinitely continuing fund” The expression “indefinitely continuing fund” is not defined in the SIS Act, and there is no definitive

authority explaining its meaning. In Cameron Brae Pty Ltd (2007) 161 FCR 468; [2007] FCAFC 135, Stone and Allsop JJ, after noting that there had been no argument about the meaning of the expression, observed at 480 [32] that the ordinary meaning of the word “indefinite” is “without distinct limitation of being or character; indeterminate, vague, undefined; of indetermined extent, amount or number”. Jessup J stated at 507–508 ([108]–[109]): “The term is not defined in the SIS Act, and has not been the subject of judicial exposition. Some light may be thrown on what was intended by s 14 of the SIS Act, which provided that the existence in the rules of a fund of a provision to avoid ‘a breach of a rule of law relating to perpetuities’ would not prevent the fund in question from being an ‘indefinitely continuing’ one. That tends to suggest that the legislature otherwise had something rather lengthy in mind. On the other hand, I doubt that ‘indefinitely’ could be given a meaning effectively equivalent to ‘forever’, since the rules of every fund would have to contain, one would have thought, reasonable and practical provisions for the fund to be wound up where it had to be. … It may be that the relevant statutory meaning of ‘indefinitely’ is ‘undefined’ rather than ‘unlimited’, but, in the absence of argument on the subject, I am not disposed to extend to the appellant the favour of adopting that meaning.” To be “indefinitely continuing” generally means that the fund must not be one which will terminate or be wound up after a specified period. A provision in the governing rules of the fund to avoid a breach of the rules relating to perpetuities does not prevent the fund from being treated as an indefinitely continuing fund for the purpose of the definition of “superannuation fund” (SISA s 14; Cameron Brae Pty Ltd (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178). In Baker 2015 ATC ¶10-399, picking up on the observations in Cameron Brae, the AAT (Senior Member O’Loughlin) said at [10]: “… The sentiment to the effect that indefinite is not meant to be forever has a certain attraction to it as many contemporary superannuation funds, eg self-managed superannuation funds, implicitly, have an end date upon exhausting assets from which benefits may be paid but are nevertheless accepted as superannuation funds which entails acceptance that they are indefinitely continuing.” The SIS Act also provides that the rules of law relating to perpetuities do not apply, and are taken never to have applied, to the trusts of any superannuation entity, regardless of when the entity was established (SISA s 343). (The meaning of “indefinitely continuing fund” is also relevant to the definition of “approved deposit fund”: ¶2-320.) Meaning of “provident, benefit, superannuation or retirement fund” The expression “provident, benefit, superannuation or retirement fund” in the SIS Act definition of “superannuation fund” is not defined but the expression has been the subject of judicial consideration. The courts have held that for a fund to be a “provident, benefit, superannuation or retirement fund”, the fund’s sole purpose must be to provide superannuation benefits, ie benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment (Scott (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ; Baker 2015 ATC ¶10-399). In Cameron Brae, at 481 [34], after referring to those cases and others, Stone and Allsop JJ expressed the “confident conclusion that a trust is only a superannuation fund if its sole purpose is for the payment of superannuation benefits”. In the same case, Jessup J summarised the position as follows, at 505 [102]: “Thus, as a matter of common understanding, it would seem that a superannuation fund is a fund which has as its sole purpose the provision of benefits to participating employees upon their reaching a prescribed age (per Windeyer J [in Scott (No. 2)]) or upon their retirement, death or other cessation of employment (per Kitto J [in Mahony on appeal])”. In Case 3/2018, 2018 ATC ¶1-095; [2017] AATA 3058, the AAT relying on the above authorities, held that a Samoan entity in that case, which was enmeshed in a complex web of entities, transactions, payments and relationships that traversed Samoa, New Zealand, the United Kingdom and the United States, was not a superannuation fund for tax purposes. It was not a superannuation fund within the ordinary meaning

of that expression, and therefore not a superannuation fund for the purposes of the ITAA97. It was also not a superannuation fund for the purposes of the ITAA36. Rather, the AAT agreed with the Commissioner’s submission that the entity was a resident trust estate because the central management and control of the trust estate was in Australia (pursuant to ITAA36 s 95(2)). Interaction with sole purpose test in the SIS Act Section 62 of the SIS Act which prescribes the approved purposes for which a superannuation fund must be maintained — the “sole purpose test” — provides guidance on the test (see ¶3-200). A breach of the sole purpose test does not automatically disqualify an entity as a superannuation fund, as was previously the case because the test then formed part of the definition of “superannuation fund” in the then governing regulatory Act (namely, the Occupational Superannuation Standards Act 1987). The sole purpose test, however, is a civil penalty provision in the SIS Act, and any breach is taken into account when determining whether the fund is a complying superannuation fund under the SIS Act (¶2-140). In addition, any person responsible for the breach may be liable to civil and criminal sanctions under SIS Act (¶3-800). Public sector superannuation scheme In SIS Act, a “public sector superannuation scheme” means a scheme for the payment of superannuation, retirement or death benefits that is established: (a) by or under a Commonwealth, state or territory law (b) under the authority of the Commonwealth or a state or territory government, or (c) under the authority of a municipal corporation, another local governing body or a public authority constituted by or under a Commonwealth, state or territory law (see further ¶2-170). Use of the expression “superannuation fund” in the tax law The term “superannuation fund” is also used for the purpose of the taxation rules in ITAA97 Div 301 to 306 generally, and for determining what is a “superannuation fund payment” for the purpose of the taxation of lump sum and income stream benefits (ITAA97 s 307-1; 307-5). The meaning of “superannuation fund” was examined in Baker 2015 ATC ¶10-399 (see above). There, the AAT held that an Individual Retirement Account (IRA) in the USA was not a “foreign superannuation fund” (or a scheme payment “in the nature of superannuation”) for the purposes of concessional tax treatment under s 305-80 of the ITAA97. A payment that is made from the IRA would not be treated as being paid either from a “foreign superannuation fund” or from “a scheme for the payment of benefits in the nature of superannuation upon retirement or death” under ITAA97 s 305-55(1) or (2) for the purposes of making a choice under s 305-80 to have the amount paid to an Australian complying fund (¶7-120, ¶8370). [SLP ¶2-165]

¶2-130 Resident regulated superannuation fund A “resident regulated superannuation fund” means a “regulated superannuation fund” (as defined in the SIS Act) that is an “Australian superannuation fund” (within the meaning of the ITAA97) (SISA s 10(1)). Regulated superannuation fund A regulated superannuation fund is a superannuation fund (¶2-120) which complies with the requirements of SISA s 19(2) to (4), as below: • the fund must have a trustee • either the trustee is a constitutional corporation pursuant to a requirement in the governing rules or the governing rules provide that the sole or primary purpose of the fund is the provision of “old-age pensions”

• the trustee must give APRA (or such other body or persons as prescribed by the SIS Regulations) an irrevocable election in the approved form signed by the trustee for the SIS Act to apply to the fund. The above process of becoming a “regulated superannuation fund” provides the legislative basis for the superannuation fund to be subject to regulation under the corporations and/or pensions powers of the Constitution (see below) by the Commonwealth. In a similar manner, ADFs (¶2-320) and PSTs (¶2-420), which by definition must have a corporate trustee, are subject to regulation under the SIS Act by virtue of the corporations power. Exempt public sector superannuation schemes do not have to become regulated superannuation funds in accordance with SIS Act in order to be complying superannuation funds (see ¶2170). All superannuation funds make the election to become regulated funds using the ATO approved form, the “Application for ABN registration for superannuation entities”, which also serves as the entity’s application for a TFN and ABN, and for GST registration, where applicable (¶5-300). Corporations route or pension route A “constitutional corporation” is a trading or financial corporation (within the meaning of para 51(xx) of the Constitution) formed within the limits of the Commonwealth. Therefore, foreign corporations cannot be the trustees of regulated superannuation funds. A corporate trustee of a superannuation fund is a financial corporation by virtue of its activity as trustee of the fund. An “old-age pension” has the same meaning as in para 51(xxiii) of the Constitution. Basically, it means a pension or annuity commencing at normal retiring age. The pension need not be a life pension (eg it may be an allocated pension), and the pension may be payable by the fund or the fund may use the member’s benefit entitlements to purchase a pension or annuity for the member from a provider (eg an insurance company or another superannuation fund). The corporate trustee of a fund is a separate legal entity and, together with its directors and officers, are subject to all the duties, obligations and penalties under the Corporations Act 2001 (CA) as well as those imposed by the SIS legislation. Trustee protection or indemnities may be available in certain circumstances under CA or SIS Act (¶3-150). To address concerns from the decision in Hanel v O’Neill [2003] SASC 409, which held that directors of corporate trustees could be personally liable in any case where there are insufficient assets to discharge the liabilities of the trust, s 197(1) of the Corporations Act 2001 provides for personal liability to be imposed on a director of a corporate trustee where the corporation’s right of indemnity as trustee is lost through disentitling conduct on the part of the corporation (eg a breach of trust or ultra vires conduct) or through a restriction in the terms of the trust that purports to deny a right of indemnity against trust assets. For a fund pursuing the pensions route, the mere insertion of the words “the sole or primary purpose of the fund is the provision of old-age pensions” in its governing rules is by itself insufficient. Guidelines for a fund pursuing the pensions route are as follows: • the main benefit provided by the fund, which must be available to all members, must be an old-age pension • the fund may also provide incidental benefits (eg benefits payable on death, disability, retirement or redundancy of a member), subject to the sole purpose test (see ¶3-200) • the rules of the fund cannot provide for lump sum benefits alone, but may permit members when they become entitled to an old-age pension to elect to take a lump sum benefit instead, with the lump sum being derived or commuted from the pension entitlement. While the choice of the corporations or pensions route is optional, some superannuation funds have no choice by virtue of their set-up or structure as they are required by the SIS Act to have a corporate trustee in all cases, eg a public offer superannuation fund (¶3-500) or a small superannuation fund with fewer than five members that is not an SMSF (¶5-650). Superannuation trustee company A “superannuation trustee company” is a company incorporated under the Corporations Act 2001 where

the sole purpose of the company is to act as a trustee of a regulated superannuation fund (a “special purpose company”). Other special purpose companies (home unit company and not-for-profit company) are not relevant for superannuation purposes. The company’s constitution must have a clause prohibiting the company from distributing income or property to its members (see the definition of “special purpose company” in reg 3 of the Corporations (Review Fees) Regulations 2003 for further information). Among other things, a special purpose company qualifies for certain concessions, for example, paying a reduced annual review fee to the ASIC. A company can advise ASIC that it is a special purpose company at the time of registration on the Form 201 “Application for registration as an Australian company”, or at a later date on Form 484 “Change to company details” supported by a Superannuation Trustee Company Declaration (see ¶18-745). Registered companies that meet the definition of special purpose company under para (a), (b) or (c) of reg 3 are not required to lodge a Form 484 with a declaration to notify their special purpose status as they are automatically recognised by ASIC as special purpose companies upon registration. Some benefits or advantages of a superannuation fund having a corporate trustee include protection from business creditors, fewer opportunities for mistakes and administrative ease when trustees change (Practitioner article “Why your SMSF should have a sole purpose corporate trustee” by Bryce Figot, Senior Associate, and Tina Conitsiotis, Consultant, DBA Lawyers: Wolters Kluwer Australian Super News Issue 9, September 2011, ¶131). Australian superannuation fund To be a complying superannuation fund in relation to a year of income, a regulated superannuation fund must be an Australian superannuation fund at all times during the year of income when it was in existence. Where applicable, the fund may be a resident ADF (¶2-330) for a part of the year of income and a resident regulated superannuation fund for the remaining part of the year of income (SISA s 42(1) (a)). Such a situation arises when an ADF converts to a superannuation fund during the year. A fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if: (1) the fund was established in Australia or any asset of the fund is situated in Australia at that time (2) at that time, the central management and control of the fund is ordinarily in Australia (3) at that time, either the fund had no active member, or at least 50% of the following is attributable to superannuation interests held by active members who are Australian residents: (i) the total market value of the fund’s assets attributable to superannuation interests held by active members, or (ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members (ITAA97 s 295-95(2)(a) to (c)). The three tests must be satisfied at the same time. A fund that fails to satisfy any one of the tests at a particular time is not an Australian superannuation fund at that time, even if the other tests are met. ATO ruling on residency tests Taxation Ruling TR 2008/9 provides guidance on the definition of “Australian superannuation fund” in s 295-95(2) (see also “ATO ruling on company residency” below). Some key points from TR 2008/9 on the three tests are noted below. Test 1: fund established in Australia or assets in Australia (s 295-95(2)(a)) The requirements in the first test must be read disjunctively. That is, the test will be satisfied if the superannuation fund is or was established in Australia, or at a particular time any asset of the fund is situated in Australia.

A superannuation fund is established in Australia if the initial contribution made to establish the fund is paid to and accepted by the trustee or trustees of the fund in Australia. The establishment of the fund requirement is a once and for all test. Once it is determined that a fund was established in Australia, this requirement is met at all relevant times and the fact that no asset of the fund is situated in Australia does not affect this conclusion. For a superannuation fund that is not established in Australia, at least one asset of the fund must be situated in Australia at the relevant time. The location of an asset is determined by reference to the type of asset and the common law rules established by the courts for assets of that kind. It is a question of fact in each case whether or not these rules are satisfied. The general common law rules established by the courts for determining the site or location of particular types of assets are as below. • Land — land and interests in land are situate in the place where the land lies. • Leases — the general rule for land applies to any leasehold interest in land, ie it is deemed to be situate in the place where the land over which the lease is held lies. • Shares — shares in a company are situate where, according to the law of the place where the company was incorporated, the shares can be dealt with effectively as between the owner for the time being and the company. The law of the place of incorporation of the company decides how shares in the company may be transferred. If they may be transferred only by registration on a particular register, they will be regarded as situate at the place where the register is kept. • Beneficial interest under a trust — if the beneficiary is given a beneficial interest in the trust property, the beneficiary’s interest in the trust is located in the country where the trust property is situated. If the beneficiary merely has a right of action against the trustees, the beneficiary’s interest is located where the action may be brought, ie at the trustees’ place of residence. • Simple contract debts — a debt is deemed to be situate where the debtor resides, irrespective of the location of the documentary evidence recording the debt. • Specialties (debts created by deed) — a specialty (eg a policy of insurance) has been held to be located where the deed itself is to be found because, by reason of the deed itself, the debt is taken to have some tangible existence. • Bank accounts — a bank account is a debt, being a single chose in action. The bank is the relevant debtor in the relationship. The rules that apply to determine the location of debts therefore apply to bank accounts. • Negotiable instruments and securities transferable by delivery — for taxation purposes, bonds, bills of exchange and other securities which can be validly and effectively transferred by delivery, with or without endorsement, are situate in the country where the paper representing the security is itself from time to time found. • Chattels — movable goods, but used in a wider sense to denote any kind of personal property, in contrast to real property (eg artwork, jewellery, a boat, and so on). Chattels are situate where they lie, ie they are situate in the place where they happen to be at the relevant time. Test 2: central management and control of fund (s 295-95(2)(b)) The central management and control (CMC) of a superannuation fund is “ordinarily” in Australia at a time even if the CMC is temporarily outside Australia for a period of not more than two years (s 295-95(4): see below). The CMC of a fund is usually where the trustees (or directors of the corporate trustee) attend to the business of the fund. It is possible that if the individual trustees (or directors of the corporate trustee) are located overseas (eg they work overseas) over long periods, the CMC condition cannot be met (see examples below).

The alternative to the CMC test that applied before 1 July 2007 (under ITAA36 former s 6E) contained a specific “two-year temporary absence rule” where the two-year period could recommence if the trustees returned to Australia for a continuous period of more than 28 days. This reset rule is not included in the test from 1 July 2007. According to the ATO, the CMC of a superannuation fund involves a focus on “the who, when and where of the strategic and high level decision-making processes and activities of the fund”. These include performance of the following duties and activities: • formulating the investment strategy for the fund • reviewing and updating or varying the fund’s investment strategy as well as monitoring and reviewing the performance of the fund’s investments • if the fund has reserves, the formulation of a strategy for their prudential management, and • determining how the assets of the fund are to be used to fund member benefits (TR 2008/9, para 19). In the majority of cases, the other principal areas of a fund’s operation, such as acceptance of contributions, the actual investment of the fund’s assets, administrative duties and the preservation, payment and portability of benefits are not of a strategic or high level nature to constitute CMC. Rather, these activities form part of the day-to-day or productive side of the fund’s operations. Who Establishing who is exercising the CMC is a question of fact to be determined with reference to the circumstances of each case. While the fund trustees have the legal responsibility or duty to exercise CMC, the mere duty to exercise CMC does not, of itself, constitute CMC. That is, the trustees must in fact perform the high level duties and activities to be considered as exercising CMC of the fund in practice. If a person other than the trustees independently and without any influence from the trustees performs those duties and activities that constitute CMC, that person is exercising the CMC of the fund. Using an investment manager to carry out part or all of the investment management function does not mean that the investment manager is in any sense exercising CMC of the fund. Where The location of the CMC of the fund is determined by where the high level and strategic decisions of the fund are made and where the high level duties and activities are performed. Whether CMC is ordinarily in Australia at a particular time is to be determined by the relevant facts and circumstances of each case. This involves determining whether, in the ordinary course of events, the CMC of the fund is regularly, usually or customarily exercised in Australia. There must be some element of continuity or permanence for CMC of the fund to be regarded as being “ordinarily” in Australia. If CMC is being temporarily exercised outside Australia, this will not prevent the CMC of the fund being “ordinarily” in Australia at a particular time. Temporarily outside Australia As noted above, s 295-95(4) provides that, to avoid doubt, the CMC of a superannuation fund is ordinarily in Australia at a time even if that CMC is temporarily outside Australia for a period of not more than two years. TR 2008/9 states that the effect of s 295-95(4) is to provide one set of circumstances in which a fund’s CMC will be taken to be “ordinarily” in Australia at a time for the purposes of s 295-95(2)(b) (ie it operates as a “safe harbour” rule), and that s 295-95(4) does not otherwise restrict the meaning of “ordinarily” so that CMC can only be outside Australia for a period of two years or less. If the CMC of a fund is outside Australia for a period greater than two years, the fund will satisfy the CMC test if it satisfies the “ordinarily” requirement in s 295-95(2)(b). However, while the CMC can be outside Australia for a period greater than two years, the period of absence of CMC must still be temporary. Furthermore, if the CMC of the fund is not temporarily outside Australia, it will not be “ordinarily” in Australia at a time even if the period of absence of the CMC is two years or less. The CMC of a fund will be “temporarily” outside Australia if the person or persons who exercise the CMC

are outside Australia for a relatively short period of time. The duration of the absence must either be defined in advance or related (both in intention and fact) to the fulfilment of a specific, passing purpose. Whether a period of absence is considered to be relatively short involves considerations of questions of degree which must be decided by reference to the circumstances of each particular case. Whether an absence is temporary must be determined objectively by reference to all the relevant facts and circumstances on a “real time” basis. That is, it cannot be established in retrospect (TR 2008/9, para 29– 34). Example: trustees are overseas for a period greater than two years, but CMC is still “ordinarily” in Australia (adapted from TR 2008/9) Joseph and his wife Marian are the trustees and members of their SMSF (JM SMSF), which was established in Australia in August 2006. Joseph and Marian exercise the CMC of the fund at trustee meetings at their home in Sydney. Joseph was seconded to his employer’s London office on 1 July 2008 for a period of two years. It was always the intention of both Joseph and his employer that the duration of his secondment would actually be two years and that Joseph would return to working in Australia at the end of that period. However, due to unforeseen business pressures, Joseph was required to remain in London for an extra year. Joseph’s wife accompanied him for the duration of his secondment. They rented out the family home in Australia and lived in a furnished house in London provided by Joseph’s employer. Both Joseph and Marian continued to maintain bank accounts and private health insurance cover in Australia during the period of Joseph’s secondment. They travelled back to Australia for a holiday during the Christmas 2009 period. During the period of Joseph’s secondment, the CMC of the JM SMSF was exercised at trustee meetings at the house in London. In these circumstances, it is considered that the CMC of the fund remains ordinarily in Australia during the period of Joseph’s secondment as the trustees’ absence from Australia was temporary. The factors supporting this conclusion include the following: • Joseph and Marian intended to return to Australia at the expiration of the two-year period of secondment and never abandoned that intention • the entire period of the absence, including the additional year, was related to the fulfilment of a specific purpose • they did not establish a home outside Australia, and • they continued to maintain their home and other assets in Australia which indicates a durability of association with Australia. Accordingly, the CMC of the JM SMSF remained ordinarily in Australia within the meaning of s 295-95(2)(b) during the period that the trustees were in London.

The AAT has held an SMSF was not a resident fund as it did not satisfy the CMC test in ITAA36 former s 6E(1)(c)(i). Although s 6E(1B) modified the CMC test, the taxpayer was not “temporarily absent from Australia” after 1 July 2000 and the continuous period for which she was outside Australia exceeded two years. Accordingly, the fund was not a resident regulated superannuation fund at all times during the relevant year (CBNP Superannuation Fund 2009 ATC ¶10-105; 09 ESL 12). Delegation of trustee’s duties and powers – enduring power of attorney If permitted by the trust deed, a person who has an enduring power of attorney in respect of an SMSF member may be the trustee or director of the body corporate trustee of the SMSF, in place of the member (SISA s 17A(3)(b); SMSF Ruling SMSFR 2010/2: ¶5-220). Where permitted by the trust deed or in the circumstances prescribed in the trustee legislation of the relevant state or territory, and consistent with the SIS Act provisions, the individual trustees and director trustees of a superannuation fund may delegate all or any of their duties and powers. Taxation Ruling TR 2008/9 states that where individual trustees or directors of a corporate trustee of a superannuation fund delegate their duties and powers to another person, the delegate will be exercising the CMC of the fund if he/she independently and without influence from the trustees, performs those duties and activities that constitute CMC of the superannuation fund. For example, in all jurisdictions, the trustee legislation permits a trustee to delegate the execution of the trust where he/she is absent from the jurisdiction or about to depart from it. In accordance with the Corporations Act 2001, the directors of a corporate trustee may also delegate their duties and powers. However, if the trustees continue to participate in the strategic and high level decision-making and activities of the fund, it cannot be said that the delegate is exercising the CMC of the fund. The trustees

may continue to participate in such activities by reviewing or considering the decisions and actions of the delegate before deciding whether any further action is required (TR 2008/9, para 123–125). Example: delegation of trustee duties (adapted from TR 2008/9) Henry and Eleanor are the trustees of their SMSF, the “Plantagenet Family Superannuation Fund”, which was established in New South Wales (NSW). The members of the Plantagenet Family Superannuation Fund are Henry and Eleanor. On 29 September 2009, Henry and Eleanor travel to France to take up management of Eleanor’s family business interests in Europe. They do not have an expected return date although they do intend to return to Australia at some point in the future. They take their children with them to France, and they move into Eleanor’s family home. The children are enrolled in local schools in France. Henry and Eleanor return to Australia permanently on 22 September 2012. Prior to moving overseas, Henry and Eleanor validly delegate to Richard, an Australian-based resident, their trustees’ duties. The trust deed of the Plantagenet Family Superannuation Fund permits the delegation of all or any of the duties and powers of the trustee, provided that the delegation is consistent with the requirements under the NSW trustee legislation. The activities delegated to Richard include: • monitoring and reviewing the performance of the fund’s investments • re-balancing the investment portfolio, and • altering the fund’s investment strategy. During Henry and Eleanor’s absence from Australia, Richard undertakes these activities without reference to Henry and Eleanor. Furthermore, Henry and Eleanor did not participate in any of these high level decision-making activities while overseas. In these circumstances, the CMC of the Plantagenet Family Superannuation Fund continues to be ordinarily in Australia within the meaning of ITAA97 s 295-95(2)(b) at all times by virtue of Richard exercising the CMC in Australia during Henry and Eleanor’s absence from Australia.

Test 3: active members of fund (s 295-95(2)(c)) The active member test in s 295-95(2)(c) is satisfied if, at the relevant time: • the fund has no “active member” (see below) • at least 50% of the total market value of the fund’s assets attributable to superannuation interests held by active members is attributable to superannuation interests held by active members who are Australian residents (s 295-95(2)(c)(i)) • at least 50% of the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members is attributable to superannuation interests held by active members who are Australian residents (s 295-95(2)(c)(ii)). A member is an “active member” of a superannuation fund at a particular time if the member is a contributor to the fund at that time, or is an individual on whose behalf contributions have been made other than an individual: (i) who is a foreign resident (ii) who is not a contributor at that time, and (iii) for whom contributions made to the fund on the individual’s behalf after the individual became a foreign resident are only payments in respect of a time when the individual was an Australian resident (s 295-95(3)). Example Harvey is a resident and a member of his employer’s superannuation fund. Harvey’s employer makes a contribution for him in July. Harvey ceases to be a resident in August, and from that time does not have any contributions made to the fund on his behalf. Harvey is not an active member from that time. In October, Harvey’s employer makes a contribution for him in relation to work done in July. Although both the July and October contributions relate to a period when Harvey was a resident, as he is now a non-resident he does not become an active member because of the contributions.

A member of a fund will also be an active member if the member’s employer is on a “contributions holiday” (ie where a defined benefit superannuation scheme is in surplus and the employer is not required to make contributions to the scheme for the member because of the surplus). Contributions and contributor The term “contributor” is not defined in ITAA97. The term therefore has its ordinary meaning in the context in which it appears. The ATO states that the concept of “contributor” within the context of the active member test is directed at establishing the status of a member as a contributor at a particular point in time, not on the specific act of contributing. In establishing that status, reference must be had to the circumstances of each case, including a reference to the member’s intention to make further contributions to the fund. The status of the member as a contributor continues over the relevant period of time until the member decides to cease making contributions. When a member ceases to be a contributor is a question of fact to be determined with reference to the circumstances of each case (TR 2008/9, para 66). The active member test must be monitored continually to ensure that if there is at least one active member at the relevant time, the 50% accumulated entitlement requirement is met. Conversely, if the fund does not have an active member at the relevant time, the 50% requirement is not applicable and the fund will be an Australian superannuation fund at the relevant time if the first two conditions in s 295-95(2) are met. Example A single member SMSF meets the first two conditions in s 295-95(2). The member goes overseas and ceases to be an Australian resident, but continues to make contributions to the SMSF. The fund will not meet the definition of Australian superannuation fund as the third condition is not met.

Example A two-member SMSF meets the first two conditions in s 295-95(2). The fund’s assets are attributable equally to the superannuation interests of the members (ie 50% each). One member goes overseas and ceases to be an Australian resident, but does not make any superannuation contributions while overseas and no contributions are made on the member’s behalf. The second member continues to make superannuation contributions to the fund. The SMSF is an Australian superannuation fund. The third condition that “more than 50% of the assets attributable to active members” is met as 100% of the assets attributable to active members are attributable to a member who was at all times an Australian resident.

Example: not an active member (adapted from TR 2008/9) Ally, who is the single member of her SMSF goes overseas on a holiday in July 2009 for an indefinite period of time. She ceases to be an Australian resident in July 2011. Before travelling overseas, Ally was an employee, but her employer failed to make any superannuation contributions in respect of the period of work performed by Ally in the quarter prior to her departure (April to June 2009). In August 2012, Ally’s former employer pays the superannuation guarantee charge to the ATO which then distributes the shortfall component of the charge to Ally’s SMSF in September 2012. Ally makes no personal contributions to her SMSF during her absence from Australia. As Ally is not a resident of Australia from July 2011 and the contribution (ie the shortfall component of the charge) was made to the SMSF on her behalf in respect of the April to June 2009 period when she was a resident, Ally does not become an active member because of the contribution.

Example: whether member of fund is a “contributor” to the fund at a particular time (adapted from TR 2008/9) Isabella, one of two members/trustees of an SMSF, has been making personal contributions to the fund on a monthly basis since the fund was established on 1 July 2007. Isabella makes the contributions through an automatic deduction from her bank account. On 1 July 2010, Isabella departs Australia for a two-year working holiday in Spain. She returns to Australia on 30 June 2012. Before her departure from Australia, Isabella decided that she would not make any personal contributions to the SMSF during her period of absence from Australia. She therefore instructed her bank to stop the regular transfer of funds to her SMSF. She makes no further contributions to the SMSF until her return to Australia. In these circumstances, Isabella is a “contributor” to the fund within the meaning of s 295-95(3) throughout the entire period from 1 July 2007 to 30 June 2010. As evidenced by her instruction to her bank to stop the regular transfers, she ceased to be a contributor from 1 July 2010. Since Isabella made no further contributions until her return to Australia, she ceased to be a contributor from that time until her return to Australia.

Practitioner and ATO guidelines on SMSF residency For practitioner articles which examine the tests and issues raised in TR 2008/9 and the use of an enduring power of attorney to meet the CMC test, see: • “SMSFs: the importance of being Aussie!” and “SMSFs: have power of attorney, will travel?” in the Wolters Kluwer Australian Super News Issue 8, 15 September 2008, and • “Strategies for satisfying the Australian ‘residency’ tests for SMSFs” by Rhys Cormick, University of Canberra, Taxation in Australia, Journal of the Tax Institute, Vol 47(5), November 2012. SMSFR 2010/2 provides guidelines on cases where a person is appointed as a superannuation fund trustee under an enduring power of attorney and the obligations of the donor and donee of the power of attorney (see ¶5-220). ATO ruling on company residency Taxation Ruling TR 2018/5 provides guidance on how to apply the CMC test of company residency in s 6(1)(b) of ITAA36 following Bywater Investments Limited & Ors v FC of T; Hua Wang Bank Berhad v FC of T [2016] HCA 45; 2016 ATC ¶20-589 (Bywater). Under para (b) of the definition of “resident or resident of Australia” in s 6(1), a company not incorporated in Australia is a resident of Australia if it carries on business in Australia, and has either its CMC in Australia, or its voting power controlled by shareholders who are residents of Australia. Foreign superannuation funds A superannuation fund is a “foreign superannuation fund” if it is not an Australian superannuation fund. A foreign superannuation fund cannot be a “complying superannuation fund” under the ITAA97 as it automatically fails the basic condition that it must be a “resident regulated superannuation fund” under the SIS Act. The tax treatment of foreign superannuation funds is discussed at ¶7-400. A foreign superannuation fund which becomes an Australian superannuation fund during an income year must include its net previous income in respect of previous years of income in its assessable income in the year in which the residency status changed (¶7-450). [SLP ¶2-183]

¶2-140 Complying superannuation fund under the SIS Act A superannuation fund (¶2-120) must comply with the conditions prescribed in SISA s 42 (see below) in order to qualify to receive a notice from the Regulator stating that it is a “complying superannuation fund” for SIS and tax purposes (¶2-150). Section 42 incorporates a “culpability test” (see below). For SMSFs, broadly similar conditions prescribed in SISA s 42A determine whether an SMSF is a complying superannuation fund, the difference being that a “compliance test” rather than the culpability test applies (see “SISA s 42A conditions — SMSFs” below). SISA s 42 conditions — funds that are not SMSFs An entity that is not an SMSF is a complying superannuation fund in relation to a year of income if: • either the entity was an Australian regulated superannuation fund (¶2-130) at all times during the year of income when it was in existence, or it was a resident ADF (¶2-330) for a part of the income year and a resident regulated superannuation fund for the remaining part of the income year • either the trustee did not contravene any “regulatory provision” (see below) in relation to the entity in respect of the year of income, or the trustee did contravene a regulatory provision on one or more occasions and the entity did not fail the “culpability test” in relation to any of the contraventions (s 42(1)). Culpability test

An entity fails the culpability test in relation to a particular contravention of a regulatory provision if: • either: – all members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention, or – some (but not all) members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention, and none of the “innocent members” would suffer “any substantial financial detriment” if the entity were to be treated as a non-complying superannuation fund in relation to the year of income concerned, and • APRA believes, after considering the taxation consequences that would arise if the entity were to be treated as non-complying, the seriousness of the contravention and all other relevant circumstances, that a notice should be given to the entity stating that it is not a complying superannuation fund in relation to the year of income (s 42(1A)). The terms “contravention” and “regulatory provision” are discussed below. The question of whether a person was in any way directly or indirectly knowingly concerned in, or party to, a particular contravention is decided on a balance of probabilities. In QX971 v APRA 99 ESL 1, a superannuation fund which contravened the in-house asset rules was found to be a non-complying fund as it had also failed the culpability test. Newly established funds A new superannuation fund, or a superannuation fund converted from an existing resident ADF, is a complying superannuation fund in relation to a year of income under s 42 if: • it complies with the requirements to become a resident regulated superannuation fund and lodges an election to become regulated under the SIS Act (¶2-130) within 60 days of its establishment or conversion, or any defect in the purported election of the fund is rectified within 28 days • either it did not contravene a regulatory provision or, if it did, it did not fail the culpability test in respect of the “pre-lodgment period” (ie the period when it came into existence to the time it lodged its election to become regulated) or the “rectification period” (ie the period when it lodged the purported election to the time it complied with the election requirements) • it remains a resident regulated superannuation fund at all times after the end of the pre-lodgment or rectification period, and either it did not contravene a regulatory provision or, if it did, it did not fail the culpability test in respect of the year after the end of the pre-lodgment or rectification period (s 42(1AA), (1AC)). SISA s 42A conditions — SMSFs An entity that is an SMSF during a year of income is a complying superannuation fund if it complies with the conditions in s 42A. An SMSF throughout the year An entity that was an SMSF at all times during a year of income is a complying superannuation fund in relation to that year of income if: • either: – the entity was a resident regulated superannuation fund (¶2-130) at all times during the year of income when it was in existence, or – the entity was a resident ADF (¶2-330) for a part of the year of income and a resident regulated superannuation fund for the remaining part of the year of income when it was in existence, and • the entity passes the “compliance test” (see below) set out in s 42A(5) in relation to the year of income (s 42A(1)).

An SMSF during only part of the year An entity that was an SMSF during a part or parts of a year of income is also a complying superannuation fund in relation to that year of income if: • either the entity was a resident regulated superannuation fund at all times during the year of income when it was in existence, or it was a resident ADF for a part of the year of income and a resident regulated superannuation fund for the remaining part of the year of income when it was in existence, and • both: – the entity passes the compliance test in respect of the part or parts of the year of income during which it was an SMSF – if the trustee contravened a regulatory provision in respect of any other part or parts of the year of income, the entity did not fail the culpability test in relation to any of those contraventions (s 42A(2)). Newly established funds A new superannuation fund (including a resident ADF that converted to a superannuation fund) that was an SMSF at the time of coming into existence, or that became an SMSF at a later time in the year of income, is also a complying superannuation fund in relation to the year of income if: • it complied with the requirements to become a resident regulated superannuation fund (¶2-130) and lodged the election to become regulated under the SIS Act within 60 days of its establishment or conversion • either: – the trustee did not contravene a regulatory provision during the pre-lodgment period (ie the period from the time the entity came into existence or became a superannuation fund, as the case may be, until the time when the entity became regulated), or – the trustee contravened a regulatory provision during the pre-lodgment period on one or more occasions, but the trustee satisfied APRA that, because of special circumstances that existed in relation to the fund during the pre-lodgment period, it would be reasonable for the fund to be treated as if it had satisfied the regulatory provisions • it was a resident regulated superannuation fund at all times during the year of income after the prelodgment period • after the pre-lodgment period, it passed the compliance test in that part or parts of the year of income occurring after the pre-lodgment period during which it was an SMSF • after the pre-lodgment period, if the trustee contravened a regulatory provision in respect of any part or parts of the year of income occurring after the pre-lodgment period during which it was not an SMSF — it did not fail the culpability test in relation to any of the contraventions (s 42A(3)). Where election to become regulated is defective An SMSF is also a complying superannuation fund in relation to a year of income if: • the trustee of the entity has purported to make an election to become a regulated superannuation fund • the requirements of SISA s 19(2) to (4) were not complied with when the election was made, but were complied with within 28 days after the trustee found out about them • the entity complied with all the other requirements specified in s 42A(4). Compliance test

An entity passes the compliance test in s 42A(5) in relation to a year of income or part of a year of income if: • the trustee did not contravene a regulatory provision during the year of income or the part of the year of income, or • the trustee contravened a regulatory provision, and the Commissioner thinks that a complying superannuation fund notice should nevertheless be given to the entity in relation to the year of income after considering: – the taxation consequences of treating the entity as a non-complying fund – the seriousness of the contravention (see below) – all other relevant circumstances (see below). For the purposes of s 42A(5), the “circumstances” must be relevant, not necessarily special or unique. The Commissioner must consider what circumstances are relevant in light of each particular case. For example, these may include whether the contraventions have been rectified, the fund’s compliance history, the events leading to the contravention and whether they influenced the trustee’s decision (see “ATO guidelines on compliance test” and “All other relevant circumstances” below). In Triway Superannuation 11 ESL 12, the AAT said that s 42A(5) is a relieving discretion and two principles need to be observed: • first, discretions that are remedial or beneficial in nature ought be given a construction that allows the fullest relief which is open on a fair reading of their term, and • second, in exercising a discretion, it is necessary to have regard to whether its exercise in a particular instance will achieve or frustrate the ends, objects or purposes of the SIS Act. That case involved a three-member SMSF (father, mother and their son) where the son had a drug addiction and took almost all of the fund’s money and spent it or gave it away. On advice from a registered tax agent, the trustees concealed the true nature of the use and loss of this money for five years. The Commissioner decided to treat the SMSF as a non-complying fund. In affirming the Commissioners’ decision not to exercise the s 42A(5) discretion in the SMSF’s favour, the AAT stated: “27. In the present matter, the breaches of the standards required of superannuation funds to be concessionally taxed, are particularly serious. 28. While tragic, the circumstances of the case are not those in which a discretion ought be exercised consistently with the principles governing exercise of discretionary powers. To do so would frustrate the wider objects of the SIS Act by relieving those responsible for superannuation funds of tax imposts where all of the assets of a superannuation fund are deployed inappropriately, and lost as a consequence. Therefore, exercising a discretion in these circumstances was not consistent with the objects of the SIS Act.” In JNVQ 09 ESL 08, the AAT reviewed the application of the compliance test and upheld the Commissioner’s decision to issue a notice of non-compliance after weighing all the relevant factors in s 42A(5). In that case, the fund had breached the in-house asset rules and the seriousness of the contravention and the length of time taken to redress it weighed heavily against the fund (see also Case 7/2009 2009 ATC ¶1-011 and CBNP Superannuation Fund 2009 ATC ¶10-105; 09 ESL 12). In Pabian Park 2012 ATC ¶10-253, the AAT said that the following observations made in Re JNVQ in respect of the exercise of the discretion under s 42A(5) are apposite: “… Any exercise of discretion must have regard to considerations of unfairness in a particular case, but must be applied in a manner consistent with the objects of the relevant Act. It is important to have regard to whether, by exercising the discretion in a particular case, the decision-maker will be achieving or frustrating those objects.”

In Pabian, despite various breaches by the SMSF (in-house asset rules, loans prohibition), the AAT accepted that there were “mitigating circumstances” (the trustees were unwell, they did not understand the seriousness of the breaches, “the case is finely balanced”). In these and after weighing up all the factors, the AAT was satisfied that it would not be inconsistent with the objects of SIS Act to exercise the discretion in favour of the fund. Accordingly, it set aside the Commissioner’s decision to issue a noncompliance notice to the fund. The non-compliance notice was “taken never to have been given” with the effect that fund remained a complying superannuation fund for each of the years of income covered by that notice (s 40(3): see ¶2-150). The ATO said that it was open to the AAT to reach its decision on the facts. The ATO, however, noted that in doing so, the AAT has accepted and followed the general approach taken in PS LA 2006/19 (see “Options available to the Commissioner” below) (ATO Decision Impact Statement). Other cases where the AAT considered the application of the compliance test are: ZDDD 11 ESL 01; [2011] AATA 3; XPMX 08 ESL 10; [2008] AATA 981; Shail Superannuation Fund 2011 ATC ¶10-228; The R Ali Superannuation Fund 2012 ATC ¶10-231; 12 ESL 01; Montgomery Wools Pty Ltd Superannuation Fund 2012 ATC ¶10-233; 12 ESL 02; ATO Decision Impact Statement. ATO guidelines on compliance test Practice Statement Law Administration PS LA 2006/19 provides guidelines on the application of the compliance test in s 42A(5), in particular, the seriousness of a contravention and the relevant circumstances to be considered (see below). Basically, a non-compliance notice will not be given to an SMSF in two situations: • if the Commissioner has accepted an undertaking (including an informal arrangement) by the trustee to rectify a contravention, provided the trustee is genuinely attempting to satisfy the terms of the undertaking, or • if the Commissioner is satisfied that the trustee has wound up the fund and fund money has been rolled over to another independently managed fund (para 16, 17). For the first situation, the Commissioner may, under SISA s 262A, accept a written undertaking by a person in connection with a matter where the Commissioner has a function or power under the Act, and may apply to court for orders to enforce a breach of the undertaking (see ¶3-850). The court’s powers under s 262A are very wide, including deeming a fund to be complying in an appropriate case (Interhealth (No 2) 12 ESL 09). In the second situation, a notice of non-compliance is inappropriate because any money in the fund has effectively been placed in a position where it will no longer be at risk from further contraventions by the trustee. Where this is not the case and there is a risk of future non-compliant behaviour by the trustee, action will be taken in accordance with Practice Statement Law Administration PS LA 2006/17 (dealing with the disqualification of a trustee: see ¶3-850). If the Commissioner finds that the trustees’ actions preceding a winding-up were such that it is appropriate to give an SMSF a notice of non-compliance, he is not precluded from doing so on the basis that the SMSF has been wound up. The compliance test applies to an entity that is an SMSF throughout a year of income, and to an entity that was not an SMSF for the whole year in respect of any part of the year of income during which it was an SMSF. In respect of that part of the year of income when the entity was not an SMSF, the culpability test (see above) applies. If a compliance notice has already been given to a fund in relation to a year of income and has not been revoked under SISA s 40 (¶2-150), a second compliance notice does not need to be given for the purposes of s 42A(5). Options available to the Commissioner In making the decision on whether to give an SMSF a notice of non-compliance for a year of income, the Commissioner must have regard to the factors set out in s 42A(5) (see above). PS LA 2006/19 outlines the factors that the Commissioner will consider in deciding whether a notice of non-compliance should be given to an SMSF under SISA s 40(1) where the trustee has contravened one or more of the regulatory provisions.

The Regulators (APRA or the Commissioner) have a range of options under the SIS Act to deal with contraventions (¶3-850). For example, where a contravention occurs, the Commissioner may use one or more of the options below: • make the fund a non-complying superannuation fund by giving the fund a notice of non-compliance (s 40(1): ¶2-150) • accept an undertaking from the trustee to rectify the contravention (s 262A: ¶3-850) (see ZDDD 11 ESL 01, where an enforceable undertaking was not accepted by the ATO in view of the seriousness of the contraventions) • disqualify individuals as trustees, thereby prohibiting them from acting as an individual trustee or as a responsible officer of a corporate trustee of a superannuation fund (s 126A: ¶3-130) • suspend or remove the trustee of a superannuation fund, and appoint an acting trustee (s 133: ¶3130) • give the trustees a rectification and/or education direction, and impose administrative penalties for certain contraventions (¶3-845, ¶5-550) • freeze the assets of the fund if there is a risk of the members’ benefits being eroded (s 264: ¶3-850), and • seek civil and/or criminal penalties through the courts (Pt 21: ¶3-800–¶3-820). Seriousness of a contravention The seriousness of a contravention is a question of fact and degree, and each case will need to be considered in light of its particular circumstances. In all cases, the ATO’s response to a contravention must be appropriate and proportionate. In determining the seriousness of a contravention when applying the compliance test in s 42A(5) (see above), the Commissioner will consider the factors below. • The behaviour of the trustee in relation to the contravention (see APRA v Derstepanian and Anor [2005] FCA 1121; 60 ATR 518). A contravention resulting from recklessness or intentional disregard for a regulatory provision is likely to be considered more serious than a contravention resulting from an honest mistake. “Recklessness” and “intentional disregard” are well-established concepts. The courts have long recognised that the ordinary meaning of “recklessness” involves something more than mere inadvertence or carelessness. For example, an entity’s conduct clearly shows disregard of, or indifference to, consequences or risks that are reasonably foreseeable as being a likely result of the entity’s actions. In other words, recklessness involves the running of what a reasonable person would regard as an unjustifiable risk. “Intentional disregard” is more than just disregard for the consequences or reckless disregard. The facts must show that an entity consciously decided to disregard clear obligations under a law, of which the entity was aware. An example is the production of false records (see PS LA 2012/15; MT 2008/1). • The extent to which the contravention affects the fund’s assets (see Case 47/94 94 ATC 417; AAT Case 9689 29 ATR 1086). The greater the proportion of the fund’s assets affected by the contravention, the more serious the contravention is likely to be. • The extent to which the fund’s assets are exposed to financial risk and whether there is any loss to the value of the fund. The greater the proportion of the fund’s assets exposed to financial risk and the greater the loss suffered by the fund, the more serious the contravention is likely to be. However, a contravention may still be serious if a significant proportion of the fund’s assets has been put at risk, even though the fund has not suffered any actual loss (see Re QX971 and APRA [1999] AATA 6). • The frequency and duration of contraventions over a period of time (see Re Preuss and APRA [2005] AATA 748; (2005) 60 ATR 1137). A single contravention on its own may not be considered serious,

but a number of contraventions taken together may make the situation more serious. In addition, the longer a contravention continues without any attempt to rectify it, the more serious it is likely to be. • The nature of the contravention in the overall scheme of SIS regulatory regime (see APRA v Holloway and Anor [2000] FCA 1245; (2000) 45 ATR 278). For example, a contravention involving an artificial arrangement intended to undermine a regulatory provision is likely to be considered a serious contravention. In Sutherland v Woods 11 ESL 08, the ATO had written to the trustees of the SMSF which had contravened various SIS Act and SIS Regulations provisions outlining the steps required to be taken to rectify the reported contraventions, or face prosecution or disqualification as trustees of the fund. The court concluded that there was no dispute that the SMSF was held to be a non-complying superannuation fund. The AAT, in JNVQ 09 ESL 08, said that the seriousness of the contravention in that case militates against any exercise of the discretion in the compliance test in s 42A(5) (see above). However, no factor is taken alone and the AAT must consider the particular mitigating circumstances upon which the applicants rely, which are part of “all other relevant circumstances” (see below). All other relevant circumstances In addition to the taxation consequences and the seriousness of the contravention, the Commissioner is required to consider “all other relevant circumstances” when applying the compliance test in s 42A(5) (see above). The circumstances do not necessarily have to be special or unique; they only have to be relevant. Some circumstances that may be relevant in a particular case include the following. • Whether the trustee has rectified the contravention, entered into an enforceable undertaking to rectify the contravention, or taken any action (where possible) to prevent the contravention from occurring again. Actions or behaviours that indicate a willingness to comply with the law will be considered favourably. • The trustee’s level of skill and knowledge. The higher the level of skill and knowledge of the trustee in managing a fund, the more likely it is that they are expected to understand the impact of their action or inaction. A trustee with a more comprehensive understanding is expected to meet a higher standard of behaviour in order to demonstrate that the fund should be given another opportunity to improve compliance before being made a non-complying fund. • The compliance history of the fund before and after the contravention. A fund with a good compliance record will be treated more favourably than a fund with a history of non-compliance. • The events which led to the contravention and whether these influenced the trustee’s decision. Examples include serious illness or death of a trustee or close relative, and natural disasters. • In the event that the ATO may have facilitated or contributed to the trustee’s adopting a course of action, see ATO Practice Statement PS LA 2011/27 (on matters that the Commissioner considers when determining whether the ATO view of the law should only be applied prospectively) as the principles discussed in that practice statement are relevant in deciding whether to give an SMSF a notice of non-compliance (PS LA 2009/19, para 36). Compliance with provisions in other Acts As a condition for obtaining or maintaining its “complying fund” status under SIS Act and ITAA97, superannuation entities have to comply with the wider definition of “regulatory provision” (see below), rather than just the SIS provisions as was the case in pre-2002 years. This is because certain prudential requirements previously imposed by SIS Act or SIS Regulations have been replaced by equivalent requirements in CA (eg the reporting and disclosure obligations to members) and TAA, and by the enactment of FSCDA covering the reporting obligations of APRA-regulated entities. Regulatory provisions Superannuation entities are granted complying fund status only if the trustee of the entity does not contravene a regulatory provision, or the trustee contravenes one or more regulatory provisions but does

not fail the culpability or compliance test, as the case may be (see above). A “regulatory provision” in relation to a superannuation entity is defined in SISA s 38A as: • a provision of the SIS Act or Regulations • a provision of the Financial Sector (Collection of Data) Act 2001 (FSCDA) (not applicable to SMSFs) • any of the following provisions in Sch 1 to the TAA (applicable to SMSFs only) – s 284-75(1) and (4) (making a statement that is false or misleading in a material particular, whether because of things in it or omitted from it) (or former s 288-85 (giving false or misleading statements) – s 284-95 (liability to an administrative penalty under s 284-75(1) and (4) by the directors of the corporate trustee of an SMSF) – Div 390 (reporting to the ATO about contributions and roll-overs) – s 136-80(1) (commutation of income stream and payment of commutation lump sum under an ATO commutation authority), or • any of the following provisions of the Corporations Act 2001 as applying in relation to financial products that are interests in the superannuation entity: s 1013K(1) or (2); 1016A(2) or (3); 1017B(1); 1017C(2), (3) or (5); 1017D(1); 1017DA(3); 1017E(3) or (4); 1020E(8) or (9); 1021C(1) or (3); 1021D(1); 1021E(1); 1021O(1) or (3); 1041E; 1041F(1); 1043A(1) or (2); any other provisions as specified in the regulations for the purposes of SISA s 38A(b), or • any of the following provisions of the Corporations Act 2001: s 1021NA(1), (2) or (3); 1021NB(1), (2) or (3). The above CA provisions deal with licensing, disclosure of information and market conduct (see Chapters 4 and 9). The requirements under the FSCDA are discussed in ¶9-740. Meaning of “contravention” The trustee of a regulated superannuation fund must comply with all regulatory provisions that are relevant to it (see above). The compliance requirements are discussed in Chapters 3, 4, 5 and 9. For the purpose of determining a superannuation fund’s compliance status under SISA Pt 5 Div 2, a contravention of a regulatory provision is to be ignored unless the contravention is: • an offence • a contravention of a civil penalty provision, or • a contravention of TAA Sch 1 s 284-75(1), (4), s 284-95 or Div 390 (SISA s 39(1)). If a regulatory provision states that a person commits an offence by engaging in or failing to engage in specified conduct, the person is taken to have contravened the provision by engaging in or failing to engage in that conduct (s 39(1A)). To avoid doubt, conduct giving rise to an administrative penalty under s 284-75(1) or (4) (or 288-85 for things done before 4 June 2010) is treated as a contravention of that section (SISA s 39(1B)). For the purposes of Div 2, it is sufficient if a contravention is established on the balance of probabilities (s 39(2)). The less onerous “balance of probabilities” civil standard of proof is used, even though certain offences can arise only if it has been established under the criminal standard of proof (ie beyond reasonable doubt) that the offence has been committed. This is because a decision on the compliance status of a fund is a reviewable decision (¶2-150). Except where a contravention of a provision gives rise only to civil liability action (eg an action against

trustees for failure to comply with a SIS Act covenant: ¶3-100, ¶3-820), a contravention is generally an offence (¶3-810). Trustee duties and penalties under SIS Act are discussed further in ¶3-800–¶3-820. [SLP ¶2-180]

¶2-150 Notification of complying or non-complying status The “Regulator” is the Commissioner of Taxation for notices given to SMSFs, and APRA for notices given to all other funds (SISA s 6(4)). The Regulator may give a written notice to the trustee of a superannuation fund stating whether it is, or is not, a complying superannuation fund in relation to a year of income specified in the notice. A notice stating that a fund is not a complying superannuation fund must set out the reasons for the decision. APRA must also give the particulars of any notice it has issued to a fund to the Commissioner (SISA s 40; 45). When must a complying notice be given? The Regulator must give the trustee of a superannuation fund a complying fund notice in relation to a year of income if the fund has satisfied all the conditions relevant to a complying superannuation fund (as discussed in ¶2-140) and: • it has not received a notice of compliance in relation to a previous year of income, or • it has received a notice of non-compliance in relation to a previous year of income and has not received a notice of compliance for a year of income later than that previous year of income and earlier than the current year of income (SISA s 41(2)). Annual notices of compliance or non-compliance are no longer issued to superannuation funds (or ADFs or PSTs), as was previously the case under the former Occupational Superannuation Standards Act 1987 (OSSA). Instead, a fund is a complying superannuation fund (or complying ADF or PST) for tax purposes if it has received a notice of compliance in respect of a year of income (including a notice under the former OSSA in relation to a pre-1994/95 income year) which has not been revoked by a subsequent notice of non-compliance in respect of that income year or a later income year (SISA s 45(1)). Funds which are already complying funds therefore will not receive any notices from the Regulator unless their complying fund status is revoked. New funds which satisfy the conditions in the SIS Act for complying superannuation funds will receive a first notice of compliance in respect of the year of establishment and, after that, will not be issued further notices unless they are later found to be noncomplying. If a notice of compliance is revoked, or the decision to give the notice is set aside, the notice is taken never to have been given (s 40(4); 41(4)). This has the effect that the fund is treated as a non-complying fund for each of the years of income covered by that notice (s 40(3)). The Commissioner can amend the fund’s assessment in respect of those years to give effect to the fund’s change of status. Where the Regulator has decided that a fund did not fully satisfy the SIS Act conditions to be a complying superannuation fund for a particular year, that decision can be reversed in light of information not considered at the time. In that event, the trustees (and the Commissioner, as required) are notified accordingly and the fund will be a complying fund for the year. The correct notice must be given In XPMX 08 ESL 10, the AAT decided that a notice of non-compliance given to a superannuation fund was invalid and ineffective as the fund in question was an SMSF at all times during the relevant year (year ended 30 June 1998). The notice of non-compliance given was expressed to be based upon the fund’s failure to satisfy conditions in SISA s 42(1) (the culpability test: see ¶2-140) which does not apply to SMSFs. The decision to issue the notice would have been sustainable had the decision been based upon SISA s 42A(1) and 42A(5), the provisions applicable to SMSFs (the compliance test: see ¶2-140). The ATO does not agree with the AAT decision. The ATO considers that the fund was not an SMSF in respect of the 1998 year of income, and as the trustees failed to satisfy the conditions in s 42(1), the ATO

was entitled to issue the notice of non-compliance in respect of that year under the transitional provisions in SISA Pt 24B Div 3. In any case, a decision to issue a notice is made under SISA s 40 which authorises the giving of notices stating whether a fund is complying or non-complying, rather than under the specific provision under which non-compliance arises. Accordingly, the ATO’s view is that a decision to give a notice of non-compliance is valid if justified under either SISA s 42 or 42A (ATO Decision Impact Statement on XPMX case). However, the ATO decided against an appeal in view of the limited ongoing relevance of the decision (the issues in the case would only arise in respect of notices issued for the 1998 and 1999 years of income) and the range of compliance strategies which are currently available to the ATO (see Practice Statement Law Administration PS LA 2006/19 in ¶2-140). Review of Regulator’s decision The Regulator’s decision to give a notice stating that a fund is or is not a complying superannuation fund, or the refusal to give such a notice, is a “reviewable decision” (SISA s 10(1)). The trustees may request the Regulator to review a reviewable decision by giving written notice, setting out their reasons for making the request, within 21 days after receiving notice of the decision. The Regulator can confirm, vary or revoke the decision, and advise the trustees accordingly. If the Regulator does not confirm, vary or revoke the decision within 60 days after receiving the request for review, the decision under review is deemed to have been confirmed (SISA s 344). An application for review of a decision that a fund is non-complying does not affect the operation of the decision. Notice of the decision that the fund is a non-complying superannuation fund can be given to the Commissioner. However, the trustees can apply to the AAT to stay the operation or implementation of the decision (Administrative Appeals Tribunal Act 1975 (AAT Act), s 41). Superannuation trustees that are dissatisfied with the Regulator’s decision (or deemed decision) after the review can apply to the AAT for a review of the decision (s 344(8)). Proceedings before the AAT are governed by the AAT Act, subject to various modifications which apply specifically to taxation reviews. An application to the AAT for review must be made within 28 days after notification of the Regulator’s decision on review, although the AAT may grant an extension of time (AAT Act s 29). If the Regulator’s decision after review is a deemed confirmation of an earlier decision, the time for applying to the AAT commences on the date of the deemed decision (60 days after the date of the original request for review) and ends on the 28th day after the date of the deemed decision (s 344(9)). Proceedings before the AAT take place in private (s 344(11)). The AAT has discretion on a case-by-case basis to determine whether confidentiality should be provided through a private hearing under AAT Act s 35(2). An appeal against an AAT decision may be made to the Federal Court, but only on a question of law. Merits review by AAT Administrative decisions by APRA with respect to APRA-regulated funds and by the Commissioner with respect to SMSFs are subject to merits review by the AAT, consistent with the guidelines developed by the Administrative Review Council. Merits review aims to ensure that all persons affected by a decision receive fair treatment, and to improve the transparency of administrative decisions where the Regulators are seen to make consistent and well-formulated decisions. These decisions are specified in the definition of “reviewable decision” in SISR reg 1.03(1), for example, a decision to refuse to grant or revoke a licence, a decision to refuse to determine certain SIS Act provisions do not apply, and decisions to ensure compliance with minimum standards and decisions giving directions to trustees. [SLP ¶2-190, ¶4-820]

¶2-170 Public sector superannuation schemes and EPSSSs A public sector superannuation scheme for tax purposes is defined in ITAA97 s 995-1(1) to have the meaning in the SISA (see ¶2-120).

A public sector superannuation scheme is a complying superannuation fund and is entitled to concessional tax treatment as such a fund under ITAA97 Div 295, if it is either a regulated superannuation fund (as discussed at ¶2-130) or an exempt public sector superannuation scheme (SISA s 45(6)). An “exempt public sector superannuation scheme” (EPSSS) means a public sector superannuation scheme that is prescribed in SISR Sch 1AA (SISR reg 1.04(4A) to (4E)). EPSSSs are subject to a different prudential regime from other regulated superannuation funds as they are not regulated under the SIS legislation. Instead, these schemes are subject to supervision under their respective enabling Commonwealth, state or territory Acts or governing rules which effectively reflect the principles of the SIS legislation for prudential regulation purposes. An EPSSS may choose to be regulated by the APRA, in which case it would cease to be an EPSSS (see below). It should be noted that the provisions in SISA dealing with TFNs only apply to an EPSSS which has a corporate trustee or has the provision of old-age pensions as its sole or primary purpose (Chapter 11). Also, certain EPSSSs are taken to be regulated superannuation funds for the purposes of the Superannuation (Resolution of Complaints) Act 1993 (SRC Act) and, therefore, are subject to the jurisdiction of the Superannuation Complaints Tribunal (SRC Act s 4A) (Chapter 13). By virtue of SISA s 46, an EPSSS is taken to be a complying superannuation fund for the purposes of SGAA. A scheme ceases to be an EPSSS at the time it is registered as a registrable superannuation entity (¶3495) and it becomes an APRA-regulated entity. These schemes are subject to regulation under SIS Act regardless of whether Sch 1AA has been amended to remove them from the list of EPSSSs (SISR reg 1.04(4AA)). [SLP ¶2-110]

Approved Deposit Funds ¶2-300 Qualifying conditions for complying ADFs An entity is eligible for concessional tax treatment as a complying ADF under ITAA97 Div 295 (see ¶7600) if it satisfies the following conditions specified in the SIS Act: • the entity is an “approved deposit fund” (as defined in the SIS Act: ¶2-320) and is resident in Australia (¶2-330) • the fund has met the prescribed requirements to be a complying ADF for the purposes of the SIS Act (¶2-340) • the trustee of the fund has received a notice from APRA stating that the fund is a complying fund, and has not received a notice in a later year stating that it is non-complying (¶2-350). An ADF that does not satisfy the conditions to be a complying ADF is taxed under Div 295 as a noncomplying ADF (¶7-650). [SLP ¶2-220]

¶2-320 What is an “approved deposit fund”? An “approved deposit fund” means a fund that is an indefinitely continuing fund and is maintained by a registrable superannuation entity (RSE) licensee that is a constitutional corporation solely for approved purposes (SISA s 10(1)). The meaning of “indefinitely continuing fund”, as discussed in relation to a superannuation fund (¶2-120), applies similarly to an ADF. The meaning of “RSE licensee” is discussed at ¶3-480.

Approved purposes The “approved purposes” of an ADF are: • receiving on deposit: (i) roll-over superannuation benefits (¶8-600) (ii) directed termination payments (within the meaning of ITTPA s 82-10F: these are permitted rollovers of employment termination payments) (iii) amounts paid under SISA Pt 24 (these are roll-overs from eligible rollover funds), and (iv) amounts paid under SGAA s 65 (these are payments of the shortfall component of a SG charge: ¶12-500) • dealing with the above amounts in accordance with the fund rules to enhance the value of, or render profitable, the property of the fund • repaying deposits and accumulated earnings upon request by the depositor (or by the executor, etc, of a deceased depositor), subject to any restrictions imposed by the ADF operating standards (¶3650) • such other purposes as may be approved by APRA (SISA s 10(1); 15). ADFs are principally superannuation roll-over vehicles with special features. For example, they cannot accept contributions directly from contributors in the same way as superannuation funds. They must pay out members’ benefits when the members reach age 65 and they cannot pay a pension. The special features of ADFs, in particular those dealing with their operation and regulation, are discussed in ¶3-650 onwards. [SLP ¶2-225]

¶2-330 Resident ADFs A fund is a resident ADF at a particular time if all of the following conditions are met: • either the fund was established in Australia or any asset of the fund is situated in Australia • the central management and control of the fund is in Australia • the accumulated entitlements of resident members are 50% or more of the total assets of the fund. The “accumulated entitlements of resident members” is the sum of the value of the fund’s assets that are attributable to all deposits made to the fund for members who are residents and total earnings on those deposits. The “total assets of the fund” is the value of the fund’s assets at that particular time. A “member” includes a depositor, and “resident” has the same meaning as in ITAA36 (SISA s 20A). During a year of income, a resident ADF may convert to a resident regulated superannuation fund (¶2130) without endangering its eligibility for concessional tax treatment in that year (SISA s 42(1)(a)(ii)). [SLP ¶2-225]

¶2-340 Complying ADFs under the SIS Act An entity is a complying ADF in relation to a year of income if, at all times during the year of income when it was in existence, it was a resident ADF (¶2-330) and any of the following conditions are met: • the trustee did not contravene any regulatory provision (¶2-140) in relation to the entity in respect of the year of income • the trustee contravened a regulatory provision on one or more occasions and each contravention was

rectified within 30 days (or such further period allowed by APRA) after the trustee became aware of the contravention • the trustee contravened a regulatory provision on one or more occasions and APRA is satisfied that the seriousness or frequency, or both, of the contraventions do not warrant giving the entity a notice stating that it is not a complying ADF • APRA, after considering all relevant circumstances, thinks that a notice should be given to the entity stating that it is a complying ADF (SISA s 43). For the above purposes, a contravention of a regulatory provision is ignored unless the contravention is an offence or a contravention of a civil penalty provision (SISA s 39). The meaning of “contravention”, as discussed at ¶2-140 in relation to superannuation funds, applies equally to ADFs. The principal prudential requirements for ADFs are discussed in Chapters 3 and 4. [SLP ¶2-230]

¶2-350 Notification of ADF status APRA may give a written notice to the trustee of a fund stating whether it is, or is not, a complying ADF in relation to a year of income specified in the notice. A notice stating that a fund is non-complying must set out reasons for APRA’s decision (SISA s 40). APRA must also give the particulars of any notice issued to a fund to the Commissioner (SISA s 40(3)). APRA is obliged to give a notice to an entity stating that it is a complying ADF in relation to a year of income if it has satisfied all the complying ADF conditions (as discussed at ¶2-340) and: • it has not received a notice of compliance in relation to a previous year of income, or • it has received a notice of non-compliance in relation to a previous year of income and has not received a notice of compliance for a subsequent year of income (SISA s 41(2)). As with superannuation funds, APRA no longer issues annual notices of compliance or non-compliance to ADFs. An APRA decision on the complying or non-complying status of an ADF is a reviewable decision. The review and appeal process for reviewable decisions is the same as for superannuation funds (¶2150). [SLP ¶2-235]

Pooled Superannuation Trusts ¶2-400 Qualifying conditions for PSTs An entity is eligible for concessional tax treatment as a PST under ITAA97 Div 295 (see ¶7-700) if it satisfies the following conditions specified in the SIS Act: • the entity is a “pooled superannuation trust” (as defined in the SIS Act: ¶2-420) • the trust has met the prescribed requirements for PSTs for the purposes of the SIS Act (¶2-430) • the trustee has received a notice from APRA stating that the trust is a PST and has not received a notice in a later year stating that it is not a PST (¶2-440). Unit trusts which are not PSTs, or which do not satisfy prescribed conditions in the SIS Act for PSTs, are taxed in accordance with the general trust provisions of ITAA36. [SLP ¶2-255]

¶2-420 What is a “pooled superannuation trust”?

For tax purposes, a “pooled superannuation trust” is defined by reference to its meaning in SISA s 48, ie a PST which satisfies the conditions for concessional tax treatment set out at ¶2-400. A PST is defined in the SIS Act as a resident unit trust (the trustee of which is a trading or financial corporation formed within the limits of the Commonwealth) that is used only for investing the following kinds of assets: • assets of a regulated superannuation fund, an ADF or a PST • complying superannuation assets or segregated exempt assets of a life insurance company (generally assets supporting life policies issued by the company and the annuity business of the company in respect of complying superannuation business) (SISR reg 1.04(5)). A “unit trust” generally means any trust estate, whether or not the interests in it are unitised. The general rules in ITAA97 apply to determine residency of the unit trust. To come within the definition of a PST, the trustee of the unit trust must also give APRA confirmation in writing of its intention for the trust to be treated as a PST. The special features of PSTs, in particular those dealing with their operation and regulation, are discussed in ¶3-700 onwards. [SLP ¶2-255]

¶2-430 PSTs under the SIS Act An entity is a PST for the purposes of the SIS Act in relation to a year of income if, at all times during the year of income when it was in existence, it was a PST as defined (¶2-420) and any of the following conditions are met: • the trustee did not contravene any regulatory provision (¶2-140) in relation to the entity in respect of the year of income • the trustee contravened a regulatory provision on one or more occasions and each contravention was rectified within 30 days (or such further period allowed by APRA) after the trustee became aware of the contravention • the trustee contravened a regulatory provision on one or more occasions and APRA is satisfied that the seriousness or frequency, or both, of the contraventions do not warrant giving the entity a notice stating that it is not a PST • APRA, after considering all relevant circumstances, thinks that a notice should be given to the entity stating that it is a PST (SISA s 44). For the above purposes, a contravention of a regulatory provision is to be ignored unless the contravention is an offence or a contravention of a civil penalty provision (SISA s 39). The meaning of “contravention”, as discussed at ¶2-140 in relation to superannuation funds, applies equally to PSTs. The principal prudential requirements for PSTs are discussed in Chapters 3 and 4. [SLP ¶2-260]

¶2-440 Notification of PST status APRA may give a written notice to the trustee of a unit trust stating whether it is, or is not, a PST in relation to a year of income specified in the notice. A notice stating that a unit trust is not a PST must set out reasons for APRA’s decision (SISA s 40). APRA must also give the particulars of any notice issued to a unit trust to the Commissioner (SISA s 40(3)). APRA is obliged to give a notice to an entity stating that it is a PST in relation to a year of income if it has

satisfied all the PST conditions (as discussed at ¶2-430) and: • it has not received a notice of compliance in relation to a previous year of income, or • it has received a notice of non-compliance in relation to a previous year of income and has not received a notice of compliance for a subsequent year of income (SISA s 41(2)). As with superannuation funds, annual notices of compliance or non-compliance are no longer issued to PSTs. An APRA decision on the complying or non-complying status of a PST is a reviewable decision. The review and appeal process for reviewable decisions is the same as for superannuation funds (¶2150). [SLP ¶2-265]

3 SIS PRUDENTIAL SUPERVISION OF SUPERANNUATION FUNDS PRUDENTIAL REQUIREMENTS Regulation of superannuation entities

¶3-000

Superannuation Regulators

¶3-005

Entities covered by the SISA

¶3-010

Spouse, child and relative in the SISA ¶3-020 GOVERNING RULES AND TRUSTEE RULES Governing rules and trustee covenants

¶3-100

Trustee representation rules

¶3-120

Trustee appointment and removal — disqualified persons

¶3-130

Governing rules and SISA requirements

¶3-140

Service providers and conflicts of interest

¶3-145

Protection for trustees in governing rules

¶3-150

Defined benefit and pension funds must have 50 members

¶3-160

FUND OPERATION Sole purpose test

¶3-200

Acceptance of contributions and accruals

¶3-220

Minimum benefits of members

¶3-230

Insurance cover and standards

¶3-240

Insurance operating standards

¶3-243

General fees rules

¶3-245

Fee cap and prohibition of exit fees

¶3-250

Assignment of members’ interest and charge on fund assets

¶3-260

Members’ rights to accrued benefits

¶3-270

Preservation of benefits

¶3-280

Portability of benefits

¶3-284

Payment of benefits

¶3-286

Illegal early release of superannuation

benefits

¶3-287

Death benefit nominations — meaning of “dependant”

¶3-288

Providing information to members and others ¶3-290 Dealing with members’ inquiries and complaints

¶3-300

Providing information to the Regulators

¶3-310

Accounts, audit and reporting by superannuation entities

¶3-315

Financial management

¶3-330

Other trustee duties and administration obligations

¶3-340

Dealing with surpluses

¶3-350

Splitting superannuation interests on marriage breakdown

¶3-355

Amalgamation of funds — successor funds

¶3-360

Winding up fund

¶3-370

Lost members and unclaimed superannuation benefits

¶3-380

Transferring inactive low-balance accounts to ATO

¶3-385

PENSION STANDARDS Minimum standards for income streams

¶3-390

INVESTMENT RULES Investment strategy standard — covenants, insurance, and reserves

¶3-400

Investment controls

¶3-405

Borrowings by superannuation funds

¶3-410

Limited recourse borrowing arrangements

¶3-415

Loans/financial assistance to superannuation fund members

¶3-420

Acquisition of assets from a related party

¶3-430

Fund investments — arm’s length rule ¶3-440 In-house asset rules

¶3-450

Related party

¶3-470

Trustees must not offer inducements

to influence employers

¶3-475

RSE LICENSING AND REGISTRATION Trustee licensing and RSE registration

¶3-480

Applying for an RSE licence

¶3-485

Approval to hold controlling stake in an RSE licensee

¶3-488

Registering an RSE

¶3-490

RSE licensees must provide information about RSE at AMM

¶3-495

PUBLIC OFFER ENTITIES AND ERFs RSE licensing and other rules

¶3-500

ERF prudential requirements

¶3-520

SUPERANNUATION SERVICE PROVIDERS Auditors and actuaries

¶3-600

Investment managers and custodians ¶3-620 ADF PRUDENTIAL REQUIREMENTS Prudential requirements for ADFs

¶3-650

ADFs providing information to the Regulators

¶3-658

Minimum benefits of ADF members

¶3-660

Preservation and payment of benefits by ADFs ¶3-662 ADF investment rules and controls

¶3-680

PST PRUDENTIAL REQUIREMENTS Prudential requirements for PSTs

¶3-700

PSTs providing information to the Regulators

¶3-710

PST investment rules and controls

¶3-730

PENALTIES SIS penalty regime

¶3-800

Application of the Criminal Code

¶3-810

SIS penalty provisions

¶3-820

Infringement notices

¶3-840

Administrative directions and penalties for SMSF contraventions

¶3-845

POWERS OF THE REGULATORS Role of the Regulators and powers

¶3-850

Powers of APRA to give directions

¶3-855

Prudential regulation by ASIC

¶3-860

Protection for whistleblowers

¶3-880

SUPERANNUATION LEVIES Superannuation supervisory levy

¶3-900

Levy payable by SMSFs

¶3-920

Financial assistance funding levy

¶3-930

Prudential Requirements ¶3-000 Regulation of superannuation entities The Superannuation Industry (Supervision) Act 1993 (SISA) and its Regulations (SISR) are the governing legislation for the regulation of superannuation funds, ADFs and PSTs in Australia. Compliance with the prudential regime in the SIS legislation is a prerequisite for superannuation entities which seek concessional tax treatment for the 1994/95 and subsequent years (¶2-100). The SISA is administered by APRA, ASIC and the Commissioner of Taxation (referred to as “Regulators” in SISA). The division of SISA administration among the Regulators is summarised in ¶3-005. The Regulators have extensive powers (regulatory and investigative) for the administration of the SISA and SISR provisions under their charge (¶3-850). The SISA is based on the pensions and corporations powers under the Constitution. Funds and trusts must be regulated under one of those powers in order to be eligible for tax concessions as a complying superannuation fund, complying ADF or PST. With limited exceptions, a superannuation fund must make an irrevocable election under the SISA to become a regulated superannuation fund (¶2-130) and comply with the regulatory provisions relevant to it. Similarly, an ADF or a PST must come within the meaning of those terms in the SISA and comply with the regulatory provisions relevant to it (¶2-320, ¶2-420). A “regulatory provision” means a provision of the SIS legislation, the Financial Sector (Collection of Data) Act 2001 (FSCDA) and certain provisions of the Corporations Act 2001 (CA) or the Taxation Administration Act 1953 (TAA) (see below and ¶2-140). A complying fund or PST must also be an Australian resident fund or trust (¶2-130). This chapter covers the large number of the SIS prudential requirements that are common to all regulated superannuation funds, ADFs or PSTs (referred to as a “superannuation entity” in the SISA). It also covers the additional requirements or rules that specifically apply to particular types of superannuation funds (eg public offer funds, standard employer-sponsored funds and SMSFs), ADFs or PSTs, and to other entities in connection with their superannuation operations (eg employers and service providers), and the SISA trustee licensing and registrable superannuation entity (RSE) registration regime (¶3-480). The disclosure and licensing obligations of superannuation entities under the CA are discussed in Chapter 4 of the Guide, and SMSF-specific issues and rules are discussed in Chapter 5. In addition to the above, RSEs and RSE licensees which are authorised to offer MySuper products have additional prudential and reporting obligations under SISA and FSCDA (see Chapter 9 of the Guide). For tax purposes, compliance with relevant regulatory provisions in SISA and other Acts constitutes one of the conditions for an entity to qualify as a complying superannuation fund, complying ADF or PST (see Chapter 2). These requirements take the form of specific duties and conditions imposed under the SIS legislation, as well as operating standards that are prescribed, and the obligations under the CA, FSCDA and TAA (see “Compliance with provisions in other Acts” in ¶2-140). A failure to comply may result not only in the entity losing its concessional tax status but in penalties being imposed on those responsible for non-compliance (eg trustees, investment managers and employers). These penalties include a civil and/or criminal penalty such as a fine or term of imprisonment, or civil liability action by an aggrieved person (¶3-820). There are exemptions from some or all of the above prudential regulatory requirements for

superannuation funds with fewer than five members (ie SMSFs and small APRA funds), certain public sector superannuation schemes, or ADFs with a single beneficiary. However, once a superannuation entity is subject to regulation under the SISA and other Acts, all of the prudential requirements relevant to it (including the penalty regime) apply at all times even if the entity fails in a particular year to be eligible for concessional tax treatment under ITAA97 as a complying fund. APRA and ATO guidelines APRA “Superannuation Prudential Practice Guides” (PPGs) provide guidance on APRA’s view of sound practice in particular areas and discuss the prudential requirements based on the SIS legislation and APRA’s prudential standards (www.apra.gov.au/superannuation-standards-and-guidance) (¶9-720). In addition, APRA issues letters and various forms of guidance notes and advices to superannuation trustees from time to time. The ATO’s website contains a range of tax and SMSF rulings, determinations, guidance notes and interpretative decisions as well as fact sheets on the application of the SIS and tax legislation (¶16-090). Different levels of protection apply to those who rely on ATO rulings, etc and other Regulators’ releases or guidelines as some of these do not have the force of law and are based on the Regulators’ interpretation of the relevant legislation. In addition, users should also exercise caution when replying on the releases and guidelines as they may be affected by legislation changes subsequent to their issue. Other regulatory and related Acts A number of other Acts complement the SIS regulatory regime. The Superannuation (Resolution of Complaints) Act 1993 established a complaints resolution scheme and the Superannuation Complaints Tribunal (SCT) to provide the forum for the resolution of complaints of members and beneficiaries of regulated superannuation funds (other than SMSFs) and ADFs, and holders of RSAs and certain superannuation policy holders. The AFCA has replaced the SCT as the external dispute resolution forum from 1 November 2018, with the SCT carrying on residual operations for complaints received by it before that date. The Complaints Act will be repealed on a date to be fixed by proclamation or, if no date is fixed, on 6 February 2022 (Chapter 13). The Superannuation (Unclaimed Money and Lost Members) Act 1999 provides a scheme for regulated superannuation funds, ADFs and RSA providers to deal with unclaimed superannuation money and benefits of lost members (¶3-380). The Corporations Act 2001 and its Regulations provide the regulatory regime for financial products (eg an interest in a superannuation fund) and their providers consequential upon the reforms made by the Financial Services Reform Act 2001 (¶4-050) (the “FSR regime”). For superannuation, the FSR regime is relevant in many areas such as product disclosure, licensing and conduct of superannuation providers and advisers. The SISA provisions in product disclosure and member information, in particular, have been replaced, generally from March 2002, by equivalent provisions in the CA. The FSR regime is discussed in Chapter 4. APRA’s powers dealing with the collection of data under the SISA and the Retirement Savings Accounts Act 1997 (RSA Act) (and various other Acts) have been consolidated into the FSCDA 2001 to harmonise and improve the efficiency of APRA’s data collection regimes. Accordingly, the SISA (and RSA Act) provisions dealing with the provision of data by superannuation entities (other than SMSFs) to APRA have been mainly replaced by equivalent provisions in the FSCDA (¶9-740). The Criminal Code Act 1995 applies to offences against the SISA and other federal Acts (¶3-800). Levy Acts The Superannuation (Financial Assistance Funding) Levy Act 1993 imposes a levy on superannuation funds and ADFs for the purpose of funding the financial assistance provided to funds which have suffered losses as a result of fraudulent conduct or theft. The Superannuation Supervisory Levy Imposition Act 1998 and Superannuation (Self Managed Superannuation Funds) Supervisory Levy Imposition Act 1991 impose a levy on superannuation entities for the purpose of recouping the Regulators’ costs of supervision of the superannuation industry (¶3-900). The Superannuation Auditor Registration Imposition Act 2012 imposes fees for certain matters in

connection with registration of SMSF auditors (¶5-508). Accounting and audit standards for superannuation funds A superannuation fund that is a reporting entity is required to prepare its general purpose financial report in accordance with AASB 1056 “Superannuation Entities” for annual reporting periods beginning on or after 1 July 2016, unless adopted earlier, and auditors of superannuation entities must comply with auditing standards (¶15-640, ¶15-650). Practical issues Practitioner articles published in the Wolters Kluwer Australian Tax Week and Australian Superannuation Tracker and Australian Financial Planning Tracker services discuss many SIS compliance and taxation issues faced by superannuation entities and professionals, as well as developments in the law. Recent articles may be found at ¶16-700. Superannuation legislation changes and reforms Legislation changes in 2018/19 and Bills which propose major changes affecting the regulation and operation of the superannuation industry, registrable superannuation entities (RSEs) and other superannuation providers are discussed in ¶17-330 and ¶17-520. Draft legislation and other government announcements proposing changes and reforms (including APRA consultations) are noted at ¶17-540 and ¶17-600. [FTR ¶790-550; SLP ¶2-100, ¶2-800]

¶3-005 Superannuation Regulators General administration of SISA is shared by APRA, ASIC and the Commissioner of Taxation as specified in SISA s 6. The term “Regulator” is used in the SISA to mean APRA, ASIC or the Commissioner, as the case may be, for the purposes of the provisions administered by them. APRA and ASIC became the Regulators from 1 July 1998, replacing the defunct Insurance and Superannuation Commissioner (ISC). From 8 October 1999, the Commissioner of Taxation was added as a Regulator, primarily for the administration of the SIS legislation to the extent that it relates to SMSFs (¶3-005). From 1 November 2011 until 30 June 2018, the Chief Executive Medicare was also a Regulator under SISA and was primarily for administration of the early release of superannuation benefits on compassionate grounds, replacing APRA and the Commissioner for that part of SIS administration during that period (¶3-280). That responsibility was transferred to the Commissioner from 1 July 2018, and the Chief Executive Medicare has ceased to be a Regulator. The Regulators have extensive powers (regulatory and investigative) for the administration of the SISA and SISR provisions under their charge (¶3-850, ¶3-860). As part of the superannuation regulatory regime, Regulators have additional administration responsibility of related Acts as below: • APRA also has administration responsibility of the Financial Sector (Collection of Data) Act 2001 (¶9740) • APRA and ASIC also have joint responsibility for the administration of the RSA Act 1997, which regulates RSA providers and RSA business (¶10-015) • ASIC has administration responsibility of the Corporation Act 2001, to the extent that it applies to superannuation entities and their activities (see Chapter 4), as well as the external resolution of complaints regime under that Act and under the Superannuation (Resolution of Complaints) Act 1993 (see Chapter 13), and • the Commissioner of Taxation also has general administration responsibility of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶3-380). Financial services reforms

The Financial Services Reform Act 2001 and related legislation amended the Corporations Act 2001 (CA) and the Australian Securities and Investments Commission Act 2001 to provide for: • a single licensing regime for financial sales, advice and dealings in relation to financial products • a consistent and comparable financial product disclosure • a single authorisation procedure for financial exchanges and clearing and settlement facilities (¶4050). Most of the provisions dealing with product disclosure requirements that were previously in the SISR were repealed from 11 March 2002 (the general commencement date of the FSR regime) and replaced by the disclosure regime for financial products in the CA. The residual disclosure rules still covered by the SISR are noted at ¶3-290. The FSR regime is discussed in Chapter 4. Collection of data and provision of returns to Regulators The FSCDA is the principal legislation governing the collection of data from, and provision of returns by, APRA-regulated superannuation entities from 2001 (¶9-740). That Act empowers APRA to make determinations which prescribe the reporting standards applicable to superannuation entities (other than SMSFs) for the provision of annual and periodic returns and other specific data. The SIS legislation continues to require superannuation entities (including SMSFs) to comply with other reporting and provision of information requirements in particular circumstances or in relation to specific fund operations (¶3-310). Resolution of superannuation complaints The Superannuation (Resolution of Complaints) Act 1993 provides for the establishment of the Superannuation Complaints Tribunal (SCT) as the external dispute resolution (EDR) scheme for superannuation complaints. In 2018, the Treasury Laws Amendment (Putting Consumers First — Establishment of the Australian Financial Complaints Authority) Act 2018 (Act No 13 of 2018) amended the Corporations Act 2001 to establish the Australian Financial Complaints Authority (AFCA) as the common EDR scheme for all disputes about products and services provided by financial firms (Corporations Act 2001 Pt 7.10A, and Div 3 — Additional provisions relating to superannuation complaints). All Australian Financial Services Licensees, Australian Credit Licensees, superannuation trustees and financial firms are generally required to become members of AFCA by law. AFCA commenced accepting complaints from 1 November 2018. The SCT continues to operate beyond AFCA’s commencement to resolve the existing complaints it received up to 31 October 2018 (see Chapter 13).

¶3-010 Entities covered by the SISA In the SIS legislation, an “entity” means any of the following — an individual, a body corporate, a partnership or a trust. Superannuation funds are entities providing or offering superannuation products or engaging in superannuation business. These entities are subject to SISA and are required to comply with all of the prudential requirements under the SIS legislation which apply to them regardless of whether they qualify for concessional tax treatment in a particular year. Examples of superannuation providers that are not subject to SISA include funds which do not become “regulated superannuation funds” (see below) and public sector superannuation schemes which are subject to their own enabling Acts (eg Commonwealth schemes). The regulatory regime for Commonwealth superannuation schemes is not covered by this Guide. Likewise, RSA providers are subject to a separate (but broadly similar) prudential regime under the RSA legislation (see Chapter 10). Prudential regulation under the SISA also extends to employers and certain service providers of regulated superannuation entities, eg auditors, actuaries, investment managers and custodians (see “Regulation of other entities engaged in the superannuation industry” below). Specifically, these entities must comply

with prescribed prudential requirements under the SISA in relation to their dealings with superannuation entities. This, in addition to whatever obligations they may have under the laws by which they are constituted or their respective professional bodies. The SISA describes entities that are regulated under the Act by way of a generic term or a particular expression which groups the entities by their function, size, benefit design or funding, or by the contributors to the entity. This classification allows all regulated entities to come under common rules, while allowing particular types of entities to be subject to additional rules relevant only to their operation (eg accumulation funds), or to regulation by a different Regulator (eg regulation of SMSFs by the Commissioner). The SISA also requires registration of superannuation entities and licensing of trustees operating APRAregulated entities. Various generic terms in the SISA describe the entities and licences involved (see “RSE licensee and RSE” below) as well as the MySuper products in regulated superannuation funds (see Chapter 9). In addition, there is a separate regime under SISA for the registration of persons who wish to be approved SMSF auditors (¶5-508). Regulation of other entities engaged in the superannuation industry Section 3(3) of SISA provides that “The Act does not regulate other entities engaged in the superannuation industry”. The government’s view is that this means the SISA does not regulate funds that are not “regulated superannuation funds” (as defined in the Act: see ¶2-130), or are not ADFs or PSTs (¶2-320, ¶2-420). Employers (and other persons such as auditors and actuaries) are not, in this sense, “entities engaged in the superannuation industry” since they do not themselves act as superannuation funds, ADFs or PSTs. On this view, s 3(3) does not prevent the regulation of employers when they interact with regulated superannuation funds, for example, under s 64 (employers to remit deductions from salary and wages promptly: ¶3-220), s 299C (employers to inform funds of employees’ TFNs: ¶11750) and Pt 29B (employers to give information about contributions: ¶12-520), or the regulation of service providers in the superannuation industry (auditors and actuaries: ¶3-600; investment managers and custodians: ¶3-620). Superannuation entity The generic term “superannuation entity” is widely used in SISA. It means a regulated superannuation fund, an ADF or a PST (SISA s 10(1)). Regulated superannuation fund A “regulated superannuation fund” is a “superannuation fund” (¶2-120) which has a corporate trustee, or whose sole or primary purpose is to provide old-age pensions, and whose trustee has elected for the SISA to apply to the fund. A superannuation fund cannot receive tax concessions unless it is a resident regulated superannuation fund (¶2-130). A “superannuation fund” is defined widely to mean an indefinitely continuing fund that is a provident, benefit, superannuation or retirement fund or a public sector superannuation scheme (¶2-120). A superannuation fund is established by governing rules in the form of a trust deed for a private sector fund or an act of parliament or ordinance for a public sector fund (for convenience all governing rules will be referred to as a trust deed in this paragraph). A superannuation fund is administered by trustees appointed in accordance with the deed (and any applicable SISA requirement). The trust deed specifies who is to make contributions to the fund and defines how those contributions are to be determined. It also specifies who is to receive benefits from the fund, the circumstances in which benefits are to be paid and how benefits are to be calculated. Benefits may take the form of a lump sum, usually paid on or after retirement or termination of employment, or a pension, usually payable from the time of retirement. The trust deed provides for the investment of monies held in the fund so as to generate returns which are added to the fund. Benefits are generally paid from the accumulated contributions and returns to the fund. In many cases, the benefits payable to a member’s dependants on the death of the member are covered by an insurance policy arranged by the trustees with a life insurance company, with the premiums paid from fund monies. The day-to-day management of the fund, including the making of investments, is often handled by a fund manager and investment manager(s) appointed by the trustees and paid for from monies in the fund.

These managers are usually companies which specialise in providing fund management, administration and investment services. A regulated superannuation fund may be an “accumulation fund” or a “defined benefit fund” (see below). Approved deposit fund An “approved deposit fund” means an indefinitely continuing fund maintained by a registrable superannuation entity (RSE) licensee (see below) that is a constitutional corporation, which has the purpose of receiving, holding and investing certain types of roll-over funds until such funds are withdrawn or the beneficiary reaches age 65 or dies (¶2-320). Pooled superannuation trust A “pooled superannuation trust” means a unit trust maintained by an RSE licensee that is a constitutional corporation, which is used only for investing assets of regulated superannuation funds, ADFs and life offices (¶2-420). Complying superannuation fund, ADF and PST These are funds and trusts that comply with all the requirements and prudential standards relevant to them under the SISA, or whose non-compliance is disregarded by the Regulator (¶2-140). Complying funds and trusts will receive a notification of their complying status under the SISA, and this entitles them to concessional tax treatment. In addition, complying superannuation funds may accept contributions for the purposes of the SG scheme (¶12-000) and, together with complying ADFs, RSAs and certain policies issued by life insurance companies, are approved roll-over vehicles. SMSF An SMSF is a superannuation fund with fewer than five members where all members are trustees, the trustee structure conforms with specific SISA requirements and the trustees are not remunerated for their services (¶5-200). The term “SMSF” replaced the term “excluded superannuation fund” from 8 October 1999 (see below). Like the former “excluded superannuation fund”, an SMSF is a regulated superannuation fund in all respects but is subject to less onerous prudential supervision under the SIS legislation. SMSFs are regulated principally by the Commissioner, rather than by APRA. The SMSF regime is discussed in Chapter 5. Excluded superannuation fund — small APRA fund The concept of an “excluded superannuation fund” was abolished from 8 October 1999 with the commencement of the SMSF regime (¶5-000). An “excluded superannuation fund” previously referred to a regulated superannuation fund with fewer than five members. The fund was not required to meet other conditions, unlike SMSFs (see above). Funds with fewer than five members are now regulated under the SISA as SMSFs or small APRA funds for SIS prudential regulation purposes. The expression “small APRA fund” is not defined in the SISA. Small APRA funds are regulated by APRA and, like SMSFs, are exempted from certain SIS prudential requirements (¶5-650). Excluded ADF An “excluded approved deposit fund” is an ADF in which there is only one beneficiary, and the fund: • was established before 1 July 1994, or was established on or after 1 July 1994 and before 1 July 2007 using eligible termination payments (within the meaning in ITAA36 as in force when the fund was established) of the fund’s beneficiary that had an initial value of at least $400,000, or • is established on or after 1 July 2007 using a superannuation lump sum or an employment termination payment of the fund’s beneficiary that had an initial value of at least $400,000 (SISR reg 1.04(4)). Public offer entity A “public offer entity” is a public offer superannuation fund, an ADF that is not an excluded ADF or a PST. A “public offer superannuation fund” is basically a superannuation fund which conducts at least some of its business by issuing interests to the public or which elects to be treated as a public offer fund.

The trustee of a public offer entity must be an approved trustee (¶3-500) or an RSE licensee that is a constitutional corporation. Public offer entities are subject to additional rules under the SISA (¶3-520). Standard employer-sponsored fund A “standard employer-sponsored fund” is a regulated superannuation fund that has at least one employersponsor who contributes to the fund under an arrangement with the trustee, rather than under an arrangement with members. A standard employer-sponsored member is a member of a regulated superannuation fund for whom an employer-sponsor contributes under an arrangement with the trustee (¶3-120). With employer-sponsored funds, the employer makes contributions to the fund for the benefit of the employees (who are members of the fund) and is generally allowed a tax deduction for those contributions (¶6-100). In many cases, the employees themselves also make contributions to the fund and are entitled to a tax deduction (in certain cases) or a government co-contribution (¶6-300, ¶6-700). Benefits are usually payable from the fund when an employee leaves the employment of the sponsoring employer, subject to the preservation requirements which limit the circumstances in which benefits can actually be paid to a member (¶3-280). Employer-sponsored funds fall into two main groups — defined benefit funds and defined contribution funds or accumulation funds, as discussed below. Eligible rollover fund An “eligible rollover fund” (ERF) is a regulated superannuation fund or ADF which is required to treat all members as protected members and every member’s benefits as minimum benefits (¶3-520). The existence of ERFs allows superannuation funds and ADFs which do not wish to comply with the member protection operating standards (¶3-230) to transfer the benefit entitlements of the affected members to ERFs. Public sector and private sector funds A “public sector fund” is a superannuation fund that is part of a public sector superannuation scheme (SISA s 10(1)). A “private sector fund” is a superannuation fund that is not a public sector fund. A “public sector superannuation scheme” is a scheme for the payment of superannuation, retirement or death benefits, which is established: (a) under a Commonwealth, state or territory law; or (b) under the authority of the Commonwealth, state or territory government, or a municipal corporation, another local governing body or a public authority that is constituted by or under a Commonwealth, state or territory law. There are three main types of private sector superannuation funds. (1) Employer-sponsored funds, established for the benefit of employees of the sponsoring employer(s) (see “Standard employer-sponsored fund” above). (2) “Productivity” (or industry) funds, established for the purposes of one or more industrial agreements or awards. (3) Personal superannuation funds. A public sector fund is of the first and second types. Exempt public sector superannuation scheme An “exempt public sector superannuation scheme” (EPSSS) is a public sector superannuation scheme that is prescribed in SISR Sch 1AA. Such a scheme is a complying superannuation fund for income tax and SG purposes, and is subject to prudential requirements imposed by the legislation under which it is established, rather than the SISA (¶2-170). Defined benefit fund A “defined benefit fund” means (SISR reg 1.03(1)): • a public sector superannuation scheme that is a regulated superannuation fund and has at least one

defined benefit member, or • a regulated superannuation fund (other than a public sector superannuation scheme) that has at least one defined benefit member, and some or all of the contributions (out of which, together with earnings on those contributions, the benefits are to be paid) are not paid into or accumulated in a fund in respect of any individual member but are paid into and accumulated in a fund in the form of an aggregate amount. For specific provisions of SISR, a fund is taken to be a defined benefit fund if at least one member of the fund receives a defined benefit pension (reg 1.03AAA). A “defined benefit member” is a member who is entitled, on retirement or termination of his/her employment, to be paid a benefit defined, wholly or in part, by reference to either or both: • the amount of: – the member’s salary at a particular date, being the date of the member’s termination of employment or retirement or an earlier date, or – the member’s salary averaged over a period before retirement, or • a specified amount. The definitions of “defined benefit fund” and “defined benefit member” are modified for certain provisions of the SISR. The modified definitions allow for superannuation funds which are paying pensions (except pensions wholly through the purchase of annuities issued by registered life offices or allocated pensions) to be subject to certain additional requirements such as annual actuarial certifications (¶3-330). Accumulation fund An “accumulation fund” (or “defined contribution fund”) is a regulated superannuation fund that is not a defined benefit fund. With an accumulation fund, the employer’s contributions to the fund in respect of each member are usually based on a percentage of the member’s salary. Those contributions, together with contributions by members (if any), are invested and the final retirement benefit payable to a member is the amount accumulated in the fund in respect of the member. RSE licensee and RSE The SISA licensing regime for superannuation trustees is different from the licensing of entities providing financial services under the Corporations Act 2001 (discussed in Chapter 4). Under the SISA, an entity (a body corporate or group of individuals) must obtain a licence from APRA before acting as a trustee of an APRA-regulated superannuation entity, ie a superannuation entity other than an SMSF or a public sector superannuation scheme (¶3-485). An “RSE licensee” means a constitutional corporation, body corporate, or group of individual trustees that holds an RSE licence granted under SISA s 29D. A registrable superannuation entity (RSE) means a regulated superannuation fund (other than an SMSF), an ADF or a PST. For the registration of RSEs under SISA by an RSE licensee, see ¶3-490. MySuper product A class of beneficial interest in a regulated superannuation fund is a MySuper product if an RSE licensee is authorised under SISA s 29T to offer that class of beneficial interest in the fund as a MySuper product (¶9-000). Superannuation system The term “superannuation system” in SISR reg 5.01(1) is used to cover the entities and/or products which may be involved when a member’s superannuation benefits are paid, transferred or rolled over in accordance with the SIS legislation (¶3-284). The superannuation system comprises regulated superannuation funds, ADFs, RSAs, EPSSSs, annuities (including deferred annuities), and the

Commissioner as the maker of payments to a superannuation provider under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (from 18 December 2008). The ATO, ASIC and state authorities, as repositories of unclaimed money under SISA provisions which have now been repealed, were part of the system until 17 December 2008 (¶3-284). Trustee A trustee in relation to a fund, scheme or trust means: • if there is a trustee (within the ordinary meaning of that expression) of the fund, scheme or trust — the trustee, or • in any other case — the person who manages the fund, scheme or trust (SISA s 10(1)). Member Subject to a contrary intention, the term “member” in the SISA has its ordinary meaning and is affected by modifications in the SISR (SISA s 10(1); 15B). Without limiting the meaning of the expression “member” in the SISA, s 10(3) provides that a “member” in relation to an SMSF includes a person who receives a pension from the fund or who has deferred his/her entitlement to receive a benefit from the fund. A non-member spouse of a member of a superannuation fund may be treated as a member in the application of particular SISA provisions (SISR reg 1.04AAA: ¶3-355). A “member spouse” and “nonmember spouse”, in relation to a superannuation interest that is subject to a payment split, mean the member spouse and non-member spouse, respectively, in relation to the interest under Pt VIIIB of the Family Law Act 1975 (s 10(1)). Dependant, spouse, etc Other key terms which are used in the SIS legislation in relation to particular prudential rules, such as “dependant”, “spouse”, “child” and “relative”, are discussed in ¶3-020. [SLP ¶2-110]

¶3-020 Spouse, child and relative in the SISA Subject to a contrary intention, a “dependant” in relation to a person includes the spouse of the person, any child of the person, and any person with whom the person has an interdependency relationship (SISA s 10(1)). Also, subject to a contrary intention, the terms “spouse” and “child” have the inclusive meanings given in s 10(1). The inclusive definitions of dependant (and of spouse and child — see below) mean that the common law concepts of these terms are relevant for the purposes of the SIS legislation. The terms “spouse”, “child”, “dependant” and “relative” are used throughout the SIS legislation and are relevant to many of the prudential rules, eg in the sole purpose test (¶3-200), the benefit payment operating standards (¶3-286), the restriction on loans to members and relatives (¶3-420) and the in-house asset rules (¶3-450). Subject to a contrary intention, the term “relative” has the exclusive meaning in s 10(1) (see below). The term “relative” is also relevant to certain SISA prudential rules such as the restriction on loans by superannuation funds (¶3-420) and the meaning of “related party” for the purposes of the in-house asset rules (¶3-470) and other related party transactions. There is a more extensive and specific definition of “relative” for the purposes of the definition of SMSF in s 17A (¶5-220). Previously, a member of a same-sex couple did not come within the meaning of “spouse”, and children in a same-sex relationship might be excluded from the definition of “child”. Therefore, members and children in a same-sex relationship might not qualify as a “dependant” of a person unless they were common law dependants or they came within the interdependency relationship concept (see below). The current SISA definitions of “spouse” and “child” (see below) mean that members of same-sex or opposite sex couples and their children are given the same treatment under the SIS regulatory

framework. The expanded SISA definitions of “spouse” and “child” also apply from the 2008/09 year of income to ensure that same-sex partners and children of same-sex couples are treated as “death benefits dependants” for the purposes of the taxation of superannuation death benefits (¶8-300) and death benefit termination payments (¶8-840) and for claiming deductions for potential detriment death benefits (¶7-150) (see ITTPA s 295-485A and 302-195A and summary of effects of post-1 July 2008 definitions of “spouse” and “child” below). Meaning of “spouse” A “spouse” of a person includes: (a) another person (whether of the same sex or a different sex) with whom the person is in a relationship that is registered under a law of a state or territory prescribed for the purposes of s 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section, and (b) another person who, although not legally married to the person, lives with the person on a genuine domestic basis in a relationship as a couple (SISA s 10(1)). The following laws and relationships are prescribed for the purposes of s 10(1)(a): • Relationships Act 2008 (Vic) — a registered domestic relationship as defined in s 3 of that Act • Relationships Act 2003 (Tas) — a significant relationship as defined in s 4 of that Act • Civil Unions Act 2012 (ACT) — a civil union as defined in s 6(1) of that Act • Domestic Relationships Act 1994 (ACT) — a relationship as a couple between two adult persons who meet the eligibility criteria for entering into a civil partnership mentioned in s 37C of that Act • Relationships Register Act 2010 (NSW) — a registered relationship as defined in s 4 of that Act • Relationships Act 2011 (Qld) — a relationship as a couple between two adults who meet the eligibility criteria mentioned in s 5 of that Act for entry into a registered relationship • Relationships Register Act 2016 (SA) — a relationship as a couple between two adults who meet the eligibility criteria mentioned in s 5 of that Act for entry into a registered relationship (Acts Interpretation (Registered Relationships) Regulations 2008, reg 3). The phrase “in a relationship as a couple” in s 10(1)(b) covers relationships between persons of the same sex in specified circumstances as well as “marital relationships”. The inclusion of same-sex relationships within this definition is not intended to change the treatment of married or opposite-sex de facto couples, but is simply to remove same-sex discrimination. The definition does not change or redefine any other indicia of a relationship. A former de facto spouse of a deceased superannuation fund member was held not to be a dependant for payment of death benefits purposes as she was not a “spouse” as defined in the trust deed of the fund (Gray v Uniting Super Pty Limited as trustee for the Construction and Building Unions Superannuation Fund 11 ESL 06). Meaning of “child” A “child”, in relation to a person, includes: • an adopted child, a stepchild or an ex-nuptial child of the person • a child of the person’s spouse, and • someone who is a child of the person within the meaning of the Family Law Act 1975 (SISA s 10(1)). An “adopted child”, in relation to a person, means a person adopted by the first-mentioned person:

• under the law of a state or territory relating to the adoption of children, or • under the law of any other place relating to the adoption of children, if the validity of the adoption would be recognised under the law of any state or territory (s 10(1)). The term “stepchild” is not defined in the SIS legislation. Under its ordinary meaning, a stepchild is a “child of a husband or wife by a former union” (Macquarie Dictionary, 2001 edn). A stepchild means a son or daughter by a former marriage of the husband or the wife, even though the natural parents are still living (IR Commrs v AB Russell (1955) 36 TC 83). The traditional common law position is that a stepchild of a marriage ceases to be a stepchild of the step-parent at the time that the natural parent dies (Re Burt [1988] 1 Qd R 23; Basterfield v Gray (1994) Tas R 293; Connors v Tasmanian Trustees Limited (1996) Tas R 267). This common law position is reflected in a variety of legislation covering issues relating to stepchildren, such as legislation dealing with administration and probate of deceased estates, family law and immigration laws (with two notable exceptions in Victoria and Queensland). The SCT has stated that it is bound by the common law that a stepchild relationship ends on the death of a natural parent (SCT Determination D04-05\186, SCT Determination D99-2000\082). A person ceases to be a “stepchild” for the purposes of being a “dependant” of the member under SISR reg 6.22, when the legal marriage of their natural parent to the member ends (Interpretative Decision ID 2011/77). Child under the Family Law Act 1975 A “child” is defined inclusively in s 4(1) of the Family Law Act 1975 (FLA). That definition states that Subdiv D of Div 1 of Pt VII (s 60HA; 60HB) affects the situations in which a child is a child of a person or is a child of a marriage or other relationship. A note to the definition states that in determining if a child is the child of a person within the meaning of the FLA, it is to be assumed that Pt VII extends to all states and territories. The intention of parliament is that all children who come within the meaning of “child” in s 4(1) will be covered by any other provisions which relate to that subsection. In particular, this ensures that West Australian children who are not covered by Pt VII pursuant to s 69ZE(s) as they are not children of a marriage will be treated as though they are, for the purpose of any legislation, referring to a child “within the meaning of the Family Law Act 1975”, howsoever expressed. Interdependency relationship Two persons (whether or not related by family) have an “interdependency relationship” if: • they have a close personal relationship • they live together • one or each of them provides the other with financial support, and • one or each of them provides the other with domestic support and personal care (SISA s 10A(1)). If two persons (whether or not related by family) have a close relationship, but do not satisfy the other requirements outlined above because either, or both, of them suffer from a physical, intellectual or psychiatric disability, they are considered to have an interdependency relationship (s 10A(2)). Regulation 1.04AAAA of SISR specifies: • the matters that are, or are not, to be taken into account in determining under s 10A(1) or (2) whether two persons have an interdependency relationship (s 10A(3)(a)), and • the circumstances in which two persons have, or do not have, an interdependency relationship (s 10A(3)(b)). The concept of “interdependency relationship” in s 10A and reg 1.04AAAA is also used in the RSA Act, and in the ITAA97 (as discussed in ¶8-310 and for the purposes of death benefit payments, see above) (Friar v Brown [2015] FCA 135: upholding the Superannuation Complaints Tribunal’s finding in D1415\074 ([2014] SCTA 222) and D14-15\075 ([2014] SCTA 223) that there was no clear evidence of an

interdependent relationship or financial dependency). Summary of effects of post-1 July 2008 definitions of “spouse” and “child” The expanded definitions of “spouse” and “child” in the SISA mean that: • a same-sex partner of a superannuation fund member will automatically qualify as a dependant under the SISA (ie a SIS dependant) and, therefore, be eligible to receive a deceased member’s death benefits, without the need to prove financial dependency (the common law test of a dependant) or an interdependency relationship (see above) • a child of a person’s relationship with another person (whether a same- or different-sex relationship) will automatically qualify as a dependant of both partners in the relationship • the range of beneficiaries who may be eligible to receive a death benefit of a deceased fund member as a pension under SISR reg 6.21(2A) and (2B) is expanded. A same-sex partner of a deceased member, being a spouse and dependant, automatically qualifies to receive a death benefit pension. Similarly, a child who is the product of a same-sex relationship will qualify to receive a death benefit pension when the benefits of either partner in the relationship are paid by a superannuation fund as death benefits if the child is under 18 years of age, or is under 25 years of age and is a financial dependant, or is permanently disabled (¶3-286). In practice, it is important to note that eligibility to receive a death benefit in a private sector superannuation fund or scheme depends not only on the SISA, but on the governing rules (trust deed) of the fund. Therefore, while same-sex partners and children of same-sex relationships will automatically qualify as dependants under the SISA definitions, their ability to receive a death benefit remains subject to the fund’s governing rules unless these rules contain similar definitions. Taxation effects The concessional tax treatment of death benefit payments to a “death benefits dependant” under ITAA97 is discussed in ¶8-300 and following (superannuation death benefits under ITAA97 Div 302) and ¶8-840 (employment termination payment death benefits under ITAA97 Subdiv 82-B). Meaning of “relative” A “relative” of an individual means the following: (a) a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his/her spouse (b) a spouse of the individual or of any other individual referred to in item (a) (SISA s 10(1)). For the purposes of item (a), if one individual is the child of another individual because of the definition of “child” in s 10(1) (see above), relationships traced to, from or through the individual are to be determined in the same way as if the individual were the natural child of the other individual.

Governing Rules and Trustee Rules ¶3-100 Governing rules and trustee covenants In SISA, the “governing rules”, in relation to a fund, scheme or trust, means any rules contained in a trust instrument, other document or legislation, or combination of them, or any unwritten rules, governing the establishment or operation of the fund, scheme or trust (SISA s 10(1)). The term “trust deed” is commonly used in the industry to refer to the governing rules. For a superannuation entity, its governing rules are therefore the primary documents which set out the structure of the fund and the rules for its operations, as well as the powers and duties of the trustees of the entity. The governing rules operate in addition to any obligation or duty that may apply to or be imposed upon the trustees or directors of the corporate trustee of the entity, for example, under the general trust law, the SIS legislation or regulatory legislation. In many cases, a superannuation entity

imposes more onerous duties and obligations than those under the statutory requirements. Generally, a provision in the governing rules that is inconsistent with a requirement of the SIS law is void to the extent of the inconsistency or is void in certain specified circumstances (¶3-140, ¶3-150). For practical purposes, the governing rules of many superannuation entities are drafted so as to be consistent with the requirements of SIS legislation (or related applicable regulatory legislation), whether by incorporation or reference to those requirements in the rules. This avoids the need for frequent changes to the governing rules, for example, each time that the SIS law is changed. The interaction of a fund’s governing rules with specific SIS requirements is discussed in ¶3-140 – ¶3150. The SIS covenants form part of the “enhanced trustee obligations” and “enhanced director obligations” for an RSA licensee in relation to MySuper products. Deemed covenants under SISA Certain trust law duties and obligations of trustees are codified in the SISA as covenants in SISA Pt 6. This paragraph discusses the covenants that apply to a registrable superannuation entity (RSE). For the covenants for SMSFs, see ¶5-400. If the governing rules of an RSE do not contain covenants to the effect of the covenants set out in s 52, those governing rules are taken to contain covenants to that effect (s 52(1)). The covenants in s 52 are grouped under four categories — general covenants, investment covenants, insurance covenants and covenants relating to risk, annual outcomes assessments, promoting financial interests of beneficiaries and MySuper products, as noted below. General covenants These are covenants by each trustee of the entity: (a) to act honestly in all matters concerning the entity (b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation trustee (see below) would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments (c) to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries (d) where there is a conflict between the duties of the trustee to the beneficiaries, or the interests of the beneficiaries, and the duties of the trustee to any other person or the interests of the trustee or an associate of the trustee: (i) to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons (ii) to ensure that the duties to the beneficiaries are met despite the conflict (iii) to ensure that the interests of the beneficiaries are not adversely affected by the conflict, and (iv) to comply with the prudential standards in relation to conflicts (for APRA prudential standards, see ¶9-700) (e) to act fairly in dealing with classes of beneficiaries within the entity (f) to act fairly in dealing with beneficiaries within a class (g) to keep the money and other assets of the entity separate from any money and assets, respectively: (i) that are held by the trustee personally, or (ii) that are money or assets, as the case may be, of a standard employer-sponsor, or an associate

of a standard employer-sponsor, of the entity (h) not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee’s functions and powers (i) if there are any reserves of the entity — to formulate, review regularly and give effect to a strategy for their prudential management, consistent with the entity’s investment strategies and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due, and (j) to allow a beneficiary of the entity access to any prescribed information or any prescribed documents (s 52(2)). The following points should be noted in relation to the general covenants: • In s 52(2)(b), a “superannuation trustee” is a person whose profession, business or employment is or includes acting as a trustee of a superannuation entity and investing money on behalf of beneficiaries of the superannuation entity (s 52(3)). This requirement is in line with the existing state and territory trustee legislation applying to professional trustees. • The general law requires trustees to avoid conflicts of duties and interest, subject to certain exceptions that allow the trustee to act despite the conflict, for example by authorisation under the fund’s governing rules. Where a conflict exists, and general law allows the trustee to proceed despite the conflict, the additional requirements in s 52(2)(d)(i) to (iv) as noted above must be met. The trustee’s obligations under s 52(2)(d) override any conflicting obligations an executive officer or employee of the trustee has under Pt 2D.1 of the Corporations Act 2001 or Div 4 of Pt 3 of the Commonwealth Authorities and Companies Act 1997 (s 52(4)). • The covenant in s 52(2)(h) does not prevent the trustee from engaging or authorising persons to do acts or things on behalf of the trustee (s 52(5)). Investment covenants These are covenants by each trustee of the entity: (a) to formulate, review regularly and give effect to an investment strategy for the whole of the entity, and for each investment option offered by the trustee in the entity, having regard to: (i) the risk involved in making, holding and realising, and the likely return from, the investments covered by the strategy, having regard to the trustee’s objectives in relation to the strategy and to the expected cash flow requirements in relation to the entity (ii) the composition of the investments covered by the strategy, including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification (iii) the liquidity of the investments covered by the strategy, having regard to the expected cash flow requirements in relation to the entity (iv) whether reliable valuation information is available in relation to the investments covered by the strategy (ie the trustees must consider and make arrangements for the regular valuation of all assets, in particular direct or unlisted investments that may be difficult to value) (v) the ability of the entity to discharge its existing and prospective liabilities (vi) the expected tax consequences for the entity in relation to the investments covered by the strategy (vii) the costs that might be incurred by the entity in relation to the investments covered by the

strategy (ie the trustees will need to consider whether the costs are justifiable in delivering the best deal for members), and (viii) any other relevant matters (b) to exercise due diligence in developing, offering and reviewing regularly each investment option (c) to ensure the investment options offered to each beneficiary allow adequate diversification (s 52(6)). APRA’s prudential standard and associated guidance material provide guidance on its expectations in relation to due diligence in s 52(6)(b) (¶9-720). Diversification While a trustee is required to consider diversification in developing an investment strategy under s 52(6) (a)(ii), this does not prevent a trustee from offering investment options that are not diversified if the trustee has formed the view that it would be appropriate for their members to be able to choose that investment option. In formulating the fund level investment strategy, trustees decide the type and number of options they offer to members. Under s 52(6)(c), trustees will have to offer investment options which will allow a member to obtain a diversified asset mix if they choose. If a member chooses to be undiversified, the trustee has no obligation to assess the appropriateness for that member of the investment strategy chosen by the member beyond the requirement to formulate and give effect to an investment strategy in respect of each investment choice option in item (a). Trustees that offer a MySuper product will meet this requirement without considering the composition of any other investment options as members will be able to choose the single, diversified investment strategy of the MySuper product. A beneficiary may direct a trustee to take up, dispose of, or alter the amount invested in an investment option (s 58(2)(d)). This will allow trustees to provide investment options in a responsible and appropriate manner, and allow members to choose investments appropriate to their individual needs. For some members, maximising their retirement income will involve consideration of investments across their entire asset portfolio, rather than just across their superannuation assets. Insurance covenants These are covenants by each trustee of the entity: (a) to formulate, review regularly and give effect to an insurance strategy for the benefit of beneficiaries of the entity that includes provisions addressing each of the following matters: (i) the kinds of insurance that are to be offered to, or acquired for the benefit of, beneficiaries (ii) the level, or levels, of insurance cover to be offered to, or acquired for the benefit of, beneficiaries (iii) the basis for the decision to offer or acquire insurance of those kinds, with cover at that level or levels, having regard to the demographic composition of the beneficiaries of the entity (iv) the method by which the insurer is, or the insurers are, to be determined (b) to consider the cost to all beneficiaries of offering or acquiring insurance of a particular kind, or at a particular level (c) to only offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries (d) to do everything that is reasonable to pursue an insurance claim for the benefit of a beneficiary, if the claim has a reasonable prospect of success (s 52(7)).

Covenants relating to risk management These are covenants by each trustee of the entity: (a) to formulate, review regularly and give effect to a risk management strategy that relates to: (i) the activities, or proposed activities, of the trustee, to the extent that they are relevant to the exercise of the trustee’s powers, or the performance of the trustee’s duties and functions, as trustee of the entity, and (ii) the risks that arise in operating the entity (b) to maintain and manage in accordance with the prudential standards financial resources (whether capital of the trustee, a reserve of the entity or both) to cover the operational risk that relates to the entity (s 52(8)). Covenants relating to annual outcomes assessments From 6 April 2019, if the entity is a regulated superannuation fund (other than a fund with fewer than five members), each trustee of the entity covenants: (a) to determine, in writing, on an annual basis, for each MySuper product and choice product offered by the entity, whether the financial interests of the beneficiaries of the entity who hold the product are being promoted by the trustee, having regard to: (i) if the product is a MySuper product — a comparison of the MySuper product with other MySuper products offered by other regulated superannuation funds, based on the factors mentioned in s 52(10), and a comparison of the MySuper product with any other benchmarks specified in regulations made for the purposes of this subparagraph, and (ii) if the product is a choice product — a comparison of the choice product with the comparable choice products in relation to the choice product, based on factors mentioned in s 52(10A), and a comparison of the choice product with any other benchmarks specified in regulations made for the purposes of this subparagraph, and (iii) the factors mentioned in s 52(11) (aa) to determine, in writing, on an annual basis, whether each trustee of the entity is promoting the financial interests of the beneficiaries of the fund, as assessed against benchmarks specified in regulations made for the purposes of this paragraph (b) to make the determination referred to in paragraph (a), and a summary of the assessments and comparisons on which the determination is based, publicly available on the website of the entity (c) to do so within 28 days after the determination is made (d) to keep the determination, and the summary of the assessments and comparisons on which the determination is based, on the website until a new determination is made as referred to in paragraph (a) (s 52(9)). Section 52(10) (MySuper products) and s 52(10A) (choice products) provide that in comparing a MySuper product with other MySuper products, or a choice product with the comparable choice products in relation to the choice product (as the case may be), the trustees must compare each of the following: (a) the fees and costs that affect the return to the beneficiaries holding the MySuper products or choice product (b) the return for the MySuper products or choice products (after the deduction of fees, costs and taxes) (c) the level of investment risk for the MySuper products or choice products (d) any other matter set out in the prudential standards.

In determining whether the financial interests of the beneficiaries of the entity who hold a MySuper product or choice product are being promoted by the trustee, the trustee must assess each of the following: (a) whether the options, benefits and facilities offered under the product are appropriate to those beneficiaries (b) whether the investment strategy for the product, including the level of investment risk and the return target, is appropriate to those beneficiaries (c) whether the insurance strategy for the product is appropriate to those beneficiaries (d) whether any insurance fees charged in relation to the product inappropriately erode the retirement income of those beneficiaries (e) any other relevant matters, including any matters set out in the prudential standards (s 52A(11)) (see “Annual outcomes assessment and promoting financial interests covenants” below). Covenants relating to promoting financial interests of beneficiaries From 6 April 2019, if the entity is a regulated superannuation fund (other than a fund with fewer than five members), each trustee of the entity covenants to promote the financial interests of the beneficiaries of the entity who hold a MySuper product or a choice product, in particular returns to those beneficiaries (after the deduction of fees, costs and taxes) (s 52(12)) (see “Annual outcomes assessment and promoting financial interests covenants” below). Covenants relating to regulated superannuation funds — MySuper products From 6 April 2019, if the entity is a regulated superannuation fund that offers a MySuper product, each trustee of the entity covenants: (a) to include in the investment strategy for the MySuper product the details of the trustee’s determination of the matters mentioned in s 52(9)(a) (see above) (b) to include in the investment strategy for the MySuper product, and update each year: (i) the investment return target over a period of 10 years for the assets of the entity that are attributed to the MySuper product, and (ii) the level of risk appropriate to the investment of those assets (s 52(13)). Annual outcomes assessment and promoting financial interests covenants The governing rules of each trustee of a regulated superannuation fund (other than an SMSF or small APRA fund) are taken to contain covenants that require trustees to: • promote the financial interests of their beneficiaries across all products (other than beneficiaries holding defined benefit interests), and • carry out annual outcomes assessments of all their MySuper and choice product offerings, including how each product continues to promote the financial interests of members. Choice products are all superannuation products that are not MySuper products or defined benefit products. The outcomes test covenant requires trustees to determine whether the financial interests of their beneficiaries are being promoted by the trustee having regard to a comparison with other similar products and specified benchmarks and factors. The obligation that the trustees “promote the financial interests” of beneficiaries reinforces and builds upon the existing trustee obligation to act in the best interests of beneficiaries by recognising that trustees must take actions to annually assess whether their MySuper or choice products are optimising outcomes for, and in the best interests of, members.

Trustees are required to assess their MySuper or choice product in respect to a range of product features including their insurance and investment strategies, and compare how their product is performing against other products and benchmarks, using certain performance metrics. In this regard, the outcomes test provides trustees with a framework for assessing their product offering to determine whether it is achieving its intended outcomes and how it may be improved. The framework for the outcomes test endeavours to support the trustee’s primary obligation to promote the financial interests of their members, in particular the net returns to those members. The covenants in s 52(9) and 52(12) effectively replaced the enhanced trustee obligations in SISA Pt 2C former Div 6 (containing former s 29VN to 29Q), as those obligations apply to trustees only in respect of their beneficiaries holding MySuper products. However, the specific obligation in former s 29VN(d) to include certain matters in the investment strategy of a MySuper product is preserved by the additional covenant for MySuper products in s 52(13) (see above). The covenants recognise that although the features of MySuper products and choice products differ, the obligation to undertake an annual outcomes assessment in respect of beneficiaries holding either MySuper products or choice products should be done in as similar a way as is possible, ie trustee obligations to members should apply irrespective of product type. Basically, for both MySuper products and choice products, the determination retains its two-step process approach: • compare products against required benchmarks (including other products) (step one), and • assess whether the product promotes the financial interests of member, including against a specified range of factors (step two). As the differentiation amongst choice products and between choice products and MySuper products can be significant, and it would be difficult to apply a single methodology for comparing both MySuper and choice products when carrying out the annual outcomes assessment, the details of the benchmarks for which a comparison of a choice product will be set out in APRA prudential standards. Covenants for directors of corporate trustees of registrable superannuation entities Section 52A of SISA clarifies the duties that apply to individuals who are directors of corporate trustees of RSEs, by reflecting many of the covenants in s 52(2) (see above), focusing on the individuals who are directors of the corporate trustee of the RSE. Where the governing rules of an RSE do not contain covenants to the effect of those set out in s 52A(2), the governing rules are taken to contain covenants to that effect (s 52A(1)). A covenant referred to in s 52A(2) operates as if the director were a party to the governing rules. These are covenants by each director of a corporate trustee of the entity: (a) to act honestly in all matters concerning the entity (b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation entity director would exercise in relation to an entity where he/she is a director of the trustee of the entity and that trustee makes investments on behalf of the entity’s beneficiaries (c) to perform the director’s duties and exercise the director’s powers as director of the corporate trustee in the best interests of the beneficiaries (d) where there is a conflict between the duties of the director to the beneficiaries, or the interests of the beneficiaries, and the duties of the director to any other person or the interests of the director, the corporate trustee or an associate of the director or corporate trustee: (i) to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons, and

(ii) to ensure that the duties to the beneficiaries are met despite the conflict, and (iii) to ensure that the interests of the beneficiaries are not adversely affected by the conflict, and (iv) to comply with the prudential standards in relation to conflicts (e) not to enter into any contract, or do anything else, that would: (i) prevent the director from, or hinder the director in, properly performing or exercising the director’s functions and powers as director of the corporate trustee, or (ii) prevent the corporate trustee from, or hinder the corporate trustee in, properly performing or exercising the corporate trustee’s functions and powers as trustee of the entity, and (f) to exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the covenants referred to in s 52 (s 52A(2)). Like the general covenants in s 52(2) for RSEs (see above): • the director’s obligations under s 52A(2)(d) override any conflicting obligations the director has under Pt 2D.1 of the Corporations Act 2001 or Div 4 of Pt 3 of the Commonwealth Authorities and Companies Act 1997, and • the covenant in s 52A(2)(e) does not prevent the director from engaging or authorising persons to do acts or things on behalf of the trustee (s 52A(3)). Superannuation entity director A “superannuation entity director” is a person whose profession, business or employment is or includes acting as director of a corporate trustee of a superannuation entity and investing money on behalf of beneficiaries of the superannuation entity (s 52A(7)). The reference in SISA s 52A(2)(f) to a “reasonable degree of care and diligence” is a reference to the degree of care and diligence that a superannuation entity director would exercise in the circumstances of the corporate trustee. Each director of a corporate trustee is required to exercise the same degree of care, skill and diligence that a prudent superannuation entity director would exercise in relation to the entity where he/she is a director of the trustee and that trustee makes investments on behalf of the beneficiaries of the entity. The required standard of care, skill and diligence is an objective standard. Care and diligence go to the way in which the director applies himself/herself to their functions. The level of skill required does not necessarily require particular qualifications, and new directors will not be expected to have the level of skill and knowledge of an experienced director immediately. It is not intended that each director will have the same skills but rather that each understand the business of the trustee and its regulatory framework and be in a position to contribute to meetings of the trustee (52A(2)(b)). Covenants may be prescribed by regulations The SISR may prescribe a covenant to be included in the governing rules of a superannuation entity. These prescribed covenants may elaborate, supplement or otherwise deal with any aspect of a matter in a covenant or other provision in SISA, but must be capable of operating concurrently with the covenants and SISA (SISA s 54A). Covenants are cumulative To avoid doubt, SISA s 51A provides that the covenants are cumulative in effect. That is, each covenant that is referred to in s 52 (for RSEs), 52A (for directors), 52B (for SMSFs), 52C (for SMSF directors) and 53 (for ADFs), or prescribed under s 54A (see above) applies in addition to every other covenant or obligation referred to in the sections that applies to the trustee or director of a corporate trustee of the superannuation entity. For example, the obligations that apply to trustees that offer a MySuper product are in addition to each

covenant that applies to a trustee of an RSE. Additional covenants for ADFs The governing rules of an ADF (other than an excluded ADF) are deemed to include two additional covenants. The first requires the fund to pay beneficiaries (including the legal personal representative of a beneficiary) within 12 months of a request for payment, and the second imposes an obligation on each director of the fund’s corporate trustee to ensure that the first covenant is given effect (SISA s 53). Civil and criminal consequences for contravening covenants A person must not contravene a covenant that is to the effect of a covenant set out in s 52 or 52A and is contained, or taken to be contained, in the governing rules of a superannuation entity (SISA s 54B(1)). Sections 54B(1) and (2) are “civil penalty provisions” in the SISA and there are civil and criminal consequences under SISA Pt 21 for contravening, or being involved in a contravention of, those subsections (s 54B(3)). A contravention does not result in the invalidity of a transaction (s 54B(4)). Section 54B does not limit the operation of s 55 about recovering loss or damage as a result of a contravention (s 54B(5)) (see below). Other covenants must not be contravened A person must not contravene any other covenant contained, or taken to be contained, in the governing rules of a superannuation entity (s 54C(1)). A contravention of s 54C(1) is not an offence, but may result in an action to recover loss or damage under s 55. A contravention of s 54C(1) does not result in the invalidity of a transaction. Recovering loss or damage for contravention of a covenant A person who suffers loss or damage as a result of conduct of another person (eg the fund trustee) that was engaged in contravention of s 54B(1), 54B(2) or 54C(1) (see above) may sue that other person or any person involved in the contravention to recover any loss or damage suffered (s 55(3)). An action under s 55(3) may be brought only with the leave of the court where directors’ covenants are contravened (s 55(4A)). A person may, within six years after the day on which the cause of action arose, seek the leave of the court to bring such an action (s 55(4A), (4B)). In deciding whether to grant an application for leave to bring such an action, the court must take into account whether the applicant is acting in good faith; and there is a serious question to be tried (s 55(4C)). The court may, in granting leave to bring such an action, specify a period within which the action may be brought (s 55(4D)). Statutory defences are provided to trustees in proceedings in respect of certain contraventions of the covenants (s 55(5), (6); 323). In an action for loss or damage suffered by a person as a result of the making of an investment by or on behalf of a trustee of a superannuation entity or as a result of the management of any reserves by a trustee of a superannuation entity, a statutory defence is available if the defendant establishes that the defendant has complied with all of the covenants referred to in s 52 to 53 and prescribed under s 54A that apply to the defendant in relation to each act, or failure to act, that resulted in the loss or damage (s 55(5), (6)). For the statutory defence in s 55(5) to be available, the trustees of RSEs must satisfy all of the covenants in s 52A, 52B, 52C, 53 and 54A where they are relevant to the investment (rather than just s 52(2)(f)) before relying on s 55(5) as a defence to an action for loss or damage in relation to the making of an investment. The above requirement recognises the interdependency between the covenants. For example, where a trustee has acted dishonestly and in a conflicted manner, it would be unreasonable to have a defence for investment loss where it had otherwise complied with the investment covenant. The rule, however, is not intended to prevent trustees from accessing the defence in cases where a covenant or duty is not

relevant to the particular loss as a result of making an investment. The defences in s 55(5) and (6) apply to an action for loss or damage, whether brought under s 55(3) or otherwise (s 55(7)). Proposed changes — Retirement Income Covenant Position Paper The government states that the retirement phase of the superannuation system is currently underdeveloped and needs to be better aligned with the overall objective of the superannuation system of providing income in retirement to substitute or supplement the Age Pension. The government is addressing this through the development of a retirement income framework. The first stage in this framework is the introduction of a retirement income covenant in the SIS Act which will require trustees to develop a retirement income strategy for their members. The covenant will codify the requirements and obligations for superannuation trustees to consider the retirement income needs of their members, expanding individuals’ choice of retirement income products and improving standards of living in retirement (see further ¶17-600). [SLP ¶2-815]

¶3-120 Trustee representation rules Standard employer-sponsored superannuation funds (with some exceptions) are required to comply with prescribed trustee representation rules in their trustee structure (SISA Pt 9). These rules are aimed at ensuring that fund members are able to have significant input in the management and operation of the fund. The trustee representation rules do not apply to SMSFs or small APRA funds (¶3-010), or to funds where an acting trustee has been appointed under the SISA. Special trustee rules apply to SMSFs and small APRA funds (¶5-200, ¶5-650). A fund that is not a standard employer-sponsored fund, and that has been declared not to be a public offer superannuation fund under the SISA (¶3-500), is required to have an arrangement for member representation that is approved by a majority of members and APRA (SISR reg 4.08A). It is not an offence if a fund contravenes the trustee representation rules. However, the fund may be directed not to accept any contributions made to it by an employer-sponsor, eg SG contributions (s 63; 87). Members can also bring a civil liability action for any loss or damage suffered as a consequence of the breach (¶3-820). The relevant trustee structure applicable to a fund, which depends on the number of members that the fund has and whether it is a public offer superannuation fund (as discussed at ¶3-500), is outlined below. The trustee of a public offer entity (¶3-500) or a small APRA fund (¶5-650) must be a registrable superannuation entity (RSE) licensee that is a constitutional corporation (¶3-485). Standard employer-sponsored fund A “standard employer-sponsored fund” is a regulated superannuation fund which has at least one standard employer-sponsor, ie an employer who contributes, or has ceased only temporarily to contribute, to the fund wholly or partly pursuant to an arrangement with the trustee. Examples of such funds are employer funds for employees and industry funds. If employees are able to select the fund to which the employer will contribute, and the employer has no relationship with the fund apart from making the contributions, the fund is not a standard employer-sponsored fund (SISA s 16). Non-public offer fund with more than 49 members A standard employer-sponsored fund with more than 49 members that is not a public offer superannuation fund must comply with the basic equal representation rules in its trustee structure (SISA s 93(4)). The basic equal representation rules are that if a superannuation fund has a group of two or more individual trustees, the group must consist of an equal number of employer and member representatives and, if the fund has a corporate trustee, the board of the corporate trustee must be constituted by an

equal number of employer and member representatives. The group or board may include an additional independent trustee or independent director, if this is requested by either the member or employer representatives and the fund’s governing rules provide for such an appointment. The additional independent trustee or director must not have a casting vote in any proceedings of the group or board of trustees (s 89). Non-public offer fund with five to 49 members A standard employer-sponsored fund with more than four but fewer than 50 members that is not a public offer superannuation fund must comply with one of the following: the basic equal representation rules (as discussed above); an alternative agreed representation rule; or an APRA-approved management arrangement (SISA s 92(4)). A fund complies with the alternative agreed representation rule if: • there is a single trustee of the fund that is a constitutional corporation • the trustee is appointed by agreement between a majority of the members and the employer(s) of those members • the trustee was an approved trustee under former s 26 (applicable until 30 June 2006) or is an RSE licensee (¶3-480) • the trustee is not an associate of a standard employer-sponsor of the fund (s 92(5)). An APRA-approved management arrangement in a superannuation fund is an arrangement in relation to the management and control of the fund which is agreed to by a majority of members and the employersponsors of those members, and is approved by APRA (s 92(4)(c)). APRA direction not to accept employer contributions APRA may direct a regulated superannuation fund not to accept superannuation contributions made to the fund by an employer-sponsor if the fund has breached a regulatory provision and APRA is satisfied that the seriousness or frequency, or both, of the contravention warrants such a direction (SISA s 63). The RSE licensee of a superannuation fund that is not a public offer fund must not accept contributions made to the fund by an employer-sponsor while the fund fails to comply with the basic equal representation rules in s 92(4) (for funds with more than four but fewer than 50 members) or 93(4) (for funds with more than 49 members), as discussed above (s 63(7B)). The trustee of a superannuation fund must notify each employer-sponsor of the fund if a s 63 direction is given to the fund. Non-compliance with any of the requirements in s 63 is a strict liability offence. Public offer superannuation fund The trustee of a standard employer-sponsored fund with five or more members that is a public offer superannuation fund (¶3-500) must be an independent trustee or the fund must comply with the basic equal representation rules. In addition, the fund must have such policy committees as are prescribed by the SISR and each committee must consist of an equal number of employer and member representatives (SISA s 92(3); 93(3)). An “independent trustee” means a trustee who is not a member, an employer-sponsor or associate of an employer-sponsor, an employee of an employer-sponsor or an associate, or a representative of an organisation which represents the interests of members or employer-sponsors (s 10(1)). A director of a corporate trustee of a fund that is also an employer-sponsor of the fund is not taken to be an associate of that employer-sponsor by reason of being such a director (s 10(2)). Where certain conditions are met, a trustee of a public offer superannuation fund who is an employersponsor of the fund or an associate of an employer-sponsor may be deemed to be an independent trustee (s 93A). Effectively, this will enable employees of a professional trustee company to become members of a public offer fund of which their employer is the trustee without the company losing its otherwise independent trustee status. APRA has substituted s 93A(1) to set out the circumstances in

which an employer-sponsor of a public offer superannuation fund will be treated as an independent trustee of the fund (Modification Declaration No 25, Commonwealth Gazette No GN 49, 8 December 2004). The trustee of a public offer superannuation fund (being a public offer entity) must be an RSE licensee that is a constitutional corporation (¶3-485, ¶3-500). Increase in membership If the membership of a fund increases from less than five to five or more but less than 50, or from less than 50 to 50 or more, the fund must comply with the trustee representation rules relevant to its membership number within 90 days of the increase in the membership (s 92(13); 93(5)). Voting rule If a fund is required (or elects) to comply with the basic equal representation rules, a decision of the group of trustees or board of the corporate trustee is taken not to have been made, or taken to be of no effect, if fewer than two-thirds of the total number of trustees or directors voted in favour of the decision (SISR reg 4.08). The two-thirds rule is based on the total number of trustees or directors, not those present at a meeting. However, the two-thirds rule does not apply to decisions made by a delegate of the trustees who has been properly delegated to make such decisions. Governing rules and voting Subject to exceptions, a provision in the governing rules of the fund is void to the extent that it purports to preclude a director of the trustee from voting on a matter relating to the fund (¶3-140). Proposed reforms to governance arrangements in superannuation funds Amendments have been proposed to replace the trustee representation rules in Pt 9. Under the proposals, RSE licensees that have a board of trustees will be required to have a minimum of one-third independent directors, including an independent Chair, and RSE licensees that are a group of individual trustees will be required to have at least one-third of the trustees that are independent (Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017 (Lapsed): ¶17-520). [SLP ¶2-600]

¶3-130 Trustee appointment and removal — disqualified persons A regulated superannuation fund must have a corporate trustee or the fund’s governing rules must provide that its sole or primary purpose is the provision of old-age pensions (SISA s 19: ¶2-130). In the latter case, subject to the requirement to have a specific trustee structure (eg for public offer funds, standard employer-sponsored funds: ¶3-120), the trustee may be an individual trustee, a group of individual trustees or a corporate trustee. The trustee of a public offer entity (¶3-500) or a small APRA fund (¶5-650) must be a registrable superannuation entity (RSE) licensee that is a constitutional corporation (¶3-485). By definition, an ADF or a PST will always have a corporate trustee that is an RSE licensee. In the case of an SMSF, the trustee may be individuals or a corporate trustee, but special rules apply as to who may be the trustees or the directors of the corporate trustee (¶5-220). Trustee appointment, removal or suspension A person must consent in writing to be appointed as a trustee or director of a corporate trustee of a superannuation entity (SISA s 118). In addition, an individual who becomes a trustee or a director of the corporate trustee of an SMSF after 30 June 2007 must sign a declaration in the approved form stating that they understand their duties as SMSF trustees within 21 days of becoming a trustee or director (s 104A: ¶5-300). A standard employer-sponsored superannuation fund that is required under the trustee representation rules (¶3-120) to have member representatives (or an additional independent trustee or independent director of a corporate trustee) in its trustee structure must establish procedures for their appointment and removal, and have these procedures notified to all members (s 107; 108).

The Regulator is empowered to suspend or remove a trustee of a superannuation entity in the following circumstances (Pt 17 s 133): • the trustee is a disqualified person • the conduct of the trustee may result in the financial position of the entity or of any other superannuation entity becoming unsatisfactory • the Regulator has revoked the approval of the trustee or cancels the registrable superannuation entity (RSE) licence of the trustee • if the entity has fewer than five members (and is not an SMSF), the trustee is not an RSE licensee that is a constitutional corporation • the trustee is an RSE licensee that has breached any of the conditions of its RSE licence, • the Regulator has reason to believe that: (i) either a person holds a controlling stake in the RSE licensee or a person has practical control of the RSE licensee, and (ii) because of the person’s control of the RSE licensee, or the way in which that control has been, is or is likely to be exercised, the RSE licensee has been, is or is likely to be unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A, or • the Regulator has reason to believe that: (i) a person holds a controlling stake in an RSE licensee, and (ii) the person does not have approval under s 29HD to hold a controlling stake in the RSE licensee. If a trustee has been suspended or removed, the Regulator may appoint an individual or a corporation as an “acting trustee” on such terms and conditions as may be determined (s 134). An acting trustee must hold the class of RSE licence relevant to it (¶3-480). Disqualified persons A “disqualified person” must not intentionally be or act as a trustee or a responsible officer of the corporate trustee of a superannuation entity (SISA s 126K). A “responsible officer”, in relation to a body corporate, means a director, secretary or an executive officer of the body (s 10(1)). The disqualified person restriction also applies to a person who is or acts as an investment manager or custodian of a superannuation entity, or is or acts as a responsible officer of a body corporate that is an investment manager or custodian of a superannuation entity (see “Offences relating to disqualified persons” below). An individual is a disqualified person if: • at any time, the person has been “convicted of an offence” (see below) in any country, being an offence in respect of dishonest conduct (Case 60/9696 ATC 560: conviction in the UK on two counts of submitting fraudulent insurance claims totalling £134) • a civil penalty order (¶3-820) has been made against the person • the person is an insolvent under administration (eg an undischarged bankrupt: see below) • to the extent that the Regulator is the Commissioner, the Commissioner has disqualified the individual under s 126A, or • to the extent that the Regulator is APRA, the Federal Court of Australia has disqualified the individual

under s 126H (s 120(1)). A body corporate is a disqualified person if: • the body corporate knows, or has reasonable grounds to suspect, that a person who is, or is acting as, a responsible officer of the body corporate is: – for a person who is a disqualified person only because he/she was disqualified under s 126H — disqualified from being or acting as a responsible officer of the body corporate, or – otherwise — a disqualified person • a receiver, or a receiver and manager, has been appointed in respect of property beneficially owned by the body • an administrator has been appointed in respect of the body • a provisional liquidator has been appointed in respect of the body, or • the body has begun to be wound up (s 120(2)). Convicted of an offence and spent convictions A reference to a person convicted of an offence includes a reference to a person for whom an order has been made under s 19B of the Crimes Act 1914, or under a corresponding provision of a law of a state, territory or a foreign country, in relation to the offence (SISA s 120(3)). For example, if the offence has been proved in a court but the court has not recorded a conviction (eg the person was a first time offender), that person is still a “disqualified person”. Spent convictions are available under certain state, federal and overseas legislation that generally prohibit the disclosure of offences in some circumstances. In some cases, a conviction that is more than 10 years old may no longer require disclosure. However, SISA expressly excludes the law on spent convictions and, accordingly, spent convictions are still relevant for determining whether a person is disqualified. A person is a disqualified person if he/she has been convicted of an offence of dishonesty, whether or not a penalty was imposed and irrespective of whether the “spent convictions” provisions of the Commonwealth or a state law apply in relation to the conviction, or whether the conviction was for an offence of dishonesty under Australian law or the law of any other country (s 120(4)). This means that extremely high standards of honesty are to be applied to persons and corporations under s 120. In Case 60/96 (see above), the AAT noted that “… It is clearly desirable that, in the context of a person or corporation acting as trustee, such high standards should not only be expected but strictly enforced. It is for this reason that the operation of spent conviction and like provisions of the Crimes Act 1914 (Cth) (‘the Crimes Act’), which would otherwise result in prior convictions in Australia, or prior convictions for relevantly minor offences, being disregarded, are expressly waived under the SISA (s 120(3) and 120(4))”. In that case, the AAT confirmed offences involving dishonest conduct committed overseas before the operation of SISA were covered for the purpose of the disqualified person test. This was the case even though the offence was a spent conviction under UK legislation, and despite the person being only 21 years old at that time and had received minor punishment, and since that time have had an exemplary record as a successful investment manager and chairman of managed funds. A person may apply for a waiver of the disqualified person status if the dishonest conduct conviction was not “serious dishonest conduct” as described in s 126B (see below). Insolvent under administration An “insolvent under administration” is defined in SISA s 10(1) to mean a person who: • under the Bankruptcy Act 1966 or the law of an external territory, is a bankrupt in respect of a bankruptcy from which the person has not been discharged

• under the law of a country other than Australia or the law of an external territory, has the status of an undischarged bankrupt, and includes • a person any of whose property is subject to control under s 50 or 188 of the Bankruptcy Act 1966, or a corresponding provision of an external territory or foreign country law, or • a person who has executed a personal insolvency agreement under Pt X of the Bankruptcy Act 1966, or the corresponding provisions of the external territory or foreign country law, if a certificate has not been given under s 232 of that Act or the corresponding provision of the external territory or foreign country law, in respect of the agreement. Section 232 of the Bankruptcy Act empowers a trustee to issue a certificate to a debtor that all the obligations created by the agreement have been discharged. This is akin to a certificate of completion. Among others, a “trustee” means the trustee of the estate of the bankrupt in relation to a bankruptcy and the trustee of the agreement in relation to a personal insolvency agreement. For the above purpose, the trustee must be satisfied that the relevant obligations have been discharged. A certificate signed by the trustee is prima facie evidence on the facts stated in it (s 232(2)). The Bankruptcy Regulations require the trustee to be satisfied that the divisible property of the debtor has, so far as practicable, been realised and that no dividend is payable to the creditors (reg 10.14). The trustee must provide the certificate on written request by the debtor within seven days of receiving the request. Where applicable, the trustee must, within seven days of giving the certificate, give a copy of it to the Official Receiver. It should be noted that a personal insolvency agreement might contain a specific term governing the circumstances when it is deemed to be completed, eg it ceases to operate on a certain date. Disqualification of individuals by Commissioner under s 126A The Commissioner may disqualify an individual under SISA s 126A in the three circumstances below: (1) if the Commissioner is satisfied that: (a) the person has contravened the SISA or the FSCDA on one or more occasions, and (b) the nature or seriousness of the contravention(s), or the number of contraventions, provides grounds for disqualifying the individual (s 126A(1)) (2) if the individual is or was a responsible officer of a trustee, investment manager or custodian (the body corporate) — if the Commissioner is satisfied that: (a) the body corporate has contravened the SISA or the FSCDA on one or more occasions (b) at the time of one or more of the contraventions, the individual was a responsible officer of the body corporate, and (c) in respect of the contravention(s) that occurred while the individual was a responsible officer, the nature or seriousness of the contravention(s), or the number of them, provides grounds for the disqualification of the individual (s 126A(2)) (3) if the Commissioner is satisfied that the individual is otherwise not a “fit and proper person” (see below) to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian (s 126A(3); former s 120A); The Commissioner may revoke a disqualification on application by the disqualified individual or on its own initiative. A disqualification or revocation made by the Commissioner takes effect on the day on which it is made. The Commissioner must give the individual written notice of a disqualification, revocation of a disqualification or a refusal to revoke a disqualification. The particulars of a notice (or a notice given under s 344(6) as result of internal review) must be published in the Gazette as soon as practicable (s 126A(5)

to (7)). A disqualified person because of a conviction for an offence under s 120(1)(a)(i) (see above) that does not involve “serious dishonest conduct” (as described in s 126B(2), see below) may apply to the Regulator for a declaration under s 126D to waive the disqualified person status (see s 126B to 126F). The AAT has refused to waive the status of an applicant as a disqualified person under s 120 as there were no exceptional circumstances to allow the application for waiver to be brought out of time, as permitted under s 126B(4) ([2014] AATA 223). Meaning of “serious dishonest conduct” An offence involves “serious dishonest conduct” if the penalty actually imposed for the offence is “a term of imprisonment of at least 2 years … or a fine of at least 120 penalty units…” (s 126B(2)). In ID 2011/24, the judge sentenced a superannuation fund member under s 20(1)(b) of the Crimes Act 1914 to imprisonment for a period that was more than two years, but ordered that he be released after he had served a specified period of his sentence upon giving security. The period of time that he spent in prison was less than two years. An order under s 20(1)(b) of the Crimes Act is called a “recognisance release order” (see s 16 of the Crimes Act). A recognisance release order enables a sentencing court to impose a term of imprisonment on the offender but to direct, by order, that the offender be released after a specified period upon the person giving security. The order for release is part of a composite sentence and operates as a qualification or condition upon the sentence of imprisonment imposed (Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409 at 416). The ATO view is that, in ID 2011/24, the sentencing court considered a term of imprisonment of more than two years to be the appropriate penalty to be imposed for the offence irrespective of the court’s direction that the member be released upon recognisance. Thus, the penalty actually imposed for the offence was a term of imprisonment of more than two years and the offence committed by the fund member was an offence involving “serious dishonest conduct” for the purposes of s 126B. The Regulator must, by written notice to the applicant, make a declaration waiving the applicant’s status as a disqualified person if, having regard to any of the matters below, the Regulator is satisfied that the applicant is highly unlikely to contravene the SISA and do anything that would result in an SMSF not complying with the SISA: • the offence to which the application relates • the time that has passed since the applicant committed the offence • the applicant’s age when the applicant committed the offence • the orders made by the court in relation to the offence, and • any other relevant matter (s 126D(1A)). The Commissioner also has the power to disqualify a person from being or acting as an auditor or actuary of an SMSF (s 131: ¶3-600). Disqualification of individuals by Federal Court under s 126H Under SISA s 126H, the Federal Court may, on application by APRA, disqualify a person from being or acting as: • an individual trustee of a superannuation entity (other than an SMSF) or a responsible officer (ie a director, secretary or executive officer) of a body corporate that is a trustee, or • an investment manager or custodian of a superannuation entity (other than an SMSF). The grounds upon which the court would make a disqualification order are set out in s 126H(3) to (5). These grounds are similar to those in s 126A(1) to (3) in relation to disqualifications made by the Commissioner, ie the person has contravened the SISA or FSCDA and the contraventions provide grounds for disqualification or disqualification of a person on the “fit and proper” grounds (see above). Also, in deciding whether the grounds in s 126H(3) to (5) are satisfied, the court may take into account

whether the individual has contravened a provision of the First Home Saver Accounts Act 2008 (FHSA Act), whether the individual is or has been a responsible officer of a body corporate that is or has been a disqualified person under SISA Pt 15 as applied by Div 2 of Pt 7 of the FHSA Act, and whether the individual’s conduct in relation to FHSAs makes the individual otherwise not “fit and proper” (SISR former reg 13.19A; repealed following the repeal of the FHSA Act). A disqualified person or APRA may apply to the Federal Court for a variation or revocation of a disqualification order under s 126H or an order that the person is not a disqualified person (s 126J). The court also has the power to disqualify a person from being or acting as an auditor or actuary of a superannuation entity (other than an SMSF) (s 130D: ¶3-600). A disqualification order by the court is subject to the normal court-based appeals process, and is not subject to internal review by APRA or merits review by the AAT. In addition, the offence provisions for contravening a disqualification order by the court are harmonised for all superannuation entities and service providers (see below). Fit and proper person test The Commissioner may disqualify an individual if satisfied that the individual is otherwise not a “fit and proper person” to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian (s 126A(3)). A similar provision empowers a court to disqualify a person under s 126H of the SISA if satisfied that the person is otherwise not a fit and person to be a trustee of a superannuation entity or a responsible officer of any body corporate that is the trustee, investment manager or custodian of a superannuation entity (s 126H(5)) (see above). The expression “fit and proper person” is not a defined term in the SIS legislation. Guidance on its meaning may be found from the cases below. In Hughes and Vale Pty Ltd v State of NSW (No 2) (1955) 93 CLR 127, the High Court said (at 156) that the words “fit and proper” were traditionally used in relation to persons holding offices or vocations: “But their very purpose is to give the widest scope for judgment and indeed for rejection. ‘Fit’ (or ‘idoneus’) with respect to an office is said to involve three things, honesty, knowledge and ability: ‘honesty to execute it truly without malice, affection or partiality; knowledge to know what he ought duly to do; and ability as well in estate as in body, that he may intend and execute his office, when need is, diligently, and not for impotency or poverty neglect it’ ….” In Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321, Toohey and Gaudron JJ said as below about the expression “fit and proper”: “The expression ‘fit and proper person’, standing alone, carries no precise meaning. It takes its meaning from its context, from the activities in which the person is or will be engaged and the ends to be served by those activities. The concept of ‘fit and proper’ cannot be entirely divorced from the conduct of the person who is or will be engaging in those activities However, depending on the nature of the activities, the question may be whether improper conduct has occurred, whether it is likely to occur, whether it can be assumed that it will not occur, or whether the general community will have confidence that it will not occur. The list is not exhaustive but it does indicate that in certain contexts, character (because it provides indication of likely future conduct) or reputation (because it provides indication of likely future conduct) may be sufficient to ground a finding that a person is not fit and proper to undertake the activities in question.” The AAT cited the above passages in its decision in Glyman v Tax Practitioners Board 2015 ATC ¶10414, which affirmed the decision of the Tax Practitioners Board to refuse to renew the applicant’s registration as a tax agent as she was not a fit and proper person. The applicant was registered as a tax agent on 1 March 2010. In October 2012, the Commissioner of Taxation determined that the applicant was a disqualified person for the purposes of Pt 15 of the SISA. As a trustee of an SMSF, she had contravened the SISA and was not a fit and proper person to be a “trustee, investment manager or custodian”. In February 2015, the applicant lodged an application with the Tax Practitioners Board to renew her tax agent registration. The Board refused the application. It considered the facts on which the Commissioner’s 2012 decision was based. It found that the applicant had breached her fiduciary duties as a trustee by transferring nearly $1m of trust funds into her personal bank account. The Board found that

having regard to her SISA disqualification and the underlying circumstances, the applicant was not a fit and proper person for registration as a tax agent. The applicant sought review of the Board’s decision by the AAT. In Hart (18 ESL 05; [2018] AATA 1267), the AAT held that the Commissioner had properly exercised his discretion under s 126A to disqualify Mr Hart from acting as a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian of a superannuation entity. Mr Hart (as trustee of the SMSF) had breached various provisions of the SIS Act, including: • failure to keep assets of the fund separate from personal or business assets • acquiring property from a related party of the fund in contravention of the law • allowing a charge to be placed over a fund asset • failure to comply with payment standards and allowing early access to member benefits, and • consistent failure to comply with lodgment of the fund’s tax returns. The AAT said “. . . his behaviour can only be described as falling significantly below the standard one would expect from a competent trustee acting for a SMSF”, and that he was “. . . unquestionably, not a fit and proper person to act in that role. His disqualification by the Commissioner was plainly warranted”. For further discussion of the expression “fit and proper”, see PS LA 2006/17 which discusses the factors the Commissioner will take into account with respect to disqualifying an individual for not being a “fit and proper person” under s 120A(3) (¶3-850). Offences relating to disqualified persons A disqualified person within the meaning in SISA s 120 cannot be a trustee, investment manager or custodian of a superannuation entity, or be a responsible officer of a body corporate that is a trustee, investment manager or custodian of a superannuation entity (s 126K). Section 126K is a two-tier fault liability and strict liability provision (¶3-820). An offence is punishable by the penalty specified in the relevant provisions (a term of imprisonment or fine). A person commits an offence if: • the person is a disqualified person, and the person knows he/she is a disqualified person • the person is or acts as a trustee, investment manager or custodian of a superannuation entity, or is or acts as a responsible officer of a body corporate that is a trustee, investment manager or custodian of a superannuation entity, and • for a person who is an individual and who is a disqualified person only because he/she was disqualified under s 126H — the person is disqualified from being or acting as a trustee of that superannuation entity or from being or acting as that responsible officer (s 126K(1), (2), (4), (5)). An offence also arises if a trustee of a fund is or becomes a disqualified person and does not immediately tell the Regulator (s 126K(8)) (a strict liability offence). A person is not entitled to fail to comply with a requirement under the SISA to answer a question or give information; to produce books, accounts or other documents; or to do any other act whatever on the grounds that this may make the person liable to a penalty by way of a disqualification under s 126A, 126H or 130D (SISA s 126L(3); RSA Act s 67AA). Also, in any proceeding under, or arising out of the SISA, a person is not entitled to refuse or fail to comply with such a requirement on similar grounds. This applies whether or not the person is a defendant in, or a party to, the proceeding or any other proceeding, and despite anything in any provision of the SISA or the Administrative Appeals Tribunal Act 1975 (s 126L). These provisions respond to the High Court’s decision in Rich v ASIC (2004) 22 ACLC 1,198, which overturned the view that disqualification proceedings were protective and not penal in nature.

[SLP ¶2-410, ¶2-550]

¶3-140 Governing rules and SISA requirements The SISA requirements interact with governing rules of a superannuation entity and certain provisions in the fund’s governing rules are void to the extent specified in SISA or to the extent of an inconsistency with the SIS requirements (see also ¶3-145 for provisions dealing with service providers and conflict of interests). Note that the SISA provisions discussed below do not apply to all superannuation entities, ie some apply only to a regulated superannuation fund or a registrable superannuation entity (RSE). The governing rules may also be void to the extent of an inconsistency with a SISA provision that provides protection for trustees in the management of the superannuation entities, such as being subject to direction or victimisation, or when exercising a discretion (¶3-150). Rules about cashing benefits after member’s death The governing rules of a regulated superannuation fund must not permit a fund member’s benefits to be cashed after the member’s death otherwise than in accordance with prescribed operating standards (SISA s 55A(1)). If the governing rules of a fund are inconsistent with s 55A(1), they are invalid to the extent of the inconsistency. The SISR standards in reg 6.21(2A) and (2B) dealing with the cashing of a deceased member’s benefits are discussed at ¶3-286. Rules do not prevent giving effect to certain elections A provision in the governing rules of a regulated superannuation fund is void to the extent that it would prevent a trustee or trustees of the fund from giving effect to: (a) an election made in accordance with s 29SAA (election to transfer accrued default amounts to a MySuper product) (¶9-120) (b) an election made in accordance with s 29SAB (election to transfer assets attributed to a MySuper product if authorisation cancelled) (¶9-120) (c) a requirement in regulations made for the purposes of s 29SAA(3) (d) an election made in accordance with s 29SAC (election not to pass costs of paying conflicted remuneration onto MySuper members) (¶9-120) (e) an election made in accordance with s 242B (election to transfer amounts held in an eligible rollover fund if authorisation cancelled) (¶3-520) (f) an election made in accordance with s 242C (election not to pass costs of paying conflicted remuneration to members of eligible rollover fund) (¶3-520) (s 55B). Rules preventing attributing an amount to a MySuper product A provision of the governing rules of a regulated superannuation fund is void to the extent that it would prevent a trustee or trustees of the fund from attributing an amount to a MySuper product for a member, instead of attributing the amount to a pre-MySuper default option (SISA s 55C(1)). A “pre-MySuper default option”, in relation to an amount attributed to a member of a regulated superannuation fund, is an investment option under which an asset (or assets) of the fund attributed to the member in relation to the amount that would be invested, under the governing rules of the fund, if the member gave no direction in relation to the amount (s 55C(2)). Inconsistent rules with outcomes assessments and MySuper products obligations A provision of the governing rules of a regulated superannuation fund is void to the extent that it is inconsistent with: (a) a covenant referred to in s 52(9), (12) or (13) that is contained, or taken to be contained, in the

governing rules of the fund, or (b) if the trustee of the fund is a body corporate — a covenant referred to in s 52A(2)(f) that is contained, or taken to be contained, in the governing rules of the fund, to the extent that the covenant relates to a covenant referred to in s 52(9), (12) or (13) (s 55D). Rules about trustee indemnification from fund assets Subject to two cases (see below), a provision in the governing rules of a superannuation entity is void if: • it purports to preclude a trustee of the entity from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee of the entity, or • it limits the amount of such an indemnity (SISA s 56(1)). Breaches of trust and penalties A provision in the governing rules of a superannuation entity is void in so far as it would have the effect of exempting a trustee of the entity from, or indemnifying a trustee of the entity against: • liability for breach of trust if the trustee: – fails to act honestly in a matter concerning the entity, or – intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the trustee was required to exercise (¶3-100) • liability for a monetary penalty under a civil penalty order (¶3-820), or • the payment of any amount payable under an infringement notice (¶3-860) (s 56(2)). Section 57 provides a similar rule to the above for the directors of the corporate trustee of a superannuation entity (see below). Operational risks A provision in the governing rules of an RSE is void in so far as it would have the effect of allowing a trustee of the entity: • to indemnify itself out of the assets of the entity for any amount expended out of capital of the trustee managed and maintained by the trustee to cover the operational risk of the entity, or • to indemnify itself out of any assets of the entity that do not form part of a reserve maintained for the purpose of covering the operational risk relating to the entity, any amount that relates to that risk, without first exhausting the reserve and any other financial resources managed and maintained by the trustee to cover the risk (s 56(2A)). Rules preventing seeking advice and indemnity Nothing in the governing rules of a superannuation entity prohibits a trustee of the entity from seeking advice from any person in respect of any matter relating to performance of the duties or the exercise of the powers of a trustee (SISA s 56(3)). A provision in the governing rules that purports to preclude a trustee of the entity from being indemnified out of assets of the entity in respect of the cost of obtaining such advice, or to limit the amount of such an indemnity, is void. Rules providing for indemnity for directors of corporate trustees Subject to SISA s 57(2), the governing rules of a superannuation entity may provide for a director of the trustee to be indemnified out of the assets of the entity in respect of a liability incurred while acting as a director of the trustee (s 57(1)). A provision of the governing rules of a superannuation entity is void in so far as it would have the effect of indemnifying a director of the trustee against:

• a liability that arises because the director: – fails to act honestly in a matter concerning the entity, or – intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the director is required to exercise (¶3-100), or • liability for a monetary penalty under a civil penalty order (¶3-820), or • the payment of any amount payable under an infringement notice (¶3-860) (s 57(2)). Section 56(2) provides a similar rule to the above for individual trustees of a superannuation entity (see above). A director of the trustee of a superannuation entity may be indemnified out of the assets of the entity in accordance with provisions of the entity’s governing rules that comply with s 57. Section 57 has effect despite s 241 of the Corporations Act 2001. Generally, s 241 prohibits a company from indemnifying or exempting a director (and the company’s officers) in respect of liabilities incurred in that capacity except where the indemnity is for liability to third parties where the director acted in good faith or for costs and expenses incurred in a successful defence of civil or criminal proceedings. Rules about voting A provision in the governing rules of a regulated superannuation fund (other than an SMSF) is void to the extent that it purports to preclude a director of the trustee from voting on a matter relating to the fund (SISA s 68C(1)). The above does not apply to a provision in the governing rules to the extent that the provision: (a) precludes a director from voting on a matter in which the director has a material personal interest (b) otherwise relates to voting by a director on a matter in which the director has a material personal interest (c) precludes a director from voting where there is a conflict of a kind described in s 52(2)(d) or 52A(2) (d) (¶3-100) (d) otherwise relates to voting by a director where there is a conflict of a kind described in s 52(2)(d) or 52A(2)(d) (e) precludes a director from exercising a casting vote, or (f) ensures compliance by the trustee of the fund, or a director, with a prudential standard that deals with conflicts of interest or duty (s 68C(2)). A corresponding rule to the above applies where the trustees of the fund are individuals (s 68D). Additional requirements in governing rules The governing rules of a regulated superannuation fund must expressly either require the trustee to be a “constitutional corporation” or provide that the sole or primary purpose of the fund is the provision of oldage pensions. The importance of this requirement is discussed at ¶2-130. Certain superannuation entities, such as a non-SMSF with fewer than five members (¶5-650) or a public offer entity (¶3-010), do not have a choice in this regard as the trustee of the entity must be a body corporate, rather than individuals.

¶3-145 Service providers and conflicts of interest There are rules in SISA on the use of particular service providers by superannuation entities, financial products, investments and entities in which funds may or must be invested in, and conflict of interests.

Service providers and investments in entities A provision in the governing rules of a regulated superannuation fund (other than an SMSF) is void to the extent that: • it specifies a person or persons (whether by name or in any other way, directly or indirectly) from whom the trustee, or one or more of the trustees, of the fund may or must acquire a service • it specifies an entity or entities (whether by name or in any other way, directly or indirectly) in or through which one or more of the assets of the fund may or must be invested • it specifies (whether by name or by reference to an entity) a financial product or financial products: – in or through which one or more of the assets of the fund may or must be invested – that may or must be purchased using assets of the fund, or – in relation to which one or more assets of the fund may or must be used to make payments (SISA s 58A(2), (3), (4)). The entities include, but are not limited to, managed investment schemes, life insurers, PSTs and other unit trusts and authorised deposit-taking institutions (ADIs). Financial products include, but are not limited to, insurance, including tied group life insurance policies. Sections 58A(2), (3) and (4) do not apply if the relevant person, entity or financial product is specified in a law of the Commonwealth or of a state or territory, or is required to be specified under such a law (s 58A(5)). The rules in s 58A are to restore a trustee’s discretion to act in the best interests of members when entering into relevant arrangements. The explanatory memorandum to Act No 61 of 2013 which inserted s 58A provides the following guidelines: • Section 58A does not require termination of contracts giving effect to arrangements required under a fund’s governing rules. Trustees will be required to determine whether the continuation of the arrangements is consistent with the obligation to act in the best interests of members. Those arrangements that can be demonstrated to be in the best interests of members can continue; others must be terminated when the current period of the relevant contract comes to an end. • If the costs of changing from the current service provider outweigh potential benefits to members then it is possible for trustees to conclude that the arrangement is in the best interests of members and no change would be required. • Section 58A does not limit a trustee’s ability to identify generic categories of investment, for example ethical investment. • Section 58A overrides provisions that state that the RSE licensee “may” use a particular entity as well provisions that state the RSE licensee “must” do so. This is to ensure that the requirements of the provision cannot be avoided through a clause that confers power to use particular named entities which might have the effect of encouraging or sanctioning the use of those entities instead of considering other options in the market. • The requirements for selecting service providers in members’ best interests are supported by APRA prudential standards covering a range of topics including conflicts of interest and outsourcing (see Chapter 9). Conflict of interest Section 58B of SISA applies if a trustee of a regulated superannuation fund does one or more of the following: (a) acquires a service from an entity

(b) invests assets of the fund in or through an entity (c) invests assets of the fund in or through a financial product (d) purchases a financial product using assets of the fund (e) uses assets of the fund to make payments in relation to a financial product. In doing one or more of the above things, the general law relating to conflict of interest does not apply to the extent that it would prohibit the trustee from doing the thing, provided the trustee would not breach SISA or any other Act (or a legislative instrument under the Acts), APRA prudential standards, the operating standards, the fund’s governing rules or a SIS covenant. This means that the trustee may enter into service provider and investment arrangements (and undertake the preliminary dealings necessary to do so) even though this may otherwise breach general law conflict of interest prohibitions. It will not be necessary, therefore, for the trust deed to expressly authorise the trustee to engage in dealings with the related party. The words “general law relating to conflict of interest” are intended to be construed broadly so as to cover general law relating to both trustees and directors and to cover conflicts between duties to beneficiaries and the interests of beneficiaries, on the one hand, and duties to other persons and the interests of other persons, on the other. APRA prudential standards and practice guides APRA has issued prudential standards and practice guides on outsourcing, conflicts of interest and other operational risks, see ¶9-720.

¶3-150 Protection for trustees in governing rules The SISA requires the governing rules of a superannuation entity to provide certain safeguards for the protection of trustees in the operation and administration of the entity. Trustee not to be subject to direction The governing rules of a superannuation entity (other than a superannuation fund with fewer than five members or an excluded ADF) must not permit the trustee to be subject to direction by any other person in the exercise of its powers under those rules (eg a member directing the trustee to invest in a particular investment: ¶3-400), except by the persons and in the circumstances specified in the SISA (SISA s 58). The exceptions specified in s 58(2) include a direction given by the court, a Regulator or the Superannuation Complaints Tribunal, a direction given by an employer-sponsor, or an associate of an employer-sponsor, as permitted by the SISR, and: • a direction given by a beneficiary to take up, dispose of or alter the amount invested in an investment option, where the entity is an RSE and the direction is given in prescribed circumstances • a direction given by a member of a regulated superannuation fund to attribute (or continue to attribute) an amount that is an accrued default amount for the member to a MySuper product or an investment option within a choice product in the fund. Any governing rule that is inconsistent is invalid to the extent of the inconsistency. Exercise of trustee discretion The governing rules of a superannuation entity (other than an SMSF or excluded ADF) must not permit a discretion under those rules that is exercisable by a person other than a trustee of the entity to be exercised unless: (a) those rules require the consent of the trustee, or the trustees, of the entity to the exercise of that discretion, or (b) if the entity is an employer-sponsored fund: (i) the exercise of the discretion relates to the contributions that an employer-sponsor will, after the

discretion is exercised, be required or permitted to pay to the fund (ii) the exercise of the discretion relates solely to a decision to terminate the fund, or (iii) the circumstances in which the discretion was exercised are covered by specific SISR (SISA s 59(1)). Any governing rule that is inconsistent with s 59(1) is invalid to the extent of the inconsistency. A qualification provided by s 59(1A) has the effect that the governing rules may, subject to the trustee complying with the prescribed SISR conditions, permit a member to give the trustee a written notice requiring the trustee to pay the member’s benefit entitlements after his/her death to the legal personal representative or a dependant or dependants of the member. Such a notice is commonly referred to as a “death benefit nomination”, and a trustee’s discretionary power to pay death benefits of the member is subject to the nomination (¶3-288). Amendment of governing rules The governing rules of a superannuation entity (other than an SMSF) must not permit the rules to be amended except with the consent of the trustee or where the amendments are in relation to the matters specified in the SISA (SISA s 60). Importantly, the governing rules of a regulated superannuation fund must not permit those rules to be amended in such a way that a person other than a constitutional corporation would be eligible to be appointed as trustee unless the rules provide, and will continue to provide after the amendment is made, that the fund has, as its sole or primary purpose, the provision of old-age pensions (s 60(2)). The governing rules of a superannuation entity are invalid to the extent that they are inconsistent with s 60. For prudential reasons, trustees should generally have qualified professionals undertake the trust deed amendments and related changes to ensure that the amendments or changes are effective and have the desired results. For a practitioner insight into the pitfalls and the inherent risks of not using legal practitioners when effecting trust deed changes, see “SMSF deeds varied via the web. The risks!” by Daniel Butler of DBA Butler Pty Ltd (Lawyers) (published in the Wolters Kluwer Australian Super News, Issue 7, August 2005). Removal of trustee In the case of a public offer entity, the governing rules must not permit the trustee to be removed, except by APRA or in the circumstances permitted by the SISR (SISA s 60A; SISR reg 3.04A). SISA Pt 17 provides for the removal of trustees by APRA. A governing rule that is inconsistent with s 60 or 60A is invalid to the extent of the inconsistency. Trustee victimisation The trustee of an employer-sponsored superannuation fund (including the responsible officer of a corporate trustee) has statutory protection against any act of victimisation in the performance of his/her obligations or powers under the SISA or the governing rules (SISA s 68). A person is taken to commit an act of victimisation against a trustee of an employer-sponsored fund if the person subjects, or threatens to subject, the trustee to a detriment on the grounds that the trustee has fulfilled, is fulfilling, or is proposing to fulfil, an obligation imposed on the trustee, or the trustee has exercised, is exercising, or is proposing to exercise, the trustee’s powers in a particular way. An employer is taken to subject an employee to a detriment if the employer dismisses the employee, or injures the employee in his/her employment, or alters the position of the employee to the employee’s prejudice (s 68(4)). For example, APRA took action for alleged victimisation against two trustee directors of a superannuation fund. The two directors were allegedly victimised in their capacity as an employee and as an auditor and suffered financial detriment when their employment and audit engagement were terminated for simply carrying out their legal obligations as trustee directors to act in the best interests of fund members (APRA media release No 10.14, June 2010).

[SLP ¶2-860 – ¶2-890]

¶3-160 Defined benefit and pension funds must have 50 members A defined benefit fund must have at least 50 defined benefit members, and a regulated superannuation fund which has fewer than 50 members must not provide a defined benefit pension. The 50-member rule also applies to sub-funds within a scheme or fund, but not to certain public sector schemes (see below). For the SISA financial management standards and actuarial requirements applicable to defined benefit and other superannuation funds, see ¶3-330. Meaning of “defined benefit pension” A “defined benefit pension” means a “pension” within the meaning of the SISA (ie an income stream that complies with the minimum standards prescribed for a pension: ¶3-390) other than: • a pension wholly determined by reference to policies of life assurance purchased or obtained by the trustee of a regulated superannuation fund solely for the purposes of providing benefits to members of that fund • an allocated pension or a market-linked pension, or • an account-based pension (¶3-390) (SISR reg 9.04E). The 50-member rule does not apply to funds paying the above excepted pensions as, with those pensions, the investment and mortality risks of the pension are not assumed by the fund but by the life insurance company or pensioner. The explanatory statement to SR 84/2004 states that the 50-member rule is: (i) to restrict the provision of defined benefit pensions to funds that are of a sufficient size to satisfactorily manage the investment and mortality risks of providing those pensions; and (ii) to prevent the payment of non-arm’s length defined pensions by small funds, in order to avoid RBL and social security means testing and to access taxation concessions for estate planning rather than retirement income purposes. Sub-funds to be treated as funds To prevent circumvention of the 50-member rule in SISR reg 9.04D or 9.04I through the use of master and hybrid fund arrangements, a sub-fund within a defined benefit scheme is taken to be a defined benefit fund, or a sub-fund within a regulated superannuation fund is taken to be a regulated superannuation fund, if: • the sub-fund has separately identifiable assets and separately identifiable beneficiaries • the interest of each beneficiary of the sub-fund is determined by reference only to the conditions governing that sub-fund (reg 9.04B; 9.04G). Exceptions — where 50-member rule does not apply Divisions 9.2A and 9.2B of SISR do not apply to a fund that is part of: • the scheme established by or under the Superannuation Act 1976 or the Superannuation Act 1990 • the Military Superannuation and Benefits Scheme, or • an exempt public sector superannuation scheme (reg 9.04A(2); 9.04F(2)).

Fund Operation ¶3-200 Sole purpose test

The trustee of a regulated superannuation fund must comply with the sole purpose test set out in SISA s 62. Essentially, the test requires the trustee to ensure the fund is maintained solely for one or more of the “core purposes”, or for one or more of the core purposes and for one or more of the “ancillary purposes”. The test does not imply that the trustee is required to maintain the fund so that the same kind of benefits will be provided to each member of the fund (s 62(1A)). The sole purpose test is a civil penalty provision, and trustees may be liable to civil and criminal proceedings if the provision is breached (¶3-820). Core purposes The core purposes specified in SISA s 62(1)(a) for a regulated superannuation fund are: • the provision of benefits for each member of the fund on or after the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member’s retirement occurred before or after the member joined the fund) • the provision of benefits for each member of the fund on or after the member attaining age 65 • the provision of benefits for each member of the fund on or after whichever is the earlier of: (a) the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; or (b) the member attaining age 65 • the provision of benefits in respect of each member of the fund on or after the member’s death if: (a) the death occurred before the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; and (b) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both, or • the provision of benefits in respect of each member of the fund on or after the member’s death if: (a) the death occurred before the member attained age 65; and (b) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both (SISR reg 13.18). For the meaning of “dependant” for the purposes of the SISA, see ¶3-020 and ¶3-288. Ancillary purposes The ancillary purposes specified in SISA s 62(1)(b) for a regulated superannuation fund are: • the provision of benefits for each member of the fund on or after the termination of the member’s employment with an employer who had, or any of whose associates had, at any time contributed to the fund in relation to the member • the provision of benefits for each member of the fund on or after the member’s cessation of work, if the work was for gain or reward in any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged and the cessation is on account of ill-health • the provision of benefits in respect of each member of the fund on or after the member’s death if: (a) the death occurred after the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member’s retirement occurred before or after the member joined the fund); and (b) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both • the provision of benefits in respect of each member of the fund on or after the member’s death if: (a) the death occurred after the member attained age 65; and (b) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both • the provision of such other benefits as are approved by the Regulator (see below). The ancillary purposes approved pursuant to s 62(1)(b)(v) are the provision of benefits for or in respect of

each member which SISR Pt 6 permits to be paid (by being cashed, rolled over or transferred), or requires to be paid, and the extent and the persons to whom the fund is permitted or required under SISR Pt 6 to pay (Superannuation Industry (Supervision) approval of provision of benefits No 1 of 2007). The provision of benefits in accordance with SISR Pt 6 is discussed in ¶3-286. The ancillary purposes approval (by reference to the provision of benefits under SISR Pt 6) addresses inconsistencies that might otherwise arise between the sole purpose test and the SISR Pt 6 payment standards. For example: • the sole purpose test allows payment of benefits only to members, dependants or the legal personal representative of the member, whereas reg 6.22 authorises payment of benefits in certain limited circumstances to any individual • the sole purpose test may prohibit payment of benefits that had become unrestricted non-preserved benefits because of termination of employment, but that had been rolled over to a second fund. The benefits would not then be payable from the second fund because of s 62(1)(b)(i), which applies only to benefits to which the relevant employer had contributed (¶3-280), and • the sole purpose test may prohibit payment of a benefit under $200 to a lost member who is found, whereas the benefit may be paid under item 111 of the conditions of release in SISR Sch 1 (¶3-280). In all of the above cases, the ancillary purposes approval ensures these benefits remain payable at any time. Regulator’s guidelines SMSFR 2008/2 contains guidelines on the application of the sole purpose test to SMSFs. In particular, the ruling states that while the sole purpose test requires trustees to ensure that the fund is maintained solely for the purposes specified in SISA s 62 (see above), there are some circumstances where a fund may be maintained solely for these purposes while providing benefits (particularly to members or other related parties) other than those specified without breaching s 62. Although SMSFR 2008/2 is stated to apply to SMSFs, the ATO’s guidelines are, in principle, generally relevant to other regulated superannuation funds. The ATO has provided examples of funds investing in shares which provide collateral shareholder discount entitlements that may breach the sole purpose test (see SMSFR 2008/2: ¶5-410). For the ATO’s views on the potential contravention of the sole purpose test if an SMSF is presently entitled to a distribution from a related or non-arm’s length trust and payment of this amount is not sought, see SMSFR 2009/3 in ¶5-410. Trauma insurance policy Where member contributions are applied to purchase trauma insurance policies, APRA considered that, an unreasonable diversion of contributions as premiums for the contingent trauma cover would be difficult to reconcile with the sole purpose test and the fundamental retirement objective of superannuation. Former SMSFD 2010/1 (withdrawn from 1 July 2014: see below) stated that the trustee of an SMSF could purchase a trauma insurance policy in respect of a member and still satisfy the sole purpose test provided any benefits payable under the policy: • were required to be paid to the trustee • were benefits that will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release, and • the acquisition of the policy was not made to secure some other benefit for another person such as a member or member’s relative. If a trustee purchased a trauma policy that provides for benefits payable under the policy to be paid directly to someone other than the trustee (eg the insured member or member’s relative is the beneficiary of the policy), this would breach the sole purpose test.

A payout under a trauma insurance policy is normally made to a superannuation fund (as owner of the policy) regardless of the insured member’s age, working status, or whether the trauma causes permanent disability. If the receipt of the benefit by the fund under the policy does not coincide with the member satisfying a condition of release under the SISR (¶3-280), the proceeds cannot be paid immediately to the member by the SMSF. Instead, they will be retained in the fund until the member subsequently satisfies a condition of release (eg retirement). The key issues are the entity deriving a benefit from the policy and the timing of that benefit. The sole purpose test must be maintained to ensure that benefits are provided to or for a member on or after the member’s retirement, employment termination or death (see above). Any benefits provided at an earlier time for the member or a related party are sometimes referred to as “current day” benefits and would breach the sole purpose test. Example An SMSF (with two members, H and J) decides to purchase trauma insurance policies for its members so as to alleviate any financial stress for them. The policies are purchased in names of H and J and each policy stipulates that proceeds from the policies are to be paid directly to them. The purchase of the policies provides a “current day” benefit, ie H and J do not have to pay the costs of premiums. This is inconsistent with the sole purpose test and the overall objective of providing retirement benefits for members, and will breach s 62.

The withdrawal of SMSFD 2010/1 is the consequence of the commencement of SISR reg 4.07D(2) from 1 July 2014, which states that a trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member of the fund unless the insured event is consistent with a condition of release specified in items 102 (Death), 102A (Terminal medical condition), 103 (Permanent incapacity) or 109 (Temporary incapacity) of SISR Sch 1. Regulation 4.07D(2) does not apply to the continued provision of an insured benefit to members who joined a fund before 1 July 2014 and were covered in respect of that insured benefit before 1 July 2014 (¶3-240). The Commissioner explains that the insured event under a trauma insurance policy, as described in SMSFD 2010/1, is not consistent with any of the conditions of release set out in reg 4.07D(2). Therefore, a trustee of an SMSF is prohibited from providing such an insured benefit in relation to a member unless the member joined the fund before 1 July 2014, and was covered in respect of that insured benefit before 1 July 2014. An SMSF trustee that continues to provide a trauma insurance benefit to a member who joined the fund before 1 July 2014, and was covered in respect of that insured benefit before 1 July 2014, can purchase a trauma insurance policy to support the provision of that benefit and still satisfy the sole purpose test in s 62 of the SISA provided the conditions set out in SMSFD 2010/1 are met. Cases and examples The Swiss Chalet case is the most often cited example of a fund which was found to have failed the sole purpose test (Case 43/9595 ATC 374). In that case, the fund had purchased shares which enabled access to a golf club for Mr A, the managing director of the employer-sponsor of the fund; invested in a Swiss chalet which also provided a source of funding for Mr A for his family trust; and operated in a manner that denied fund members information about their entitlements and the fund. Although the sole purpose test considered in the case was contained in the Occupational Superannuation Standards Act 1987 (OSS Act), the same result would be expected under s 62. Another often cited case is Case 23/96 96 ATC 278, where the trustees of two superannuation funds (“B1 Fund” and “B2 Fund”) were a husband and wife (“H” and “W”). H and W were members of the B1 Fund with 12 others and were the only members of the B2 Fund. H and W withdrew approximately $53,000 from B2 Fund and paid it into B1 Fund, which then used the money to pay its tax liability ($21,000) and pay the trustee of the B Family Trust ($32,000). The AAT held that using the money held on trust for the beneficiaries of B2 to pay B1 Fund’s tax liability was contrary to the sole purpose test under the OSS Act. Superannuation funds which contravene one or more regulatory provisions in the SISA (¶2-140), particularly those governing investments of the fund, are very likely to also fail the sole purpose test. Examples of these cases are:

• The Trustee for the R Ali Superannuation fund 12 ESL 01 — in this case, the fund also contravened the in-house asset rules in s 84(1) or 85(1) (¶3-450), the arm’s length rule in s 109 (¶3-440), and the prohibition on giving loans to members in s 65 (¶3-420) • Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund 12 ESL 02 — in this case, the fund also contravened the in-house asset rules and arm’s length rule • Dolevski v Hodpik Pty Ltd 11 ESL 07 — in this case, the fund also contravened the in-house asset rules and arm’s length rule. This case also examined whether: (i) the contraventions were due to reasonable reliance on information supplied by another person or due to reasonable mistake such that defences under s 323(2) of the SISA may be relied upon; and (ii) the trustees acted honestly in all the circumstances of the case such that s 221(2) of the SISA may be relied upon for the court to grant relief from liability (¶3-820) • Raelene Vivian, suing in her capacity as the DC of T (Superannuation) v Fitzgeralds 07 ESL 23 — in this case, the fund also contravened the in-house asset rules. This case also examined the principles and factors relevant to the assessment of an appropriate penalty • ZDDD 11 ESL 01 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members and arm’s length rule • Olesen v Eddy 11 ESL 02 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members • Olesen v MacLeod 11 ESL 11 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members. The case also examined whether the conduct amounted to a “serious contravention”, whether a monetary penalty should be ordered and consideration of other principles and factors relevant to the assessment of an appropriate penalty • Triway Super 11 ESL 12 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members and s 126K of the SISA (disqualified person not to be a trustee: ¶3-130) • Olesen v Parker & Parker 11 ESL 21 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members and arm’s length rule. This case also examined whether: (i) the contraventions were due to reasonable reliance on information supplied by another person or due to reasonable mistake such that defences under s 323(2) of the SISA may be relied upon; and (ii) the trustees acted honestly in all the circumstances of the case such that s 221(2) of the Act may be relied upon for the court to grant relief from liability • Aussiegolfa Pty Ltd (Trustee) 2018 ATC ¶20-664 — in this case, the full Federal Court held that fund would be maintained solely for the core purposes, or the core purposes and the ancillary purposes set out in s 62 in an arrangement when property was leased by a sub-fund in which an SMSF had invested in to the daughter of the fund members on arm’s length terms (¶3-450) (see also the ATO's decision impact statement (DIS) below). In the Aussiegolfa DIS (www.ato.gov.au/law/view/document?docid=LIT/ICD/VID54of2018/00001), the ATO stated it did not consider that the case is authority for the proposition that a superannuation fund trustee can never contravene the sole purpose test when leasing an asset to a related party simply because market-value rent is received. “It is the purpose of making and maintaining a fund's investments that is central to identifying if there is a contravention of the sole purpose test.” The DIS also noted the observations of the court that a collateral purpose, and a contravention of s 62 of the SISA, could well be present if the circumstances indicated that leasing to a related party had influenced the fund's investment policy. For example, a superannuation fund trustee will contravene the sole purpose test if it acquires residential premises for the collateral purpose of leasing the premises to an

associate of the fund, even where the associate pays rent at market value. [SLP ¶3-610]

¶3-220 Acceptance of contributions and accruals A regulated superannuation fund can only accept contributions and grant benefit accruals in accordance with SISR Pt 7 (contributions standard). The contributions standard applies to “contributions” (eg employer contributions for employees, personal contributions, spouse contributions and contributions made by any other person, payments of the SG shortfall component and payments from the SHASA), but contributions do not include benefits “rolled over” or “transferred” (¶3-284) to the fund (reg 1.03(1)). Rolled over or transfer payments are generally payment on behalf of an individual (eg a fund member) made between superannuation funds and certain other entities within the superannuation system. The “superannuation system” comprises regulated superannuation funds, ADFs, RSAs, exempt public sector superannuation schemes (EPSSSs) (eg some schemes established under Commonwealth, state or territory government legislation), deferred annuities (an annuity offered by a life office which commences payment when the payment standards permit but no later than when the annuitant reaches age 65) and, from 18 December 2008, the Commissioner as the maker of payments to a superannuation provider under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SISR reg 5.01(1)). For example, the contribution standard would apply to a roll-over or transfer from outside the superannuation system (eg a transfer from a foreign fund). The transfer of amounts from a New Zealand KiwiSaver scheme that complies with the Trans-Tasman retirement savings portability requirements is to be treated as a contribution when received by an RSE; however, special provisions apply to the transfer of these amounts (¶8-380). Examples of other payments to a fund that are not subject to the contribution standard include insurance proceeds and payments under a family law superannuation split (see “What are contributions?” below). Contributions received by regulated superannuation funds must be allocated to members within 28 days after the end of the month in which they were received (see below). The Regulator may direct the trustee of a regulated superannuation fund which has contravened a regulatory provision (including the trustee representation rules: ¶3-120) or the FSCDA (¶9-740) not to accept employer contributions (SISA s 63). The trustee must notify employer-sponsors of the issue of the direction and refund contributions accepted in contravention of the direction within 28 days, or such further period allowed by the Regulator. A trustee which fails to comply with the above requirements is guilty of a strict liability offence (¶3-820). The governing rules of a regulated superannuation fund may prescribe more restrictive acceptance of contribution and benefit accrual rules than the SIS standards and trustees may, at their discretion, impose more restrictive arrangements in accordance with their powers under the governing rules. Contributions may be made “in specie” (in assets other than cash). In these cases, the trustees must also ensure that the relevant investment provisions of the SIS legislation dealing with acquisition of assets are not breached (¶3-430). A registrable superannuation entity (RSE) that is a regulated superannuation fund must not accept contributions unless the RSE is registered under SISA Pt 2B (reg 7.03A) (¶3-490). Superannuation contributions, including fund reserves allocated to a member, are subject to contribution caps for taxation purposes (see below). Superannuation providers are required to provide the ATO with information about contributions received and roll-over superannuation benefits (¶12-530). The ATO uses the information received for various purposes such as administration of the SG, co-contributions and contributions caps regimes. RSA providers are subject to similar contribution rules and the terms “fund” and “member” in this paragraph may be read as a reference to “RSA provider” and “RSA member” (¶10-110). The data and payment standards dealing with contributions are discussed at ¶9-790.

Topics covered The acceptance of contribution rules are discussed under the following topics. • What are contributions? • SISR rules on accepting contributions • Exception: contributions related to earnout rights • Additional rule — public offer superannuation fund • Bring forward rule and work test after age 65 • Eligible spouse contributions and child contributions • Accepting spouse contributions-splitting • Accepting downsizer contributions • Work test exemption for members with low balances • Accrual of benefits — defined benefit funds • Accepting contributions outside age and work tests • Caps on contributions and tax treatment • Contributions must be allocated to members • Repaying contributions under cooling-off provisions • Refund of contributions, including excess contributions, made in error • Employers remitting contributions to superannuation funds • Employer reporting of contributions on pay slips • Employers using a clearing house for superannuation payments • MySuper products — limitation imposed by governing rules. What are contributions? In the SISR, the term “contributions”, in relation to a fund, includes: • payments of superannuation guarantee shortfall components to the fund • payments to the fund from the Superannuation Holding Accounts Special Account, but • does not include benefits that have been rolled over or transferred to the fund (SISR reg 1.03(1)). For SIS purposes, roll-overs and transfers are payments made within the superannuation system. The contribution standard therefore does not apply to a roll-over or transfer originating from within the superannuation system including under SISR Pt 6 Div 6.4, 6.5 or 6.7, or under SISR Pt 7A, or as provided for under Pt VIIIB of the Family Law Act 1975. The standard also does not apply to proceeds from an insurance policy, eg for a claim paid in respect of a member’s life or disability insurance policy, as these are not regarded as contributions. A transfer from an overseas superannuation fund (¶7-120, ¶8-370) and a payment of a CGT exempt amount by an entity to a superannuation fund (¶6-550) are examples of transfers or roll-overs from outside the superannuation system. These payments are contributions which are subject to the

contribution standard in reg 7.04. Ordinary meaning of “contributions” TR 2010/1 explains the ordinary meaning of the word “contribution” in relation to a superannuation fund, ADF or RSA in the ITAA97, how a contribution can be made, and when a contribution is made. Aspects of the ruling are also relevant to the meaning of “contribution” in the SIS legislation, as the SISR definition of contribution is inclusive (see above). The ruling states that, in the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general. For example, the capital of a superannuation fund may be increased directly by transferring money or funds to it, transferring an existing asset to it (an in specie contribution), creating rights in the fund (also an in specie contribution), or increasing the value of an existing asset held by it. The fund’s capital can also be increased indirectly by paying an amount to a third party for the benefit of the fund, forgiving a debt owed by the fund, or shifting value to an asset owned by the fund (see further ¶6-120, ¶6-123). A person’s purpose is the object which the person has in view or in mind. Generally, a person will be said to intend the natural and probable consequences of the person’s acts and, likewise, this may be inferred from the acts. This is a determination of a person’s objective purpose, not the person’s subjective intention. A person will not normally have a purpose of benefiting a fund member if a transaction carried out is in no way dependent upon the identity of the other party as a superannuation fund, or the person is simply fulfilling the terms of a contract or arrangement entered into on a commercial or arm’s length basis. By contrast, an objective determination of a person’s purpose may in some cases lead to the conclusion that the person’s purpose is to benefit one or more particular fund members or all of the members in general. This may occur when a transaction or arrangement is entered into because of a connection or relationship between the person and the fund, or cannot be explained by reference to commercial or arm’s length dealings. A contribution of property is received when either legal or beneficial ownership of the property passes to the fund. If there is no formal ownership registration process as evidence, ownership passes when the fund acquires possession of the property or on execution of a deed of transfer of the property. Otherwise (eg with shares in a publicly listed company or Torrens title land), ownership passes when the fund is registered as the property’s owner or when the fund acquires beneficial ownership of the property (eg possession of the requisite transfer forms, or a properly completed off-market share transfer form). A contribution by way of debt forgiveness is taken to occur when the lender executes a deed of release that relieves a superannuation fund from its obligation to repay the loan. The ATO considers that shares acquired by a superannuation fund under an employee share scheme (ESS) are contributions as the fund’s capital increases when a person transfers an asset (such as a share or option to acquire shares) to the fund, but the fund pays less than the market value of the asset. Whether the contribution of the shares (which is an in-specie contribution) is an employer contribution or a personal contribution will depend on the facts of each case. The general prohibition on the intentional acquisition of assets (including in-specie contributions) from related parties of the fund (¶3-430) may also need to be considered (Factsheet Employee share scheme options and acquisition of shares by selfmanaged super funds: www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsftechnical/employee-share-scheme-options-and-acquisition-of-shares-by-self-managed-super-funds). TA 2009/10 warns about arrangements involving non-commercial use of negotiable instruments (eg promissory notes) to pay a benefit from or make a contribution to a superannuation fund (see ¶3-280). TA 2008/12 “Non-cash contributions to superannuation funds” warns about in specie contribution arrangements designed to allow a fund member to circumvent the contribution caps under ITAA97 (¶16250). SISR rules on accepting contributions A regulated superannuation fund may accept contributions only in accordance with the rules in SISR reg 7.04 as summarised below. An additional rule in reg 7.04A applies if the fund is a public offer superannuation fund.

An amount paid to a superannuation fund which cannot be accepted under the contribution rules must be returned to the entity or person that paid the amount, rather than the member for whom the contribution is made. This is to avoid potential unintended consequences that may arise if the amount was returned to the member, such as an increased tax liability. Rule 1: Age of member and work test A regulated superannuation fund may accept contributions in accordance with the rules set out in the table below (reg 7.04(1)). Age of member

Contributions and conditions

– under 65

contributions made in respect of the member

– not under 65, but is under 70

contributions made in respect of the member that are: (a) mandated employer contributions (b) if the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made (see “Work test” below): (i) employer contributions (except mandated employer contributions: see below), or (ii) member contributions (see below) (c) downsizer contributions (see below) d) if the member has not satisfied the work test during the financial year in which the contributions are made, but satisfies the requirements in reg 7.04(1A): (i) employer contributions (except mandated employer contributions), or (ii) member contributions (see “Work test exemption for members with low balances”: below)

– not under 70, but is under 75

contributions made in respect of the member that are: (a) mandated employer contributions, or (b) if the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made and the contributions are received on or before the 28th day after the end of the month that the member turns 75: (i) employer contributions (except mandated employer contributions), or (ii) member contributions made by the member (c) downsizer contributions d) if the member has not satisfied the work test during the financial year in which the contributions are made, but satisfies the requirements in reg 7.04(1A) — contributions received on or before the 28th day after the end of the month on which the member turns 75 that are: (i) employer contributions (except mandated employer contributions), or (ii) member contributions made by the member (see “Work test exemption for members with low balances”: below).

– not under 75

mandated employer contributions

In any of the above circumstances, a fund may accept contributions in respect of a member if it is reasonably satisfied that the contribution is in respect of a period during which the fund may accept the contribution, even though the contribution is actually made after that period (reg 7.04(6)). For example, this will allow a fund to accept a delayed contribution for an employee after an employee’s death (Interpretative Decision ID 2014/31). Where a fund is unwilling or unable to accept contributions after the death of an employee in a case where the fund has already closed the member’s account, the employer may make a payment, equal to the contribution amount, directly to the deceased employee’s personal legal representative. For superannuation guarantee purposes, such a payment is treated as a contribution to a complying superannuation fund for the benefit of the employee (see SGAA 23(9A)). An exception to the acceptance of contribution rules is available for contributions of the proceeds of the sale of a business to which certain small business concessions apply where the sale involved an earnout right (see “Exception: contributions related to earnout rights” below). A person who has triggered the “bring forward rule” for non-concessional contributions in a financial year and has since attained age 65 will be required to satisfy the “work test” (see below) in later financial years even if the person is making contributions under the remainder of the bring forward cap in those later years (see “Bring forward rule and work test after age 65” below). Employer and member contributions “Employer contributions” are contributions by or on behalf of an employer-sponsor of the fund. “Member contributions” are contributions by or on behalf of a member other than employer contributions for the member, eg personal contributions, spouse contributions and government co-contributions (see below) (reg 1.03(1); 5.01(1)). “Mandated employer contributions” are: • SG contributions, ie contributions made by or on behalf of an employer to reduce the employer’s potential liability to the SG charge (¶12-000) • SG shortfall components, ie payments of the shortfall component of the SG charge by the ATO (¶12400) • award contributions made by or on behalf of an employer in satisfaction of the employer’s obligations under an industrial agreement or award • payments from the SHASA (reg 5.01(1), (2)) (¶12-600). With regard to SG or award contributions by employers, mandated employer contributions only cover those contributions to the required SG level (eg 9.5% in 2015/16: see ¶12-200), or to the industrial award or agreement level (if higher than the SG level). Any excess employer contributions are not mandated employer contributions and these may be accepted only if the relevant rule for employer contributions as noted in the table above is met. Where members have an effective arrangement with their employer to salary sacrifice to superannuation, the superannuation contributions under the arrangement are considered to be made by the employer. Salary sacrifice arrangements, including the tax consequences of the arrangements and whether they are “effective”, are discussed in ¶12-250. Work test As noted in the table, non-mandated employer contributions and member contributions for members aged 65 or more can only be accepted if “the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made” (commonly called the “work test”). A person is “gainfully employed on a part-time basis during a financial year” if the person was gainfully employed at least 40 hours in a period of not more than 30 consecutive days in that financial year (reg 7.01(3)). For people who are engaged in some form of gainful employment in a financial year, the work test is not difficult to satisfy. For example, a person who was gainfully employed for 40 hours within a four-

week period in a financial year would have met the work test. Such a person is therefore able to make superannuation contributions for the rest of the year without having to meet the work test again in that year. “Gainfully employed” means being employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. “Gain or reward” is the receipt of remuneration such as wages, business income, bonuses and commissions, in return for personal exertion in these activities. It does not include the passive receipt of income, eg receipt of rent or dividends (reg 1.03(1)). An exception applies for recent retirees with small superannuation balances who do not meet the work test (see “Work test exemption for members with low balances”). Residency and identity of person making contribution Member contributions (see above) can be accepted in respect of a member between the age of 65 and 75 provided the member satisfies the work test. Additionally, for a member who is 70 or more but below 75, the contributions must be made by the member himself/herself. The validity of a contribution is not affected by the overseas residence or nationality of the member in respect of whom the contribution is made (SPG 270, para 22). The validity of a contribution made in respect of a member under age 70 is not affected by the identity of the person or entity that made the contribution or by the relationship or lack of relationship between the contributor and the member. Therefore, a contribution may be made by any person or entity in respect of a member under age 70 (subject to the work if aged 65 or above). However, where the member is aged 70 or above but under age 75, the contributing person or entity must be either the member or the member’s employer or an associate of the employer (SPG 270, para 23). Exception: contributions related to earnout rights An exception to the restrictions on the acceptance of superannuation contribution in reg 7.04(1) (see the table above) allows superannuation funds to accept a contribution of an amount of the proceeds of the sale of a business to which the small business 15-year asset exemption or retirement exemption applies, provided the sale involved an earnout right and the contribution would not have been affected by the contribution restrictions had it been made during the financial year in which the business was sold. Specifically, despite reg 7.04(1), a regulated superannuation fund may accept, as a contribution, an amount to the extent that the amount does not exceed the member’s capital gains tax (CGT) cap amount if: (a) the amount to be accepted as a contribution could be covered under s 292-100 (certain CGT-related payments) of the ITAA97 in relation to a CGT event referred to in that section (b) the capital proceeds from the CGT event were or could have been affected by one or more financial benefits received under a look-through earnout right, and (c) reg 7.04(1) would not have prevented the fund from accepting the amount as a contribution had it been made to the fund in the financial year in which the CGT event happened (reg 7.04(6A)). The CGT event is the one referred to in whichever of s 292-100(2), (4), (7) and (8) that could cause the amount to be covered under that subsection (reg 7.04(6A), Note). In reg 7.04(6A), the terms “capital proceeds”, “CGT cap amount”, “CGT event”, “financial benefit” and “look-through earnout right” have the same meaning as in the ITAA97 (reg 7.04(7)). Rule 2: Member contributions where no TFN is provided In addition to Rule 1, a regulated superannuation fund must not accept any member contributions if the member’s TFN has not been quoted (for superannuation purposes) to the trustee of the fund (reg 7.04(2)). For example, co-contributions payments made by the ATO for a member cannot be accepted unless the member’s TFN has been quoted. The expression “quoted (for superannuation purposes)” is discussed at ¶6-680. Breach of rules — action to be taken

A regulated superannuation fund that has received an amount in a manner that is inconsistent with Rules 1 or 2 must return the amount to the entity or person that paid the amount within 30 days of becoming aware that the amount was received in a manner that is inconsistent with the Rules unless, in the case of Rule 2, the member’s TFN is quoted (for superannuation purposes) within 30 days of the amount being received by the fund (reg 7.04(4)). In addition to the above, special rules provide for the returned contribution amounts to be increased or reduced in the circumstances specified in reg 7.04(4)(b), for example to take account of unit price movements, reasonable administration and transaction costs incurred by the fund and risk insurance interests. Additional rule — public offer superannuation fund A public offer superannuation fund (¶3-010) cannot require a new employer of an existing fund member to become a standard employer-sponsor of the fund before the fund will accept employer contributions on behalf of the member. A “standard employer-sponsor” of a superannuation fund means an employer who contributes, or has ceased only temporarily to contribute, to the fund wholly or partly pursuant to an arrangement with the trustee of the fund (¶3-120). This rule effectively applies to new employment arrangements entered. It means that employees can choose to remain in the same fund when they change employment, and the employer contributions made for them do not have to be returned or paid to another fund if their new employer is not a standard employer-sponsor of the fund to which the contributions are paid. The above rule is particularly relevant for the operation of the superannuation guarantee choice of fund regime (¶12-040). It should also be noted that if an industrial award requires contributions to be paid into a particular superannuation fund, the above rule does not change the award obligations of the employer. Bring forward rule and work test after age 65 Under the bring forward arrangement for non-concessional contributions (generally non-deductible member contributions: ¶6-540), a person who is under 65 years of age in an income year can “bring forward” two years’ cap amount as his/her non-concessional contributions cap over a three-year period. In that case, the person’s non-concessional cap in the first year is three times the annual cap amount and this cap applies to all contributions made in the first year and the next two years. For example, this will enable a person in 2009/10 to make non-concessional contributions totalling $450,000 for the 2009/10 year and the next two financial years. Regulation 7.04(1) of SISR provides that a member aged 65 to 74 can make personal (non-concessional) contributions to a superannuation fund provided the member satisfies the work test in each year that the contribution is made (see table under the heading “SISR rules on accepting contributions” above). The work test requires the member to be “gainfully employed on at least a part-time basis in the financial year”, ie the member must work for at least 40 hours during a consecutive 30-day period in each financial year (see above). The effect of reg 7.04(1) is that a member will have to meet the work test to make contributions once the member turns 65, even if the member is using up the remainder of a bring forward cap. The ATO applies the bring forward rule and the acceptance of contributions rule as discussed above (see examples below from the ATO fact sheet Super contributions — too much super can mean extra tax, available at www.ato.gov.au). In both examples, assume that the bring forward cap amount is $450,000. Example 1 Trevor has retired and he makes a contribution of $400,000 in the financial year he turns 65 years old. He was not required to meet the work test to make the contribution as he was under 65 years of age at the time he made the contributions. As Trevor has retired and does not meet the work test, he cannot make further contributions in future financial years after he turns 65 years of age to use up the remainder of his brought-forward cap ($450,000 − $400,000 = $50,000).

Example 2 On 2 July 2008, Dimitri turns 65. Because he is 64 at some time in the 2008/09 financial year, he can use the bring forward option in

that financial year. However, before accepting any contribution, the fund must also be satisfied that Dimitri satisfies the work test, if the contribution is made after 2 July 2008. On 30 June 2009, Dimitri tries to contribute $450,000. If Dimitri’s fund is not satisfied that he meets the work test, the fund must return the full amount of the contribution within 30 days.

Eligible spouse contributions and child contributions A regulated superannuation fund may accept contributions for a spouse or a child if permitted by the trust deed of the fund, subject to the contribution rules in SISR reg 7.04 as discussed above. This means that spouse contributions may be accepted if the spouse for whom the contributions are made is under the age of 65, without restrictions. If the spouse is aged 65 but under 70, spouse contributions may only be accepted if the spouse is at least “gainfully employed on a part-time basis” (see above). If the spouse is aged 70 or over, the fund cannot accept spouse contributions for the spouse as only personal contributions can be accepted for a person in this age group. There are no age limits or work tests for the spouse making the contributions. Accepting spouse contributions-splitting Eligible members of superannuation funds (and RSA holders) can split personal and employer contributions with their spouse. The mechanism for splitting contributions (effectively, a roll-over, transfer or allotment of an amount of the contributions made for or by the member for the benefit of the member’s spouse within the same fund or to another fund), and the circumstances in which a trustee or RSA provider may accept an application for contributions-splitting, are set out in SISR Div 6.7 and RSAR Div 4.5 (SISR reg 6.40 to 6.46; RSAR reg 4.37 to 4.43). Contributions-splitting is available to members who have an accumulation interest or a defined benefit interest that is not a defined benefit component, and the interest is not subject to a payment split or a “payment flag” within the meaning of Pt VIIIB of Family Law Act 1975 (¶6-680). Providing contributions-splitting is optional for superannuation funds or RSA providers. Where this is made available, the trustees or RSA providers must make the roll-over, transfer or allotment to the receiving spouse as soon as practicable and, in any case within 90 days, after receiving a contributionssplitting application. Where contributions-splitting is provided by a regulated superannuation fund, a member may, in a financial year, apply to the trustee of the fund to split (ie roll over, transfer or allot) for the benefit of the member’s spouse an amount of the splittable contributions made by or for the member in: • the previous financial year, or • the financial year in which the application is made — where the entire benefits of the member (ie including the splittable contributions) are to be rolled over or transferred in that financial year (reg 6.44(1)). An application to split contributions made for or by a member in a current financial year for the benefit of the member spouse may occur, for example, where the member exits an employer-sponsored fund on termination of employment or changes a fund in that year and rolls over or transfers his/her entire benefits from the fund. A member is limited to one valid contributions-splitting application in a financial year. The splitting of non-concessional contributions (generally undeducted contributions) contributed after 5 April 2006 is prohibited as an integrity measure. The contributions-splitting process and tax aspects are discussed further at ¶6-800. Accepting downsizer contributions A regulated superannuation fund may accept downsizer contributions from 1 July 2018 (reg 7.04). The downsizer contributions scheme is discussed in Chapter 6. The term “downsizer contribution” takes its meaning from ITAA97 s 292-102.

A contribution is a downsizer contribution to the extent that it is from an individual’s share of the proceeds of the sale of a dwelling under a contract entered into on or after 1 July 2018. The maximum amount that an individual can contribute from the proceeds of such a sale is $300,000. This can be done as a single contribution or as multiple contributions. If a superannuation fund becomes aware that a contribution it has received is an ineligible downsizer contribution, in whole or in part, (eg the fund is notified of that fact by the Commissioner, or it exceeds the $300,000 limit), the fund must then assess whether it can otherwise accept the contribution under a different rule based on the member’s age or work test status. Where a fund determines that the contribution can be accepted for some other reason under the contribution acceptance rules, the contribution will count towards the individual’s applicable contributions caps like other contributions. Downsizer contributions are treated in the same way as other contributions that a superannuation fund is permitted to accept. As such, fund trustees that generally have discretion regarding contributions made to the fund are not obligated to accept an allowable downsizer contribution. However, for individuals wishing to make a downsizer contribution into a MySuper product, superannuation providers must accept the contribution in accordance with SISA s 29TC(1)(f) (exception to limitations on accepting contributions into MySuper accounts:

¶9-150). Work test exemption for members with low balances A work test exemption enables individuals aged 65 to 74 years with a total superannuation balance of below $300,000 to make voluntary superannuation contributions (see table above) for 12 months from the end of the financial year in which they last met the work test, applicable to contributions in the 2019/20 and later financial years (reg 7.04(1A)). A regulated superannuation fund may accept voluntary contributions made in respect of a member aged 65 to 74 years (see table above) if the following requirements are met: • the member has not been gainfully employed on either a full-time or part-time basis during the financial year in which the contributions are made (ie the member does not satisfy the work test conditions in the contribution year) • the member satisfied the work test conditions in the previous financial year • the member has a total superannuation balance (¶6-490) below $300,000 on 30 June of the previous financial year, and • the member has not previously relied on the work test exemption in relation to a previous financial year. The work test exemption does not apply to defined benefit funds. This does not prevent a member of a defined benefit fund from opening an accumulation superannuation account in order to make voluntary contributions utilising the work test exemption. The government has stated that: • total superannuation balances will be assessed for eligibility at the beginning of the financial year following the year that the individuals last met the work test. Once eligible, there is no requirement for the individuals to remain under the $300,000 balance cap for the duration of the 12-month period • existing annual concessional and non-concessional caps ($25,000 and $100,000 respectively in 2018/19) will continue to apply to contributions made under the work test exemption • individuals will be able to access unused concessional cap space to contribute more than $25,000 under existing concessional cap carry forward rules during the 12 months, and

• individuals who use the work test exemption in the year they turn 65 will be allowed to access the bring forward arrangements for non-concessional contributions (Assistant Treasurer’s media release, 7 December 2018: www.srr.ministers.treasury.gov.au/media-release/048-2018/? utm_source=wysija&utm_medium=email&utm_campaign=Media+Release+%E2%80%93+Work+test+exemption+for+ (see ¶17-600 for further proposed changes announced in the 2019/20 Federal Budget). Accrual of benefits — defined benefit funds In addition to the contribution standards, a defined benefit fund may grant an accrual of benefits in respect of a member under identical conditions relating to mandated employer contributions and non-mandated employer contributions as discussed above (SISR reg 7.05). An “accrual” of benefits in a fund does not include allocation of investment earnings or charging of costs, or benefits rolled over or transferred into the fund (reg 7.01(1)). Accepting contributions outside age and work tests The trustee of a superannuation fund (or its duly delegated agent) may determine that a particular contribution in respect of a member is made in respect of an earlier eligible contribution period and can be accepted (reg 7.04(6); 7.05(5)). APRA expects that a trustee would only apply this in circumstances such as the following: (a) it is an employer contribution paid after the end of a period of gainful employment but clearly related to an earlier

employment period that was a valid contribution period for the member; or (b) it is a contribution that was erroneously allocated to another member during a valid contribution period for the correct member and the late contribution is merely a corrective transaction to reverse the original error. A government co-contribution may be accepted by a fund at any time because it is made in respect of a period during which the member’s contribution that gave rise to the co-contribution was validly made (SPG 270 para 41). Caps on contributions and tax treatment The tax concessions that are available to contributors (eg employers, members, spouse or other persons) in the form of a tax deduction, tax rebate or government co-contribution are discussed in Chapter 6. Subject to the SISR rules and its trust deed, a regulated superannuation fund is not limited in the amount of contributions it may accept. However, there are caps on the amount of concessional contributions (generally deductible contributions) and non-concessional contributions (generally undeducted contributions) that receive concessional tax treatment in the hands of the recipient fund (namely, being taxed in the fund at 15% in the case of concessional contributions or being untaxed in the case of nonconcessional contributions). The operation of the caps on concessional and non-concessional contributions and the tax consequences of making contributions in excess of the caps for a year are discussed in ¶6-400, ¶6-500 and ¶6-540. For the tax treatment of contributions in the hands of the fund, see ¶7-120 and ¶7-310. Contributions must be allocated to members The trustees of all regulated superannuation funds (including a defined benefit fund) are required to allocate a contribution in relation to an accumulation interest to a member of the fund within 28 days after the end of the month the contribution is received or, if it is not reasonably practicable to do so, within such longer period as is reasonable in the circumstances (reg 7.08). For exceptions to the 28-day rule, see reg 7.07H and 7.07G(4). The allocation rule for defined benefit interests is reg 7.11, which applies to funds that are required to allocate contributions in accordance with ITAR reg 292-170.03. That regulation sets out how certain defined benefit funds must calculate notional taxed contributions and requires the trustee to allocate contributions made to the fund having regard to the present and prospective liabilities of the fund to its members (¶6-520). The allocation of contribution provisions are operating standards and they prevent the practice of funds allocating contributions directly to reserve accounts or deferring the allocation of contributions to a member account to avoid the superannuation contributions surcharge. For further information on reserves, see ¶3-400. The operation of reg 7.08 together with reg 7.11 means that a member with an accumulation interest in a defined benefit fund is treated in the same way as a member with an accumulation interest in an accumulation fund. This is an integrity measure for the purposes of the concessional contributions cap to ensure that amounts allocated from reserves are included as concessional contributions. It should be noted that reg 7.08 does not preclude the transfer of administration costs that are charged against a contribution to an administration reserve account, provided the contribution is first allocated to a member of the fund. Repaying contributions under cooling-off provisions Contributions which are repaid under the cooling-off provisions in the Corporations Regulations 2001 must be transferred or rolled over to another superannuation entity and retained in the superannuation system until a condition of release is met (¶3-280, ¶4-400). Refund of contributions, including excess contributions, made in error A prima facie case for restitution occurs where the trustee of a superannuation fund is the recipient of an amount greater than was intended, for example, because of a clerical, transcription or arithmetic error. The Commissioner accepts that the principles of unjust enrichment and the equitable remedy of restitution apply to the trustees of superannuation funds just as they apply to any other entity. The decisions in

Personalised Transport Services Pty Ltd v AMP Superannuation Ltd & Anor 06 ESL 12 and SCT Determination D06-07\129 make that clear. However, determining when restitution is appropriate is complicated and it may be a matter for the courts or tribunals. In ID 2010/104 involving a fund returning contributions purportedly in restitution of a payment made in mistake, the Commissioner stated that the grounds for restitution for mistake concentrate on the principle of unjust enrichment which concerns whether it would be unjust for the recipient to retain the enrichment. The law is that it is prima facie unjust for a recipient to retain an enrichment conferred because of mistake, regardless of whether the mistake is a mistake of law or fact (David Securities Pty Ltd v Commonwealth Bank of Australia 92 ATC 4658). However, the payer’s prima facie right of recovery may be rebutted to the extent that circumstances have removed any unjust enrichment (Mason & Carter, Restitution Law in Australia, 2nd edn, Lexis Nexis Butterworths, Australia, 2008 at p 401). A court will find that the recipient may justly retain a mistaken payment if any one of several defences applies in a particular case (David Securities at 4,684). In ID 2010/104, the Commissioner found that the individual formed an intention to make a superannuation contribution of a certain amount and gave effect to that intention by contributing that amount. The fund was the intended recipient and the individual obtained the expected superannuation benefits. The individual was not mistaken in the sense that he thought he was required to make a contribution. In the circumstances of this case, there was a contribution (as discussed in TR 2010/1), and it would not have been unjust for the trustee of the fund to retain the contribution. Is interest payable by the fund trustee on the refunded payment? The Commissioner considers that it would be unusual for interest to be payable. The measure of restitution is generally the value of the enrichment. Its purpose is to restore the parties to the position they were in prior to the mistake, as opposed to the remedies commonly available under torts or contract law, where the purpose is to place the parties in the position they would have been in had the wrong not occurred. The Commissioner states that the reasonable adjustments included in reg 7.04(4) (for fund administration costs, transaction costs, etc, see above) reflect the ordinary principles of restitution where a party has a defence to the action restitution to the extent to which they have altered their circumstances based on the receipt. The Commissioner also noted that in SCT Determination D06-07\129, the Tribunal awarded interest to the complainant but gave no legislative authority. The Commissioner’s view is that interest payable (if any) is to be calculated from the day from which it was unreasonable for the trustee to have withheld payment, until the day the payment would be sent to the complainant. He inferred that interest was awarded because of the length of time that the complainant did not have the benefit of the money, due to the trustee’s refusal to refund the amount. The complainant had advised the trustee of the mistake and requested a refund on 29 May 2006, and it was not until 28 March 2007 that the Tribunal ordered the amount plus interest to be paid to the complainant. Employers remitting contributions to superannuation funds An employer who has deducted an amount from the salary or wages of its employees for the purpose of paying that amount as a superannuation contribution of the employee(s) is required to remit the amount deducted to the superannuation fund concerned within 28 days of the end of the month in which the deduction was made. Employers who fail to comply may be liable to a fine (this is a strict liability offence) (SISA s 64(2)). An employee whose employer has breached the provision can also sue the employer under common law. As an alternative to remitting the amount deducted to the fund, employers may pay that amount within the 28-day period to the Small Business Superannuation Clearing House (SBSCH) (the SGAA-approved clearing house: ¶12-010), provided the SBSCH accepts the payment (s 64(2A)). Contributions deducted from employees’ salary or wages to which s 64 applies are generally members’ voluntary contributions, rather than employer contributions. APRA considers that a trustee’s duties and powers may give rise to obligations to act in respect of non-receipt of the contributions that fall within the ambit of s 64. APRA states that a trustee who knows, or should reasonably know, of such outstanding contributions arguably has the duty to act in the interests of members in following up outstanding amounts. The trustee should identify the failure of remittance and take follow-up action by implementing

an effective control process to monitor employer obligations under s 64. The trustee must inform members of any outstanding contributions at the end of the reporting period within their knowledge and of the actions taken to have the contributions paid. Employer reporting of contributions on pay slips Employers are not required under SISA to report to employees, on pay slips, information about superannuation contributions, such as the amount of the contributions they have made or will make and the date on which the employer expects to pay them (SISA former Pt 29B). However, obligations on disclosures about contributions may arise under the Fair Work legislation (¶12-520) or under the data and payment standards made under the SISA (¶9-790). Employers using a clearing house for superannuation payments A “clearing house” refers to a service or facility that is set up to receive employer payments and to redistribute the payments to various superannuation funds as superannuation contributions made by the employer for the nominated employees. Clearing houses are commonly used by employers that have a large number of employees to make payment of the employer’s contributions for various purposes, such as the SGA Act choice of fund regime (¶12-040). Using a clearing house means that the employer is only required to make a single payment to the clearing house (usually through a direct debit authority) which, in turn, distributes the contributions and the employees’ data to the employees’ chosen superannuation fund on the employer’s behalf. A “clearing house account” is a bank account used to receive and disburse superannuation contributions to a number of different superannuation funds. The account may also include non-superannuation deductions and contributions (eg health insurance premiums). For tax and SG purposes, contributions made through clearing houses, other than the Small Business Superannuation Clearing House (SBSCH) which is the approved clearing for SGA Act purposes, enter the superannuation system only when they are received by the employee’s chosen fund or, where relevant, the default fund. By contrast, contributions made though SBSCH are taken to be received by the funds at that time (¶12-010). For SISR purposes, contributions enter the superannuation system when they are received by the superannuation fund, RSA or exempt public sector superannuation scheme. On the risks associated with using clearing houses, APRA states as below: 46. Where an RSE licensee uses a clearing house service, APRA expects the risks arising from the use of this service to be considered within the RSE licensee’s risk management framework. The risks associated with this service may include, but are not limited to, risks related to timing of contributions received and the transfer of monies from the clearing house to the RSE, including the need to ensure that all such monies are RSE monies. 47. Where an RSE licensee operates its own clearing house service, APRA considers that there may be additional risks, particularly regarding the separation of RSE monies from clearing house monies. To avoid mixing non-superannuation monies received as part of the clearing house function with monies of the RSE, an RSE licensee is expected to ensure that the clearing house account is separate to any bank accounts of the RSE (SPG 270 para 46, 47). The ATO’s guidelines on the ordinary meaning of contribution, how a contribution can be made and when a contribution is made for tax purposes, which may also be relevant for SIS purposes, are discussed in TR 2010/1 (¶6-120, ¶6-123). MySuper products — limitation imposed by governing rules Sections 29TC(1)(f) and 29TC(3)(a) of SISA (about the characteristics of a MySuper product: ¶9-150) effectively permit the governing rules of a superannuation fund to place limitations on the source or kind of contributions to a MySuper product, if those limitations are of a prescribed kind. Under SISR reg 9.48: • funds may limit contributions where the contribution is a transfer from a “foreign superannuation fund” (as defined in ITAA97), or a similar foreign fund (this is consistent with other legislative arrangements under which funds can choose not to accept transfers from certain foreign superannuation funds)

• funds may limit in specie contributions and contributions by non-associated employers to “corporate MySuper products” (as defined by the Fair Work Act 2009) or to MySuper products to which s 29TB applies (ie large employers-tailored MySuper products: ¶9-180). [SLP ¶2-980]

¶3-230 Minimum benefits of members As a prescribed operation standard, the trustee of a regulated superannuation fund (or ADF) must maintain minimum benefits for the benefit of members and ensure that members’ minimum benefits are kept in the fund until they are cashed, rolled over or transferred in accordance with the SISR (see “Restriction on the use of a member’s minimum benefits in the fund” below). In an accumulation fund, a member’s “minimum benefits” comprise benefits arising from: • the contributions made in relation to the member plus net investment earnings (member-financed benefits) • the member’s mandated employer contributions (¶3-220) plus net investment earnings (mandated employer-financed benefits) • government co-contribution benefits (ie co-contributions, less costs and repayments of overpayments of co-contributions), and investment earnings on them • amounts rolled over or transferred into the fund which are taken by the trustee of the receiving fund to be minimum benefits and all benefits rolled over or transferred from an RSA (reg 5.01(1); 5.04 to 5.06A). The definition of minimum benefits and restrictions on the use of minimum benefits in SISR reg 5.08(1) (see below) prevents the use of forfeiture arrangements for tax avoidance purposes by accumulation funds. These arrangements typically involve a fund forfeiting a member’s excess superannuation benefits to the fund and, subsequently, paying forfeited benefits to another member of the fund (usually a spouse or other associate of the member). For a defined benefit fund, if a member belongs to a class of employees for which a benefit certificate for SG purposes applies, the member’s minimum benefits are the amount specified in the certificate as the member’s minimum requisite benefit. For other members in the defined benefit fund, the member’s minimum benefits are the sum of the member’s member-financed benefits, the member’s mandated employer-financed benefits and government co-contribution benefits and investment earnings on them (reg 5.04(3)) and any amount allocated to the member under ITAR reg 292-170.03. These are allocations of reserves which are taken to be the concessional contributions of a member. Their inclusion as minimum benefits ensures that trustees of such defined benefit funds cannot put in place arrangements to circumvent the concessional contribution cap (¶6-520). All the benefits of a member in an eligible rollover fund (¶3-520) or in an ADF (¶3-660) are minimum benefits. Restriction on the use of a member’s minimum benefits in the fund Subject to certain exceptions (see below), the trustee of a regulated superannuation fund must ensure that the member’s minimum benefits are maintained in the fund until the benefits are: • cashed as benefits of the member (other than for the purpose of the member’s temporary incapacity) • rolled over or transferred as benefits of the member, or • transferred, rolled over or allotted in accordance with SISR Div 6.7 as spouse contributions-splitting amounts (SISR reg 5.08(1)).

A member’s benefits are “cashed” if they are paid to the member or another person in accordance with the SISR rules on preservation and payment of benefits (¶3-280 – ¶3-286). In contrast, a member’s benefits are “rolled over” if they are not paid to the member, or another person, but are paid to one or more superannuation entities within the superannuation system, and benefits are “transferred” if they are paid from one regulated superannuation fund to either another fund or an RSA where the member has not yet satisfied a condition of release under the SISR or RSAR preservation rules (reg 5.01(1)). The three exceptions where the use of a member’s minimum benefits does not apply are noted below. (1) If a court forfeiture order (¶3-286) applies to all or a part of the member’s benefits (reg 5.08(1A)). This exception is consistent with reg 6.17(2C) which allows payment to be made from a member’s benefits in compliance with a court forfeiture order, for example, to allow the proceeds of crime to be recovered from a person’s superannuation. (2) The amount of a member’s minimum benefits in an accumulation fund where the amount is attributable only to employer contributions other than mandated employer contribution (reg 5.08(2)). This exception allows for members’ benefits derived from non-mandated employer contributions to be forfeited or divested if the member concerned does not stay in the employer’s employment for a specified period. In effect, the exception grandfathers “employee retention arrangements” of the kind which have been in force in relation to the member concerned since before 12 May 2004 (ie before the change to the definition of minimum benefits from that date (see “Benefits in employee retention schemes” below for discussion of the scope of this exception). (3) An amount of a member’s minimum benefits cashed as temporary incapacity benefits where the amount is not attributable to the member’s member-financed benefits and not attributable to the member’s mandated employer-financed contribution (reg 5.08(3)). The exception means that temporary incapacity benefits can be paid from an accumulation fund from voluntary employerfunded or insured benefits, as was permitted before the definition of minimum benefits was extended from 12 May 2004. Benefits in employee retention schemes The exception in reg 5.08(2) (second exception) applies to minimum benefits in an accumulation fund (including an SMSF) which are derived from non-mandated employer contributions that are forfeited in whole or part from the member pursuant to a written agreement entered into before 12 May 2004 between the member and the member’s employer. This written agreement makes the member’s entitlement to such minimum benefits conditional on the member remaining in the employer’s employment for a “specified minimum period”. For the forfeiture to occur, the member’s employment must have ended before the minimum employment period specified in the written agreement. The second exception effectively provides “grandfathering” rules for existing employee retention schemes which have been in force since 12 May 2004, where voluntary employer-funded benefits only fully vest in an employee after a certain period of employment. In summary, reg 5.08(2A) to (2D) expands the scope of the second exception: – by extending grandfathering to minimum service provisions contained in governing rules, an award or a certified agreement – by extending grandfathering to minimum service provisions where the terms have been changed during the period after 12 May 2004 or where the terms have been set out in different documents at different times during that period, and – by extending grandfathering to minimum service provisions which allow the member to be an employee of their current employer’s predecessor or related company for the minimum service period, or to be a member of another fund to which their current employer or its predecessor or related company contributed for the minimum service period. The expansion of the second exception under reg 5.08(2A) to (2D) therefore provides similar relief for employee retention arrangements and allows for some practical situations that are not covered by reg

5.08(2). There is a considerable degree of overlap between reg 5.08(2) and 5.08(2A), and some employee retention schemes may find that they are covered by both exceptions. Investment returns and member protection The trustee of a regulated superannuation fund (or ADF) must determine the costs and investment returns to be credited/debited from time to time against members’ benefits in the fund (SISR reg 5.02(1)). The terms “cost” and “investment return” are defined terms (reg 5.01(1)). In determining the costs to be charged, the trustee may include the following: (a) the direct costs of establishing, operating and terminating the fund (b) any administrative, insurance and taxation costs relating to the establishment, operation and termination of the fund, and (c) if the member’s benefits are subject to a payment split, the costs incurred in administering the payment split (not including the costs offset by any fees payable under reg 59 of the Family Law (Superannuation) Regulations 2001 in respect of the payment split) (reg 5.02(2)). If costs charged against members’ benefits are refunded, the refunded amount must be distributed in a fair and reasonable manner to the members affected (reg 5.02C). The trustee must determine the investment return to be credited or debited to a member’s benefits (or benefits of a particular kind) in a way that is fair and reasonable as between all the members and the various kinds of benefits of each member (reg 5.03(2)). If the fund maintains reserves, it must also have regard to certain specified matters (reg 5.03(1)). [SLP ¶3-000]

¶3-240 Insurance cover and standards The SISA imposes obligations on superannuation fund trustee regarding the provision of insurance for permanent incapacity benefit and death benefit to MySuper members under s 68AA(1) and 68AA(5) as discussed below. A member of a regulated superannuation fund is a MySuper member if the member holds a beneficial interest in the fund of a class that the RSE licensee of the fund is authorised to offer as a MySuper product (¶9-030). A “death benefit” means a benefit provided in the event of the death of the member (s 68AA(10)). A “permanent incapacity benefit” means a benefit provided if the member is suffering permanent incapacity (s 68AA(10)). A member is taken to be suffering permanent incapacity if a trustee of the fund is reasonably satisfied that the member’s ill-health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience (SISA s 10(1); SISR reg 1.03C). A failure to comply with s 68AA(1) or (5) is a breach of a condition of the RSE licence (see s 29E(1)(a)). Providing permanent incapacity and death benefit insurance cover for MySuper members Each trustee of a regulated superannuation fund must ensure that: (a) the fund provides permanent incapacity benefit to each MySuper member of the fund (b) the fund provides death benefit in respect of each MySuper member of the fund, and (c) the benefits referred to in (a) and (b) are provided by taking out insurance (SISA s 68AA(1)). The trustee may determine “reasonable conditions” to which the provision of permanent incapacity benefit or death benefit is subject. The determined conditions in relation to a benefit are reasonable if they are

the same as the terms and conditions of the policy of insurance taken out to provide the benefit (s 68AA(2) to (4)). Section 68AA(1) does not apply if a MySuper member makes an election not to receive permanent incapacity benefit or death benefit in accordance with s 68AA(5) (see below) in relation to a benefit (reg 68AA(8)). From 1 July 2019, the obligation in s 68AA for a trustee to provide death or permanent disability insurance under a MySuper product also does not apply if a MySuper member meets one of the criteria noted in s 68AAA(1) (see “Opt-out insurance rules for superannuation members from 1 July 2019” below). However, once a MySuper member no longer meets the listed criteria in s 68AAA(1), the requirement under s 68AA for the trustee to provide death and permanent disability insurance re-applies (s 68AA(8A) and (8B)). MySuper members electing not to receive permanent incapacity or death benefit A regulated superannuation fund must ensure that each MySuper member of the fund may elect either or both of the following: • that permanent incapacity benefit will not be provided to the member by the fund • that death benefit will not be provided in respect of the member by the fund (s 68AA(5)). The trustee may require MySuper members who wish to make the opt-out election under s 68AA(5) to make the election in relation to both the permanent incapacity benefit and death benefit, or to make the election to death benefit if they make the election to permanent incapacity benefit (reg 68AA(6)). The obligation to give MySuper members the choice under s 68AA(5) does not apply to a MySuper member if the trustee certifies, in writing, that the trustee is reasonably satisfied that the risk that is to be insured cannot be placed with an insurer at a reasonable cost, or be provided on an opt-out basis (SISA s 68AA(7); SISR reg 9.49). Therefore, a trustee does not have to provide members holding a MySuper product with the ability to opt out the life and TPD insurance (that must be offered on a compulsory basis for MySuper members under s 68AA(1)) if the trustee is reasonably satisfied that the insurance cannot be provided on an opt-out basis at reasonable cost or cannot be obtained from an insurer on opt-out basis at all. If a MySuper member makes an election not to receive permanent incapacity benefit or death benefit in accordance with s 68AA(5) in relation to a benefit, s 68AA(1) does not apply in relation to the member and the benefit (reg 68AA(8)). Section 68AA does not apply to certain fund members Section 68AA does not apply to a defined benefit member, an ADF Super member (within the meaning of the Australian Defence Force Superannuation Act 2015), or a person who would be an ADF Super member apart from the fact that the superannuation fund is or was, for the purposes of SGAA Pt 3A, a chosen fund for superannuation contributions made for the person by the Commonwealth (s 68AA(9)). Section 68AA also does not require the provision of death benefit or permanent incapacity benefit in respect of a MySuper member if death benefit or permanent incapacity benefit is not to be provided because of s 68AAA about inactive accounts (see “Opt-out insurance rules for choice and MySuper members from 1 July 2019” below). Opt-out insurance rules for choice and MySuper members from 1 July 2019 Fund trustees are required under s 68AA to provide MySuper members with the option to opt out of death and total and permanent disability insurance cover, except in certain circumstances (see above). There are no similar requirements for members who hold a choice product but some trustees of choice products may choose to provide insurance on an opt out basis. From 1 July 2019, the trustee of a regulated superannuation fund must ensure that the fund does not provide a benefit to, or in respect of, a member under a choice product or MySuper product by taking out or maintaining insurance if:

(a) the member’s account is inactive in relation to that product for a continuous period of 16 months, and (b) the member has not elected that the benefit will be provided under the product by taking out or maintaining insurance, even if the member’s account is inactive in relation to that product for a continuous period of 16 months (s 68AAA(1)). Section 68AAA(1) does not apply to certain funds and members (see “Exceptions” below). With regard to s 68AAA(1)(b), the trustee must ensure that each member of the fund who holds a choice product or MySuper product offered by the fund may elect, in writing, that a benefit specified in the election is to be provided to the member under the product by taking out or maintaining insurance, even if the member’s account is inactive in relation to that product for a continuous period of 16 months. Section 68AAA was inserted by the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (Act No 16 of 2019) (PYSP) as part of a package of measures to limit certain fees and ban exit fees, ensure that insurance arrangements in superannuation are appropriate and members are not paying for insurance cover that they do not know about or premiums that inappropriately erode their retirement savings, and to strengthen the ATO’s role in reuniting small, inactive balances (see ¶17-330). Inactive account and test period For the purposes of s 68AAA(1), a choice or MySuper account is considered inactive if no contributions or rollovers have been received in the account in the previous continuous period of 16 months (s 68AAA(3)). A reset rule for the period of activity applies when a contribution or rollover is received. That is, the contribution or rollover will reset the clock on inactivity for another 16 months (s 68AAA(4) and 68AAA(5)). The timing and frequency of assessing whether a member holds a product that meets one of the listed criteria is at the trustee’s discretion. However, the requirements imposed on trustees to not offer opt-out insurance to these members, as well as the notification requirements for inactive members, necessitate that trustees make these assessments at a reasonable frequency. Disclosure and notification obligations of trustees From 1 July 2019, the Corporation Regulations 2001 (CR) (dealing with the disclosure and notification obligations of trustees of superannuation funds to their members) set out: • when a trustee must notify a member that a member’s account has been inactive and that insurance may no longer be offered or maintained without a direction from the member, and • how a trustee must inform a member that the member can cancel their insurance where the member has previously directed the trustee to take out or maintain insurance coverage under the provisions below. CR reg 7.9.44B requires a trustee to notify a member once their account has been inactive, when after a further prescribed period of continued inactivity, insurance will cease to be provided either because of amendments to the SIS Act or the fund’s governing rules. This is intended to give a member an opportunity to take steps to maintain their insurance cover if they wish (see “Insurance inactivity notices” below). CR reg 7.9.44C requires the trustee to acknowledge a member’s direction to maintain insurance cover even though the member’s account may be considered inactive, and provide annual reminders to the member (see “Notice about the right to cease insurance cover” below). When considering a period of inactivity, the trustee must include the period before 6 April 2019 (the date the CR provisions commenced) (CR Ch 10 Pt 1.29). Insurance inactivity notices Regulation 7.44B sets out the periods of inactivity which trigger the requirement to issue an inactivity notice, as below: • when a member’s account has been inactive for a continuous period of time and insurance would cease to be provided if the account continued to be inactive for another seven months

• when a member’s account has been inactive for a continuous period of time and insurance would cease to be provided if the account continued to be inactive for another four months, and • when a member’s account has been inactive for a continuous period of time and insurance would cease to be provided if the account continued to be inactive for another month. For example, when insurance cover will cease after 16 months of inactivity consistent with the SIS Act, a notice will be required to be sent after nine months of inactivity, then after 12 months of inactivity and then after 15 months of inactivity. An inactivity notice is not required if the person has elected to maintain insurance or insurance has already ceased to be provided. Regulation 7.9.44B also sets out the contents of the insurance inactivity notice, and provides that notices need to be given to the member within two weeks of the end of the prescribed periods of inactivity. Notice about the right to cease insurance cover Where a member’s account is considered inactive and the member has elected to take out or maintain insurance, the member must be made aware of how to cancel the insurance cover in the future. Regulation 7.9.44C requires a trustee of the fund to provide a notice about rights to cease insurance within two weeks of the member making the election, and at certain intervals after that, to remind the member that insurance premiums are still being charged to the member’s account. The trustee is able to decide the date the reminder is sent to the member, as long as it is within 15 months of the last notice sent to the member. This will give trustees the flexibility to align the distribution of reminder notices with their ordinary distribution schedule. The notice about rights to cease insurance cover will: • explain that the member has elected to take out or maintain insurance cover even though their product has been inactive • state the date the election was made, and • explain how the member can cancel their insurance cover. Exceptions The insurance opt-out rules in s 68AAA do not apply: • to a defined benefit member, an ADF Super member (within the meaning of the Australian Defence Force Superannuation Act 2015) or a person who would be an ADF Super member if they had not chosen a fund (s 68AAA(6)) • to SMSFs or small APRA funds (s 68AAD) • where an employer makes contributions to a fund, in addition to its superannuation guarantee obligations, which cover the full cost of the member’s insurance premiums, on behalf of the member (s 68AAE). For the SG exception to apply, the employer must: • notify the trustee that it is paying the employee’s insurance premiums • the amount the employer is contributing exceeds the employer’s superannuation guarantee obligations for the member; and • the excess is equal to or greater than the insurance premiums, payable in relation to the insurance cover for the quarter (s 68AAE). Breach of s 68AAA A failure to comply with s 68AAA is a breach of the RSE licensee law with which the trustee must comply. This failure to comply with the RSE licensee law may result in certain consequences, eg a direction from

APRA to comply (SISA s 131D), cancellation of the trustee’s authority to offer a MySuper product (SISA s 29U) or cancellation of the RSE license (SISA s 29G). RSE licence conditions and cancellation of RSE licences are discussed in Chapter 9. Proposed changes — low balance accounts and members under 25 Amendments have been proposed which ensure that trustees can only provide insurance to a member of a choice or MySuper product if directed by the member where the member: • is under 25 years old and begins to hold a product on or after 1 October 2019 (proposed new s 68AAB), or • holds a product with a balance less than $6,000 (proposed new s 68AAC). These amendments were previously part of the measures introduced by the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (PYSP), but were omitted from the Act when passed by parliament. The government has delayed the start date of these elements by three months from the announced commencement of the package to provide additional time for funds to take action and notify members prior to the changes taking effect from 1 October 2019 (Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019 (Lapsed): ¶17-520). APRA and ATO guidelines The Regulators’ guidelines are available in Protect Your Super (www.letstalk.ato.gov.au/SuperCommunity/news_feed/protect-your-super) which contains the ATO’s advice and implementation documents on the PYSP changes, and in APRA’s letter of 8 May 2019 and FAQs to all RSE trustees (www.apra.gov.au/sites/default/files/letter_protecting_your_super_legislative_amendments_implementation.pdf www.apra.gov.au/protecting-your-super-package-frequently-asked-questions).

¶3-243 Insurance operating standards A regulated superannuation fund must comply with prescribed operating standards which: • prohibit the trustee from providing insured benefits other than those that are consistent with the conditions of release in the SISR for death, terminal medical condition, permanent incapacity and temporary incapacity to beneficiaries who join a fund from 1 July 2014 (reg 4.07D) (see “Permitted types of insurance” below), and • prohibit the trustee from providing insured benefits for members unless they are supported by an insurance policy from an insurer, ie a fund will not be able to self-insure (see “Self-insurance” below) (reg 4.07E). “Insured benefit”, for a member, means a right, other than an anti-detriment payment, for the member’s benefits to be increased on the realisation of a risk (reg 4.07C). An “anti-detriment payment” means a “tax saving amount” for ITAA97 s 295-485(1)(b) (¶7-148). Permitted types of insurance The trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member unless the insured event is consistent with a condition of release specified in SISR Sch 1, items 102, 102A, 103 or 109 (these cover the release of benefits in the event of a member’s death, terminal medical condition, permanent incapacity and temporary incapacity) (reg 4.07D(2)). Where a trustee is unable to amend the fund’s governing rules to comply with the restrictions on providing insured benefits, those terms of the governing rules are deemed to be omitted from the rules and replaced by terms that allow the provision of benefits that are permitted (reg 4.07D(4)). Exemptions The restriction in reg 4.07D(2) does not apply to: (a) the continued provision of benefits to members who joined a fund before 1 July 2014, or

(b) the provision of benefits under an approval granted before 1 July 2014 under SISA s 62(1)(b)(v) (ie which allows for determination of benefits under the sole purpose test: see ¶3-200) (reg 4.07D(3)). The exemption only extends to circumstances where a member was actually covered in respect of an insured benefit before 1 July 2014 and cannot be used to provide members with a type of cover they did not have before 1 July 2014. A member can, however, vary his/her level of insurance cover from 1 July 2014, with adjustments to the associated premiums after 1 July 2014. The exemption in item (a) can apply if a member is transferred to another fund under the successor fund transfer rules in reg 6.29, so as to ensure the continuance of a member’s pre-1 July 2014 insurance arrangements in the successor fund. The exemption in item (b) addresses inconsistencies in fund operations and the SIS requirements on provision of benefits. Currently, funds offer a range of benefits to members as permitted by the core and ancillary purposes of the sole purpose test in s 62. The wording of s 62 allows funds to offer insured benefits that are not consistent with the conditions of release in SISR Sch 1. Consequently, these benefits cannot be released to members at the time of their disability, but must remain in the member’s superannuation account until a condition of release (eg the member reaching preservation age) is met. Where an approval has been granted under s 62(1)(b)(v), before 1 July 2014, for the provision of and release to beneficiaries of particular insured benefits, those benefits are exempted from the restriction on providing types of insured benefits. This exemption includes the provision of such benefits to beneficiaries who join the fund from 1 July 2014. The exemption only applies while the approval under s 62(1)(b)(v) remains in force. Former determination SMSFD 2010/1, which previously stated that a trustee of an SMSF could purchase a trauma insurance policy in respect of a fund member and still satisfy the sole purpose test in s 62 in certain circumstances, was withdrawn from 1 July 2014 in light of the commencement of reg 4.07D from that date (see further ¶3-200). Self-insurance If a regulated superannuation fund does not self-insure in relation to a particular risk, the fund may provide an insured benefit, in relation to that risk, to members of the fund only if the benefit is fully supported by an insurance policy provided by an insurer (SISR reg 4.07E(2)). This includes insurance from a Lloyds underwriter. If a regulated superannuation fund self-insures in relation to a particular risk, the fund may, on and after 1 July 2016, provide an insured benefit, in relation to that risk, to members of the fund only if the provision of the benefit is fully supported by an insurance policy provided by an insurer (reg 4.07E(4)). This effectively prohibits such a fund from providing an insured benefit to its members on or after 1 July 2016 unless the insured benefit is fully supported by an insurance policy provided by an insurer (see “Exceptions to prohibition under reg 4.07E” below). Where the fund’s governing rules do not permit a trustee to obtain an external insurance policy in respect of benefits previously self-insured, the trustee must, before 1 July 2016, amend the rules of the fund to allow the trustee to do so (reg 4.07E(5)). Where the trustee cannot amend the governing rules, they are deemed to be amended to allow the trustee to obtain such a policy (reg 4.07E(6)). Exceptions to prohibition under reg 4.07E The prohibition on self-insurance does not apply to: • the trustees of any fund where the insured benefits are provided by or their provision is guaranteed by the Commonwealth Government or the government of a state or territory (reg 4.07E(7)) • the provision of insured benefits to defined benefit members of funds (or sub-funds) that, as at 1 July 2013, are self-insuring in respect of their defined benefit members and are not prohibited from doing so under a condition on their RSE trustee’s licence (reg 4.07E(8)). In addition, where a beneficiary is receiving benefit payments, has made a claim for benefit payments, or has experienced an insured event, during the period when self-insurance is permitted in respect of their

fund, that beneficiary’s ability to continue to receive benefit payments, to lodge a claim, to have a claim determined or to have further benefits paid is not affected (reg 4.07E(9)). Modifications to exceptions Under reg 4.07E(8), the prohibition in reg 4.07E(4) does not apply in relation to defined benefit members if, on 1 July 2013, the defined benefit fund self-insures in relation to defined benefit members and, on or before 1 July 2013, the fund was not prohibited from self-insuring by a condition imposed on the trustee’s RSE licence (the relevant condition being condition B.1 of an RSE licence). APRA has become aware that reg 4.07E may have limited the ability of RSEs to accept successor fund transfers from self-insuring defined benefit funds, as the successor fund could only continue the selfinsurance after 1 July 2016 if it had been permitted to self-insure on 1 July 2013 (in relation to defined benefit members and the risk) and actually did so at that time. For example, assume Fund A self-insured in relation to defined benefit members up to and including 1 July 2013, and there was no condition on its RSE licence prohibiting self-insurance. Under reg 4.07E(8), Fund A may continue to self-insure defined benefit members in relation to the risk after 1 July 2016. However, if Fund A transfers self-insured defined benefit members to Fund B under successor fund arrangements, and Fund B did not itself satisfy reg 4.07E(8) as at 1 July 2013, Fund B would only be able to continue the self-insurance of the transferred members until 1 July 2016 (under reg 4.07E(3)), and would not be able to extend the self-insurance arrangements to new members of the relevant defined benefit division or sub-fund. To address the above concerns, an additional exception to reg 4.07E(2) and (4) has been added to facilitate successor fund transfers of self-insured defined benefit members, so that the restrictions in those subregulations will no longer apply to RSEs to the extent that they have received a successor fund transfer of defined benefit members where the transferring defined benefit members were self-insured in their original fund (reg 4.07E(8A); Superannuation Industry (Supervision) modification declaration No 1 of 2014). This exception applies subject to any condition imposed by APRA under SISA s 29EA(1) on the licence of the RSE licensee of the fund. The modification declaration (MD) is intended to allow new defined benefit members to join the selfinsurance arrangement only where those defined benefit members have a connection (for example, through a common employment relationship, or membership of the same division or sub-fund) with the transferred defined benefit members and would otherwise have been permitted to join the self-insurance arrangement within the original fund. The explanation statement to the MD states that the successor fund may permit defined benefit members of the self-insurance arrangement to change insurance categories within the self-insurance arrangement. For example, where the self-insurance arrangement covers temporary incapacity and death, a defined benefit member who has only had death cover may add temporary incapacity cover to their existing arrangement (subject to the fund’s own requirements). However, the successor fund may not itself make changes to its insurance offerings within the selfinsurance arrangement so as to extend those self-insured offerings to different risks. That is the MD is not designed to allow a successor fund to self-insure in relation to an entirely new risk, eg to allow selfinsurance in relation to permanent incapacity where the original fund only self-insured in relation to death; but this does not mean that the successor fund’s terms of self-insurance of that risk have to be precisely the same as the terms of self-insurance in the original fund. The successor fund may undertake a subsequent successor fund transfer of the members in which case reg 4.07E(8A) will apply to the subsequent successor fund transfer and allow relevant defined benefit members to be self-insured in the third (or subsequent) fund. APRA prudential standards and practice guides APRA’s interpretation of the meaning of “the risk” is that it refers to a type of insured benefit, eg death, permanent incapacity, temporary incapacity. Self-insurance is discussed in Prudential Standard SPS 160 “Defined Benefit Matters” and Prudential Standard SPS 250 “Insurance in Superannuation” (¶9-720). Voluntary Code of Practice for superannuation funds

The Insurance in Superannuation Working Group (ISWG, see below) has released a Insurance in Superannuation Voluntary Code of Practice (www.fsc.org.au/policy/life-insurance/insurance-insuperannuation-working-groupiswg/Insurance_in_Superannuation_Voluntary_Code%20of%20%20Practice.pdf). The parties bound by the Code are superannuation fund trustees which have adopted the Code (see “Legal status of Code” below). The overarching objective of the Code is to improve the insurance in superannuation offered to fund members, and the processes by which superannuation trustees which have adopted the Code provide insurance benefits to their members. Among others, an objective is that “insurance offered on an automatic basis in superannuation must be appropriate and affordable, and must not inappropriately erode retirement income”, and that the Code is intended to introduce greater transparency around life insurance premiums that are automatically packaged into superannuation. The insurance products held by superannuation funds covered by the Code include: • death cover, which pays on the death of an insured member, or if they are diagnosed as terminally ill with a life expectancy less than a specified period (generally 12 or 24 months) • total and permanent disability (TPD) cover, which pays if an insured member becomes disabled and is unable or unlikely to ever work again, or unable or unlikely to look after themselves ever again • income protection cover, which is designed to provide a replacement income of a specified amount for members who are unable to work due to illness or injury. Depending on the policy, payments may continue up to a specified age if the disability is ongoing or permanent, or may be payable for a specified maximum period. Legal status of Code The Code contains industry standards that superannuation trustees which have adopted the Code will uphold on an “if not, why not basis” when providing insurance benefits to their members. For these superannuation trustees, the Code operates alongside, and is subject to, existing laws and regulations which will prevail where there is any conflict or inconsistency between the Code and any law or regulation. Among other things, superannuation trustees are required under the SIS Act covenants (¶3-100) to perform their duties and exercise their powers in the best interests of our beneficiaries and, accordingly, are expected to comply with their commitments in the Code to the extent that they are in the best interests of beneficiaries and consistent with their other legal obligations. ISWG The ISWG comprises the Association of Superannuation Funds of Australia (ASFA), the Australian Institute of Superannuation Trustees (AIST), the Financial Services Council (FSC), Industry Funds Forum (IFF), and Industry Super Australia (ISA). It was formed in November 2016 to review automatic insurance premiums within superannuation. ASIC report on consumer experience of insurance through superannuation ASIC has released Report REP 591 Insurance in Superannuation which sets out the findings following a review of 47 superannuation trustees on the consumer experience of insurance provided through superannuation. The review focused on insurance claims and complaints handling, disclosures about insurance and cover ceasing, insurer rebates paid to trustees, and whether members were defaulted into demographic categories that resulted in higher premiums (www.asic.gov.au/regulatory-resources/find-adocument/reports/rep-591-insurance-in-superannuation/). [SLP ¶3-030]

¶3-245 General fees rules Part 11A of SISA contains the general fees rules for regulated superannuation funds and ADFs (s 99A to

99F). The rules do not apply to SMSFs or PSTs. Entry fees The trustee of a regulated superannuation fund or an ADF must not charge entry fees (SISA s 99B(1)). An entry fee is a fee, other than a buy-sell spread, that relates, directly or indirectly, to the issuing of a beneficial interest in a superannuation entity to a person who is not already a member of the entity. Buy-sell spread, switching fee or exit fee If the trustee, or the trustees, of a regulated superannuation fund or an approved deposit fund charge a buy-sell spread, a switching fee or an exit fee, the fee must be no more than it would be if it were charged on a cost recovery basis (SISA s 99C(1)). The regulations may prescribe the way in which a buy-sell spread, a switching fee or an exit fee charged on a cost recovery basis is to be worked out. Cost of advice to employers The trustee, or the trustees, of a regulated superannuation fund or an approved deposit fund must not include in any fee charged to any member of the fund an amount that relates to costs incurred by any person, directly or indirectly, in relation to personal advice provided by any person to an employer of one or more members of the fund (SISA s 99D). Fair and reasonable attribution of costs among members If there is more than one class of beneficial interest in a regulated superannuation fund, the trustee, or the trustees, of the fund must attribute the costs of the fund between the classes fairly and reasonably (SISA s 99E). Cost of financial product advice Section 99F(1) of SISA provides that the trustee or the trustees of a regulated superannuation fund must not directly or indirectly pass the cost of providing financial product advice in relation to a member of the fund (the subject member) on to any other member of the fund, to the extent that: (a) the advice is provided by a trustee of the fund or another person acting as an employee of, or under an arrangement with, a trustee or trustees of the fund (b) the advice is “personal advice” (c) the advice is provided in any of the following circumstances: (i) the subject member has not yet acquired a beneficial interest in the fund when the advice is given, and the advice relates to whether the subject member should acquire such an interest (ii) the advice relates to a financial product that is not a beneficial interest in the fund, a “related pension fund” for the member and the fund, a “related insurance product” for the member and the fund or a “cash management facility” within the fund (iii) the advice relates to whether the subject member should consolidate that member’s beneficial interests in two or more superannuation entities into a beneficial interest in a single superannuation entity (iv) at the time the advice is provided, the subject member reasonably expects that a person mentioned in item (a) will periodically review the advice, provide further personal advice or monitor whether recommendations in the original or any later advice are implemented and the results of that implementation (v) other prescribed circumstances. The terms “financial product” (¶4-060) and “personal advice” (¶4-630) have the same meanings as in Ch 7 of the Corporations Act 2001.

The terms “related pension fund”, “related insurance product”, “cash management facility” and “life policy” are defined in s 99F(3) and (4). While RSE licensees will have to comply with the general fees rules for all products they offer, APRA can specifically ensure that the general fees rules are complied with in relation to a MySuper product at the time they consider an application from an RSE licensee for authorisation to issue MySuper products: • as the RSE licensee will be in breach of a standard condition on their RSE licence if it does not comply with the general fees rules, and • APRA may cancel the RSE licensee’s authorisation of a MySuper product if the RSE licensee does not comply with the general fees rules in relation to the MySuper product (s 29U(2)(d)). For the interaction of the Pt 11A fee rules with the fee rules in SISA Pt 2C Div 5 for MySuper products, see Chapter 9.

¶3-250 Fee cap and prohibition of exit fees The general fee rules in SISA Pt 11A from 1 July 2019: • impose a “fee cap” which restricts the total amount of administration fees, investment fees and associated costs as prescribed in regulations that can be charged where the balance of an account is less than $6,000, and • prohibit exit fees charged as a result of the disposal of all or part of a member’s interests in a superannuation entity, regardless of the balance. The above measures were implemented by the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (PYSP) (Act 16 of 2019) and PYSP Regulations (F2019L00539) to protect individuals’ retirement savings from erosion from disproportionately high fees and to ban exit fees to remove a barrier to account consolidation. The Act also implemented other measures which ensure that insurance arrangements in superannuation are appropriate so that members are not paying for insurance cover they do not know about or premiums that inappropriately erode their retirement savings (¶3-243), and which strengthen the ATO’s role in reuniting small, inactive balances to reduce the costs to members and consolidate the accounts of members with multiple superannuation accounts. Cap on fees and costs From 1 July 2019, the total amount of administration fees, investment fees and prescribed costs that can be charged annually are 3% of the balance of the account held by the member, if the balance is less than $6,000 at the end of the fund’s income year or at the time of account closure (SISA s 99G, SISR reg 9.51). An apportionment applies if the member begins to hold the account during an income year. The amount of administration fees, investment fees and prescribed costs that can be charged is calculated using the member’s account balance at the end of the fund’s income year apportioned based on the number of days the member held the account during the income year (s 99G(2), (5)). If the member ceases to hold the account during the income year, the amount of fees and prescribed costs that can be charged is calculated using the member’s balance on the day the member ceases to hold the account and is apportioned based on the number of days the member held the account in the fund. If the trustee has charged more than the permitted administration fees, investment fees or prescribed costs (or calculated amount under the cap), the trustee has up to three months after the end of the fund’s income year to refund the excess to the member, or up to three months from the day the member ceased to hold the account to refund the excess to the member (s 99G(6)). “Prescribed costs” refer to an amount prescribed in regulations (if any) incurred by the trustee for the administration of the fund or investment of the fund’s assets which are not charged to the member as a

fee (s 99G(3)(c)). The amount prescribed (as part of the capped fees and costs charged to a member of a regulated superannuation fund in relation to a MySuper product or choice product for a year of income of the fund) is so much of the indirect cost of the MySuper product or the choice product for the year that is required to be reported to the member under s 1017D of the Corporations Act 2001 as: (a) is not charged to the member as a fee, and (b) is incurred by the trustee of the fund in relation to the year, and (c) relates to the administration of the fund or investment of the assets of the fund (SISR reg 9.50). The EM (to Act No 16 of 2019) explains the amount prescribed as below: • 2.15 It is expected that the regulations will capture amounts which directly or indirectly reduce the return on a member’s investment. It would include the situation where the charging of these amounts may be deducted from a member’s return before the investment earnings are attributed to the member. • 2.16 It is expected that the regulations will prescribe these amounts with reference to the amount of indirect cost disclosed by the trustee. • 2.17 It is the balance of an account that determines whether administration fees, investment fees and prescribed costs are capped and, if so, the maximum amount of these fees and costs that is charged. That is, a member who has more than one account in a fund may have total combined superannuation savings in that fund greater than $6,000. However, if the balance of a particular account is less than $6,000, the administration fees, investment fees and prescribed costs that can be charged for that account will be capped and will be calculated based on the amount in that account. An administration fee or investment fee that is charged at a reduced rate for a member of a MySuper account to align with the fee cap is not a contravention of a trustee’s obligation to only charge fees in accordance with the charging rules or the requirement to follow the same process for a class of member of the same beneficial interest (SISA s 29TC(i)(d), s 29VA(11), s 29VB(1)(d), s 29VB(4) and s 29VE(c)). For the avoidance of doubt, a trustee that is meeting the fee cap is meeting its obligations under s 99E of the SIS Act to attribute the costs of the fund fairly and reasonably between classes. Prohibition of exit fees From 1 July 2019, a trustee of a superannuation fund or an ADF cannot charge a member an exit fee (other than a buy-sell spread) when the member withdraws all or part of their interest from the fund or when the member’s interest is transferred out of the fund, eg a transfer to the ATO under the SUMLM Act (SISA s 99BA). Exit fees cannot be applied to the balance or interest that is fully or partly withdrawn or transferred out of the fund. An “exit fee” is a fee, other than a buy-sell spread, that relates to the disposal of all or part of a member’s interests in a superannuation entity (s 99BA(2)). This can include a deferred entry fee or a percentage based fee. The exit fee effectively is a fee triggered by the disposal of the member’s interest. Regulations may prescribe circumstances when the ban on exit fees does not apply. APRA and ATO guidelines The Regulators’ guidelines are available in Protect Your Super (www.letstalk.ato.gov.au/SuperCommunity/news_feed/protect-your-super) which contains the ATO’s advice and implementation documents on the PYSP changes, and in APRA’s letter of 8 May 2019 and FAQs to all RSE trustees about the PYSP reforms (www.apra.gov.au/sites/default/files/letter_protecting_your_super_legislative_amendments_implementation.pdf www.apra.gov.au/protecting-your-super-package-frequently-asked-questions).

¶3-260 Assignment of members’ interest and charge on fund assets

The trustee of a regulated superannuation fund (or ADF) must not recognise, encourage or sanction an assignment of a member’s superannuation interests or a charge over a member’s benefits (SISR reg 13.12; 13.13). Also, the trustee must not give a charge over the assets of the fund (reg 13.14). The above restrictions do not apply if the assignment or charge is permitted expressly or implicitly by the SIS legislation (reg 13.15; 13.15A; see “Approved charges on fund assets” below). A “charge” includes a mortgage, lien or other encumbrance (reg 13.11). In reg 13.12, a “charge” does not include a specific charge given in respect of particular benefits of a member before the fund became regulated or where the trustee was permitted under the Occupational Superannuation Standards Regulations or Superannuation Industry (Supervision) (Transitional Provisions) Regulations 1993 to recognise the charge. The ordinary meaning of the word “give” and the difference in wording between reg 13.12, 13.13 and 13.14 indicate that the phrase “give a charge” in reg 13.14 requires a trustee, by some positive action, to create a charge and not merely recognise (including act on or give effect to) a previously established charge (see ID 2011/81). The trustee of a fund does not “give a charge” for the purposes of reg 13.14 if the trustee purchases an asset subject to a charge that was established before the trustee purchased the asset (ID 2011/81). In that case, the SMSF acquired real property from an unrelated party and, at the time of purchase, was aware that the property was subject to a charge in favour of another unrelated party. The property remained subject to the charge after it was acquired. The ATO states that the explanatory statement to the regulations gives no explanation in relation to reg 13.14. However, differences in the language used in reg 13.12, 13.13 and 13.14 (see above) support the view that reg 13.14 is intended to apply to the creation of a charge by the fund trustee, as distinct from the trustee recognising an existing charge on acquiring an asset. The above provisions would prohibit a member from assigning his/her interest in the fund to another member or prevent a fund from participating as a borrower in margin lending arrangements if the fund is required to grant a charge over its assets as part of the arrangements (ID 2007/58). A fund participating in margin lending would also contravene the borrowing restriction in SISA s 67 as discussed at ¶3-410 (ID 2007/58). Approved charges on fund assets Trustees are permitted, in certain circumstances, to give a charge over fund assets in relation to derivatives transactions on approved Australian and foreign stock and futures exchanges under reg 13.15A. This exception was expanded from 10 May 2016 to cover fund trustees giving a charge over the fund’s assets over-the-counter (OTC) derivative transactions, whether cleared or uncleared so as to address certain inadequacies of the exception before that date, as summarised below. The rules of certain exchanges and clearing houses and certain existing, or expected, laws and prudential standards of certain jurisdictions either expressly require that security be granted or have the consequence that security needs to be granted. Trustees may not be able to rely on the former “derivatives contract” exception in reg 13.15A (as it then applied) to grant the charges required by the rules of exchanges and clearing houses or law for a number of reasons. These include the following: (a) the term “derivatives contract” may not be broad enough to capture other OTC derivatives such as foreign exchange forwards and swaps and interest rate swaps utilised by trustees (b) the former exception did not contemplate security being granted by the trustee to third parties who assist the trustee to access the approved body (ie a trustee’s clearing member), including in circumstances where the trustee was not a direct participant of the approved body if the charge was not contemplated in the rules of the approved body (c) the list of “approved bodies” in SISR Sch 4 did not include some important OTC derivatives clearing houses which clear high volumes of OTC derivatives (eg LCH Clearnet). Similarly, the broad exception in reg 13.15 which provides that the restriction on granting security does

not apply to an assignment or charge that is permitted, “expressly or by necessary implication”, by the SISA or SISR may not cover the granting of security in the context of cleared or uncleared OTC derivatives. Amended reg 13.15A (effective from 10 May 2016) therefore allows trustees of superannuation funds and ADFs to provide margin by way of security in relation to derivatives in the manner required to access international capital markets and liquidity so as to allow those entities to access liquid global markets such as the United States cleared OTC derivatives market through Futures Commission Merchants (FCMs). Schedule 4 contains the list of approved bodies (being domestic and foreign exchanges and clearing houses) to whom trustees may grant security for the purposes of reg 13.15A. In addition, a broader definition of “derivative” applies (see reg 13.15A(2) and note). The note to the “derivative” definition is a reminder that, while the term “derivative” covers a variety of arrangements, not all are “eligible obligations” (ie what financial markets would typically consider to be a derivative). CFDs and margin accounts (ID 2007/57) In this ID, the trustee of an SMSF deposited fund assets with the CFD provider as security in relation to the fund’s obligations to pay margins under a separate written agreement with the provider. As the terms of the agreement stated the circumstances in which the fund assets would be realised, this showed an intention to create a charge over the assets. Accordingly, by entering into the agreement with the CFD provider, the trustee has contravened reg 13.14. Regulation 13.15A is not applicable in this case as a CFD is not an options contract or a futures contract, and the charge was not given in relation to the rules of an approved body.

Margin account for investment in shares (ID 2007/58) In this ID, the trustee of an SMSF maintained a margin account with a broker’s clearing house which continued over a period of time at different monetary levels depending on the value of shares on hand. In relation to shares, a margin account with a broker is an account through which shares can be purchased for a combination of cash and a loan (margin lending). The portfolio of shares is used as security for the margin lending facility. The trustee has contravened SISA s 67(1), which prohibits the trustee from borrowing money or maintaining an existing borrowing of money. The limited exceptions to the general prohibition under s 67(2), 67(2A) and 67(3) are not available as operating the margin account does not fall within the exceptions (¶3-410). The trustee has also contravened reg 13.14. The exception in reg 13.15A is not applicable as the shares held as fund assets were provided as security for the loan taken out to purchase the shares, thus representing a charge over fund assets.

[SLP ¶3-212]

¶3-270 Members’ rights to accrued benefits The trustee of a regulated superannuation fund must not allow a member’s right or claim to accrued benefits, or the amount of those accrued benefits, to be altered adversely to the member by amendment of the fund’s governing rules or by any other act carried out, or consented to, by the trustee (SISR reg 13.16). The restriction does not apply to an alteration if: • the alteration does not relate to a member’s minimum benefits (¶3-230) and written consent to the alteration has been given by the member (and, by the non-member spouse if the benefits are subject to a payment split) • the alteration does not relate to a member’s minimum benefits and the Regulator has consented in writing to the alteration after either: – the alteration has been approved by at least two-thirds of all of the fund members who are affected by it, in accordance with the procedures specified in reg 13.16(4), or – for a fund covered by the basic equal representation rules in SISA s 89 (¶3-120), the alteration has been approved by at least two-thirds of the total number of trustees or, if the fund has a

single corporate trustee, by two-thirds of the directors of the corporate trustee, subject to the procedures specified in reg 13.16(5), or • the alteration is necessary for compliance with the SISA, the Income Tax Act 1986, the Superannuation (Unclaimed Money and Lost Members) Act 1999, the ITAA36 or ITAA97, or their regulations • the alteration is solely for the purpose of rectifying a mistake which has resulted in a member’s right or claim to accrued benefits, or the amount of the accrued benefits, being advantageously altered and the Regulator has approved the alteration • the alteration affects only the benefits of members in respect of whom assessments under s 15 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 have been made, and the alteration serves to enable the trustee: – to be reimbursed for an amount paid, or to be paid, under that Act and the Superannuation Contributions Tax (Imposition) Act 1997, or – in relation to an amount paid before reimbursement occurs, to charge interest on the amount paid • the alteration is made: – to give effect to a payment split – as a consequence of the trustee taking action that, because of Div 2.2 of the Family Law (Superannuation) Regulations 2001, has the effect that a future payment in respect of the superannuation interest of the member spouse would not be a splittable payment, or – as a consequence of the operation of a fund’s governing rules that, because of Div 2.2 of the Family Law (Superannuation) Regulations 2001, has the effect that a future payment in respect of the superannuation interest of the member spouse would not be a splittable payment, or • the alteration enables the trustee to be reimbursed for an amount paid, or to be paid, under s 24 of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 because of an overpayment of government co-contributions (reg 13.16(2)). [SLP ¶3-214]

¶3-280 Preservation of benefits The trustee of a regulated superannuation fund (or ADF) must comply with rules for the preservation of member benefits (discussed in this paragraph) and for the portability and payment of members’ benefits (discussed in ¶3-284 and ¶3-286) (SISR Pt 6 reg 6.01 to 6.46). Under the SISR, a member’s benefits in a regulated superannuation fund may comprise one or more of the following categories of benefits: • preserved benefits (PBs) • restricted non-preserved benefits (RNPBs) • unrestricted non-preserved benefits (UNPBs). A member’s benefits in an ADF may comprise only of PBs and/or UNPBs, ie there are no RNPBs in ADFs (¶3-662). Generally, PBs and RNPBs must be preserved until the member satisfies a condition of release as specified in SISR Sch 1 (see below). For example, PBs and RNPBs must be retained in the fund until a member’s “retirement” on or after attaining his/her preservation age (or until the member satisfies another

condition of release with no cashing restriction). On the other hand, UNPBs do not need to be preserved because they are classified as UNPBs under the preservation rules or the member has previously satisfied a condition of release in respect of these benefits and no cashing restrictions apply, ie these benefits are payable on demand by the member, subject only to any restriction in the trust deed of the fund in which the benefits are kept. A member’s preservation age varies between 55 and 60 years, based on his/her birth date (see “Preservation age” below). The governing rules or the trustee of a superannuation fund may alter the category of a member’s benefits in the fund, provided this does not decrease the member’s PBs or increase the member’s UNPBs in the fund (reg 6.16). Where a relevant condition of release is satisfied and no cashing restriction applies, a member’s benefits may be paid in a lump sum or pension form, or both (¶3-286). It has been held that the Official Trustee in Bankruptcy could not access a bankrupt member’s superannuation benefits (which were held in an employer-sponsored superannuation fund) even though the benefits had unconditionally vested in the member, as the Trustee could not be in a better position than the bankrupt member (Kirkland). The Commissioner has issued alerts on arrangements which promote the early access to preserved superannuation benefits for private use (see “Taxpayer alert on early access to superannuation” at the end of this paragraph). Payments of superannuation benefits to members that do not comply with the conditions of release are not treated as superannuation benefits, and are taxed as ordinary income at the marginal tax rates of members (¶8-500). APRA guidelines APRA’s Superannuation Prudential Practice Guide SPG 280 “Payment standards” provides guidelines on the following: • General matters — payment standards, governing rules, risk management and administration • Classification of benefits • Conditions of release — retirement, transition to retirement income streams, early release of benefits • Pension issues • Roll-overs and transfers — successor funds, illegal early release and identity theft/fraud, and portability rules • Death benefit payments • Miscellaneous (www.apra.gov.au/superannuation-standards-and-guidance) (¶9-720). The preservation rules are discussed under the following topics • Preservation system overview • Earnings in the fund • Negative investment returns • Preservation rules • SISR Sch 1 — Conditions of release/cashing restrictions • Conditions of release for temporary residents

• Condition of release — retirement • Preservation age • Condition of release — terminal medical condition • Condition of release — post-preservation age non-commutable income stream • Condition of release — permanent incapacity and temporary incapacity • Condition of release — termination of employment • Condition of release — temporary resident permanently departing Australia • Condition of release — severe financial hardship • Condition of release — compassionate grounds • Condition of release — former lost members with small benefits • Condition of release — release of benefits under ATO release authority • Condition of release — release of benefits to a provider of a KiwiSaver Scheme • Condition of release — release of benefits to acquire deferred superannuation income streams • Eligible spouse contributions • Preservation and cooling-off rules • Taxpayer alert on early access to superannuation. Preservation system overview The preservation regime (1 July 1999 system) requires all contributions made by or on behalf of a member of a regulated superannuation fund, and all earnings of the fund in respect of the period from 1 July 1999 to be preserved. In contrast, under the pre-1 July 1999 system, undeducted contributions and the earnings on benefits which were RNPBs and UNPBs were not required to be preserved. Because the post- and pre-July 1999 systems are different, grandfathering rules require trustees of regulated superannuation funds to calculate each member’s non-preserved benefits as at 30 June 1999 so as to retain the non-preserved status of these benefits under the 1 July 1999 system. The dollar amount of each member’s non-preserved benefits, calculated as at 30 June 1999, is not indexed for future years. The method of calculating a superannuation fund member’s PBs, RNPBs and UNPBs under the 1 July 1999 system is outlined below (see “Preservation rules”). Discussion of the pre-1 July 1999 system may be found in earlier editions of the Guide. Earnings in the fund — accumulation account and pension account Under the 1 July 1999 preservation rules, the investment earnings of a superannuation fund in an accumulation phase are preserved benefits (with certain exceptions, see below). The preservation rules do not affect the earnings in superannuation funds which have commenced to be paid in the form of an income stream. In such cases (with one exception), the investment earnings are taken to be UNPBs if they relate to a benefit being paid as a non-commutable life pension or annuity or to an UNPB being paid as a pension or annuity (SISR reg 6.15A). An exception applies in respect of the investment earnings on benefits in a “transition to retirement” income stream (see “Condition of release — post-preservation age non-commutable income stream” below). These earnings remain as PBs until the pensioner or annuitant satisfies a condition of release

with a “nil” cashing restriction such as retirement or after reaching preservation age or attaining age 65 (SISR reg 6.15A(2) to (5); RSAR reg 4.17B). Once a condition of release with a “nil” cashing restriction is met, investment earnings on transition to retirement income streams become UNPBs. This treatment places investment earnings on benefits in the “transition to retirement” phase on the same footing as investment earnings on benefits in the accumulation phase. Negative investment returns An exception to the general rule that all investment returns accruing from 1 July 1999 must be preserved is provided by SISR reg 6.16A. This covers the situation where a member’s benefits in a fund are largely or wholly made up of PBs, RNPBs and/or UNPBs and the negative investment returns debited to the member’s benefits exceed the amount of the member’s PBs. In such a case, the negative return for a period must be debited in the following order: (a) against the member’s PBs; (b) against the member’s RNPBs; and (c) against the member’s UNPBs. As investment returns from 1 July 1999 are preserved by virtue of reg 6.03, a member’s RNPBs or UNPBs which have been reduced because of earlier negative returns cannot be restored to their prereduction levels by subsequent positive investment returns. Preservation rules The rules for determining the PBs, RNPBs and UNPBs for a member of a regulated superannuation fund for the periods before and after 1 July 1999 allow for the implementation of the 1 July 1999 preservation rules (under which all contributions and earnings of the fund from 1 July 1999 are preserved), and the retention of the status of pre-1 July 1999 non-preserved benefits of the member, if any. PBs — on or after 1 July 1999 The amount of a member’s PBs at any time on or after 1 July 1999 is the total benefits of the member in the fund reduced by the member’s RNPBs and UNPBs (see below) (SISR reg 6.03). The PBs of a member include: • benefits transferred from another superannuation fund, ADF or RSA that are PBs in the transferor fund (reg 6.06; 6.12) • contributions made, or benefits rolled over or transferred, to the fund which are taken by the trustee to be PBs (reg 6.15) • benefits in the fund recategorised by the trustee as PBs in accordance with the fund’s governing rules (reg 6.16). As PBs are a residual amount (ie total benefits less RNPBs and UNPBs), contributions and earnings of the fund automatically become subject to preservation under the 1 July 1999 system as they are part of the member’s total benefits and are not included in the member’s RNPBs or UNPBs. Employment termination payments rolled over to the fund from 1 July 2004 are PBs (previously they were UNPBs). RNPBs — on or after 1 July 1999 A member’s RNPBs in a regulated superannuation fund at any time on or after 1 July 1999 are specified in reg 6.08. For all type B members and type A members who are not defined benefit members, RNPBs are the sum of: • the amount of the member’s RNPBs in the fund as at 30 June 1999 as calculated under reg 6.07 • the amount of the member’s RNPBs received from another regulated superannuation fund, exempt public sector superannuation scheme or RSA on or after 1 July 1999. For type A members who are defined benefit members, RNPBs are the sum of:

• either: – where the trustee elects in respect of the member, the greater of the member’s RNPBs in the fund as at 30 June 1999 as calculated under reg 6.07 that would be payable to the member on 1 July 1999 if the member resigned or were retrenched from employment on that day, or – the amount of the member’s RNPBs in the fund as at 30 June 1999 as calculated under reg 6.07 • the amount of the member’s RNPBs received from another regulated superannuation fund, exempt public sector superannuation scheme or RSA on or after 1 July 1999. RNPBs also include benefits that were RNPBs in the source from which they were received (reg 6.09; 6.12) and benefits in the fund recategorised by the trustee as RNPBs in accordance with the fund’s governing rules (reg 6.16). A member’s RNPBs thus cannot be increased by contributions made to the fund on behalf of the member, or by investment earnings on the member’s benefits in respect of the period on or after 1 July 1999, as these are PBs by virtue of reg 6.03. Where a tax deduction is allowed for personal superannuation contributions under ITAA36 former s 82AAT on or after 1 July 1999 for contributions made before that date, the benefits arising from those contributions that were previously allocated to RNPBs are taken to be PBs (reg 6.08(2)). UNPBs — on or after 1 July 1999 A member’s UNPBs in a regulated superannuation fund are the sum of (reg 6.10): (1) PBs or RNPBs of the member which have become UNPBs because the member has satisfied a condition of release and no cashing restrictions apply for that condition of release (reg 6.12) (2) amounts (other than a CGT exempt component) received as roll-overs of former ETPs made by employers on or after the “commencement day” (see below) (3) UNPBs received by the fund in respect of the member on or after the commencement day (and before 1 July 2004) (4) investment earnings on the amounts in items (1) to (3) for the period before 1 July 1999. Where a tax deduction is allowed to a fund member for personal superannuation contributions under ITAA36 former s 82AAT on or after 1 July 1999 for contributions made before that date, the benefits arising from those contributions that were previously allocated to RNPBs, and which become UNPBs because a condition of release had been satisfied, are taken to be PBs (reg 6.10(3)). That is, a reclassification from UNPBs to PBs will be made so that the deductible contributions are subject to preservation. Member contributions made at any time on or after 1 July 1999 are PBs by virtue of reg 6.03. Roll-overs or transfers of a member’s benefits that are UNPBs in the transferor fund remain as UNPBs in the transferee fund (reg 6.13). SISR Sch 1 — Conditions of release/cashing restrictions A member’s PBs and RNPBs in a superannuation fund (or ADF) can only be accessed (“cashed”) if a condition of release is satisfied. The conditions of release are specified in SISR Sch 1 (reproduced in the table below). The conditions of release have specific meanings or tests which must also be met, eg “retirement”, attaining “preservation age” and taking benefits as a non-commutable income stream, “permanent or temporary incapacity”, “severe financial hardship” or “compassionate grounds”, as discussed below. As noted in Sch 1, a cashing restriction applies as to the form or amount of the benefit payment with certain conditions of release. For example, a benefit paid because of a member’s temporary incapacity must be paid as a non-commutable income stream for a period not exceeding the period of incapacity from employment of the kind engaged in immediately before the temporary incapacity. Also, while no

cashing restriction applies to the amount constituting RNPBs paid on termination of employment from an employer-sponsored fund, any PBs can only be paid as a non-commutable life pension or annuity. A member of a fund is taken to have satisfied a condition of release if the event specified in that condition has occurred in relation to the member (but see “Limitation on conditions of release for temporary residents” below). SISR Schedule 1 — conditions of release of benefits

PART 1 — REGULATED SUPERANNUATION FUNDS Column 1

Column 2

Column 3

Item No.

Conditions of release

Cashing restrictions

101

Retirement

Nil

102

Death

Nil

102A

Terminal medical condition

Nil

103

Permanent incapacity

Nil

103A

Former temporary resident to Amount that is at least the amount of the whom reg 6.20A or 6.20B applies, temporary resident’s withdrawal benefit in the requesting in writing the release of fund, paid: his/her benefits (a) as a single lump sum, or (b) if the fund receives any combination of contributions, transfers and roll-overs after cashing the benefits — in a way that ensures that the amount is cashed

103B

The trustee is required to pay an amount to the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s superannuation interest in the fund

Amount that the trustee is required to pay to the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s superannuation interest in the fund, paid as a lump sum to the Commissioner

104

Termination of gainful employment Nil with a standard employer-sponsor of the regulated superannuation fund on or after 1 July 1997 (where the member’s preserved benefits in the fund at the time of the termination are less than $200)

105

Severe financial hardship

For a person taken to be in severe financial hardship under reg 6.01(5)(a) — in each 12month period (beginning on the date of first payment), a single lump sum not less than $1,000 (except if the amount of the person’s preserved benefits and restricted non-preserved benefits is less than that amount) and not more than $10,000 For a person taken to be in severe financial hardship under reg 6.01(5)(b) — Nil

106

Attaining age 65

Nil

107

The Regulator has determined A single lump sum, not exceeding an amount under reg 6.19A(2) that a specified determined, in writing, by the Regulator, being amount of benefits in the regulated an amount that: superannuation fund may be released on a compassionate ground (a) taking account of the ground and of the person’s financial capacity, is reasonably required, and (b) in the case of the ground mentioned in reg 6.19A(1)(b) — in each 12-month period (beginning on the date of first payment), does not exceed an amount equal to the sum of: (i) three months’ repayments, and (ii) 12 months’ interest on the outstanding balance of the loan

108

Termination of gainful employment 1. Preserved benefits: Non-commutable life with an employer who had, or any pension or non-commutable life annuity of whose associates had, at any 2. Restricted non-preserved benefits: Nil time, contributed to the regulated superannuation fund in relation to the member

109

Temporary incapacity

A non-commutable income stream cashed from the regulated superannuation fund for: (a) the purpose of continuing (in whole or part) the gain or reward which the member was receiving before the temporary incapacity, and (b) a period not exceeding the period of incapacity from employment of the kind engaged in immediately before the temporary incapacity

109A

For acquiring a superannuation interest (within the meaning of the ITAA97) that supports a deferred superannuation income stream to be provided under a contract or rules that meet the standards of reg 1.06A(2)

The restrictions contained in reg 1.06A(3)(e)

110

Attaining preservation age

Any of the following: (a) a transition to retirement income stream (b) a non-commutable allocated annuity (c) a non-commutable allocated pension (d) a non-commutable annuity (e) a non-commutable pension

111

Being a lost member who is found, Nil

and the value of whose benefit in the fund, when released, is less than $200 111A

The Commissioner of Taxation gives a superannuation provider a release authority under Div 131 in Sch 1 to the TAA

The restrictions contained in s 131-35 and 13140 in that Schedule

111B

A person gives a superannuation provider a release authority under s 135-40 in Sch 1 to the TAA

The restrictions contained in s 135-75 and 13585 in that Schedule

113

A person gives a transitional release authority to a superannuation provider under ITTPA s 292-80B

Restrictions contained in ITTPA s 292-80C(1) and (2)

113A

A former resident of Australia has: (a) moved permanently to New Zealand, and (b) nominated a provider of a KiwiSaver Scheme for the purposes of this item

Amount that is at least the amount of the former resident’s withdrawal benefit in the fund, paid:

Any other condition, if expressed to be a condition of release, in an approval under SISA s 62(1)(b)(v)

Restrictions expressed in the approval to be cashing restrictions applying to the condition of release

114

(a) as a single lump sum, or (b) if the fund receives any combination of contributions, transfers and roll-overs after cashing the benefits — in a way that ensures that the amount is cashed

PART 2 — APPROVED DEPOSIT FUNDS Column 1

Column 2

Column 3

Item No.

Conditions of release

Cashing restrictions

201

Retirement

Nil

202

Death

Nil

202A

Terminal medical condition

Nil

203

Permanent incapacity

Nil

204

Former temporary resident to Amount that is at least the amount of the whom reg 6.24A applies, temporary resident’s withdrawal benefit in the requesting in writing the release of fund, paid: his/her benefits (a) as a single lump sum, or (b) if the fund receives any combination of transfers and roll-overs after cashing the benefits — in a way that ensures that the amount is cashed

204A

The trustee is required to pay an amount to the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s superannuation interest

Amount that the trustee is required to pay to the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s superannuation interest in the fund, paid as a lump sum to the Commissioner

in the fund 205

Severe financial hardship

For a person taken to be in severe financial hardship under reg 6.01(5)(a) — in each 12month period (beginning on the date of first payment), a single lump sum not less than $1,000 (except if the amount of the person’s preserved benefits and restricted non-preserved benefits is less than that amount) and not more than $10,000 For a person taken to be in severe financial hardship under reg 6.01(5)(b) — Nil

206

Attaining age 65

Nil

207

The Regulator has determined A single lump sum, not exceeding an amount under reg 6.19A(2) that a specified determined, in writing, by the Regulator, being amount of benefits in the approved an amount that: deposit fund may be released on a compassionate ground (a) taking account of the ground and of the person’s financial capacity, is reasonably required, and (b) in the case of the ground mentioned in reg 6.19A(1)(b) — in each 12-month period (beginning on the date of first payment), does not exceed an amount equal to the sum of: (i) three months’ repayments, and (ii) 12 months’ interest on the outstanding balance of the loan

207A

For acquiring a superannuation interest (within the meaning of the ITAA97) that supports a deferred superannuation income stream to be provided under a contract or rules that meet the standards of reg 1.06A(2)

The restrictions contained in reg 1.06A(3)(e)

208

Attaining preservation age

Any of the following: (a) a transition to retirement income stream (b) a non-commutable allocated annuity (c) a non-commutable allocated pension (d) a non-commutable annuity (e) a non-commutable pension

208A

The Commissioner of Taxation gives a superannuation provider a release authority under Div 131 in Sch 1 to the TAA

The restrictions contained in s 131-35 and 13140 in that Schedule

208B

A person gives a superannuation provider a release authority under

The restrictions contained in s 135-75 and 13585 in that Schedule

s 135-40 in Sch 1 to the TAA 210

A person gives a transitional release authority to a superannuation provider under ITTPA s 292-80B

Restrictions contained in ITTPA s 292-80C(1) and (2)

211

Being a lost member who is found, Nil and the value of whose benefit in the fund, when released, is less than $200

Note Unless a contrary intention is specified, the definitions set out in reg 6.01(2) apply to Sch 1. Conditions of release for temporary residents Regulation 6.01B sets out the conditions of release that an individual who, at any stage, has been a temporary resident can satisfy. The regulation applies to a member who is or was a temporary resident but not a member who: (a) is an Australian citizen, a New Zealand citizen or a permanent resident, or (b) is, at any time, the holder of a Subclass 405 (Investor Retirement) visa or a Subclass 410 (Retirement) visa described in Sch 2 to the Migration Regulations 1994. For a temporary resident member to whom reg 6.01B applies, the only conditions of release that can apply to the member are: • a condition of release that was satisfied by the member before 1 April 2009, and • the conditions of release in items 102, 102A, 103, 103A, 103B, 109, 111A, 111B, 113A, 202, 202A, 203, 204, 204A, 208A and 208B of Sch 1 (see the table below). SISR Sch 1 — conditions of release and cashing restrictions Condition of release — retirement For the purposes of the preservation rules, a member’s “retirement” is taken to occur: • for a member who has attained a preservation age less than 60 — if an arrangement under which the member was “gainfully employed” (see ¶3-220 and below) has ended and the fund trustee is reasonably satisfied that the member intends never to again become gainfully employed, either fulltime (ie at least 30 hours per week) or part-time (ie at least 10 hours per week), or • for a member who has attained the age of 60 — an arrangement under which the member was gainfully employed has ended, and either of the following circumstances apply: – the member attained that age on or before the ending of the employment, or – the trustee is reasonably satisfied that the member intends never to again become gainfully employed, either on a full-time or a part-time basis (SISR reg 6.01(7)). This means that the “retirement” of a person cannot happen before age 55 but, after age 60, retirement may be taken to have occurred upon cessation of gainful employment even if the person subsequently reenters gainful employment. Also, a person who leaves employment before age 60, but chooses to access his/her benefits only after age 60, will be covered by the “retirement” condition of release. While two definitions of “retirement” have slightly different tests applicable to them, proof of age is required in either case. Where the trustee must be reasonably satisfied that the member intends never again to become gainfully employed, additional evidence will be required to support this. Proof of retirement may be satisfied by obtaining evidence that the member’s gainful employment has ceased (eg

a statement from the employer) and of the member’s intention, at the time of the claim, to never again be gainfully employed either on a full-time or a part-time basis (eg a statutory declaration from the member). Where a member has reached the age of 60, is in two or more employment arrangements at the same time, and ceases one of these employment arrangements, this is a valid condition of release in respect of all preserved and restricted non-preserved benefits accumulated up until that time. However, it is APRA’s view that this will not change the character of any preserved or restricted non-preserved benefits that accrue after the condition of release has occurred. That is, a member will not be able to cash any further benefits or investment earnings accrued from another existing employment arrangement, or any benefits or investment earnings from a new employment arrangement, until a further condition of release occurs (Superannuation Prudential Guide SPG 280 para 22). Whether a person is “gainfully employed” is a question of fact, and not all jobs or undertakings will meet the “gainful employment” test. For example, a director of a small private company is unlikely to be gainfully employed by virtue of holding that office as being a director of a company alone is not necessarily employment, and is not necessarily under a contract of service (see Beljan v Energo Form Act Pty Ltd [2013] ACTMC 21 [22]). By contrast, a person who is self-employed as an Uber driver may qualify as being in gainful employment and could possibly satisfy the retirement definition on ceasing such self-employment. Preservation age A person’s preservation age depends on the birth date of the person as set out in the table below (SISR reg 6.01(2)). Date of birth

Preservation age

Before 1 July 1960

55

1 July 1960 – 30 June 1961

56

1 July 1961 – 30 June 1962

57

1 July 1962 – 30 June 1963

58

1 July 1963 – 30 June 1964

59

After 30 June 1964

60

Condition of release — terminal medical condition The expression “terminal medical condition” has the meaning given by SISR reg 6.01A (reg 6.01(2)). A terminal medical condition exists in relation to a person at a particular time if the following circumstances exist: (a) two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period (the certification period) that ends not more than 24 months after the date of the certification, and (b) at least one of the registered medical practitioners is a specialist practising in an area related to the illness or injury suffered by the person (c) for each of the certificates, the certification period has not ended (reg 6.01A). If a member satisfies this condition of release, the member’s benefits in the fund which have accrued up to that point in time become unrestricted non-preserved benefits and can be accessed at any time and in any form. Any additional benefits accrued by the member while the certification period is current also become unrestricted non-preserved benefits. The certification period is the period referred to in reg 6.01A(a) (see above) within which a registered medical practitioner has certified that the member is likely to die. Benefits covered by the condition of release retain their unrestricted non-preserved status even where they are not accessed by the member.

Any benefits which are accrued after the certification period ends are not covered by the condition of release, and another condition of release would need to be satisfied in order for these benefits to be accessed. Condition of release — post-preservation age non-commutable income stream This condition of release allows a member of a superannuation fund (or RSA holder) who has reached preservation age to access his/her PBs and/or RNPBs in the fund (or RSA) without having to “retire” from gainful employment in the form of: • a non-commutable allocated annuity or allocated pension • a non-commutable annuity or pension, or • a transition to retirement income stream. Non-commutable allocated income streams and transition to retirement income streams A “non-commutable allocated annuity” and “non-commutable allocated pension” means a pension or annuity which meet the relevant standards (eg SISR reg 1.06(4) for allocated pensions, reg 1.05(2), (9) or (10) for an annuity). A “transition to retirement income stream” (TRIS) means an account-based income stream that meets the standards of reg 1.05(11A) or reg 1.06(9A) and, from 1 July 2017, that meets the standards in reg 1.06A (see ¶3-390). In addition, the total amount of pension payments in any year is limited to a maximum amount of no greater than 10% of the account balance at the start of each year (reg 6.01(2)). The standards are discussed in ¶3-390. A restriction applies to both types of income streams so that where the income stream is commuted, the resulting benefit cannot be taken in cash. The following exceptions permit the benefit resulting from a commutation to be cashed where: • the annuitant/pensioner has satisfied a condition of release with a “nil” cashing restriction (see “SISR Sch 1 — conditions of release and cashing restrictions” above) • the commutation is to cash an UNPB • the commutation is to pay a superannuation contributions surcharge • the commutation is to give effect to a payment split under the family law • the commutation is to make a payment for the purpose of giving effect to an ATO release authority under the ITAA97 in connection with excess contributions tax (reg 6.01(2), definition of “noncommutable allocated annuity”, para (b)) (¶6-600). In addition, the commutation restriction above does not prevent commutations for the purpose of returning a benefit to the accumulation phase or to purchase another non-commutable income stream. Where a commuted annuity or pension originally contained more than one category of benefits (eg PB, RNPB and UNPB), the trustee (or annuity provider) must determine the preservation components of the resulting superannuation benefit (or ETP before 1 July 2007) from the commutation in accordance with reg 6.22A, ie in the following order — UNPBs, RNPBs and PBs (see example below). UNPBs and RNPBs are fixed dollar amounts which are known at the commencement of the income stream, and the payment amounts made out of the income stream up to the time of commutation will also be known. Therefore, by following the cashing order in reg 6.22A, the trustee (or annuity provider) will be able to determine the preservation components of a commutation superannuation benefit (or resulting superannuation lump sum). Example: commutation of a non-commutable allocated pension Alison commences a non-commutable allocated pension from a superannuation fund. The pension has an opening account balance of $100,000, made up of $10,000 UNPBs, $20,000 RNPBs and $70,000 PBs.

After three years, Alison decides to return to full-time work and commutes the pension by rolling back the account balance to the accumulation phase. At the time of the commutation, the account balance of the pension is $85,000, with $25,000 having been paid out as pension income payments. The $85,000 represents a superannuation benefit. To ascertain the preservation status of the commutation benefit, the trustee (allocated pension provider) should apply the order for cashing of benefits set out in reg 6.22A. Accordingly, the $25,000 of income payments from the pension will consist of $10,000 of UNPBs and $15,000 of RNPBS, and the superannuation benefit of $85,000 will consist of the remaining $5,000 of RNPBs and $80,000 of PBs.

The ATO’s view is that reg 6.22A applies on a whole of fund level only where a member has a single interest in the fund. If a member has two or more interests, reg 6.22A applies separately to each interest. Where an income stream contains benefits in more than one category, the trustee (or annuity provider) may alter the benefit category provided this does not result in an increase in the amount of UNPBs or a decrease in the amount of PBs (reg 6.16). This enables the trustee (annuity provider) to reclassify UNPBs and RNPBs as PBs, thus avoiding the need to determine the preservation components of a superannuation benefit resulting from a commutation. Non-commutable annuity and non-commutable pension A “non-commutable annuity” and “non-commutable pension” are defined to mean benefits which meet the minimum standards in reg 1.05(2), (9) or (10) and 1.06(2), (7) or (8), respectively (ie the standards relating to lifetime, life expectancy and market linked annuities and pensions), except that where the annuity or pension is commuted within the six-month cooling-off period which applies to these types of products, the resulting superannuation benefit cannot be cashed. The exceptions to this restriction allow a resulting superannuation benefit to be cashed where the annuitant/pensioner has satisfied a condition of release of benefits with a “nil” cashing restriction, or where the purpose of the commutation is to cash an UNPB. The restriction on commutation above does not prevent commutations within the six-month period for purposes other than to cash the resulting superannuation benefit. For example, commutation is permitted where the resulting benefit is rolled over or transferred within the superannuation system (ie to return a benefit to the accumulation phase or to purchase another income stream). Where the benefit is rolled over or transferred, it will retain its preservation status so that the annuitant/pensioner can only access the PBs or RNPBs when a condition of release with a “nil” cashing restriction is satisfied, or a condition of release is met which allows the benefit to be cashed in a form permitted under Sch 1 (reg 6.18; 6.19). Alternatively, where the non-commutable annuity or pension is commuted within the six-month period, the resulting benefit may be used to purchase another non-commutable pension or non-commutable annuity or a non-commutable allocated annuity or pension. In addition, under the minimum standards as noted above for these types of income stream products, commutation is also allowed outside the six-month period for certain specified purposes (eg to pay a superannuation contributions surcharge, to give effect to a superannuation benefit payment split under the family law). Where a commuted annuity or pension originally contained more than one category of benefits (eg PB, UNPB and RNPB), the trustee (or annuity provider) must determine the preservation components of the resulting benefit from the commutation in accordance with the SISR as discussed above in relation to a non-commutable allocated annuity or pension. Annuity providers subject to the SISR payment standards Because annuity providers are not subject to the SISR payment standards, the definitions of “noncommutable allocated annuity” and “non-commutable annuity” specifically provide that the payment standards for regulated superannuation funds under reg 6.16; 6.18; 6.19 and 6.22A apply to these noncommutable annuities. This ensures that the outcomes described above, in relation to the form and the order in which benefits can be cashed and the ability of annuity providers to alter the preservation category of benefits, apply equally to both regulated superannuation funds and annuity providers. Condition of release — permanent incapacity and temporary incapacity A member is taken to be suffering “permanent incapacity” if a trustee of the fund is reasonably satisfied that the member’s ill-health (whether physical or mental) makes it unlikely that the member will engage in

gainful employment for which the member is reasonably qualified by education, training or experience (SISR reg 1.03C). A trustee is not required to assess the extent of the incapacity at the time the member ceased gainful employment. That is, the full extent of the incapacity may have developed at some later time and the trustee’s decision should take account of these developments. Where a member settles a total and permanent disability (TPD) claim, including a settlement conciliated through the Superannuation Complaints Tribunal, the member’s PBs will include the settlement amount and can be cashed under the permanent incapacity condition of release only where the trustee is reasonably satisfied that the member is unlikely because of ill-health ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience. “Temporary incapacity”, in relation to a member who has ceased to be gainfully employed (including a member who has ceased temporarily to receive any gain or reward under a continuing arrangement for the member to be gainfully employed), means ill-health (whether physical or mental) that caused the member to cease to be gainfully employed but does not constitute permanent incapacity. As noted in SISR Sch 1 above, cashing restrictions apply in relation to this condition of release. It is not necessary for the member’s employment to fully cease. Benefits may be paid where a member makes a partial return to gainful employment while incapacitated, provided that the member’s remuneration plus the temporary incapacity benefits do not exceed the member’s remuneration at the time the member became ill. Condition of release — termination of employment A member may cash his/her PBs and RNPBs from a regulated superannuation fund upon terminating employment (eg upon resignation, retrenchment or dismissal prior to retirement) with a standard employer-sponsor if the benefits are less than $200 at the time of the termination and cashing is permitted by the trust deed of the fund. A standard employer-sponsor is an employer that contributes to the fund (or has ceased only temporarily to contribute) wholly or partly pursuant to an arrangement between the employer and the trustee of the fund (see SISR Sch 1, item 104 above). In other cases (eg the benefits are more than $200), the member may access his/her PBs and RNPBs upon termination of employment with an employer who had, or any of whose associates had, at any time contributed to that fund in relation to the member. The member’s RNPB relating to the employer will become an UNPB, which are accessible at any time. The member’s PB can only be paid in the form of a non-commutable life pension or non-commutable life annuity (see SISR Sch 1, item 108 above). Condition of release — temporary resident permanently departing Australia A temporary resident departing Australia in the circumstances prescribed in SISR reg 6.20A or 6.20B can request to withdraw his/her benefits. A compulsory cashing rule applies if the temporary resident is a member of a regulated superannuation fund that is not an unfunded public sector superannuation scheme and a voluntary cashing rule applies if the fund is an unfunded scheme. A payment to the ATO by the trustee of a regulated superannuation fund under the Superannuation (Unclaimed Money and Lost Members) Act 1999 in relation to the superannuation interest of a former temporary resident is also a condition of release (¶3-286). Condition of release — severe financial hardship A person is taken to be in “severe financial hardship”, if the trustee is satisfied (based on written evidence from the relevant government department or authority responsible for administering income support payments) that: • the person had been receiving “Commonwealth income support payments” (as defined in reg 6.01(1), eg an income support supplement, a service pension, or a social security benefit or pension, or a drought relief payment) for a continuous period of at least 26 weeks and was in receipt of payments of that kind on the date of the written evidence, and is unable to meet reasonable and immediate family living expenses (reg 6.01(5)(a)), or • for a person who has attained his/her “preservation age” (see above) plus 39 weeks — the person has

received Commonwealth income support payments for a cumulative period of 39 weeks after attaining the relevant preservation age and was not gainfully employed on a full-time or part-time basis on the date of application for early release of the preserved or restricted non-preserved benefits (reg 6.01(5)(b)). The written evidence provided for under reg 6.01(5)(a) is ineffective if it is dated more than 21 days before the date of the person’s application to the trustee for release of benefits (reg 6.01(5A)). If a person meets the condition of release in reg 6.01(5)(a), the cashing restriction, in each 12-month period (beginning on the date of first payment), is a single lump sum not less than $1,000 (except if the amount of the person’s preserved benefits and restricted non-preserved benefits is less than that amount) and not more than $10,000. There is no cashing restriction if reg 6.01(5)(b) is met. Condition of release — compassionate grounds A person must apply to the ATO (or, before 30 June 2018, the Chief Executive Medicare) for a determination that an amount of the person’s preserved benefits or restricted non-preserved benefits in a specified superannuation entity be released on “compassionate grounds” because the person does not have the financial capacity: (a) to pay for “medical treatment” (defined in the SISR as treatment covering life-threatening illnesses or to alleviate acute or chronic pain or mental disturbance: reg 6.19A(3), (4)) or medical transport for the person or a dependant (b) to enable payments to prevent foreclosure by a mortgagee or the exercise of an express or statutory power of sale over the family home (c) to pay for home and vehicle modifications to accommodate the special needs of a severely disabled person or dependant (d) to pay for expenses associated with the person’s palliative care, in the case of impending death (e) to pay for expenses associated with a dependant’s palliative care, death, funeral or burial, or (f) to meet expenses in other cases where the release is consistent with a ground mentioned in items (a) to (e), as the Regulator determines (reg 6.19A(1)). Where the condition of release is met, the benefit must be released as a single lump sum not exceeding an amount that is determined in writing by the Regulator to be reasonably required, based on the nature of the hardship and the person’s financial capacity. Other cashing restrictions apply for ground (b) (see the table under “SISR Sch 1 — conditions of release of benefits” above). The ATO must give a copy of its written determination to both the member who applied for the early release of benefit and the trustee of the superannuation entity or RSA provider. In Flanagan v APRA 04 ESL 17, the Federal Court upheld APRA’s decision to reject a member’s application for early release of preserved benefits on compassionate grounds as the purpose of the application was to extinguish a child support debt which had threatened the seizure of his principal residence. In Collier & Collier v First State Super Trustee Corporation 98 ESL 14, a consent order by the Family Court to release benefits on the grounds of severe financial hardship did not enable the Federal Court to order the release of benefits as this did not come within the prescribed SISR conditions. The ATO’s guidelines on the process and administration of the release of benefits on compassionate grounds from 1 July 2018 may be found in CRT Alert 058/2018. Condition of release — former lost members with small benefits A superannuation fund member who was previously “lost” (¶3-380), and whose benefit in the fund is less than $200, may cash his/her benefit with no restriction (SISR Sch 1, item 111). Condition of release — release of benefits under ATO release authority In specific circumstances, the ATO may issue a release authority to a superannuation provider (fund) for

a specified amount of an individual’s benefits to be released by the fund to the ATO in conjunction with an excess concessional or non-concessional contributions determination (¶6-520, ¶6-565), or an FHSS determination (¶6-385), or a Division 293 tax assessment (¶6-400). A separate scheme also enables an individual to give a release authority issued by the ATO in connection with the payment of a Division 293 tax debt account discharge liability to a superannuation provider (¶6400). The release conditions and the circumstances in which such release authorities arise are set out in items 111A and 111B for superannuation funds and items 208A and 208B for ADFs (see “SISR Schedule 1 — conditions of release of benefits” above), and are discussed in ¶6-400 and ¶6-640. Condition of release — release of benefits to a provider of a KiwiSaver Scheme A condition of release allows a superannuation fund to release money to a former resident of Australia who has: (a) moved permanently to New Zealand, and (b) nominated a provider of a KiwiSaver Scheme for the purposes of the release (SISR Sch 1 item 113A). A cashing restriction ensures that the amount of the former resident’s withdrawal benefit in the fund is paid as a single lump sum. If the fund subsequently receives any combination of contributions, transfers and roll-overs after cashing the benefits, the fund must ensure that the released amount is cashed. Condition of release — release of benefits to acquire deferred superannuation income streams SISR Sch 1 item 109A sets out a condition of release that permits a superannuation fund member to acquire an interest in a deferred superannuation income stream that meets pension and annuity standards in SISR reg 1.06A(2) using the member’s preserved and restricted non-preserved superannuation benefits. This enables deferred superannuation income streams (also referred to as “innovative income streams”) to be purchased while a member is still in the accumulation phase on potentially more attractive terms than those available when a member reaches retirement age. The meaning of deferred superannuation income stream is discussed in ¶3-390. The reg 1.06A standards are intended to cover a range of lifetime products that do not meet the existing annuity and pension standards in SISR reg 1.06(9A) (for pensions) and 1.05(11A) (for annuities). Under the reg 1.06A standards, the income streams are required to be payable for a beneficiary’s remaining lifetime, and income stream payments can be guaranteed in whole or part by the income stream provider, or determined in whole or part through returns on a collective pool of assets or the mortality experience of the beneficiaries of the asset pool. These income streams may also have a deferral period for annual payments and are permitted to be commuted subject to a declining capital access schedule and preservation rules. The SISR minimum standards for pensions and annuities (see ¶3-390) are important for tax purposes as explained below. Under the ITAA97, superannuation funds and life insurance companies which provide innovative stream products that comply with the pension standards in reg 1.06A and 1.06B (about the maximum commutation amount) are entitled to the income tax exemption (earnings tax exemption) on income from assets they hold to support these income streams where the member’s superannuation interest is in the retirement phase (¶7-153). Also, income streams which comply with the standards are superannuation pensions and annuities for tax purposes and income stream payments are treated as superannuation income stream benefits under the ITAA97 in the hands of the recipients and enjoy concessionally tax treatment (¶8-210, ¶8-240, ¶8-320). Eligible spouse contributions Eligible spouse contributions are PBs in a regulated superannuation fund. A spouse who has never been gainfully employed can only satisfy certain conditions of release (eg reaching age 65, death, financial hardship or compassionate grounds). However, for a spouse who has at any time been gainfully employed, whether before or during the membership of the fund, all of the other conditions of release in Sch 1 may apply.

Preservation and cooling-off rules The “cooling-off” provisions in the CR, which allow the return of a superannuation product, do not constitute a condition of release for SISR purposes. Contributions which are repaid under the cooling-off provisions must be transferred or rolled over to another superannuation entity and retained in the superannuation system until a condition of release is met. PB and RNPB roll-overs which are repaid under the cooling-off provisions must be transferred or rolled over to another superannuation entity and retained in the superannuation system until a condition of release is met. UNPB roll-overs may be paid to the member under the cooling-off provisions (¶4-400). Taxpayer alert on early access to superannuation TA 2009/1 warns about arrangements incorrectly offering people early release of their preserved superannuation benefits before retirement for a fee without meeting the SISR conditions of release. This alert reiterates previous ATO concerns about substantially similar arrangements as described in TA 2002/3. TA 2009/1 applies to arrangements having the following features. (1) A group of Australian residents have existing superannuation benefits held in funds. (2) A person or group of persons (the organiser) approaches such Australian residents, either directly or indirectly, to enter into an early release arrangement. The group may be composed of members of an ethnic community or share a common employer. (3) The organiser incorrectly informs such Australian residents that they can use the early release arrangement to gain immediate access to their superannuation contributions for use for personal or investment purposes. (4) The organiser purports to establish and operate an SMSF. (5) The organiser arranges the roll-over of superannuation benefits of the individual into the SMSF. (6) The superannuation benefits of the Australian residents are subsequently released from the SMSF by the organisers of the arrangement without a condition of release being satisfied. (7) A significant fee is normally charged upon the release of benefits, as much as 30% of the benefits improperly released. The ATO considers that these types of arrangements give rise to income tax and superannuation regulatory issues, including whether: (a) the organiser of the arrangement, the trustee of the SMSF or any other person may have committed a criminal offence, such as those under the SISA (b) the arrangement, or certain steps within it, may constitute a sham at general law (¶16-080) (c) the purported SMSF used in the arrangement was properly established for the provision of superannuation benefits upon retirement, as prescribed under the SISA (d) the release of the superannuation benefits under the arrangement was properly authorised by meeting a relevant condition of the release (e) any amounts received by the Australian resident that breach the preservation requirements have been properly included in their assessable income for the relevant income year (f) any penalties or interest charges should be applied to any understatement of such assessable income for the Australian resident (g) any fee or commission received by the organiser/s of an illegal early release arrangement should be included as assessable income for the relevant income year

(h) any fee or commission should not be allowable as a deduction by the Australian resident taxpayer for that income year (i) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of TAA Sch 1 Div 290 (¶16-070). [SLP ¶3-050]

¶3-284 Portability of benefits The SISR rules on the roll-over or transfer of a member’s benefits in a superannuation fund or ADF are set out in: Div 6.4 (reg 6.27B to 6.29) — see “General rules — roll-overs and transfers of benefits from a fund with consent”, and Div 6.5 (reg 6.30 to 6.38) — see “Compulsory roll-over and transfer of superannuation benefits”. The terms “roll-over” and “transfer” have often been used interchangeably for payments made within the superannuation system. The “superannuation system” comprises regulated superannuation funds, ADFs, RSAs, exempt public sector superannuation schemes (EPSSSs) (eg some schemes established under Commonwealth, state or territory government legislation), deferred annuities (an annuity offered by a life office which commences payment when the payment standards permit but no later than when the annuitant reaches age 65) and the Commissioner of Taxation (for payments made to a superannuation provider under the Superannuation (Unclaimed Money and Lost Members) Act 1999) (reg 5.01(1)). A benefit is “rolled over” if it is paid as a superannuation lump sum (other than by way of being transferred) within the superannuation system. The term “transferred”, in relation to a member’s benefits paid out of, or received by, a regulated superannuation fund or ADF, means paid to, or received from, another regulated superannuation fund or ADF or an RSA or an EPSSS otherwise than upon the member satisfying a condition of release under the SISR (¶3-280) (reg 5.01(1)). An employment termination payment from an employer, a transfer from an overseas superannuation fund and a capital gains tax exempt amount are examples of transfers or roll-overs outside the superannuation system. These payments are contributions and are subject to the SISR acceptance of contribution standards, while a roll-over and transfer of a benefit is not a “contribution” for the purposes of the standards (reg 1.03(1)) (¶3-220). General rules — roll-overs and transfers of benefits from a fund with consent Two general rules govern the roll-over or transfer of a member’s benefits from a fund to another superannuation entity (SISR reg 6.28, 6.29). First, except as otherwise provided by SISA or SISR or the Corporations Act 2001 and Corporations Regulations 2001, a member’s benefits in a regulated superannuation fund (or ADF) must not be rolled over from the fund unless: • the member has given consent to the roll-over to the trustee of the fund, or • the trustee believes, on reasonable grounds that the receiving regulated superannuation fund (or ADF, EPSSS, RSA provider) has received the member’s consent to the roll-over (reg 6.28(1)). “Consent” means written consent or any form of consent determined by the Regulator as sufficient in the circumstances (reg 6.27B). Second, except as otherwise provided by SISA or SISR or the Corporations Act 2001 and Corporations Regulations 2001, a member’s benefits in a regulated superannuation fund (or ADF) must not be transferred from the fund unless: • the member has given consent to the transfer to the trustee of the fund

• the trustee of the fund believes, on reasonable grounds, that the receiving regulated superannuation fund (or ADF, EPSSS, RSA provider) has received the member’s consent to the transfer • in the case of an eligible rollover fund (ERF: see (¶3-520), the trustee of the fund believes, on reasonable grounds, that the member has an interest in the receiving fund and that fund has received at least one contribution or roll-over in respect of the member within the 12-month period ending when the transfer is to be made • the transfer is to a “successor fund” (ie a fund that confers on transferee members equivalent rights in respect of the benefits transferred that the member had in the transferor fund: ¶3-360), or • for SISA s 29SAA, 29SAB, 387, 388 or 394, the trustee is required by an APRA prudential standard to transfer the benefits (see “Benefit transfers to MySuper accounts” below) (reg 6.29(1)). Benefit transfers to MySuper accounts As noted in the last dot point, a member’s benefits in a regulated superannuation fund may be transferred without consent where the fund trustee is required by an APRA prudential standard (see “APRA prudential standards and guidelines” below) to transfer the benefits for s 29SAA, 29SAB, 387, 388, or 394 purposes (¶9-120 and ¶9-130). These are transfers of accrued default member accounts as noted below. • Paragraphs 29SAA(1)(b) and 387(1)(b) require the trustee to take the action required under the prudential standards in relation to accrued default amounts where the trustee has sought MySuper authorisation but the member is not eligible to be in the fund’s MySuper product. • Section 29SAB requires action to be taken under the prudential standards if the authorisation to offer a MySuper product is cancelled under s 29U(1). • Section 388 requires the trustee to take the action required by the prudential standards if the trustee holds accrued default amounts and has not applied for MySuper authorisation before 1 July 2017. • Section 394 requires trustees that are not authorised to operate an eligible rollover fund to transfer the amounts held in existing eligible rollover funds to an authorised eligible rollover fund or a fund that offers a MySuper product in accordance with the prudential standards. The exception provided in reg 6.29(1)(d) is necessary as prudential standards are otherwise of no effect to the extent that they conflict with the SISR. Operating standards for transferee fund The trustee of a superannuation fund receiving the roll-over or transfer of a person’s benefits (receiving fund) must be an entity that is registered under SISA Pt 2B (¶3-490) (reg 6.28(2), 6.29(2)). In addition, the trustee of the receiving fund must not accept the roll-over or transfer of a person’s benefits if the trustee reasonably believes that the benefits being rolled over or transferred are made on the basis of a belief held by the trustee of the transferor fund that the receiving trustee has received the person’s consent to the roll-over or transfer, and the receiving trustee has not in fact received that consent (SISR reg 4.12). Compulsory roll-over and transfer of superannuation benefits Members of certain regulated superannuation funds may request the trustee of the fund to roll over or transfer his/her withdrawal benefits to another fund of the member’s choice in accordance with compulsory roll-over or transfer of benefit rules in SISR Div 6.5. A “withdrawal benefit” means, if the member voluntarily ceased to be a member, the total amount of the benefits that would be payable to the member, or to another superannuation entity or an EPSSS or an RSA in respect of the member, or to another person or entity because of a payment split of the member’s interest in the superannuation fund (SISR reg 1.03(1)). Division 6.5 does not apply: • to unfunded public sector superannuation schemes

• to member benefits paid as a pension (other than an account-based pension or an allocated pension or market-linked pension), or • in respect of a defined benefit component of a superannuation interest in a defined benefit fund, if the member holds the interest as an employee of an employer-sponsor of the fund (reg 6.30(2)). SuperStream — information and reporting Under SuperStream: • the Commissioner is required to keep a central register containing SuperStream information, including the bank details and an Internet protocol address (or other approved electronic service address) for prescribed eligible superannuation entities (SISA s 34Y, 34Z). • the Commissioner may make this information available to entities that must comply with the data and payment regulations and standards to ensure that payments and transmissions of data are sent to the correct destination. The information that is required to be provided to the Commissioner and the manner and timing for its provision are prescribed in SISR Pt 3B (reg 3B.02). • SISR Pt 6 Div 6.5 prescribes which superannuation transactions are subject to the superannuation electronic data and payment regulations and standards (SuperStream), and what information is required to accompany a request for a roll-over or transfer, a member registration and a contribution, and when that information must be validated (reg 6.33 to 6.38). SuperStream data and payment standards which have been made under SISA Pt 3B are discussed in ¶9780. Extension of SISR Pt 3B and Pt 6 Div 6.5 to SMSFs The operation of SuperStream has been extended to cover SMSFs (Treasury Laws Amendment (2018 Measures No 2) Regulations 2018: F2018L01373). In summary, SMSFs are included as prescribed eligible superannuation entities in reg 3B.01 and are subject to requirements in SISA s 34Z to provide information to the Commissioner for SuperStream purposes (Sch 1 amendments) and also subject to SISR Pt 3B regulations. SMSFs may be required to provide the Commissioner with their unique superannuation identifier, bank details for electronic payments, and an Internet protocol address or other digital address that can facilitate SuperStream communication. In practice, an SMSF is only required to obtain a digital address and provide it to the Commissioner if it receives a contribution (other than a contribution from a member or a related party employer), or a roll-over, or transfer of a member’s withdrawal benefit. If an SMSF never receives a contribution, roll-over, or transfer of a member’s withdrawal benefit, it is not required to provide the listed information to the Commissioner and consequently is not required to obtain a digital address. The extension of SuperStream to SMSFs commence on or after 30 November 2019 (ie SMSFs will not be required to do anything in relation to SuperStream before that date) and will apply to transfers and rollovers that are requested on or after 30 November 2019. Roll-over or transfer process — forms in SISR Sch 2A and 2B A member of a regulated superannuation fund or an ADF (transferring fund) may request the trustee of the fund, in writing, to roll over or transfer an amount that is the whole or a part of the member’s withdrawal benefit to another regulated superannuation fund or ADF, an RSA provider or an EPSSS (the receiving fund) (reg 6.33(1)). If the receiving fund is not an SMSF, the member may make the request to the transferring fund or the receiving fund. If the request is to roll over or transfer an amount that is the whole of the member’s withdrawal benefit, the member may use the form specified in SISR Sch 2A to make the request (see reg 6.33(2)). If the receiving fund is an SMSF, the member must make the request to the transferring fund, and the member may use the form specified in SISR Sch 2B if the request is to roll over or transfer the whole of the member’s withdrawal benefit (see reg 6.33(3)).

An ATO approved form will replace these forms in light of the extension of SuperStream to SMSFs. The roll-over or transfer process is summarised below: • the trustee of the receiving fund must tell the transferring fund about the request and give the information to the transferring fund (reg 6.33A) • the transferring fund must be able to electronically receive information in relation to the roll-over or transfer sent to it by the receiving fund in accordance with reg 6.33A and with any applicable standards made under SISA s 34K(3) or RSA Act s 45B(3); by the member, in accordance with any standards under s 34K(3) or s 45B(3); or by the Commissioner under reg 6A.03 (reg 6.33B) • the trustee of the transferring fund may request further information in order to process the request (reg 6.33C) • the trustee of the transferring fund must ask the ATO, using an electronic interface provided by the ATO, for validation of the member’s details (reg 6.33D) • for transfers of withdrawal benefits to an SMSF, the trustee of the transferring fund must, using an electronic interface provided by government, verify the SMSF and member’s details (reg 6.33E), and • subject to reg 6.35 and 6.38, the trustee must roll over or transfer the amount in accordance with the request (reg 6.34). The trustee may refuse to roll over or transfer an amount under reg 6.34 in the circumstances specified in reg 6.35. There will be a suspension or variation of the obligation to roll over or transfer a member’s benefit if: • APRA believes, on reasonable grounds, that the roll-over or transfer would have an adverse effect on the financial position of the fund or the interests of other members of the fund, or • the trustee of the fund has applied to APRA to suspend or vary the roll-over or transfer obligation by providing APRA with information about the fund’s financial position and the effect of roll-overs or transfers on the position, or on the interests of, other fund members (reg 6.36; 6.37; 6.38). Electronic portability request scheme Regulation 6A.01 of SISR prescribes the electronic portability request scheme under which a member of a regulated superannuation fund or ADF may give the Commissioner a request to roll over or transfer the member’s withdrawal benefits held in the fund (SISA s 34A). The electronic portability request scheme does not apply to withdrawal benefits held in an unfunded public sector superannuation scheme, an SMSF, or in respect of a defined benefit component of an interest in a superannuation fund if the member who holds the interest is an employee of an employersponsor of the fund. If the member’s request is in respect of a benefit being paid as a pension, the pension must be an allocated pension, an account-based pension or a market linked pension for it to be rolled over or transferred under the scheme. This is consistent with the paper portability arrangements (see “Compulsory roll-over and transfer of superannuation benefits” above). The key differences between the electronic scheme and the paper portability arrangements include the following: • the member applies electronically to the Commissioner, rather than in writing to the trustee of their fund • the Commissioner verifies the member’s identity, instead of the member providing certified copies of identity documents to the fund trustee, and confirms the ownership of the benefits and fund membership details • the Commissioner gives the request electronically to the fund trustee.

It is not compulsory for members to electronically request the roll-over or transfer of their benefits under the scheme. Members may continue to apply in writing to their fund under reg 6.33(1) to (3) if they do not wish to use the scheme or their request cannot be completed electronically. A member may not be able to complete an electronic portability request if: • the member’s withdrawal benefit is held in a fund exempted from the scheme • the member’s withdrawal benefit is an interest exempted from the scheme • the member’s withdrawal benefit details in a fund are not displayed on the ATO’s online service • the request is for the roll-over or transfer of part of the member’s benefit • the information required on the electronic request is not provided, or • the request is in respect of a benefit that the member is receiving as a pension other than an allocated pension, an account-based pension or a market linked pension. The Commissioner must: • confirm the member’s identity and the member’s ownership of the withdrawal benefit • confirm the member’s membership in the complying superannuation fund to which the roll-over or transfer is to be made, and • identify the account in the complying superannuation fund to which the roll-over or transfer is to be made (reg 6A.03). Portability form — Sch 2A of SISR Schedule 2A of the SISR sets out the prescribed portability form that members must use to request a transfer of the whole balance of their superannuation benefits from one fund to another, including an SMSF. The form Rollover initiation request to transfer whole balance of superannuation benefits between funds (NAT 71223), and ATO guidelines (eg proof of identity, compliance checklist) are available at www.ato.gov.au/Forms/Rollover-initiation-request-to-transfer-whole-balance-of-superannuation-benefitsbetween-funds. A separate portability form must be completed for each transfer, together with certified copies of proof of identity documents, and sent to either fund. The fund to which the balance is transferred must be: • able to accept the transfer • a complying and regulated fund (visit “Super Fund Lookup” to confirm this — this is an online tool available at superfundlookup.gov.au/LookupTool.aspx). The portability form cannot be used to: • transfer part of the balance of a superannuation account • transfer benefits without knowing where they are located • transfer benefits from multiple funds — a separate form must be completed for each transfer • transfer benefits where certain conditions or circumstances do not allow it, eg if there is a superannuation agreement under the Family Law Act 1975 in place • open a superannuation account, or • change the fund to which employers pay contributions (this must be done by completing a standard

choice form: ¶12-046). Consolidation of accounts — ATO electronic portability form The Commissioner has general administration of the electronic portability scheme (SISA Pt 3 Div 3) and related SIS TFN provisions (SISA s 6(1)(g); RSA Act s 3(1)(e)). APRA’s general administration of the portability arrangements under the SISA is unaffected by the scheme. Interaction of SIS portability rules and TFN rules The TFN rules in the SISA and RSA Act are discussed in ¶11-700 to ¶11-750. Certain superannuation fund members and RSA members may request the ATO to consolidate their accounts using the ATO “electronic portability form” (SISA s 34A; 299NA; 299U(2A); RSA Act s 39A; 138A; 144(2A)). For the purposes of the portability scheme, the Commissioner may request a member’s TFN (ie quotation of the member’s TFN on the form and disclose the member’s TFN to the transferring fund or RSA provider for the purposes of the scheme). The Commissioner’s disclosure of the member’s TFN to the transferring fund’s trustee would occur when the Commissioner electronically transmits the transfer request to the trustee. If the Commissioner discloses the member’s TFN to the transferring fund’s trustee, the member is taken to have quoted their TFN to the trustee for the purposes of the superannuation legislation and at the time the Commissioner discloses the TFN to the trustee. Members are not required to quote their TFN on the transfer request, but failure to quote the TFN may affect whether the Commissioner can pass on the member’s request to the transferring fund’s trustee. Members who do not wish to disclose their TFN on the transfer request may apply directly to their fund in writing to roll-over or transfer their benefits to another fund under the SISR Div 6.5 portability requirements. The quotation of TFN is not mandatory on the standard portability form in SISR Sch 2A or on the fund’s transfer form. Electronic portability scheme and TFN rules are taxation laws The SISA and RSA Act provisions relating to the electronic portability form and TFNs are “taxation laws” (as defined in ITAA97 s 995-1(1)) and, consequently, are subject to the administrative and offence provisions relating to taxation laws, including: • confidentiality of taxpayer information (TAA Sch 1 Div 355) • penalties relating to false or misleading statements (TAA Sch 1 Subdiv 284-B), and • offences relating to TFNs (TAA Pt III Div 2 Subdiv BA). APRA prudential standards and guidelines APRA’s Prudential Practice Guide SPG 280 sets out guidelines on the SISR payment standards, including the SISR requirements for the roll-over and/or transfers of a member’s benefits (www.apra.gov.au/superannuation-standards-and-guidance). Briefly, SPG 280 states that a member’s benefit must not be rolled over or transferred (in whole or in part) from an RSE, unless any of the following apply: (a) the member has given consent (b) the transfer is to a successor fund (c) the transfer is of an accrued default amount to a MySuper product pursuant to Prudential Standard SPS 410 MySuper Transition (d) the transfer is to an ERF pursuant to Prudential Standard SPS 450 Eligible Rollover Fund (e) the transfer is to the Commonwealth pursuant to the provisions of the Superannuation (Unclaimed Money and Lost Members) Act 1999, or

(f) the transfer is to a superannuation interest of the member’s spouse pursuant to the Family Law Act 1975 (SPG 280 para 29). For a list of all SPSs and SPGs issued by APRA, see ¶9-720. [SLP ¶3-050]

¶3-286 Payment of benefits The rules on payment of a member’s benefits from a regulated superannuation fund are set out in SISR Div 6.2 (reg 6.17 to 6.17C). The rules govern the manner, time and extent to which the benefit must be paid and, when making benefit payments, require the trustee to have regard to death benefit nominations (¶3-288) and any other duty that may arise in a particular case, such as giving or seeking information or restrictions under the family law (reg 6.17A; 6.17AA; 6.17B; 6.17C). Generally, a member’s benefits may be paid by being: • “cashed” under the compulsory and voluntary cashing rules in Div 6.3 (see below) • rolled over or transferred under Div 6.4 or 6.5 (dealing with the portability of member benefits: ¶3-284) • rolled over, transferred or allotted under Div 6.7 (dealing with spouse contributions-splitting amounts: ¶6-850) • cashed, rolled over or transferred in accordance with Pt 7A (dealing with superannuation interests subject to a payment split under the family law: ¶3-355), or • paid in accordance with the Family Law (Superannuation) Regulations 2001 (where the trustee pays, creates, transfers or rolls over a superannuation interest in satisfaction of a non-member spouse interest on marriage breakdown) (reg 6.17(2), (2A), (2B)). The restriction on the payment of a member’s benefits in reg 6.17(2) does not apply if, under a law of the Commonwealth, a state or a territory, a court makes a forfeiture order (however called) under a prescribed proceeds of crime law forfeiting part or all of the member’s benefits in the fund to the Commonwealth, a state or a territory (reg 6.17(2C)). In such a case, the member’s benefits must be paid in accordance with the forfeiture order (see “Forfeiture orders and confiscation orders” below). If a member of a regulated superannuation fund (or ADF) becomes a bankrupt (within the meaning of s 5(1) of the Bankruptcy Act 1966), the trustee of the fund is not prevented from paying to the trustee in bankruptcy an amount out of the fund that is property divisible among the member’s creditors within the meaning of s 116 of the Bankruptcy Act 1966 (SISA s 349A). Bankruptcy issues affecting superannuation fund members and their contributions are discussed in ¶15-300. The provisions dealing with the payment and release of benefits under the conditions of release in SISR (¶3-280) are prescribed operating standards which must be complied with at all times (¶3-820). Additionally, it must be noted that the payment of benefits which is not made in accordance with SISR can have serious taxation consequences (¶8-500). The taxpayer in Xiu Xu 2013 ATC ¶10-342 had withdrawn $62,500 from her SMSF to complete the purchase of a home after she had been made redundant from her job. The AAT found that the taxpayer did not satisfy the conditions of release claimed to be applicable for the withdrawal (viz, retirement, severe financial hardship, compassionate grounds and attaining preservation age) (¶3-280). The taxpayer had also failed to include the $62,500 as assessable income in her tax return under ITAA97 s 6-10 and 304-10 (payment in breach of legislative requirements). As the taxpayer also did not exercise reasonable care in relation to her income tax return, the AAT affirmed the administrative penalty of 25% of the shortfall amount imposed by the Commissioner under TAA Sch 1 s 284-75(1). Further, the AAT said that there were no compassionate, special or particularly unusual features of her case that justified exercising the discretion to remit any part of the penalty pursuant to TAA Sch 1 s 298-20.

APRA guidelines APRA’s Prudential Practice Guide SPG 280 — Payment Standards (June 2017) sets out guidelines on the SISR payment standards, including the SISR requirements for the roll-over and/or transfers of a member’s benefits (www.apra.gov.au/superannuation-standards-and-guidance) (¶3-280). For a list of other SPGs issued by APRA, see ¶9-720. Division 6.3 — compulsory and voluntary cashing rules Under SISR Div 6.3 the payment of a member’s benefits from a superannuation fund may be compulsory or voluntary, with special procedures and rules to deal with the superannuation entitlements of temporary residents who are departing or have left Australia permanently (see below). In addition, special rules govern the payment of a deceased member’s benefits as an income stream after the member’s death (see “Form of cashing of benefits after member’s death” below). The trustee of a regulated superannuation fund providing a pension under reg 1.06(2), (7) or (8) (ie lifetime pensions or market linked pensions (¶3-390)) must not pay the pension, or allow the pension to be commuted, except in accordance with those regulations. The ATO has issued alerts warning taxpayers of arrangements offering early access to superannuation benefits and arrangements involving non-commercial use of negotiable instruments to pay fund benefits (see “Taxpayer alerts” below). Compulsory cashing of benefits A member’s benefits in a regulated superannuation fund must be cashed, or rolled over for immediate cashing, as soon as practicable after the member dies (reg 6.21(1), (3)). This rule means that a member may voluntarily leave his/her superannuation entitlements in the fund until his/her death. The meaning of “cashed” is not defined (see “‘Cashing’ a benefit and making a payment in specie” below). Under reg 6.21, the member’s benefits may be cashed in one or more of the following forms: • in respect of each person to whom the benefits are cashed: – a lump sum, or an interim lump sum and a final lump sum (see example below) • subject to reg 6.21(2A) and (2B) (dealing with death benefit paid as income streams, see below): – one or more pensions, each of which is in the retirement phase – the purchase of one or more annuities, each of which is in the retirement phase (reg 6.21(2)). The requirement that a death benefit that is cashed as one or more pensions or annuities must also be a superannuation income stream in the retirement phase applies from 1 July 2017 (see “Pension or annuity must be in the retirement phase” below). Benefits may be cashed as an interim and final lump sum to facilitate an interim payment of the benefits, for example, if, at the relevant time, the member’s entitlement has not yet been finally determined. Example Paul and Robin are married and are the trustees and members of their SMSF. Robin passed away, and Paul is the beneficiary of Robin’s superannuation benefits and, as Robin’s husband, was also the dependant at the time of her death. Under reg 6.21(2)(a)(ii), the death benefits may be cashed in no more than two instalments, as an interim lump sum and a final lump sum.

It is the trustee’s responsibility to arrange for the timely cessation of any pension payments that were being paid to the deceased member and, where applicable, commence payment of any reversionary pensions or lump-sum payments to any persons nominated in binding death benefit nominations. As part of the trustee’s obligations to act in the best interest of members, there must be death benefit payment procedures and systems, including specifically covering the payment of augmented or antidetriment lump-sum death benefits to dependants and claiming a tax deduction under ITAA97 s 295-485

as discussed in ¶7-148 (Prudential Practice Guide SPG 280, para 58). For instance, if the fund’s policy is not to pay augmented death benefits and claim such a deduction, the reason for such a policy should be explicitly stated and disclosed to members. Under the compulsory cashing rule, the benefits may be rolled over as soon as practicable for immediate cashing (reg 6.21(3)). This allows the benefits to be cashed from a source other than the original fund (eg because the original fund does not offer pensions and the beneficiary wants to be paid a pension). A compulsory cashing rule also applies to a temporary resident member’s benefits in a regulated superannuation fund that is not an unfunded public sector superannuation scheme under reg 6.20A, while a voluntary cashing rule applies to the cashing of a temporary resident member’s benefits in a fund that is an unfunded public sector superannuation scheme under reg 6.20B (see “Temporary residents leaving Australia permanently” below). The payment of the member’s benefit is made as a single lump sum. If the trustee of a regulated superannuation fund is required to pay an amount to the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for a person’s superannuation interest in the fund (¶8-400), the amount must be cashed in favour of the Commissioner as a lump sum (reg 6.20C). Form of cashing of benefits after member’s death The compulsory cashing of a deceased member’s benefits under SISR reg 6.21 is also restricted by reg 6.21(2A) and (2B), as summarised below. First, on the death of a member, the deceased member’s benefits can be cashed as a pension or to purchase an annuity for an entitled recipient only if, at the time of the member’s death, the entitled recipient: • is a dependant of the member, and • in the case of a child of the member: – is less than 18 years of age, or – being 18 or more years of age, is either financially dependent on the member and less than 25 years of age, or has a disability of the kind described in s 8(1) of the Disability Services Act 1986 (reg 6.21(2A)). Second, if benefits in relation to a deceased member are being paid to a child of the deceased member in the form of a pension under reg 6.21(2A), the benefits must be cashed as a lump sum on the earlier of: (a) the day on which the pension is commuted, or the term of the pension expires (unless the benefit is rolled over to commence a new annuity or pension), and (b) the day on which the child attains 25 years of age, unless the child has a disability of the kind described in s 8(1) of the Disability Services Act 1986 on the day that would otherwise be applicable under item (a) or (b) (reg 6.21(2B)). Pension or annuity must be in the retirement phase The requirement in reg 6.21(2)(b)(i) and (ii) (applicable from 1 July 2017, see above) that a death benefit which is cashed as one or more pensions or annuities must also be a superannuation income stream in the “retirement phase” operates in conjunction with the special treatment of a superannuation income stream being in the “retirement phase” for tax and SIS purposes and the application of the transfer balance cap regime from that date (¶6-430, ¶16-230, ¶16-530). Broadly, from 1 July 2017, a pension or annuity provider (eg a superannuation fund, RSA provider or insurance company) can only claim an earnings tax exemption in respect of a superannuation income stream that is in the retirement phase (¶7153). In most cases, a pension or annuity will be in the retirement phase when a superannuation income stream benefit is payable from it, or it is a deferred superannuation income stream or a transition to retirement income stream in certain circumstances (ITAA97 s 307-80(1): ¶16-230). This requirement from 1 July 2017 also means that the only income streams that can be paid to a

dependant beneficiary of a deceased member are those for which an entity can claim an earnings tax exemption. If a pension or annuity that is paid to a dependant ceases to be in the retirement phase, the interests supporting the income stream must be cashed out as a lump sum, or rolled-over and paid as a new pension or annuity that is in the retirement phase. An example is where a death benefits pension is paid to a dependant spouse who has already reached the limit of his/her transfer balance cap because of the person’s own superannuation interests. If the pension provider refuses to comply with a commutation authority that is issued under TAA Sch 1 Subdiv 136-B in respect of the superannuation income stream, the income stream would cease to be in the retirement phase (s 307-80(4)). In such a situation: • the provider would no longer be entitled to an earnings tax exemption in respect of a superannuation income stream, and • the pension or annuity would also cease to satisfy the compulsory cashing rules in reg 6.21(2)(b)(i) and (ii) (or RSAR reg 4.24(3)(b)(i) and (ii)) and the provider would have to cash the relevant benefits in another form. Voluntary cashing of benefits The general rules for the voluntary cashing of benefits are: • PBs and RNPBs may only be cashed if the member satisfies a condition of release (¶3-280) (reg 6.18; 6.19) • UNPBs may be cashed at any time (reg 6.20). The amounts of PBs or RNPBs that may be cashed cannot exceed the amount of PBs or RNPBs that the member had accrued and the amount of any investment earnings accruing on those benefits before 1 July 1999 at the time the condition of release was satisfied. The voluntary cashing of superannuation benefit rules do not apply to cashing of benefits in the event of the death of a member. In that case, the cashing rules are governed by reg 6.21 (see above). Form of benefit payment A member’s benefits may be voluntarily cashed: • where there is a “nil” cashing restriction attached to a condition of release (¶3-280), in one or more of the following forms: – one or more lump sums – one or more pensions – the purchase of one or more annuities • where there is a cashing restriction attached, in the form specified in the condition of release (reg 6.18(3); 6.19(3); 6.20(3)). Benefits may be cashed as two or more lump sum payments to facilitate an interim payment of the member’s benefits when the entitlement arises and a final payment of the remainder of the benefits when ascertained. This may be relevant if, at the time of a member’s entitlement, the fund’s actual earnings rate is not yet known since the fund’s last balance date and an estimated earnings rate was used for the calculation of benefits. Priority order where there is a cashing restriction If a member has satisfied a condition of release and there is a cashing restriction in respect of that condition, the trustee must give priority to cashing the benefits in the following order: • first — to unrestricted non-preserved benefits • second — to restricted non-preserved benefits

• third — to preserved benefits (SISR reg 6.22A). For an example, see “Condition of release — post-preservation age non-commutable income stream” at ¶3-280. Persons in favour of whom benefits may be cashed The governing rules of a superannuation fund must not permit a member’s benefits to be cashed after the member’s death other than in accordance with the payment standards prescribed in the SISR (SISA s 55A). Any rule inconsistent with the above is invalid to the extent of the inconsistency. Subject to certain exceptions, a member’s benefits in a fund may not be paid to a person other than the member or the member’s legal personal representative: • unless the member has died and the benefits are paid to either or both of the following: – one or more dependants of the deceased – the member’s legal personal representative, or • the benefits are paid to an individual, after the trustee has made reasonable enquiries and has not found a dependant or legal personal representative of the member (SISR reg 6.22(1) to (3)). The term “dependant” is defined inclusively in the SISA. A person ceases to be a “stepchild” for the purposes of being a “dependant” of the member under reg 6.22 when the legal marriage of their natural parent to the member ends (Interpretative Decision ID 2011/77). The inclusive definition means that that person may still qualify as a dependant if he/she has an “interdependency relationship” with the deceased, or was a dependant of the deceased within the ordinary meaning (ie financially dependent on the deceased), at the date of the member’s death (¶3-020). A general exception allows a member’s benefits to be cashed in favour of a person other than the member if the cashing is expressly permitted by the Regulator as an approved ancillary purpose under the sole purpose test (¶3-200) and the benefits are cashed to the extent of that approval (reg 6.22B). Other specific exemptions apply as below. • Where a superannuation fund receives an ATO release authority in respect of a member under TAA Sch 1 s 131-15 or s 135-40 (¶6-640), or equivalent ITAA97 provisions before 1 July 2018. In that case, the fund can cash the member’s benefits in favour of the Commissioner in accordance with the authority in satisfaction of the member’s tax liability (reg 6.22(4)). • To allow a superannuation fund to cash a member’s benefits in favour of the Commissioner if the member’s benefits are to pay an amount to the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶8-400) (reg 6.22(5)). • To allow superannuation funds to pay a member’s benefits in accordance with a court forfeiture order (see “Forfeiture orders and confiscation orders” below). For the meaning of “dependant” in the SISA, see ¶3-288. For other restrictions on the payment of a deceased member’s death benefits, see above. Trustees may need to take into account any relevant state or territory laws concerning provision of benefits for minors, including the trust law provisions. Temporary residents leaving Australia permanently A “temporary resident” means a holder of a temporary visa under the Migration Act 1958 (SISR reg 6.01(2)). Temporary residents may access their superannuation upon when they leave or have left Australia if they satisfy the rules prescribed in the SISR. Compulsory cashing — not an unfunded public sector superannuation scheme A compulsory cashing rule applies to a member’s benefit in a regulated superannuation fund that is not an

unfunded public sector superannuation scheme if: • the member: – was a temporary resident – is not an Australian citizen, New Zealand citizen or permanent resident – has left Australia • the member’s visa has ceased to be in effect, and • the trustee of the fund receives a request for cashing from the member and the conditions in reg 6.20A(2) or (3) as noted below are met (reg 6.20A(1), (1A)). A payment made under reg 6.20A is a departing Australia superannuation payment within the meaning of ITAA97 s 301-170 (¶8-400). The conditions under reg 6.20A(2) and (3) are: • the member’s withdrawal benefit in the fund is less than $5,000 and the trustee has received: – a copy of a visa, or evidence of a visa, showing that the member was a temporary resident but the member’s temporary visa has ceased to be in effect – a copy of the member’s passport showing that he/she has left Australia (reg 6.20A(2)) • the trustee of the fund is satisfied, based on a written statement from the Department of Immigration and Citizenship, that the member was a temporary resident but the member’s temporary visa has ceased to be in effect, and the member has left Australia (reg 6.20A(3)). Where the above conditions are met, the benefits must be cashed within 28 days after the request is lodged: • as a single lump sum that is at least the amount of the member’s withdrawal benefit in the fund, or • if the fund receives any combination of contributions, transfers and roll-overs after cashing the benefits, in a way that ensures that an amount that is at least the amount of the member’s withdrawal benefit is cashed without requiring an additional application from the member. For the ways of giving evidence of a visa, see the Migration Regulations reg 2.17. The above process similarly applies to the compulsory cashing of a member’s superannuation benefits held in an ADF (reg 6.24A). Voluntary cashing — unfunded public sector superannuation scheme A temporary resident member’s benefit in a regulated superannuation fund that is an unfunded public sector superannuation scheme may be cashed if the trustee of the fund receives a request from the member and documentation evidencing the member’s visa and departure from Australia similar to those for compulsory cashing of benefits under reg 6.20A as described above (reg 6.20B). The benefits must be cashed: • as a single lump sum that is at least the amount of the member’s withdrawal benefit in the fund, or • if the fund receives any combination of contributions, transfers and roll-overs after cashing the benefits, in a way that ensures that an amount that is at least the amount of the member’s withdrawal benefit is cashed without requiring an additional application from the member (reg 6.20B(4)). A payment made under reg 6.20B is a departing Australia superannuation payment under ITAA97 (¶8400). “Cashing” a benefit and making a payment in specie

For the purposes of the benefit payment provisions in the SISR, the term “cashed” is not defined and it therefore has its ordinary meaning. “Cashing” necessarily involves the actual payment of cash, assets or other consideration for the benefit of the beneficiary. The term “cashed” suggests that the benefits need to be paid out of the superannuation system. It generally refers to the receipt of one or more lump sums, one or more pensions, or the purchase of one or more annuities. Consequently, transferring shares and cash to a taxpayer’s account from a deceased member’s account via a journal entry would not amount to “cashing” the benefits (Interpretative Decision ID 2002/141). The ATO’s view is that the above general rule reflects the ordinary meaning of the word “cashed” which, in the Macquarie Dictionary, means “… to give or obtain cash for (a cheque, etc)”. Therefore, there is a presumption arising from the use of that word “cashed” that a benefit, whether given in the form of a pension or lump sum will be paid in money (or money equivalent such as a cheque or electronic funds transfer). The ATO states that the definition of “lump sum” in SISR reg 6.01 (defined as including an asset) modifies the ordinary meaning of “cashed” where a benefit is paid as a lump sum. In that case, the “cashing” of a benefit may be paid in specie (subject to cashing restrictions, if any, attached to a condition of release in SISR Sch 1 in relation to the payment of that lump sum benefit). For example, if the condition of release that is satisfied relates to severe financial hardship or compassionate grounds (¶3-280), the benefit payment must be in cash. In summary, a payment of benefits in specie is permitted in the case of lump sum benefits because reg 6.01(1) expressly provides that a “lump sum” includes an asset. By contrast, as there is no equivalent modification relevant to the payment of pensions, a pension (or other income stream payment) cannot be made in specie (NTLG Superannuation Subcommittee, 8 May 2006). There may be tax consequences for the payer’s superannuation fund when benefits are paid in specie (¶7-130). SMSFD 2011/1 states that a benefit payable with a cheque or promissory note is “cashed” for the SISR purposes at the time the cheque or note is received by the member or beneficiary if: • at the time of receipt, money is payable immediately and available for payment • the trustee takes all reasonable steps to ensure that the money is paid promptly • the money is paid, and • the SISR requirements are otherwise satisfied. Forfeiture orders and confiscation orders From 9 August 2011, the restrictions on how a member’s benefits in the fund may be paid as prescribed under SISR reg 6.17 do not apply if a court makes a forfeiture order (however called) forfeiting part or all of the member’s benefits in the fund to the Commonwealth, a state or a territory under a law of the Commonwealth, a state or a territory mentioned in the table below (reg 6.17(2C)): Item

Law

Provision(s)

Commonwealth 1.1

Proceeds of Crime Act 2002

Section 47, 48, 49, 92

New South Wales 2.1

Confiscation of Proceeds of Crime Act 1989

Subsection 18(1)

2.2

Criminal Assets Recovery Act 1990

Section 22

Victoria 3.1

Confiscation Act 1997

Division 1 of Part 3 Section 35 Part 4 Subsection 157 (6)

Queensland 4.1

Criminal Proceeds Confiscation Act 2002

Section 58, 58A, 151 Part 5 of Chapter 3

Western Australia 5.1

Criminal Property Confiscation Act 2000 Section 30, to the extent that it applies to confiscation under section 6 in satisfaction of a person’s liability under section 20 Section 30, to the extent that it applies to confiscation under section 7

South Australia 6.1

7.1

Criminal Assets Confiscation Act 2005

Section 47

Tasmania Crime (Confiscation of Profits) Act 1993

Section 16

Australian Capital Territory 8.1

Confiscation of Criminal Assets Act 2003

Section 54, 58, 62, 67

Northern Territory 9.1

Criminal Property Forfeiture Act 2002

Section 75, 76, 80, 96, 97, 99

A forfeiture order includes a confiscation order. The exception in reg 6.17(2C) is to allow the trustees of regulated superannuation funds to recognise a forfeiture order issued under Commonwealth, state or territory proceeds of crime legislation and enable the proceeds of crime to be recovered from a member’s superannuation (ie the member’s entitlements represented by the minimum benefits), as reg 6.22 would otherwise prevent the member’s benefits in the fund from being cashed in favour of a person other than the member or the member’s legal personal representative (¶3-286). The exception is limited to forfeiture orders because these recover profits from a crime for which a person has been convicted and require the court to make a finding that the person’s superannuation is the proceeds of crime. It does not allow other court orders to be imposed on superannuation that may impose a fine or recover amounts not directly linked to a crime because this would result in the loss of superannuation savings genuinely contributed for retirement income purposes.

Taxpayer alerts Unauthorised benefit releases TA 2009/1 warns about arrangements for unlawful access to superannuation benefits for which a significant fee is normally charged upon the release of benefits to an SMSF (¶3-280). Payments of benefits via non-commercial use of negotiable instruments TA 2009/10 “Non-commercial use of negotiable instruments involving SMSFs” warns about arrangements involving non-commercial use of negotiable instruments to pay a benefit from or make a contribution to an SMSF. The ATO is concerned that some SMSF trustees and members are attempting to use negotiable instruments in a non-commercial and contrived manner to artificially avoid liquidity problems, change the timing of transactions or to obtain taxation advantages. The ATO considers that arrangements of this type give rise to regulatory and taxation issues, being whether: SIS regulatory issues • the arrangement, or some step within it, may be a sham at general law • the benefit payment standards may not be met • the contributions standards (¶3-220) may not be met • the restriction on funds acquiring assets from related parties (¶3-480) may apply • the restriction on funds providing financial assistance to a member or relative of a member (¶3-430) may apply • the in-house asset provisions (¶3-450) may not be met. Taxation issues • the arrangement, or some step within it, may be a sham at general law (¶16-080) • the arrangement attempts to change the timing of a contribution in order to reduce or eliminate liability for excess contributions tax under ITAA97 Div 292 (¶6-500) • any assessable income may arise to one of the parties and, if so, at what time such income may arise • income tax deductions may be available to one of the parties and, if so, at what time such deductions may be allowable • the general anti-avoidance provisions in ITAA36 Pt IVA may apply to the arrangement or some part of it (¶16-080), and • any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of TAA Sch 1 Div 290 (¶16-070). [SLP ¶3-050]

¶3-287 Illegal early release of superannuation benefits The illegal early release (IER) of superannuation benefits may take various forms and it generally refers to the situations where a member of a regulated superannuation fund accesses or attempts to access his/her preserved benefits in the fund without satisfying a condition of release set out in SISR Sch 1 (¶3280). Typically, IER occurs where a member’s superannuation benefits held in APRA-regulated funds are illegally accessed under the guise of transfers or roll-overs to SMSFs. This passes control of the money

from an APRA-licensed trustee into the hands of a scheme promoter or participant so that the money can illegally leave the superannuation system via an SMSF. The two main types of IER schemes involve: • the fraudulent use of a member’s identification by an unrelated party to steal superannuation benefits without the member’s knowledge or consent, and • a member participating with a promoter to access the member’s benefits. In many cases, the participant ends up with a considerably reduced benefit after fees, tax and penalties are deducted. APRA and the ATO, as Regulators of the superannuation industry, have provided guidance on process that may be implemented to manage the risks of IER of superannuation benefits (see “Process to manage the risk of early release of superannuation benefits” below). Taxpayer Alert TA 2009/1 has also warned about arrangements offering early access to superannuation benefits using SMSFs (¶3-280). Generally, as a promoter is often not a trustee of a purported superannuation fund that is used in a scheme, this limits the Commissioner’s ability to pursue SISA penalties against those involved. This means that promoters of IER schemes are principally dealt with by the ASIC relying on its powers in the Corporations Act regarding the provision of unlicensed financial advice. Additionally, in the absence of specific SISA provisions on the promotion of IER schemes, the Commissioner’s compliance and enforcement methods under the SISA focus on disrupting or closing down schemes from operating, such as freezing the SMSF’s assets under SISA s 264.

To address the above inadequate enforcement powers, s 68B now expressly prohibits the promotion of IER schemes and imposes civil and criminal penalties on promoters of a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund contrary to the SISR payment standards (see below). Note that s 68B applies to complement the other powers that are conferred on the Regulators by SISA for compliance regulation which remain unchanged (¶3-850). Penalties for promotion of IER schemes A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with payment standards prescribed under SISA s 31(1) (s 68B(1)). The payment standards are the preservation and payment of benefit rules, as discussed in ¶3-280 to ¶3-286. Section 68B(1) is a civil penalty provision (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 for contravening or being involved in a contravention of the provision (¶3820). The term “person” is not defined in SISA; therefore, it takes its meaning from s 2C of the Acts Interpretation Act 1901 to include a body corporate and an individual. Promote and scheme The terms “promote” and “scheme” have the meanings in s 68B(3). Whether a person has promoted a scheme will be determined on a case-by-case basis having regard to the whole of the circumstances. The explanatory memorandum (to Act No 11 of 2014 which inserted s 68B) states that is determined on an objective basis, considering the whole of the circumstances, and the factors which may indicate that a person has promoted a scheme include, but are not limited to the following: • the person markets or encourages interest in the scheme (this may be marketing directly in the conventional sense, or otherwise. It includes conduct such as distributing marketing material in relation to such a scheme, advising persons to consider entering into the scheme, or employing or recruiting other persons to conduct or market the scheme) • the person devises or designs the scheme or part of the scheme (this includes setting up the legal or financial arrangements of the scheme, constructing or commissioning the production of documents used as part of the scheme, or establishing mechanisms to obtain or facilitate circumstances that may allow persons involved in the scheme the ability to obtain financial or other benefits in relation to the scheme) • the person facilitates the means by which the participants can participate in the scheme (eg providing some or all of the necessary paperwork for participants to sign or directing them to complete the necessary documents) • the person has provided information to the participants as to how to undertake activities which ultimately result in the individual accessing his/her superannuation benefits without meeting a condition of release, and • the person undertakes the relevant activities with the intention that he/she will result or are likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards. Whether or not a person has received consideration in respect of the scheme is not determinative of whether a person has promoted the scheme. The fact that a person has received consideration in respect of a scheme is an indication that they may have promoted a scheme, although this is not a necessary element to establish. Often promoters of such schemes will deduct a portion of the superannuation benefits as either a “fee” or on the basis that an amount for tax will be remitted to the ATO on behalf of the participant in the scheme where the amount so deducted for tax are never remitted to the ATO. In some cases, a promoter may take all of the superannuation benefits and not pass on any amount to a participant.

In identifying whether a “scheme” exists, consideration should be given to a continuum, a sequence of events, a course of action or a course of conduct, rather than focusing on particular transactions at particular points in time (para 1.13–1.16). Likely to result Section 68B(1) is breached if a scheme is “likely to result” in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards. Therefore, the Commissioner may seek civil and criminal penalties if a scheme is likely to result, but has not actually resulted, in a payment being made (see the example below). According to the explanatory memorandum (EM), whether a scheme is likely to result in a payment being made from a regulated superannuation fund, otherwise than in accordance with the payment standards, is determined by an objective analysis (para 1.19). Example — from the EM ABC Superannuation Fund receives a roll-over request from John, a member of Smith Superannuation Fund, an SMSF. ABC Superannuation Fund, as part of the roll-over process, confirms with the ATO whether John is a member of the Smith Superannuation Fund. The ATO advise that John is not a member and, as a result, ABC Superannuation Fund rejects the roll-over request. The Commissioner obtains information under his formal powers from ABC Superannuation Fund that identifies that Mr X is behind the roll-over request from John. Neither John nor Mr X receive any money. Despite no money having been received by John or Mr X, penalties for a contravention of s 68B may still be sought by the Commissioner.

Process to manage the risk of early release of superannuation benefits With respect to IER involving transfers and roll-overs into SMSFs, APRA and the ATO have written to all trustees to provide guidance on additional processes that trustees should consider implementing to assist in verifying the validity of these transfer or roll-over requests (APRA letter Ref No IER, 5 February 2010). The attachment to the APRA letter sets out suggestions that trustees should consider integrating into their benefit payment processes to assist in verifying the validity of transfer/roll-over requests to SMSFs so as to minimise the risk of illegal early release and identification (ID) fraud (see below). APRA has cautioned that: • the suggestions are generic and do not take into account a trustee’s discretion in the carrying out of transfer/roll-over requests • the suggestions do not prevent trustees from carrying out additional checks or alternative processes that provide an equivalent or greater level of assurance, and • most importantly, these checks do not diminish the responsibility of a trustee to safeguard members’ superannuation benefits. Extracts from the attachment, including a flowchart of the suggested process, are noted below. Flowchart of suggested process

Note: • Trustees (and/or administrators) should consider starting this process as soon as possible after receiving a transfer/roll-over request to allow time to resolve issues and/or report concerns if appropriate. • Complete the checks for transfer/roll-over request for all SMSFs, paying particular attention to transfer/roll-over requests for new SMSFs. New SMSFs are displayed in Super Fund Lookup (SFLU) with a status of “Registered — status not determined” (see below). • Any issues identified while undertaking the checks should be recorded. • Trustees (or fund representatives) should attempt to resolve issues by contacting the member concerned where appropriate. • If after this contact, the trustees suspect that there is illegal activity being conducted, the trustees should: – contact the ATO and AUSTRAC (Australian Transactions Reports and Analysis Centre: see below) to report illegal early release of superannuation, and – contact state police, APRA, AUSTRAC, ASIC and ATO in the case of ID fraud. • If the trustees do not encounter any issues, the transfer/roll-over request can be completed in accordance with the fund’s normal procedure for transfers and roll-overs. Proof of identity (POI) checks on a member The purpose of POI checks is to reduce the risk of ID fraud. Check

What to look for

What this may mean

Check the member Match the member’s information with information information stored on file: • name • member number • date of birth • signature • passwords.

Failure to match the information could identify someone trying to impersonate their member. That person may not have all the details or the most recent details provided by the member.

Check for forged documents

If the documents do not meet the standards or they contain indicators of

Check if the identification documents meet the standards.

Check the contact details

Refer to the issuing authority (eg state transport departments) for guidance on standards and what to look for in identifying fraudulent copies.

forgeries, the documents may be fraudulent.

Check for repeated use of numbers where the numbers should be different (eg document ID, account number, client ID) in documents.

Someone may be forging documents. These may be copied, resulting in key ID numbers being the same in each copy.

Check for unusual repeated use of a Justice of the Peace (JP) for transfers/roll-over requests from different members.

Someone may be forging documents using a copy of a JP certification.

Check if the only contact details provided is a PO Box and/or a mobile phone number.

Someone may be trying to hide their identity by providing details which make them harder to trace.

Prevention measures • Consider limiting the amount of personal information that the fund provides in communications to members (eg on the member statement). Distribution of personal information in this way exposes that information to the risk of being stolen. • Stolen information can be used by someone to impersonate the member thereby compromising the integrity of member POI checks. • Refer to federal and state authorities. Super Fund Lookup — confirm the SMSF is a regulated SMSF The Super Fund Lookup (SFLU) which is maintained by the ATO contains publicly available information about all superannuation funds that have an ABN, including funds regulated by the ATO and APRA. The SFLU address is superfundlookup.gov.au (¶18-730). The purpose of SMSF checks is to verify that the transfer/roll-over is to a regulated superannuation fund. APRA-regulated funds are permitted to transfer/roll-over benefits to an SMSF only if it is a regulated SMSF. Check the payment details The purpose of checking the transfer/roll-over payment is to verify that the payment is valid and is being made to an SMSF. IER promoters often seek to ensure payments are made directly to them so that they can take their “cut” before passing the remainder to the member. Trustees must always ensure that the payment is made to an SMSF. To reduce the risk of a transfer/roll-over being paid to an entity that is not a regulated superannuation fund, trustees may request a copy of the fund’s bank account statement or account establishment confirmation documents as part of the standard documents for the transfer/roll-over request. Check

What to look for

What this may mean

Check the bank account details

Check that the name of the SMSF on SFLU matches the name on bank documents.

Failure to match the bank account details may mean that an SMSF does not exist or there is a possible passingoff attempt on the SMSF.

Cheque payments

Check the name on the cheque is the name of the SMSF as it appears on SFLU.

An IER promoter may seek to have the cheque paid directly so they can take their “fees” before giving the rest to the

Cross cheques issued by the fund and member. add “account payee only” to the cheque. This means that the cheque can only be paid to a financial institution account and should only be paid into the account of the payee on the cheque.

Electronic fund transfer (EFT) payments

Check the address to send cheque is the same as the contact address on SFLU.

An IER promoter may seek to have the cheque paid directly so they can take their “fees” before giving the remainder to the member.

Check the EFT details are the bank account details of the SMSF provided on the bank documents.

Failure to match the bank account details may mean that an SMSF does not exist or there is a possible passingoff attempt on the SMSF.

Check the Bank/State/Branch (BSB) Someone may be trying to make a number on EFT is for an Australian bank payment overseas which is very difficult account. to recover. Previous release enquiries

Check to see if the member has previously made enquiries for release on: • financial hardship grounds, and/or • compassionate grounds.

Someone may be seeking to transfer the money into an SMSF where they can access it, having failed to access the money legitimately.

Other APRA-regulated fund checks Trustees should identify, determine and undertake any additional checks which they consider appropriate to verify the validity of a transfer/roll-over request, including to other APRA-regulated funds. Trustees may decide to discuss the transfer/roll-over request with the member concerned to verify that the request is valid and that the member understands his/her responsibilities as a trustee of an SMSF. Trustees may obtain further details to verify the validity of the request such as: • a copy of the SMSF’s trust deed • a copy of the ATO’s “New Trustee Letter” (which is also sent to new directors of corporate trustees and new trustees of SMSFs) • a copy of the SMSF trustee declaration under the SISA (for new trustees after 1 July 2007) • a printout from the ATO’s Australian Business Register (ABR) of the SMSF containing its membership information, and • where the member has a legal personal representative, a copy of the appointment instrument/authority to act for the member. Reporting issues and IER activities Report any unresolved issues to the relevant authority and/or Regulator, as below. Report to the ATO Fund trustees must report to the ATO and/or APRA if they detect an IER attempt, or they have any suspicions about a transfer/roll-over request to an SMSF, or they have any previous dealings with IER funds. Report to AUSTRAC, the police and members Superannuation funds (except SMSFs) are “reporting entities” under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and, among other requirements, fund trustees are required to

report “suspicious matters” to AUSTRAC. All identity theft and IER cases should be reported to AUSTRAC in accordance with the Act (¶15-140). A fund that becomes aware of an ID fraud attempt should report this to the relevant authorities — relevant state police, APRA, AUSTRAC and ASIC. The fund should also contact members who have been the victims of an ID fraud and these members should be encouraged to contact the relevant state police, ATO, financial institutions and any other superannuation funds they hold an account with.

¶3-288 Death benefit nominations — meaning of “dependant” The governing rules of a superannuation entity (other than an SMSF or excluded ADF) must not permit discretions which are exercisable under the governing rules of the entity to be exercised by a person other than the trustee, except in certain circumstances (SISA s 59: ¶3-150). The payment of death benefits to the beneficiaries or the estate of a deceased fund member is one of the more important exercise of trustee discretionary powers. Most superannuation funds permit members to make death benefit nominations in a non-binding manner. Generally, this would involve the members informing the trustee regarding their preferred death benefit recipients, and leaving the trustee to make the eventual decision on death benefit payments in light of all the relevant circumstances. Alternatively, the trustee may provide for greater certainty to members in making death benefit nominations in two mutually exclusive ways, pursuant to either s 59(1)(a) or 59(1A). The payment of death benefits from a superannuation fund is determined in accordance with the governing rules of the fund and not in accordance with the terms of the deceased’s will (McFadden v Public Trustee for Victoria [1981] 1 NSWLR 15 at 22). Therefore, this is ultimately a matter for the discretion of the trustee of the fund unless legislation or the governing rules provide otherwise. The trustees of superannuation funds cannot abrogate their responsibility in making decisions in the exercise of their fiduciary functions except as authorised under the governing rules of the trust or legislation. When undertaking their duties, trustees must act in good faith, responsibly and reasonably (Scott v National Trust [1998] 2 All ER 705 at 717). “Binding” death benefit nomination Under SISA s 59(1A), the governing rules of a superannuation entity may permit a member to give a notice to the trustee requiring the member’s benefits to be paid on his/her death to the legal personal representative or dependants. The acceptance of a member’s “binding” death benefit notice is permitted only if the trustee has given the member information that the trustee reasonably believes the member needs to enable him/her to make an informed decision on the making of a death benefit notice (SISA s 59(1A); SISR reg 6.17A(2)). A member’s death benefit notice is binding on the trustee if the following conditions are met. (1) Each death benefit nominee is a legal personal representative or dependant of the member. (2) The allocation of the death benefit among the nominees is clear. (3) The notice is in writing and is signed and dated by the member in the presence of two witnesses aged over 18, neither of whom is a nominee. (4) The notice contains a declaration, signed and dated by the witnesses, stating that it was signed by the member in their presence. (5) The notice is “in effect”. A death benefit notice ceases to have effect three years from the day it was first signed, last confirmed or amended by the member, or at the end of any shorter period provided in the fund’s governing rules (reg 6.17A(7)). A member who has given a trustee a death benefit notice as above may confirm, amend or revoke the notice. The notice amending or revoking a death benefit notice must comply with the procedural

requirements in points (3) and (4) above. A confirmation notice must be in writing, signed and dated by the member (reg 6.17A(5), (6)). A trustee is not required to comply with a death benefit nomination if the trustee is aware that a payment under the nomination, or the lodgment or failure to revoke the nomination, would breach a court order (reg 6.17A(4A)). If the information provided by a member in a death benefit notice is not sufficiently clear to allow the trustee to pay the benefit, the trustee must seek written clarification from the member as soon as practicable after receiving the notice. The Supreme Court of Queensland has held that a letter sent by a member of a superannuation fund to the fund’s trustee pursuant to the trust deed was a non-binding death benefit nomination (Donovan v Donovan [2009] QSC 26 (Fryberg J)). The court said it was quite plain that the deed’s intent was to require the nomination to be in the form described in reg 6.17A(6), as otherwise the requirements of trust deed (in cl 11.4(b)) as to form would be meaningless. In addition, such an interpretation made sense in the context of a superannuation fund and it was understandable that a deed should specify a requirement in effect to comply with the form described in reg 6.17A(6) out of an abundance of caution. Alternative exception — s 59(1)(a) As another exception to the general restriction in SISA s 59, the governing rules of a fund may permit a discretion to be exercisable by a person other than the trustee if the governing rules require the trustee’s consent to the exercise of the discretion (s 59(1)(a)). This effectively will also permit members to determine, with greater certainty, the persons to whom death benefits would be paid. The governing rules must provide that the trustee consent to the death beneficiary nomination. To implement this, the trustee must actively consent to such nominations through a process of appropriate consideration. The difference between requiring trustee consent to member discretion under s 59(1)(a) and non-binding guidance as noted at the outset is that the use of s 59(1)(a) provides greater certainty for member nomination within a more systematic framework, without being binding on the trustee. Where the governing rules allow a s 59(1)(a) procedure to be adopted, the trustee must have formally documented processes in consenting to member nominations. A passive process where nominations are consented to without adequate consideration would not suffice. Also, as members’ circumstances change over time, the consent process should include a periodical review mechanism that takes into consideration such changes. Such a process would also be consistent with the duty of the trustee to act in the best interests of members. Monitoring changes in member circumstances Trustees should decide in advance how to deal with members’ benefit entitlements if the circumstances of a nominated beneficiary have changed. For example, if the member previously nominated a spouse but has since divorced and remarried, the former spouse may no longer be a dependant. Another example is where a nominee may have predeceased the member and the member has not changed or revoked the notice, or a nominated beneficiary is under a legal disability when the benefit is payable. SMSFs and the SISR binding nomination rules Section 59 of SISA does not apply to SMSFs. This means that the governing rules (trust deed) of an SMSF may permit members to make death benefit nominations that are binding on the trustee, whether or not in circumstances that accord with the binding death benefit nomination rules in SISR reg 6.17A (see below). However, a death benefit nomination is not binding on the trustee to the extent that it nominates a person who cannot receive a benefit in accordance with the SIS operating standards discussed in ¶3-286 (eg the nominated beneficiary is not a “dependant” within the meaning in the SISA, see Munro’s case below). As s 59 does not apply to SMSFs, it is possible, consistent with the SISA and SISR, for the governing rules of an SMSF to permit a member to make a binding death benefit nomination in a different manner and form to that set down in reg 6.17A (SMSFD 2008/3). On the basis of SMSFD 2008/3, a death benefit nomination in the SMSF context may remain valid indefinitely as the SMSF is not subject to reg 6.17A (and the three-year renewal rule: see “‘Binding’ death benefit nomination” above) provided this is not inconsistent with the express provisions of the trust deed of the fund. For example, if the SMSF trust deed were to be drafted to totally reflect the requirements in s

59(1A) and reg 6.17A, any nomination must then conform to the SISR requirements, including the renewal requirement, despite SMSFD 2008/3. With death benefit nominations, SMSF trustees must therefore ensure that the provisions of the fund’s trust deed are met when exercising their discretion in relation to death benefit payments when a member dies. In Munro v Munro [2015] QSC 61, the Queensland Supreme Court held that a death benefit nomination form completed by an SMSF member was not a binding nomination as the nominated beneficiary was the “Trustee of Deceased Estate”. Clause 31.2 in the fund’s trust deed requires the trustee to pay a benefit payable on the death of the member in accordance with a binding nomination where the nomination is signed by the nominator, specifies that a benefit is to be paid to one or more nominated dependants or the legal personal representative of the member, states the nomination is binding on the trustee and complies with the relevant requirements. The court found that the nomination must mean what it said — that is, it was the “Trustee of Deceased Estate” that was nominated. The nomination did not comply with either clause 31.2 of the trust deed or reg 6.22 of the SISR (which only allows a death benefit payment to be made in favour of a dependant or a member’s legal personal representative) as the nomination was of neither the deceased member’s executors under his will not a dependant under reg 6.22. It is typical for the spouse or children of a deceased superannuation fund member to also be an executor or administrator of the deceased member’s estate, or to be appointed as attorneys under a power of attorney for the member. In these cases, care should be taken to ensure that conflict transactions or conflict of duty situations are avoided (see below). Practical issues The following practical implications were canvassed in the practitioner article “How long can a binding death benefit nomination (BDBN) last for?” (by B Figot and D Butler, DBA Butler Lawyers: published in the Wolters Kluwer Australian Super News, Issue 5, 11 June 2009). • The specific provisions of the SMSF’s governing rules are absolutely vital. If the governing rules include reg 6.17A (or if there is any ambiguity as to whether they include reg 6.17A), a court will probably deem reg 6.17A to apply “out of an abundance of caution”. Therefore, for those SMSFs that want BDBNs that last for more than three years, the governing rules should be very clear that reg 6.17A (or at least the three-year rule contained in reg 6.17A(7)) is not to apply. • The best practice is for the SMSF governing rules to expressly allow for indefinite BDBNs, yet for members to make a new BDBN every three years anyway. That way, if when the three-year period expires, the member is unable to make a new BDBN because they are, say, in a coma (cf SCT Determination D07-08\030), at least their BDBN still has a “leg to stand on”. By contrast, if the SMSF governing rules were ambiguous as to how long a BDBN could last for, or they referred to the threeyear period, this could place the member’s estate planning at risk. • Drafting a BDBN must be done correctly. Like a will, specific wording should be used in order to ensure that — unlike Donovan’s case (see above) — the requisite intention is manifested. However, many people overlook the importance of the actual wording of a BDBN, which is as important as that in a will. Enduring power of attorney (EPoA) A “conflict transaction” entered into by an attorney under an EPoA or POA can invalidate a transaction. Whether an attorney’s action in a particular case will be valid or invalid in a particular case will depend on the governing rules of the superannuation fund, the EPoA document, the relevant powers of attorney legislation in the applicable state/territory and the SIS legislation. In Re Narumon [2018] QSC 185, the attorneys under an EPoA executed by Mr Giles, an incapacitated superannuation fund member, were his wife and sister. The attorneys purported to extend a lapsed BDBN and also execute a new BDBN in which they were both nominated beneficiaries for death benefits payable by the fund. The EPOA document did not expressly authorise the attorneys to enter into conflict transactions. In the circumstances of the case, the Court found as follows: • the fund’s governing rules allowed for any power or right of a member to be exercised by an attorney;

this would have allowed the attorneys to confirm and the then existing BDBN which had lapsed • the EPoA document did not expressly deal with superannuation matters. However, the meaning of “financial matters” in the relevant (Queensland) legislation was wide enough to cover superannuation • the extension/confirmation by the attorneys of the prior BDBN was not a conflict transaction and was valid. The BDBN benefited the attorneys, but this was not a conflict transaction as it simply ensured the continuity of Mr Giles’ prior wishes; and • the new BDBN executed by the attorneys, which provided a different proportion for payment of the member’s death benefits and would have benefited Mrs Giles more than the prior BDBN was a conflict transaction, and was invalid. SMSFD 2008/3 and managing risks The following extracts from the practitioner article “Can a BDBN specify how a death benefit is paid?” (by B Figot and D Butler, DBA Butler Lawyers: published in the Wolters Kluwer Australian Super News, Issue 11, 17 December 2009) discusses whether there is anything to stop an SMSF’s governing rules from allowing a BDBN to specify how benefits are to be paid and the risks that must be considered. “Firstly, despite the Commissioner’s determination [SMSFD 2008/3], the view that the requirements in the regulations do not apply to SMSFs is not universally accepted. The recent case of Donovan v Donovan [2009] QSC 26 considered the validity of a BDBN made by the member of a SMSF. The judge was aware of the Commissioner’s determination but left the door open to the possibility that even SMSF BDBNs must conform to the superannuation regulations. Secondly, the most popular type of SMSF pension (including death benefit pensions) is an accountbased pension. Account-based pensions can generally be commuted (ie exchanged for a lump sum) at any time. Further, there is generally no limit on the size of account-based pensions annual payments. These characteristics can be sought to be addressed by having the BDBNs also add extra rules as to how pensions are paid (eg with a cap of maximum pension payments, without the ability to be commuted, etc). In order to achieve this, the SMSF’s governing rules would need to specify limitations and in so doing ensure that there is no conflict with the superannuation regulations. Moreover, in order for these limitations to be irrevocable, the SMSF’s governing rules would need to contain special provisions to preclude the surviving spouse from opting out. This type of strategy has yet to be tested in court. Thirdly, remember that the members of the SMSF must also be trustees (or directors of the trustee company). This means that members also can write the SMSF’s cheques! Consider an example where dad fears that mum is a spendthrift and will quickly dissipate any superannuation death benefits. Accordingly, dad makes a BDBN that specifies that upon his death, mum (as the surviving director of the SMSF’s corporate trustee) must pay herself a pension. If mum truly is a spendthrift, she may well take the money out of the SMSF and waste it. Although an action could then be brought against the trustee in the Supreme Court, this would not help in achieving the goal of ensuring that mum is financially supported. Practical methods to deal with these risks To overcome the first risk, some advocate inserting provisions directly in the SMSF’s governing rules. However, this does little to address the second or third concern. Another technique is for the client to accept these risks. The client can merely accept that by using the superannuation environment, tax efficiency is being achieved but this comes at the cost of being able to fully control superannuation benefits from the grave. The final technique can be split into two ‘sub-techniques’. The first sub-technique is to make a BDBN specifying that upon death, superannuation death benefits be paid not to the spouse, but rather to the deceased’s estate. The terms of the deceased’s estate (ie the will) can then specify that the surviving spouse receive an annuity of $X per annum as increased for inflation each year. Naturally, an independent third party would be the executor of the

estate and the trustee of any trust that arises under it. However, the first sub-technique opens the door to the new risk of the estate being challenged. Therefore, the second sub-technique should be considered. This is to withdraw benefits from the SMSF during the member’s lifetime and then put the benefits in an inter vivos trust (eg a family discretionary trust). The governing rules of the inter vivos trust could specify that the surviving spouse receive $X as increased for inflation each year and an independent third party would be the trustee. For completeness, note that in New South Wales the ‘notional estate’ provisions can mean that this technique could also be subject to a subsequent challenge against the estate. Both these sub-techniques involve a loss of tax efficiency.” More BDBN cases The article “The most important case ever in SMSF succession planning … and what it really means” by Bryce Figot, Director, DBA Lawyers, on the recent case of Wooster v Morris [2013] VSC 594 (Wooster) provides many insights and lessons on BDBNs for trustees of SMSFs. Extracts from the article are reproduced below. “Lesson 1 — LPR does not automatically become a trustee Wooster clearly dispels the myth that when a person dies, their executor (legal personal representative) automatically becomes a trustee in the deceased’s place. Here, the plaintiffs were the deceased’s executors but they did not become trustees. Rather, the identity of trustee upon death is determined by the trust deed of the SMSF. In DBA Lawyers’ opinion, there are very few deeds that appropriately distribute the power to appoint a trustee upon death or loss of capacity. Lesson 2 — BDBNs are only a partial solution at best There is a misconception that SMSF succession planning is completely handled by making a BDBN. Wooster clearly dispels this myth as well. In Wooster, the deceased had made a valid BDBN but the plaintiffs still had to spend over three and a half years in legal battles to obtain their money. Accordingly, an adviser cannot simply tell a client to make a BDBN and expect that succession planning is handled. This leads into the most important lesson from the case. Lesson 3 — what really matters is the identity of who is holding the ‘purse strings’ Wooster clearly demonstrates that far more important than any BDBN is the identity of who is holding the ‘purse strings’ upon a member’s death or loss of capacity. As stated above, this depends to a very large degree on what the trust deed of the SMSF provides. There is huge variation in this regard. Although DBA Lawyers carefully draft their deeds to ensure sensible outcomes, many practitioners find that other SMSF trust deeds have poorly drafted provisions that invariably result in the ‘minority’ surviving member(s) wielding an unfair amount of power upon death.” In Ioppolo & Hesford (as Executors of the Estate of the late Francesca Conti) v Conti [2013] WASC 389, there was no BDBN in place but the deceased, by her will, had expressed the desire that her entitlements in the SMSF be applied to her children (beneficiaries under the will) and had specifically stated she did not want any entitlement paid to her husband (the defendant). Apart from the distribution of the deceased member’s benefits issue, the case also provides some guidelines on the application of SISA s 17A on the appointment of trustees when an SMSF member dies. The executors of deceased member of the SMSF had applied to court to be appointed a trustee of the fund and sought directions on whether the defendant (as the surviving member and trustee of the SMSF) was obliged to appoint the executors as trustee, and whether the trustee was entitled to distribute the deceased member’s interest in the fund contrary to the direction in the deceased’s will. Finding for the defendant, the court said that there was no obligation to appoint the executor as an additional trustee and that the surviving trustee was entitled to distribute the deceased member’s benefits at his discretion. The executors had argued for their appointment as a trustee of the SMSF in accordance with s 17A, with particular reference to s 17A(1)(d)(i), to ensure the fund remained compliant. The court disagreed, stating that s 17A(3) allows for the appointment of an executor as a trustee of the fund but does not in its terms require such an appointment. Effectively, on the death of one of the members of a two-member SMSF, the fund can remain an SMSF for six months as provided by s 17A(4). In this case,

“Mr Conti appointed a corporate trustee and the fund remained an SMSF because it migrated from the type of fund covered in s 17A(1) to a fund covered by s 17A(2).” The parties agreed that the trustees of the fund are entitled but not bound to take into account the desires of a deceased member expressed in a will as to the distribution or application of that member’s superannuation account. Essentially it was the plaintiffs’ argument because the defendant did not comply with the direction in the deceased’s will, he was not acting bona fide. The court held that the trustee was entitled to ignore the direction in the will and the mere fact he did so could not in and of itself be evidence of a lack of bona fides. As there was nothing else in the evidence which suggests the trustee did not act in good faith, and the plaintiffs’ arguments failed. The plaintiffs also sought to have one of them appointed as a trustee under s 77 of the Trustees Act 1962 (WA). To take that step, it would be necessary to establish there was good reason for doing so, but the court was not satisfied the trustee acted with a lack of bone fides or in any way improperly. Accordingly, there were no grounds for appointing an additional trustee adding that “… to do so would sow the seeds of disaster. It would result in there being one corporate trustee aligned with the first defendant and one individual trustee aligned with the beneficiaries under the will. There is no mechanism for resolving the inevitable disputes that would arise in this situation. In such circumstances there would have to be a compelling reason to appoint an additional trustee. No such reason exists in this case and the discretion found in s 77 should not be exercised.” On appeal by the executors, the WA Court of Appeal has confirmed the decision in the Ioppolo case that on the death of a member of SMSF, the SISA permitted but did not require the executor of the deceased member’s estate to be appointed as a trustee of the SMSF (Ioppolo & Anor v Conti & Anor [2015] WASCA 45). Section s 17A(3) of SISA did not require Mr Conti to appoint one or other of the executors as a trustee of the fund, and that there was no evidence capable of sustaining the assertion that Mr Conti had acted in bad faith in making the determination that the late Mrs Conti’s interest in the fund should be conferred on him. Conflict of duty/interest issues An executor/administrator of a deceased estate, as a fiduciary, must not allow their personal interests to conflict with their obligations owed to the estate, without proper authorisation. Care should be taken to ensure that a conflict of duty/interest situation does not arise where a person acts as executor/administrator while also receiving superannuation death benefits in their personal capacity. These conflict situations can arise where no BDBN is in place or the deceased has died intestate, because of the executor/administrator’s duty to collect assets of the deceased on behalf of an estate and their interests as beneficiaries of superannuation death benefits. In McIntosh v McIntosh [2014] QSC 99, the mother of the deceased (her son who died intestate) was the administrator of the deceased estate. While in that capacity, the mother also applied for, and received, death benefits from her son’s industry and retail superannuation funds in her personal capacity. Under Queensland’s intestacy laws, the death benefits, had they been paid to the estate, would have been distributed equally between the mother and her former husband as the deceased’s parents. The Queensland Supreme Court held there was a conflict of duty contrary to her fiduciary duties as administrator: “… When the mother made application to each of the superannuation funds for the moneys to be paid to her personally rather than to the estate, she was preferring her own interests to her duty as legal personal representative to make an application for the funds to be paid to her as legal personal representative. She was in a situation of conflict which she resolved in favour of her own interests. As such she acted … in breach of her fiduciary duty as administrator of the estate …” The mother was required to account to the estate for the death benefits she had personally received. The McIntosh principles were applied in Burgess v Burgess [2018] WASC 279. In that case, Mr Burgess had died without leaving a will and was survived by his wife and two minor children. A year later, Mrs Burgess applied to become administrator of the deceased’s estate. Mr Burgess’ estate (including superannuation paid to the estate) would be split among Mrs Burgess and their two young children. Mr Burgess had superannuation benefits in four public offer funds, where no BDBNs was in place.

She had applied for and received death benefits from one fund before her appointment as administrator, and had applied for and received death benefits from a second fund after her appointment. The third superannuation fund had also paid benefits to the estate, while the fourth fund had not yet made any payment at that time and neither had Mrs Burgess made any application to the fund for payment. The court found as follows: • Benefits from first fund — Mrs Burgess could retain the benefits as she was not an administrator at the time of application and no conflict had arisen in relation to the first fund • Benefits applied for and received after appointment as administrator — Mrs Burgess was required to account to the estate for the benefits There was a conflict of interest and as administrator she was bound to claim the benefits on behalf of the estate after her appointment as administrator; • Benefits still unpaid — Mrs Burgess was bound, as administrator, to claim any remaining superannuation benefits which are still unpaid on behalf of the estate. The court (Martin J) also stated that the undesirable outcome in the case might have been avoided if there had been a will which contained a conflict authorisation or there had been BDBNs in relation to the superannuation benefits. The importance of having a will and a BDBN for superannuation benefits, and conflict issues, were also discussed in Gonciarz v Bienias [2019] WASC 104. In that case, the deceased (a member of Retail Employees Superannuation Trust (REST)) died intestate and those entitled to distribution of the estate under the intestacy rules were his spouse (the plaintiff) and two others (the defendants). The deceased had made a non-binding beneficiary nomination for one of the defendants before marrying the plaintiff. The plaintiff had made a death benefit claim in her capacity as the spouse of the deceased to the trustee of REST. She had also applied for a grant of letters of administration of the estate. The defendants claimed that the plaintiff had acted in conflict to her duties as administrator by making an application to REST for the payment of the superannuation benefits to herself (following the Burgess v Burgess principle, see above). The issue which the plaintiff faced were twofold — the estate required an administrator to administer the estate, and the plaintiff as the deceased’s widow had a strong claim to payment of the death benefit. By accepting the grant of administration, the plaintiff would be obliged to subordinate her personal claim to the death benefit to that of the estate. In the circumstances of the case, the court decided to grant the plaintiff’s request to be removed as administrator and for a new administrator to be appointed to achieve “…an outcome that is in the interests of all beneficiaries”. By contrast, in Brine v Carter [2015] SASC 205, an executor was found not to have a conflict as the other executors had effectively consented to that executor claiming superannuation benefits in her personal capacity despite the conflict situation. Who is a dependant? In the SISA, a “dependant” in relation to a person includes the spouse and any child of the person and any person with whom the person has an interdependency relationship (SISA s 10(1); 10A). The inclusive definition means that a “dependant” under the common law principles (generally a person who is financially dependent on the deceased) is also covered. The SISA definition is discussed in ¶3-020. The ITAA97 contains two definitions which includes the term “dependant” — “SIS dependant” which has the same meaning as dependant in the SISA, and “death benefits dependant” which has the meaning given in ITAA97 s 302-195. The definition of “death benefits dependant” (which has a narrower meaning and which is used for the purposes of the taxation of superannuation death benefits) (¶8-300) and the taxation of death benefit termination payments (¶8-840) is discussed in ¶8-310. The meaning of spouse, child, SIS dependant and death benefits dependant is discussed in ¶3-020. Death benefit payments to other persons and unclaimed money

When a member dies, and the trustee after making reasonable enquiries is unable to find either a legal personal representative or a dependant of the member, the trustee may cash the member’s benefits in favour of another individual, subject to the fund’s governing rules (SISR reg 6.22: ¶3-286). The trustee must make a decision in relation to the benefit payment that is fair and reasonable to the circumstances of all parties who have, or are likely to have, an interest in the death benefit. Interested parties who consider that the trustee’s decision is “unfair or unreasonable” may complain to the Superannuation Complaints Tribunal (¶13-140). If the trustee is unable to find an appropriate beneficiary, the benefit must be dealt with in accordance with the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶3-380). For other restrictions on the form of death benefit payments, see “Form of cashing of benefits after member’s death” in ¶3-286. Death benefits and estate planning The taxation of superannuation death benefits is discussed in ¶8-300 to ¶8-340. A superannuation death benefit may be paid to an individual who is a SIS “dependant” of a deceased member (as noted above), but this payment may be subject to tax if that person is not also a “death benefit dependant” under s 302-195 of ITAA97 (¶8-310). If there is no binding death benefit nomination in place when a member of an SMSF dies, the fund trustee has the following options for payment of superannuation death benefit: (1) Pay a lump sum death benefit to each child (a SIS dependant, as well as a death benefit dependant for tax purposes) of the deceased member. (2) Pay a lump sums death benefit to the deceased member’s estate (ie legal personal representative), which will subsequently be distributed to the beneficiaries in accordance with the deceased member’s will. Note superannuation is not an estate asset and will not be distributed in accordance with the terms of a deceased’s will unless the death benefit is paid to the estate. That is, if the deceased’s intention is for a will to apply to superannuation proceeds, this will only occur if the fund trustee pays the death benefit to the deceased’s legal personal representative who will then distribute the proceeds to anyone (whether or not a SIS dependant or death benefits dependant), in accordance with the will. (3) Pay the death benefit to the deceased member’s legal personal representative to hold in a trust created under the member’s will (eg a general testamentary trust). (4) Pay the superannuation death benefit as a pension. On the member’s death, a “reversionary” pension previously paid to the member will automatically revert to another person (the reversionary). Where the pension previously paid to the member is not a reversionary pension, a new pension can be created subject to the rules for pension death benefits in SISR reg 6.21(2A) and (2B) (see “Form of cashing of benefits after member’s death” in ¶3-286). In summary, SMSF members should bear in mind the following for estate planning and taxation purposes: (1) Who do they want to provide for after their death? (2) Is this person a death benefit dependants? (3) What is the most tax effective way to distribute to this person/persons? (4) Is it better for death benefits to be paid directly to intended beneficiaries or to the member’s estate? (5) Can pensions be paid to intended beneficiaries? (6) If the intended beneficiaries are children (eg an adult child), whether or not they are financially dependent, and if so how much longer would they be financially dependent?

(7) What is the best way to support financially dependent children for the period of time they will remain financially dependent? (8) What (if any) are appropriate restrictions to place on dependants’ access to a death benefit that will ensure that the dependant is adequately provided for until such time as the dependant would ordinarily be financially independent? For a case study and practitioner which examines the SIS and taxation implications for superannuation death benefits, see “Planning for minor dependants and your SMSF death benefit” by Philip de Haan, Partner, and Aimee Riley, Lawyer, Thomson Geer Lawyers in the Wolters Kluwer Australian Super News, Issue 7, 21 August 2015 (¶103).

¶3-290 Providing information to members and others The trustee of a regulated superannuation fund must provide information to members, former members and other persons, such as prospective members and employer-sponsors, in accordance with the product disclosure rules in Pt 7.9 of the Corporations Act 2001 (CA) and Regulations (CR) from 11 March 2002 (¶4-050). Previously, these information requirements were prescribed by SISR Pt 2 former reg 2.05 to 2.48C and SISA Pt 19 former s 150 to 193 (the public offer fund rules: ¶3-520). The SISR continues to prescribe certain residual disclosure obligations (see below). The product disclosure rules under the CA and CR are discussed in Chapter 4. In summary, the rules for superannuation products or interests cover: • point of sale disclosure requirements, as provided in CA s 1013D, the content requirements for Product Disclosure Statements, and general information requirements relating to superannuation products in CR Pt 7.9 Div 4 • periodic statements for retail clients (CA s 1017D; CR Pt 7.9 Subdiv 5.2 to 5.3) • periodic disclosure of fund information (CA s 1017DA; CR Pt 7.9 Subdiv 5.4 to 5.7) • ongoing disclosure of material changes and significant events (CA s 1020G; CR Pt 7.9 Subdiv 5.8) • information and documents to be given to existing holders of superannuation products on request (CA s 1017C; CR Pt 7.9 Subdiv 5.9 to 5.10) • information about complaints (CA s 1017DA(1)(a)(iii); CR Pt 7.9 Subdiv 5.11) • periodic reporting requirements when product holders cease to hold the product (exiting members or deceased members) (CA s 1017D(5)(g); CR Pt 7.9 Subdiv 5.12). Residual SISR disclosure provisions The following disclosure of information provisions are still prescribed by the SISR. • reg 2.01 to 2.05 — which cover the scope and application of SISR information provisions, the manner of, and charges for, providing information • reg 2.29 — which requires funds (other than SMSFs) to provide information to APRA about the fund’s derivatives charge ratio (in conjunction with the requirements in CR reg 7.9.37(1)(i) dealing with the provision of fund information: ¶4-180) • reg 2.30 to 2.33 — which deal with the time and manner of providing information on request (to other than a “concerned person” as defined in s 1017C of the Corporations Act 2001) • reg 2.36B to 2.36E — which deal with providing information about superannuation interests subject to a payment split (¶3-355).

[SLP ¶2-920]

¶3-300 Dealing with members’ inquiries and complaints Part 7.10A of the Corporations Act 2001 and the Superannuation (Resolution of Complaints) Act 1993 (as amended by the Treasury Laws Amendment (Putting Consumers First — Establishment of the Australian Financial Complaints Authority) Act 2018 (AFCA Act)) provide the external dispute resolution (EDR) scheme to deal with superannuation complaints which are not resolved by the superannuation trustees under the fund’s internal dispute resolution (IDR) procedures. The operation of the EDR process under AFCA (which replaced the Superannuation Complaints Tribunal for complaints lodged from 1 November 2018) is discussed in Chapter 13. From 6 March 2018, each trustee of a regulated superannuation fund other than an SMSF, or of an ADF: (a) must be a member of the AFCA scheme (b) must have an IDR procedure that complies with the standards, and requirements, mentioned in subparagraph 912A(2)(a)(i) of the Corporations Act 2001 in relation to financial services licensees (see below) (c) must give to ASIC the same information as the trustee would be required to give under subparagraph 912A(1)(g)(ii) of the Corporations Act 2001 if the trustee were a financial services licensee, and (d) must ensure that written reasons are given, in accordance with requirements specified under subsection (1B) of this section, for any decision of the trustee (or failure by the trustee to make a decision) relating to a complaint (s 101(1)). However, paras (1)(a) to (c) do not apply to a trustee if the trustee is required under the Corporations Act 2001 to have a dispute resolution system complying with subsection 912A(2) or 1017G(2) of that Act (s 101(1A)). ASIC may, by legislative instrument, specify for the purposes of paragraph (1)(d) any or all of the following: (a) the persons who must be given written reasons (b) the matters that must be included in those reasons (c) the times by which those reasons must be given, or (d) the circumstances that constitute a failure to make a decision (s 101(1B)). Requirement for superannuation entities to establish IDR procedure Section 912A(2)(a)(i) of the Corporations Act 2001 basically requires entities to have an IDR procedure that complies with standards and requirements made or approved by ASIC in accordance with regulations made for the purposes of the provision. ASIC guidelines on IDR and transitional provision for giving written reasons Transitional provisions in the AFCA Act provide that until the first time an instrument made under SISA s 101(1B) (see above) comes into force, para 101(1)(d) has effect as if: (a) the requirements of para 101(1)(c) to (e) of SISA as in force immediately before 6 March 2018 were the requirements specified under subsection 101(1B), and (b) subsection 101(1A) of SISA as in force immediately before 6 March 2018 still had effect. ASIC Regulatory Guide RG 165 (as reissued in May 2018) provides guidance on the transitional arrangements for trustees of regulated superannuation funds and ADFs and RSA providers as below (RG165.88).

“Prior to the Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Act 2018 (AFCA Act), provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Retirement Savings Account Act 1997 (RSA Act) imposed requirements in relation to the time within which complaints should be dealt with by the trustees of regulated superannuation funds and approved deposit funds, and by retirement savings account (RSA) providers. The SIS Act also imposed requirements in relation to the giving of reasons for decisions on complaints by the trustees of regulated superannuation funds. These requirements sat alongside the IDR arrangements for financial service providers under the Corporations Act. Schedule 2 of the AFCA Act has now: • repealed s 101(1) and (1A) of the SIS Act and s 47(1) and (2) of the RSA Act, which set out the requirements for dealing with inquiries and complaints within 90 days and the requirements for the giving of reasons for decisions on complaints • amended the SIS Act and RSA Act to require trustees of a regulated superannuation fund (other than a self-managed superannuation fund) or of an approved deposit fund, or an RSA provider to have an IDR procedure that complies with the standards and requirements made or approved by ASIC for s 912A(2)(a)(i) of the Corporations Act in relation to AFS licensees, and • amended the SIS Act and RSA Act to empower ASIC to make a legislative instrument setting out requirements for the giving of reasons for decisions on complaints. As a transition measure, the IDR time frame requirements for trustees of regulated superannuation funds and ADFs, and RSA providers in s 101(1) and (1A) of the SIS Act and s 47(1) and (2) of the RSA Act will continue until we consult on and finalise updated IDR standards and requirements that are made or approved under s 912(2)(a)(i) of the Corporations Act. The effect of the requirements in the SIS Act for trustees of regulated superannuation funds in relation to the giving of reasons for decisions on complaints is also retained until ASIC makes a legislative instrument setting out the requirements: Sch 2, item 10 of the AFCA Act.” Regulatory Guide RG 165 also provides guidance on the transitional arrangement on disclosure of AFCA contact details in final response letters and delay letters (RG 165.88). SISA former s 101 — duty to establish arrangements for dealing with inquiries and complaints Before its substitution by the AFCA Act, former s 101(1) provided that each trustee of a regulated superannuation fund (other than an SMSF) or an ADF must take all reasonable steps to ensure that there are arrangements in force at all times under which members and other persons have the right to make inquiries or complaints of the kind specified below in relation to that person. For the above purposes, the persons eligible to make enquires and complaints are: (a) a beneficiary or former beneficiary may make an inquiry or complaint about the operation or management of the fund in relation to that person (b) the executor or administrator of the estate of a former beneficiary may make an inquiry or complaint about the operation or management of the fund in relation to the former beneficiary, and (c) without limiting the generality of (a) or (b), any person may make an inquiry or complaint about a decision of a trustee that relates to the payment of a death benefit if the person has an interest in the death benefit, or claims to be entitled to death benefits through, a person who has an interest in the death benefit (former s 101(1A)). The trustee must ensure that an inquiry or complaint is properly considered and dealt with within 90 days after it was made (former s 101(1)(b)). If an eligible person makes a complaint relating to the payment of a death benefit, the person must be given written reasons for the decision in relation to the complaint when the person is given notice of the decision (former s 101(1)(c)(i)). If no decision is made within 90 days after the complaint is made, the person may, by giving notice in writing to the trustee, request written reasons for the failure to make a

decision in relation to the complaint within that period (former s 101(1)(c)(ii)). If an eligible person makes a complaint of another kind specified in s 101(1A), the person may, by giving notice in writing to a trustee of the fund, request written reasons for a decision made by the trustee in relation to the complaint, or if no decision is made within 90 days after the complaint is made, the failure to make a decision in relation to the complaint within that period (former s 101(1)(d)). In both instances, the written reasons are to be given to the person within 28 days after the request is given to the trustee, or such longer period as ASIC permits (former s 101(1)(e)). A person who intentionally or recklessly contravenes former s 101 is guilty of an offence punishable on conviction by a fine not exceeding 100 penalty units. The above requirements similarly apply to trustees of certain exempt public sector superannuation schemes and of ADFs other than an excluded ADF. [SLP ¶3-620]

¶3-310 Providing information to the Regulators The trustee of a superannuation entity is required to provide annual returns and audit reports to the Regulator as discussed in ¶3-315. Apart from those requirements, various other reporting obligations may arise in particular circumstances as noted below. Newly established entities The trustee of a newly established superannuation entity must, within seven days after its establishment, provide prescribed information to APRA or a specified person as prescribed (SISA s 254(1); SISR reg 11.03). The information to be given by a new superannuation fund is set out in reg 11.04. For new ADFs and PSTs, see reg 11.05 and 11.06 respectively. A new superannuation fund may comply with the information requirements in conjunction with its election to become a regulated superannuation fund (¶2-130). For this purpose the new fund must, within 60 days of its establishment, provide the required information and election to the Commissioner using the approved form “Application for ABN registration for superannuation entities” (¶18-730). A new superannuation fund includes a former resident ADF that has converted to a superannuation fund. When a superannuation entity lodges the approved form above, the ATO will also allocate an ABN and a TFN to the entity. An entity may, if it so wishes, also use the form to register for the GST. Where the entity is not an SMSF and, therefore, is not regulated by the ATO for SIS prudential purposes, the ATO will forward relevant information in the form concerning the entity to APRA. A superannuation fund is considered to come into existence after its trust deed is signed and property is set apart for the benefit of specified members (eg when the fund receives contributions). Significant adverse events The trustee of a superannuation entity must immediately inform the Regulator in writing of the occurrence of an event having a significant adverse effect on the financial position of the entity after becoming aware of such an event (SISA s 106). Before 1 January 2008, funds had three business days to give that notice. An event has a significant adverse effect if, as a result of the event, a trustee of the entity will not, or may not, be able to pay benefits to beneficiaries as and when they fall due at any time before the trustee’s next annual report to beneficiaries. Section 106 is a civil penalty provision (¶3-820). Fund status change If the trustee of a superannuation entity knows that the entity has ceased to be an SMSF or has become an SMSF since becoming a superannuation entity, the trustee must notify the Commissioner in writing as soon as practicable and not later than 21 days after that knowledge (SISA s 106A). A person who fails to comply is guilty of an offence punishable on conviction by a fine of up to 100 penalty

units (¶3-800). Information at request of a Regulator The Regulator may, by written notice, require the trustee of a superannuation entity to provide, within a specified time, information or reports on such matters as are set out in the notice (SISA s 254(2)). In addition the Regulator may, by written notice, require a “relevant person” to produce, at such reasonable time and reasonable place as are specified, any books relating to the affairs of the entity (s 255(1); Robertson 95 ATC 4225). A relevant person in relation to a superannuation entity means an individual trustee or investment manager, a responsible officer of a corporate trustee or corporate investment manager, an auditor or actuary of the entity, or a custodian in relation to the entity. Similar powers to request production of books apply for the purposes of investigation of a superannuation entity by the Regulator (s 269; Glaser 98 ATC 4230). The Regulator may also request information from the trustee of a superannuation entity for the purposes of its statistical data collection program (s 347A). Fund details, winding up, trustee retirement and other information requirements The trustee of a superannuation entity (other than an SMSF) must notify APRA in writing of changes in the entity’s name, RSE licensee and other contact details. The changes must be notified within 28 days or, in the case of an eligible rollover fund, immediately after the change (SISR reg 11.07(1)). The trustee of a superannuation entity (other than an SMSF) must also notify APRA in writing that an incoming trustee has commenced as a trustee of the entity as soon as possible, but no later than five days, after commencement (reg 11.07(2A)). The trustee of a superannuation entity must notify the Regulator of a decision or resolution to wind up the entity or to retire as a trustee. This must be notified as soon as practicable after the making of the decision or resolution and before winding up commences or the trustee has retired. For an SMSF, the notification must be given before, or as soon as practicable after, winding up commences or the trustee has retired (reg 11.07(3), (4)). A regulated superannuation fund which becomes an SMSF, or an SMSF which ceases to be one, must provide prescribed information to the ATO within 28 days of the change in status (reg 11.07A). Notification of changes can be made using the ATO form at www.ato.gov.au/super/self-managed-superfunds/administering-and-reporting/notify-us-of-changes. The trustee of a superannuation fund that has been declared not to be a public offer fund must notify APRA in writing of a breach of any of the conditions to which the fund was subject (¶3-500). Other disclosure or provision of information obligations may be imposed on a superannuation entity in connection with an investigation of the entity under SISA Pt 25 or by the TFN provisions under Pt 25A. Derivatives charge ratio reporting The derivatives charge ratio of a regulated superannuation fund is the percentage of the fund’s assets (other than cash) that are subject to a charge in relation to a derivatives contract (as defined in SISR reg 13.15A(2)) to the fund’s total assets (based on market value) (SISR reg 2.29(1)). For the purposes of s 1017DA(1)(a) of the Corporations Act 2001 (CA), a regulated superannuation fund must provide fund information to members in each reporting period. In all cases, the fund information must include all the items of information specified in reg 7.9.37(1) of the Corporations Regulations 2001 (CR), so far as applicable, including information, as provided in CR reg 7.9.37(1)(i), about the fund’s derivatives charge ratio if the ratio exceeds 5% at any time during the reporting period (¶4-180: “Fund information — content”). If CR reg 7.9.37(1)(i) applies, the trustee of the fund must give the information mentioned in that paragraph to APRA as soon as practicable, and in any event within six months, after the end of the reporting period to which the information relates (SISR reg 2.29(2)). SMSFs are exempted from both of the above reporting requirements (SISR reg 2.18(2); CR reg 7.9.38; ¶4-090).

Transfer balance account report — events-based reporting All superannuation providers, including SMSFs and life insurance companies, with members in retirement phase are required to comply with events-based reporting requirements using a Transfer Balance Account Report (TBAR) in connection with the transfer balance cap and total superannuation balance regime which commenced from 1 July 2017 (ATO factsheet Superannuation Transfer balance account report: www.ato.gov.au/super/apra-regulated-funds/reporting-and-administrative-obligations/reportingand-administrative-obligations-for-the-transfer-balance-cap) (¶6-422). The TBAR reporting requirements for APRA-regulated funds are to be incorporated into the SuperStream data and payment standards reporting requirements in the course of 2018 (see ¶9-790). [SLP ¶3-234]

¶3-315 Accounts, audit and reporting by superannuation entities The trustee of a registrable superannuation entity (RSE) (¶3-490) or an SMSF must comply with the accounts, audit and reporting obligations in SISA Pt 4 as below: • obligations for RSEs — Div 2, comprising s 35A to 35AD • obligations for SMSFs — Div 3, comprising s 35AE, 35B, 35C, 35D. The annual return and periodic reporting requirements for RSEs are set out in the FSCDA and discussed at ¶9-740 and following. Where the SIS legislation imposes accounts and record-keeping obligations, the person responsible must not incorrectly keep accounts and records (a strict liability offence), or incorrectly keep accounts and records with the intention to deceive, mislead or provide false or misleading information (SISA s 303; 307; Criminal Code Act 1995). RSEs — keeping accounting records Each trustee of an RSE must ensure that: • accounting records that correctly record and explain the transactions and financial position of the RSE licensee for the entity and the entity are kept • the accounting records of the RSE licensee and the entity are kept in a way that enables: – the preparation of reporting documents referred to in FSCDA s 13 (these are the returns and reports prescribed under the FSCDA: ¶9-750), and – the preparation of any other documents required to be audited under the RSE licensee law (SISA s 35A(1)) • the accounting records of the RSE licensee and the entity are kept in a way that enables those reporting documents and other documents to be conveniently and properly audited in accordance with the RSE licensee law. “RSE licensee law” means: (a) SISA or SISR; (aa) prudential standards (¶9-700); (b) the FSCDA; (c) the Financial Institutions Supervisory Levies Collection Act 1998; (d) the provisions of the Corporations Act 2001 listed in SISA s 38A(b) of the definition of regulatory provision or specified in regulations made for the purposes of s 38A(b)(xvi) of that definition, as applying in relation to superannuation interests; and (e) any other provisions of any other Commonwealth law as specified in regulations (SISA s 10(1)). Each trustee of the entity must ensure that the accounting records under s 35A(1): • are retained for at least five years after the end of the year of income to which the transactions relate • are kept in Australia, or in another country if APRA gives written approval for the records to be kept in that country, and the conditions (if any) specified in the approval are met, and

• are kept in writing in the English language, or in a form in which they are readily accessible and convertible into writing in the English language (s 35A(2)). The trustee must notify APRA, in the approved form, of the address where the accounting records are kept: • if, before 1 July 2013, APRA has not already been notified of the current address — within 28 days after 28 July 2013 • otherwise — within 28 days after the entity is registered under s 29M (¶3-490) (s 35A(4)). The trustee must notify APRA, in the approved form and within 28 days, if the accounting records are moved to a new address (s 35A(5)). Section 35A is a two-tier liability provision (¶3-820). A trustee who contravenes s 35A(1), (2), (4) or (5) commits an offence punishable by a penalty of 100 penalty units (fault liability) or 50 penalty units (strict liability). RSEs — auditor request for information If the auditor of an RSE requests, in writing, a trustee of an RSE to give the auditor a document, each trustee of the entity must ensure that the document is given to the auditor within 14 days of the request being made. An auditor may only request documents that are relevant to the preparation of a report about the operations of the entity or the RSE licensee of the entity (SISA s 35AB(1)). Section 35AB is a two-tier liability provision. A trustee who contravenes the section commits an offence punishable by a term of imprisonment for two years (fault liability) or 50 penalty units (strict liability). RSEs — appointed auditor’s functions and duties Section 35AC of SISA applies if the RSE licensee law requires an auditor of an RSE to be appointed, or requires or permits a function or duty to be performed, or a power to be exercised, by an auditor. The RSE licensee must not appoint a person as an auditor of the entity unless the RSE licensee is reasonably satisfied that the person: (a) meets the eligibility criteria for auditors of RSEs set out in the prudential standards, and (b) has not been disqualified from being or acting as an auditor of an RSE under s 130D (¶3-600). The RSE licensee must end the appointment of the appointed trustee if the RSE becomes aware that the person no longer meets the conditions above (s 35AC(6)). A person who is appointed as an auditor must perform the functions and duties set out in the RSE licensee law that are relevant to the person’s appointment and must comply with the RSE licensee law in performing the functions and duties (s 35AC(3), (4)). The trustee of the RSE to whom the RSE licensee law applies must make any arrangements that are necessary to enable the appointed auditor to perform the functions and duties (s 35AC(5)). RSEs — appointed actuary’s functions and duties Section 35AD of SISA applies if the RSE licensee law requires an actuary of an RSE to be appointed or requires or permits a function or duty to be performed, or a power to be exercised, by an actuary. The obligations and duties of the RSE licensee and RSE actuary under s 35AD mirror those in s 35AC for auditors. RSEs — approved audit report form The approved audit report form June 2018 (issued under Prudential Standard SPS 310 “Audit and Related Matters”) is available at www.apra.gov.au/forms-superannuation-entities. SMSFs — keeping accounting records

Each trustee of an SMSF must ensure that: (a) accounting records that correctly record and explain the transactions and financial position of the entity are kept (b) the accounting records are kept in a way that enables the following to be prepared: (i) the accounts and statements of the entity referred to in s 35B (ii) the returns of the entity referred to in s 35D, and (c) the accounting records are kept in a way that enables those accounts, statements and returns to be conveniently and properly audited in accordance with SISA (s 35AE(1)). Each trustee of the SMSF must ensure that the accounting records: • are retained for at least five years after the end of the year of income to which the transactions relate, and • are kept in Australia and are kept in writing in the English language (or in a form readily accessible and readily convertible into writing in the English language (s 35AE(2)). Section 35AE is a two-tier liability provision. A trustee who contravenes the section commits an offence punishable by a penalty of 100 penalty units (fault liability) or 50 penalty units (strict liability). SMSFs — keeping financial statements The trustee of an SMSF must, in respect of each year of income of the fund, ensure that the following are prepared: • a statement of financial position and an operating statement (except if specified otherwise by reg 8.01: see below) • a statement of net assets of the entity and a statement of changes in net assets (as specified in reg 8.01(2): see below), or • the accounts and statements specified in reg 8.02(3) (see below) (s 35B(1), (2)). The SISR have prescribed market value reporting for SMSFs (see “SMSF accounts and statements — market value reporting of assets” below). Exceptions under reg 8.01(1) — statement of financial position and operating standard not applicable In the two situations below, the requirement to prepare a statement of financial position and operating statement under s 35B(1)(a) and (b) does not apply: 1. the trustee prepares a statement of net assets of the entity and a statement of changes in net assets of the entity in respect of that year of income — if the fund is a defined benefit fund in respect of a year of income of the fund (or an accumulation fund in respect of the 1994/95 year of income of the fund) (reg 8.01(2)), and 2. the trustee prepares the accounts and statements specified by reg 8.02(3) (see below) — if the fund is a regulated superannuation fund in respect of a year of income where, at the end of the year, the benefits paid to each individual member of the fund: (a) are wholly determined by reference to policies of life assurance, or (b) if item (a) does not apply only because shares in the life insurance company issuing the policies were acquired because the company was demutualised, the benefits paid to each individual member would otherwise be wholly determined by reference to policies of life assurance and the shares have been held for no longer than 18 months from the date of acquisition (reg 8.01(3)). The accounts and statements specified in reg 8.02(3) for a fund covered by reg 8.01(3) (see point 2

above) are: • a statement that policies of the kinds mentioned in reg 8.01(3) are in place at the end of the year of income • a statement as to whether those policies have been fully maintained as directed by the relevant insurers • a statement of the identities of those insurers • the amounts contributed by employers and members in respect of the year of income • where not all of those amounts have been paid as premiums on the policies — the amount of premiums paid on the policies in respect of the year of income, and • the expenses incurred by the fund in respect of the year of income, other than amounts covered by premiums. Signing and retaining accounts The accounts and statements prepared under s 35B(1) must be: • signed by the director of the single corporate trustee or at least two directors of the corporate trustee of the fund, or at least two individual trustees of the fund, and • retained for a period of five years after the end of the year of income to which they relate (s 35B(3), (4)). Section 35B is a two-tier liability provision. A trustee who contravenes the section commits an offence punishable by a penalty of 100 penalty units (fault liability) or 50 penalty units (strict liability). SMSF accounts and statements — market value reporting of assets The assets of an SMSF must be valued at their market value when preparing the fund’s accounts and statements required by SISA s 35B(1) for the 2012/13 year and any later year of income (SISR reg 8.02B). The term “market value” means the amount that a willing buyer of an asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made: • the buyer and seller dealt with each other at arm’s length in relation to the sale • the sale occurred after proper marketing of the asset, and • the buyer and seller acted knowledgeably and prudentially in relation to the sale (s 10(1)). In pre-2012/13 years, SMSFs were generally able to choose either the historical cost or market valuation accounting method to value their assets when preparing their financial statements. By contrast, APRAregulated funds are required by the Australian Accounting Standard AAS 25, as reporting entities, to value their assets at net market value as at the reporting date. The market value basis reporting for SMSFs will ensure that assets held within the superannuation system are valued in the same manner and will enhance the comparability of financial information and fund performance across all sectors of the superannuation system. This will also provide members with current and accurate information about the financial position of their SMSF and their entitlements. Note that market value reporting has been required for other regulatory provisions or fund operations, eg SMSFs paying pensions or ensuring compliance with the in-house asset limit under SISA. For the ATO guidelines on valuation of assets, see ¶18-775. SMSFs — auditor appointment and audit For each year of income, each trustee of an SMSF must ensure that an approved SMSF auditor is appointed to give the trustee a report, in the approved form, of the operations of the entity for that year.

The appointment must be made within whichever of the periods set out in the regulations that applies to the entity (SISA s 35C(1)). For s 35C(1), the prescribed period is no later than 45 days before the day by which s 35D requires a return to be lodged for the fund (SISR reg 8.02A). Regulation 8.03 prescribes the period for which the report mentioned in s 35C(6) must be provided (see “Time for auditor to give audit report to trustees” below). If an auditor requests, in writing, a trustee of an SMSF to give the auditor a document, each trustee must ensure that the document is given to the auditor within 14 days of the request being made. Only documents that are relevant to the preparation of the report may be requested (s 35C(2)). A trustee who contravenes s 35C(1) or (2) commits an offence punishable by a term of imprisonment for two years (fault liability) or a penalty of 50 penalty units (strict liability). SMSFs — approved audit report form An approved form: (a) must either: (i) relate solely to the audit of the accounts and statements referred to in s 35B(1) and prepared in respect of a year of income; or (ii) relate only to the audit of those accounts and statements and of any other accounts and statements, prepared in respect of a year of income, that are identified in the form (b) must include a statement by the auditor as to the extent of the auditor’s compliance with the auditor independence requirements referred to in s 128F(d) (¶5-508), and (c) must include a statement by the auditor as to whether, in the auditor’s opinion, each trustee of the SMSF has, during the year of income, complied with the provisions of SISA or SISR that are identified in the form (s 35C(5)). ATO form The ATO approved form of the audit report to be given by the auditor to the trustee of an SMSF for reporting periods commencing on or after 1 July 2016 is available at www.ato.gov.au/Forms/SMSFindependent-auditor-s-report (Self-managed superannuation fund independent auditor’s report). For the ATO approved form in earlier periods, see ¶18-740. Time for auditor to give audit report to trustees The auditor must give the audit report to each trustee of an SMSF within the prescribed period after the end of the year of income (s 35C(6)). The prescribed period is 28 days after the trustee of the fund has provided all documents relevant to the preparation of the report to the auditor (reg 8.03). An auditor who contravenes s 35C(6) commits an offence punishable by a penalty of 50 penalty units (strict liability). Summary of key dates for SMSFs • The prescribed period within which SMSF trustees must appoint an auditor is the period ending 45 days before the due date for lodgment of the SMSF annual return. The prescribed period for the appointment does not vary when the prescribed period within which the auditor must give their report is extended. • The prescribed period for which an audit report in respect of an SMSF must be given is 28 days after the trustee of the SMSF has provided all documents relevant to the preparation of the report to the auditor. This ensures that SMSF auditors do not contravene the SISR if they cannot provide the audit report within the prescribed period due to circumstances beyond their control. SMSFs — annual return lodgment The trustee of an SMSF is required to lodge an annual return in respect of its operations each year.

The annual return reporting requirements for SMSFs (ie a fund that was an SMSF at any time during the year of income) are set out in SISA s 35D. An SMSF is required to lodge an annual return each year within the reporting period or such longer period allowed by the Commissioner (s 35D(2)). The reporting period is the period prescribed by the SISR or, if not prescribed, specified by legislative instrument made by the Commissioner. The lodgment date for an SMSF annual return is usually the date by which the fund is required to lodge its tax return for the year. The lodgment date is 31 October following the end of the income year for most funds, subject to exceptions (¶11-050, ¶11-070). The SMSF annual return must be in the “approved form” and contain such information as the form requires in respect of the year of income (¶5-510). An annual return that is not in the approved form may be rejected and such a decision is not subject to review (C & M Baldwin 92 ATC 2063). A trustee who contravenes s 35D commits an offence punishable by a penalty of 50 penalty units (fault liability) or 25 penalty units (strict liability). APRA guidance on audit of RSEs only APRA Prudential Standard SPS 310 Audit and Related Matters sets out the requirements in relation to the audit of an RSE licensee’s business operations and the audit-related reporting requirements (¶9-720). Superannuation Prudential Guide SPG 310 provides guidelines to assist RSE licensees and auditors in complying with those requirements and, more generally, to outline prudent practices in relation to audit arrangements. Among other requirements, APRA expects that all parts of the auditor report in the approved audit report form are submitted simultaneously by the RSE licensee, or by a person on behalf of the RSE licensee, in electronic format to APRA. RSE auditors may include additional material into the approved form where the RSE auditor has been engaged by the RSE licensee to express an audit opinion on additional aspects of its business operations. Such insertions would not limit or detract from the audit opinion provided in accordance with SPS 310.

¶3-330 Financial management Regulated superannuation funds are subject to stringent financial management standards (SISR reg 9.01 to 9.45). These standards cover: • the circumstances in which a fund is considered to be in an “unsatisfactory financial position” — in such a case, the auditor or actuary of the fund is obliged to report the situation to the trustee who is then required to take remedial action (¶3-600) • the requirements for maintaining and monitoring the solvency of a fund — different rules apply according to whether the fund is a defined benefit fund or an accumulation fund. From 12 May 2004, defined benefit funds must have at least 50 defined benefit members, and superannuation funds paying defined benefit pensions must have at least 50 members (¶3-160). Defined benefit funds The trustee of a “defined benefit fund” (¶3-010) is required to have an actuarial investigation made in relation to the fund, and must obtain an actuarial report in respect of that investigation (SISR reg 9.29; 9.30). The actuarial investigation and reporting requirements must be satisfied on the establishment of the fund or on conversion from an accumulation fund to a defined benefit fund, and in every three-year period after the last investigation. These requirements do not apply if the fund has a defined benefit member who is being paid a defined benefit pension. Such funds are subject to an annual actuarial certification (see “Funds paying pensions” below). Defined benefit funds must also comply with funding and solvency certification requirements, and take

specific action in case of technical insolvency and winding up of the fund (reg 9.09; 9.23). Exemptions from these requirements apply to funds which: • are part of a scheme established by the Superannuation Act 1976, the Superannuation Act 1990 or the Military Superannuation and Benefits Scheme • are part of an exempt public sector superannuation scheme, or • have never been used for SG purposes (reg 9.05; 9.20). Regulator may request new certificates or investigation The Regulator may direct the trustee of the fund, in writing, to obtain from an actuary a new or replacement funding and solvency certificate, or to require an actuarial investigation, if the Regulator considers on reasonable grounds that to do so would be in the prudential interests of the fund and in the best interests of fund members (SISR reg 9.09(1A); 9.29(2)). Funds paying pensions A fund which has a defined benefit member who is being paid a defined benefit pension from the fund, on or after 12 January 1999, must have actuarial certifications as to whether pensions will continue to be paid under the fund’s governing rules (SISR reg 9.29A). A “defined benefit pension” means a pension (within the meaning of the SISA) other than: • a pension purchased or obtained in the form of an annuity from a life assurance company by the trustee of a fund solely for the purpose of providing benefits to members of that fund, or • an allocated pension or a market linked pension. Funds providing pensions wholly through the purchase of annuities issued by life offices are exempted as the solvency arrangements supporting the annuity payments are subject to regulation under the Life Insurance Act 1995, and funds paying allocated or market linked pensions are exempted as the members bear both the investment and longevity risks in those products. After obtaining its first actuarial certificate under reg 9.29A, a fund must have actuarial investigations made at least once a year. A fund that has five or more members may apply to APRA to have the actuarial investigations made for a period not exceeding three years. Accumulation funds The trustee of an accumulation fund must comply with financial management standards which (SISR reg 9.34 to 9.45): • prescribe the maximum rate of return that the trustee of a solvent fund may allot to members in each year of income • require a fund that is technically insolvent to be wound up or be subject to a special supervision program aimed at restoring solvency within five years. The financial management standards do not apply to funds that are part of an exempt public sector superannuation scheme or that have never been used for SG purposes. [SLP ¶3-120]

¶3-340 Other trustee duties and administration obligations In addition to accounts, audit and record-keeping obligations (¶3-315), the trustee of a superannuation entity must comply with various duties and obligations relating to the entity’s management, administration and operation. These include: • takings steps to identify multiple accounts of members and merging such multiple accounts (see below)

• complying with rules when using a member’s TFN to facilitate account consolidation (see below) • seeking information from an investment manager on the making of, or the returns on, investments and other relevant information so as to be able to assess the manager’s investment management capability (s 102: ¶3-400) • keeping and retaining minutes of trustee meetings, records of trustee changes and consents to act as trustees, for at least 10 years (s 103; 104: these are strict liability offences) • keeping and retaining copies of all “member or beneficiary reports” which are given to members (such as those required under the SISA or the entity’s governing rules) for at least 10 years (not applicable to a PST) (s 105: this is a strict liability offence) • establishing procedures for the appointment of additional independent trustees or member representatives as trustees (not applicable to a superannuation fund with fewer than five members, an ADF or a PST) (s 107; 108: ¶3-130) • ensuring that the appointment of an investment manager is made in writing (s 124: ¶3-400) • ensuring the accounts, records, statements, etc, are properly and correctly maintained so as to protect the integrity of the SIS system (Pt 26 s 303; 306; 307; 308). A person responsible for keeping accounts, accounting and other records must not incorrectly keep accounts and records (a strict liability offence), or incorrectly keep or make accounts and records, or provide false or misleading information, with the intention to deceive or mislead (SISA s 300 to 308; Criminal Code Act 1995). Identifying and consolidating multiple accounts of members Each trustee of a superannuation entity (other than a PST or SMSF) must: • set out a procedure for identifying if multiple “superannuation accounts” (see below) are held by a member • carry out the procedure to identify such members at least once each financial year • for such members, merge the member’s multiple accounts where the trustee reasonably believes it would be in the member’s best interest, regardless of the balances of the accounts, and • ensure no fees are payable (other than a buy-sell spread: ¶9-210) for any merger (SISA s 108A). Section 108A is a strict liability offence provision (penalty: 50 penalty units). There is no requirement to merge a member’s multiple accounts if it is not practicable in the circumstances to merge the accounts, or one or more of the accounts is a defined benefit interest or income stream (s 108A(2)). Impracticable circumstances may include where a member has an interest in a hybrid scheme, which may include a defined benefit and an accumulation benefit. In deciding whether it is in the member’s best interest to merge accounts, the trustee must take into account the possible savings in fees, charges and insurance premiums which will result if they merge two or more separate accounts creating a single account (s 108A(4)). Trustees should not ordinarily regard cases like the following as impracticable: • where there are costs associated with the implementation of the rules or operational requirements that the fund considers are of a higher priority • where contributions have been paid into two or more accounts in the current reporting period, or higher per-account costs may arise as a result of having a smaller number of accounts. A “superannuation account” is a record of the member’s benefits, in relation to a superannuation entity in which the member has an interest, which is recorded separately from other benefits of the member in

relation to the entity (if any) and from other benefits of any other member in relation to the entity. TFN provisions in the SIS Act The rules regarding the use of TFNs by RSA providers, trustees of eligible superannuation entities and of regulated exempt public sector superannuation schemes (superannuation providers) are contained in Pt 11 of the RSA Act (¶10-350) and Pt 25A of the SIS Act. APRA shares administration of these provisions with the Commissioner of Taxation. APRA has made Retirement Savings Accounts Tax File Number approval No 1 of 2017 (F2017L01270) (the RSA TFN approval) and Superannuation Industry (Supervision) Tax File Number approval No 1 of 2017 (F2017L01262) (the SIS TFN approval). Relevantly, the SIS TFN approval made the following approvals for the purposes of the SISA provisions below: (a) s 299E(1) — approved the manner of a trustee of an eligible superannuation entity (other than an SMSF) or of a regulated exempt public sector superannuation scheme requesting that a beneficiary or applicant to become a beneficiary of the entity or scheme quote their TFN in connection with the operation or the possible future operation of the SIS Act and the other Superannuation Acts (b) s 299G(1) — approved the manner of a trustee of an eligible superannuation entity (other than an SMSF) requesting that a beneficiary of the entity or scheme quote their TFN in connection with the operation or the possible future operation of the Acts referred to in that subsection (c) s 299P(a) for the purposes only of s 299D — approved the manner for a beneficiary, or applicant to become a beneficiary, of an eligible superannuation entity (other than an SMSF) or of a regulated exempt public sector superannuation scheme, to quote their TFN to a trustee of the entity or scheme in connection with the operation or possible future operation of the SIS Act and the other Superannuation Acts (d) s 299S(1)(b) — approved the manner of a person setting out their TFN in an application to the trustee of an eligible superannuation entity (including an SMSF) or regulated exempt public sector superannuation scheme for payment of a benefit (e) s 299M(2) — approved the manner of a trustee of an eligible superannuation entity (other than an SMSF) (the first fund) informing another superannuation provider of a TFN of a beneficiary of the first fund, and (f) s 299N(2) — approved the manner of a trustee of a regulated exempt public sector superannuation scheme (the first fund) informing another superannuation provider of a TFN of a beneficiary of the first fund. The SISA TFN provisions and approvals are discussed further in ¶11-750. Privacy rules reflected in 2017 TFN approval The 2017 TFN approval also reflects the current Privacy (Tax File Number) Rule 2015 (2015 TFN Rule) issued by the Privacy Commissioner under s 17 of the Privacy Act 1988 (Privacy Act), which replaced the requirements previously set out in the Tax File Number Guidelines 2011. The 2015 TFN Rule regulates the collection, storage, use, disclosure, security and disposal of individuals’ TFN information and is legally binding on superannuation and RSA providers. APRA guidelines and further information For additional information, including FAQs, explanation of the TFN obligations under the Privacy (Tax File Number) Rule 2015 and TFN penalties, see: • APRA website — www.apra.gov.au/tax-file-number-approvals • APRA’s letter on the TFN approval, 28 September 2017 — www.apra.gov.au/sites/default/files/letterall-rse-licensees_superannuation-legislative-instruments_28-september-2017.pdf Use of TFNs for consolidation or roll-over

From 1 January 2012, the trustee of a superannuation entity must comply with prescribed rules when using a beneficiary’s TFN to locate accounts and where they use TFNs in order to facilitate account consolidation (SISR Div 6.8 reg 6.47 to 6.50). RSA providers are subject to similar rules under the RSAR (¶10-350). For the above purposes, a “beneficiary” means a person who quotes his/her TFN to a trustee in accordance with SISA s 299LA(1) and who is a beneficiary of an eligible superannuation entity or of a regulated exempt public sector superannuation scheme, or an applicant to become such a beneficiary. An RSA provider or superannuation entity means an RSA provider, eligible superannuation entity or regulated exempt public sector superannuation scheme. A trustee means a trustee of an eligible superannuation entity or of a regulated exempt public sector superannuation scheme (reg 6.47). The SISR Div 6.8 rules dealing with the conditions for use of TFNs, obtaining the beneficiary’s consent and procedures are the prescribed conditions for the use of TFNs quoted by a beneficiary to a trustee in accordance with s 299LA(1) (¶11-750). Under s 299LA(2), a trustee will have obtained sufficient consent to use the beneficiary’s TFN to locate multiple amounts within the fund if the beneficiary has quoted his/her TFN for superannuation purposes to the superannuation entity. The prescribed rules for the use of TFNs, obtaining the beneficiary’s consent and procedural requirements are the same under the SISR and RSAR and are discussed in ¶10-350. [SLP ¶3-600, ¶3-660]

¶3-350 Dealing with surpluses The trustee of a standard employer-sponsored fund (other than an SMSF) may make payments to a current or former standard employer-sponsor (including an associate or related body corporate of the employer-sponsor) only if the payment is a reasonable payment for services rendered in connection with the operation or management of the fund or is in the nature of an investment or a loan to the employersponsor under the in-house asset rules (SISA s 117(4), (8)). In other cases, payments to a standard employer-sponsor may be made only if: • the fund’s governing rules require or permit the payment to be made • the trustee had declared its intention to make the payment and, where appropriate, the trustee had equal employer/member representation at the time of the declaration • an actuary has certified that the fund will remain in a satisfactory financial position if the payment were to be made • the trustee is satisfied that the payment and any associated changes to the governing rules are a reasonable resolution of the interests of the employer-sponsor and members • all members have been given notice of the proposed payment together with particulars of any changes to the governing rules • the trustee decided to make the payment or has passed a resolution agreeing to make the payment three months after the relevant notice was given to members • any other requirements prescribed by the SISR have been complied with (s 117(5)). Any or all of the above conditions may be waived at APRA’s discretion. The restrictions on payments to employer-sponsors will not apply in circumstances where their application would result in the acquisition of property otherwise than on just terms and the acquisition would be invalid because of s 51(xxxi) of the Constitution (s 117(3A)). Apart from the SISA restrictions, trustees must also have regard to trust law issues relevant to a proposed return of surplus. For example, the High Court has held that the use of a surplus in an employersponsored superannuation fund could create an industrial dispute over which the industrial tribunal had

jurisdiction (Shell Australia (1992) 174 CLR 345). In UEB (1991) 1 NZSC 40,233, an amendment to the trust deed of a superannuation fund which allowed a surplus to be returned to the employer on termination of the fund was held to be invalid and beyond the trustee’s powers. The amendment adversely affected the members whose consent was not obtained and could not remove the prohibition in the trust deed on payments of surplus to the employer. Also, in Hillsdown (1997) 1 All ER 862 (an appeal from the UK Pensions Ombudsman heard in the UK High Court of Justice, before Knox J), a payment of surplus to an employer under a transfer-out power was held to be both a breach of the employer’s implied obligation of good faith to its employees, a fraud on a power and a breach of trust, even though the trustees had acted honestly and intended to act in the best interests of members. For a case where a return of surplus to the employer in conjunction with an increase in members’ benefits was held to be valid, see Lock (1991) 25 NSWLR 593. [SLP ¶3-640, ¶3-645]

¶3-355 Splitting superannuation interests on marriage breakdown The Family Law (Superannuation) Regulations 2001 (FLSR) provide the administrative framework for the application of the Family Law Act 1975 (FLA), Pt VIIIB. Essentially, that Part allows a member spouse of a superannuation fund or ADF to make an agreement with his/her non-member spouse to split the member spouse’s superannuation interest between them on separation. If the parties are unable to agree, the Family Court will be able to order that the superannuation interest be split between them. From 15 June 2005, married couples are also able to split annuities purchased wholly with roll-over amounts (a “superannuation annuity”) in the same way as other superannuation benefits under FLA Pt VIIIB. A superannuation annuity that is split on marriage breakdown is given the same treatment as that applying to pensions under the SISR and the Income Tax Regulations 1936 (ITR) (SISR reg 1.05). The FLSR provisions commenced when Pt VIIIB came into effect on 28 December 2002. Superannuation splitting under the FLA and FLSR is discussed in detail in Chapter 14. Trustees’ obligations and options for superannuation interests subject to a payment split The regulatory and administrative framework for trustees of regulated superannuation funds and ADFs to deal with the splitting of a member’s superannuation interest pursuant to a financial agreement or court order under Pt VIIIB, and the additional options that may be exercised in relation to the interest that is subject to a payment split, are contained in SISR Pt 7A (reg 7A.01 to 7A.22), as below. • Division 7A.1A sets out the obligations and options for trustees in dealing with an original superannuation interest that is subject to a payment split and an allocated pension or market linked pension is being paid in respect of the interest, and no request has been received as to how the interest is to be dealt with. • Division 7A.2 further clarifies the obligations and options where the original superannuation interest is an accumulation interest in the growth phase or an allocated pension or market linked pension is being paid in respect of the interest. The Division is not applicable to a “partially vested accumulation interest” or the interest is determined by reference to a life insurance policy, or to an original interest if the trustee has created a non-member spouse interest under reg 7A.03B. • Division 7A.3 sets out the payment options and standards for the non-member spouse entitlements in respect of the split superannuation interests (ie the preservation and conditions of release of the benefits). • Division 7A.4 sets out further rules for creating a new interest in the fund for the non-member spouse, or for rolling over or transferring the benefits for, or paying the benefits to, the non-member spouse. Generally, where a member holds a superannuation interest (the “original interest”) which becomes subject to a family law agreement or order, the member’s former spouse may ask the trustee to create a new interest in the fund to hold his/her entitlement under Div 7A.2. If the member’s interest is an allocated pension or market linked pension, the trustee may create a new interest for the former spouse without

waiting for a request. If the original interest is an accumulation interest in the growth phase (ie payments have not begun to be made to the member), the former spouse can also request a new interest, roll-over or lump sum payment of his/her entitlement under Div 7A.2. In summary, the SISR provisions: • require the trustee of the fund or ADF to give notice to the member spouse and non-member spouse that the member spouse’s superannuation interest is subject to a payment split • if the interest is held in an SMSF, allow the member spouse to request the trustee to roll over or transfer the non-member spouse’s entitlement to a regulated superannuation fund, ADF, RSA or exempt public sector superannuation scheme (EPSSS) nominated by the non-member spouse • allow the non-member spouse to request the trustee to create a new interest in the fund or ADF on his/her behalf, transfer the entitlement to another regulated superannuation fund, ADF, RSA or EPSSS nominated by the non-member spouse or, if the non-member spouse has met a condition of release, payment of his/her entitlement • allow the trustee, if no request is received from the member spouse or non-member spouse, to create an interest on behalf of the non-member spouse or roll over or transfer the non-member spouse’s entitlement, if no fund is then nominated, to an eligible rollover fund • ensure that unrestricted non-preserved, restricted non-preserved and preserved benefits are shared between the parties on an equal basis in proportion to their share of overall benefits • ensure that minimum benefits held in the fund or ADF are shared proportionately between the member spouse and non-member spouse, with the trustee having the option of making all of the member spouse’s and non-member spouse’s benefits minimum benefits, provided the minimum benefits of other fund members are not reduced • provide for information to be disclosed or given by the trustee to the non-member spouse before the non-member spouse has an interest created, and for the provision of ongoing information where an interest cannot be created or transferred (eg in the case of defined benefit schemes). If a trustee acts to satisfy a payment split (eg by creating a new interest for a non-member spouse or transferring or rolling over an amount to another fund or RSA for the benefit of a non-member spouse or ensure that a future payment of the superannuation interest would not be a splittable payment under the FLSR), the trustee’s action will comply with the payment standards in the SISR (¶3-286) (reg 6.17(2A), (2B)). Altering a member’s right or claim to accrued benefits to satisfy a superannuation agreement, flag lifting agreement or splitting order is also permitted (reg 13.16(2)(f): ¶3-270). Trustee to provide information about interests subject to a split The information requirements in relation to superannuation interests that are subject to a split are set out in SISR Pt 2 Div 2.5A (reg 2.36B to 2.36E). If an interest in a superannuation fund (or ADF) becomes subject to a payment split, the trustee of the fund must notify the member spouse and non-member spouse in writing that the interest is subject to a payment. This “payment split notice” must be given: • within 28 days of a payment split under a superannuation agreement or flag-lifting agreement, or • in the case of a splitting order, by the later of the end of 28 days after the “operative time” (see below) for the payment split and the end of 28 days after the trustee receives a copy of the order. The payment split notice must contain the information set out in reg 2.36C, such as the fund’s contact details, whether the governing rules will allow the non-member spouse to be a member of the fund, the circumstances under which the entitlement is payable to the non-member spouse, the value of the components of the benefit and, if the non-member spouse is able to become a fund member, all relevant

details to understand the management and financial condition of the fund. Operative time — deeming provision Special rules ensure that certain SISA provisions are not inadvertently breached when the trustee of a superannuation fund receives a court order which specifies an operative time that is in the past. In relation to the payment split of a member spouse’s superannuation interest under a court order, the “operative time” means the time specified in the order (which may be a time in the past), and in relation to a payment split under a superannuation agreement, the operative time is the beginning of the fourth business day after the day on which a copy of the agreement is served on the trustee or, in the case of an SMSF, when the agreement is served on the trustee. When the trustee is served with a court order specifying an operative time that is in the past, the nonmember spouse is treated as a member of the fund from the later of the operative time for the payment split and the time that the trustee receives the agreement or order to prevent an inadvertent breach of the following provisions (SISR reg 1.04AAA(2)): • s 17A, except s 17A(5) — conditions for SMSFs (¶5-220) • s 65 — lending to fund members (¶3-420), and • Pt 8 — the in-house assets rules (¶3-450). Also, the non-member spouse is to be treated as a member of the fund from the later of the end of six months after the operative time for the payment split and the end of six months after the trustee receives the agreement or order (reg 1.04AAA(3)). This rule is relevant to s 17A(5), which provides when an SMSF would cease to be an SMSF due to the admission of new members and therefore no longer has fewer than five members. It ensures that SMSFs and SAFs have sufficient time to restructure their affairs if a court order specifies an operative time which is a date in the past so they are not in breach of the above SISA provisions.

¶3-360 Amalgamation of funds — successor funds Part 18 of SISA provides for the amalgamation of funds in circumstances where the trustee of a regulated superannuation fund or ADF has not become a registrable superannuation entity (RSE) licensee (¶3-480). Amalgamations may occur as APRA can suspend or remove such a trustee and put in place an RSE licensee as an acting trustee. Part 18 facilitates the transfer of all members’ benefits in an RSE to another entity. APRA may approve the transfer of all benefits of members and beneficiaries in a regulated superannuation fund or ADF (transferor fund) to another regulated fund or ADF (transferee fund) if all the trustees of the transferor fund are party to the transfer and the trustee of the transferee fund is an approved trustee (s 144; 145). For a transfer of benefits to be approved, APRA must be satisfied that: • all reasonable attempts to bring about the transfer under another SISA or SISR provision (eg under the successor fund arrangements) have failed or the transfer was taking place under a scheme for winding up or dissolving the transferor fund under s 142 (¶3-290) • the transfer is reasonable in all the circumstances, having regard to the factors set out in s 146. When the benefits of members and beneficiaries in a transferor fund are transferred to a transferee fund, members and beneficiaries and other persons cease respectively to have rights or contingent rights against the transferor fund (s 147). This provision ensures there is a clean break between members and beneficiaries and other persons holding contingent rights against a transferor fund after the transfer. The ITAA97 provides separate CGT roll-over and loss transfer relief for merging superannuation funds and transfers of member benefits to another superannuation fund in certain circumstances (¶7-140).

Successor funds The benefits of a member of a regulated superannuation fund may be transferred to a successor fund (SISR reg 6.29(1)) (¶3-284). A “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: • the fund confers on the member equivalent rights to the rights that the member had under the original fund in respect of the benefits • 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 (reg 1.03(1)). To meet the “equivalent rights” requirement, the member’s position and rights in the successor fund must effectively be the same as in the original fund. That is, the member’s rights in respect of benefits are equivalent in value, measure, force and effect to those in the original fund. Although special consideration should be given to significant rights, any judgment of whether rights are equivalent should not be assessed solely on an individual change to a specific right but on the equivalency of the bundle of rights (including rights to contingent benefits). Both the transferor and transferee trustees must satisfy themselves whether equivalent rights will be conferred in a particular case based on the individual circumstances of a transfer, a scrutiny of the fund’s governing rules, due diligence examinations and legal advice. Successor fund transfer rules not applicable to MySuper transfers The general rule for the transfer of member benefits in reg 6.29(1)(d) provides that a member’s benefits in a fund must not be transferred from the fund unless the trustee of the fund is required by a prudential standard made under SISA s 34C to transfer the benefits for s 29SAA, 29SAB, 387, 388 or 394 (see ¶3284). These are transfers of accrued default member accounts (discussed in ¶9-120 and ¶9-130). The rule in reg 6.29(1)(d) is necessary as prudential standards are of no effect to the extent that they conflict with the SISR. Therefore, transfers under prudential standards would have to otherwise satisfy one of the existing requirements of reg 6.29 noted in ¶3-284. The successor fund transfer rules do not apply to the transfer of accrued default amounts to a MySuper product in another fund. These transfers are discussed in ¶9-120 and ¶9-130. A prudential standard, made under s 34C for the purpose of s 29SAA, 29SAB, 387, 388 or 394, requires the transfer of the accrued default amounts to another fund in the following circumstances: • Paragraphs 29SAA(1)(b) and 387(1)(b) require the trustee to take the action required under the prudential standards in relation to accrued default amounts where the trustee has sought MySuper authorisation but the member is not eligible to be in the fund’s MySuper product. • Section 29SAB requires action to be taken under the prudential standards if the authorisation to offer a MySuper product is cancelled under s 29U(1). • Section 388 requires the trustee to take the action required by the prudential standards if the trustee holds accrued default amounts and has not applied for MySuper authorisation before 1 July 2017. • Section 394 requires trustees that are not authorised to operate an eligible rollover fund (EDR) to transfer the amounts held in existing EDRs to an authorised EDR fund or a fund that offers a MySuper product in accordance with the prudential standards. APRA prudential standards and guidelines APRA prudential standards and guidelines on successor fund transfers and wind-ups and related issues are noted at ¶3-284 and ¶9-720.

¶3-370 Winding up fund

A superannuation fund may be wound up for one or more of the following reasons: • the principal employer-sponsor is being wound up or liquidated, or has been taken over or amalgamated resulting in a consolidation of superannuation funds • insolvency of the fund • rationalisation of various existing superannuation arrangements covering a number of different groups of employees into a single arrangement, or a decision by the employer-sponsor to replace the existing superannuation arrangements for employees • the Regulator has formulated a scheme for the winding up or dissolution, or both, of the fund under SISA s 142. The prudential requirements to which trustees must have regard during the winding-up process include the following: • lodging of returns for the fund (as required under the SIS legislation or the FSCDA: ¶3-310) • notifying the regulator of a significant adverse event affecting the financial position of the fund (SISA s 106(1): ¶3-310) • clarifying and complying with the conditions for return of surpluses in an employer-sponsored fund to a standard employer-sponsor (SISA s 117: ¶3-350) • complying with the successor fund rules for transfers of members’ benefits (SISR reg 6.29: ¶3-284) • complying with or amending the trust deed to include an enabling clause to wind up the fund (SISR reg 4.05(2)(b)) • complying with the special rules for winding up defined benefit funds (SISR Div 9.4) • complying with other notification requirements, eg giving written notice to the regulator of the decision or resolution to wind up, or of a trustee’s decision to retire, or trustee changes (SISR reg 11.07). Regulators’ guidelines Guidance for successor fund transfers and wind-ups may be found in Superannuation Prudential Practice Guide SPG 227 (¶9-720) (see Superannaution Reporting Standard SRS 602.0 Wind-up at ¶9-750). For the ATO fact sheet on superannuation fund wind-ups and related reporting, see www.ato.gov.au/Super/Self-managed-super-funds/Winding-up.

¶3-380 Lost members and unclaimed superannuation benefits The trustee of a regulated superannuation fund or an ADF or an RSA provider (superannuation provider) is required to deal with unclaimed superannuation monies of members in accordance with the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLM Act) and to pay unclaimed money of members to the Commissioner of Taxation (ATO) or a state or territory government or authority (“state or territory authority”). The Commissioner of Taxation is responsible for the administration of the SUMLM Act. The term “unclaimed superannuation monies” covers these types of unclaimed money: • unclaimed money under the SUMLM Act (see “Unclaimed Money” below) • lost member accounts, ie small accounts of lost members, and inactive accounts of unidentifiable members (see “Lost members” below), and • unclaimed superannuation of former temporary residents, and

• superannuation of inactive low-balance members. In this paragraph, all references are to the SUMLM Act and its regulations unless stated otherwise. A “member” means a member of a superannuation fund, a depositor with an ADF or an RSA holder, and a “fund” means a regulated superannuation fund, an ADF or an RSA. State and territory authorities and public sector superannuation schemes may pay unclaimed superannuation moneys to the Commissioner, and the Commissioner may accept, and subsequently pay out, amounts transferred by state and territory authorities and public sector superannuation schemes. A superannuation provider who has paid unclaimed money to the ATO or a state or territory authority is discharged from liability as trustee in respect of that money. A payment of unclaimed money to the ATO or a state or territory authority is not assessable to the person entitled to the unclaimed money at the time of payment. However, a repayment of the unclaimed money subsequently to a person entitled to it (see below) will be assessable as a superannuation benefit (¶8130). Individuals are able to claim back monies from the Commissioner at any time. Interest on these monies is currently only payable in the case of former temporary residents who become an Australian or New Zealand citizen or hold a permanent resident visa (s 20H(2A)). Interest accrues and is payable on all unclaimed superannuation monies held by the ATO (s 24G(3A), (3B), (3C), (3D); 17(2AB), (2AC), (2AD), (2AE); 20H(2AA)). Outline of SUMLM Act The outline below is provided in s 7 of the SUMLM Act. Readers are advised to refer to the Wolters Kluwer Australian Superannuation Law & Practice service and to the legislation for further coverage and information. Unclaimed money register At the times determined by the Commissioner, superannuation providers must give the Commissioner of Taxation details relating to any unclaimed money they hold in respect of members who have reached the eligibility age or who have died. Unclaimed money is money in an inactive account which the superannuation provider is unable to ensure is received by a person entitled to receive it. Superannuation providers must pay to the Commissioner of Taxation any unclaimed money they hold. Later, the Commissioner must, if satisfied that it is possible to do so, pay the amount he or she has received in respect of a person to: (a) the person (b) to a fund identified by the person (c) if the person has died — to the person's death beneficiaries or legal personal representative. If a State or Territory law regulates unclaimed money in a way consistent with this Act, superannuation providers that are trustees of public sector superannuation schemes may give details relating to the money, and pay the money, to the relevant State or Territory authority instead of paying it to the Commissioner of Taxation. The Commissioner of Taxation may publish, or make available, details relating to unclaimed money in respect of members who have reached the eligibility age or who have died. Superannuation of former temporary residents The Commissioner of Taxation must give the superannuation provider for a fund a notice identifying a member of the fund if satisfied that the member is a former temporary resident. The superannuation provider must give the Commissioner a statement and pay the Commissioner the amount that would be payable to the member if the member had requested payment in connection with

leaving Australia (subject to reductions for amounts paid or payable from the fund in respect of the member). If the Commissioner is satisfied, he or she has received a payment under this Act for such a member, the Commissioner must pay the amount he or she has received (and interest, in some cases) to the member, to a fund identified by the member or, if the member has died, to the member’s death beneficiaries or legal personal representative. The Commissioner of Taxation may publish, or make available, details relating to amounts paid to the Commissioner in respect of such members. Lost members register The Commissioner of Taxation may publish, or make available, details relating to lost members. Superannuation of lost members At the times determined by the Commissioner, superannuation providers must give the Commissioner of Taxation details relating to: (a) small accounts of lost members, and (b) inactive accounts of unidentifiable lost members. Superannuation providers must pay to the Commissioner of Taxation the value of any such accounts. Later, the Commissioner must, if satisfied that it is possible to do so, pay an amount he or she has received in respect of a person: (a) to a fund identified by the person, or (b) if the person has reached eligibility age or the amount is less than $200 — to the person, or (c) if the person has died — to the person's death beneficiaries or legal personal representative. Superannuation of inactive low-balance members At times determined by the Commissioner, superannuation providers must give the Commissioner of Taxation details relating to inactive low-balance accounts. Superannuation providers must pay to the Commissioner of Taxation the value of any such accounts. Later, the Commissioner must, if satisfied that it is possible to do so, pay an amount the Commissioner has received in respect of a person: (a) to a fund identified by the person, or (b) if the person has reached eligibility age or the amount is less than $200 — to the person, or (c) if the person has died — to the person’s death beneficiaries or legal personal representative. Reunification of amounts held by the Commissioner If, having taken the steps required in relation to unclaimed amounts, or amounts held by the Commissioner for lost members or inactive low-balance members, the Commissioner still holds an amount, the Commissioner must pay that amount to a fund in which the member for whom the Commissioner holds the amount is active, or in accordance with the regulations. Prescribed public sector superannuation schemes The trustees of certain public sector superannuation schemes may comply with this Act in the same way as superannuation providers. Unclaimed money An amount payable to a member is “unclaimed money” if: • the member has reached the eligibility age (65 in all cases, or in pre-29 August 2002 cases, 65 for a man and 60 for a woman)

• the superannuation provider has not received an amount in respect of the member (and, in the case of a defined benefits superannuation scheme, no benefit has accrued in respect of the member) within the last two years, and • after the end of five years since the superannuation provider last had contact with the member, the provider has been unable to contact the member again after making reasonable efforts (s 12). An amount payable is taken to be unclaimed money if: • a “payment split” applies to a “splittable payment” (within the meaning of those terms in Pt VIIIB of the Family Law Act 1975) in respect of a superannuation interest of a fund member and, as a result, the non-member spouse (or his/her legal personal representative if he/she has died) is entitled to be paid an amount, and • after making reasonable efforts and after a reasonable period has passed, the superannuation provider concerned is unable to ensure that the non-member spouse or his/her legal personal representative, as the case may be, receives the amount (s 12(2)). The trustee of a superannuation fund must make reasonable efforts to contact a member who has reached eligibility age (age 65 for a man and 60 for a woman) and the member’s account is inactive within the last two years and five years have passed since the trustee last had contact with the member (s 13(1)). If the member has reach eligibility age and there has been a payment split under the family law or the member has died, the trustee must make reasonable efforts to ensure that the non-member spouse or the legal personal representative of the deceased member, as the case may be, receives the amount (s 13(1A)). In the case of a deceased member, an amount payable in respect of a member of a fund is taken to be “unclaimed money” if: (a) the member has died (b) the superannuation provider determines that, under the governing rules of the fund or by operation of law, a benefit (other than a pension or annuity) is immediately payable in respect of the member (c) the superannuation provider has not received an amount in respect of the member (and, in the case of a defined benefits superannuation scheme, no benefit has accrued in respect of the member) within the last two years, and (d) after making reasonable efforts and after a reasonable period has passed, the superannuation provider is unable to ensure that the benefit is received by the person who is entitled to receive the benefit (s 14). A superannuation provider who does not know a member’s date of birth or sex must make reasonable attempts to obtain that information. If that information is known, the provider is required to keep records of it (s 10). Certain assumptions may be used when determining whether a member has reached eligibility age. Penalties may be imposed for failing to comply with the above requirements (s 13(2); 15). States and Territories States and territories which have legislation dealing with unclaimed money are: • New South Wales — Unclaimed Money Act 1995 (NSW) • Victoria — Unclaimed Money Act 2008 (Vic) (replacing former Unclaimed Moneys Act 1962) • Queensland — Public Trustee Act 1978 (Qld) • South Australia — Unclaimed Superannuation Benefits Act 1997 (SA)

• Tasmania — Unclaimed Moneys Act 1918 (Tas) • Northern Territory — Unclaimed Superannuation Benefits Act 1998 (NT) • Australian Capital Territory — Unclaimed Moneys Act 1950 (ACT). Lost members The lost members’ scheme under the SUMLM Act applies to all regulated superannuation funds (except SMSFs), ADFs, ERFs and RSA providers. SMSFs are not covered as they cannot have “lost members”. The term “lost member” in the SUMLM Act is defined by reference its meaning in the SIS Regulations and the RSAR Regulations. Except in certain circumstances (see below), a “lost member” is a member of a superannuation fund, ADF, ERF or an RSA holder who: • is “uncontactable” — ie either the fund or RSA never had an address for the member or two written communications sent to the member’s last-known address have been returned unclaimed, and the fund has not received a contribution or roll-over for the member within the last 12 months of the member’s membership of the fund • is an “inactive member” — ie he/she has been a member for more than two years, joined the fund or RSA under a standard employer-sponsored arrangement, and in the last five years the fund or RSA has not received further contributions or roll-over amounts, or • joined the fund from another fund, exempt public sector superannuation scheme (EPSSS) or RSA as a lost member/RSA holder (RSAR reg 1.06; SISR reg 1.03A). A member is not a lost member if: (a) the member is permanently excluded from being a lost member; or (b) within the last two years of the member’s membership, the superannuation provider has verified that the member’s address is correct and has no reason to believe that the address is now incorrect. A member is permanently excluded from being a lost member if: • the member is an “inactive member” who has indicated by a positive act (eg by deferring a benefit) that he/she wishes to remain a member • the member has contacted the fund or RSA at any time after becoming a member indicating that he/she wishes to remain a member, or • the member is a member of an SMSF (reg 1.03A(2)). Despite the above, a superannuation provider may also decide that a member, class of members or all members cannot be permanently excluded from becoming lost members (reg 1.03A(3)). Consequences of members becoming lost If a fund has lost members, the consequences are: • the superannuation provider must report details of the lost member to the ATO for recording on the lost members register • if the lost member is transferred to another fund or an EPSSS, the transferor fund must provide certain information about the member to the transferee fund as required under reg 7.9.81 of the Corporations Regulations 2001 (note to reg 1.03A(3)). There may also be consequences regarding the information to be supplied to the member (see CR reg 7.9.60A and Pt 14 of Sch 10A). Lost member accounts An account in a superannuation fund (or an RSA) is taken to be a “lost member account” if: • the member on whose behalf the account is held is a “lost member” (see above)

• the balance of the account is less than $6,000, and • the account does not support or relate to a defined benefit interest (within the meaning of ITAA97 s 291-175 and former s 292-175) (s 24B(1)). The balance of an account does not reflect any earnings, fees or charges that have not yet been credited to, or debited from, the account. An account in a fund is also taken to be a “lost member account” if: • the member on whose behalf the account is held is a “lost member” • the superannuation provider has not received an amount in respect of the member within the last 12 months • the superannuation provider is satisfied that it will never be possible for the provider, having regard to the information reasonably available to the provider, to pay an amount to the member, and • the account does not support or relate to a defined benefit interest (s 24B(2)). Unclaimed superannuation of former temporary residents The SUMLM Act also provides a scheme to deal with the superannuation benefits of “former temporary residents” (as defined in s 20AA) (SUMLMA Pt 3A). Briefly, the Commissioner must give superannuation funds a notice identifying a fund member if satisfied that the member used to be the holder of a temporary visa, has left Australia, and is not an Australian or New Zealand citizen or the holder of a visa. The fund is then required to give the Commissioner a statement and pay to the Commissioner the amount that would be payable to the member if the member had requested payment in connection with leaving Australia (subject to reductions for amounts paid or payable from the fund in respect of the member). On application, the Commissioner must pay the unclaimed amount (plus interest, in some cases) to the member, to a fund identified by the member or, if the member has died, to the member’s legal personal representative. The scheme and taxation of unclaimed superannuation of former temporary residents are discussed in ¶8-400. Events-based reporting of lost members and unclaimed money Superannuation providers are required to report information about superannuation member attributes and superannuation transactions, including lost members and unclaimed superannuation money, to the Commissioner under TAA Sch 1 s 390-5 in the approved form under event-based reporting (see ¶9-795). ATO Guidance The ATO’s protocol about unclaimed superannuation money and lost members may be found in www.ato.gov.au/Super/APRA-regulated-funds/Fund-reporting-protocol/Unclaimed-superannuationmoney-protocol/ and www.ato.gov.au/Super/APRA-regulated-funds/Fund-reporting-protocol/Lostmembers-register-protocol/.

¶3-385 Transferring inactive low-balance accounts to ATO From 13 March 2019, superannuation providers are required to transfer superannuation savings accounts with balances below $6,000 to the Commissioner if an account, related to a MySuper or choice product, has been inactive for a continuous period of 16 months. An account need not be transferred if the member has chosen to maintain insurance or if the existing insurance cover has not ceased (SUMLMA Pt 3B). Also, from 13 March 2019, the ATO is also empowered to proactively pay amounts held by it into a member’s active superannuation account, where the reunited account balance would be greater than $6,000 (SUMLMA Pt 4B). Part 4B sets out a procedure for transferring amounts received by the Commissioner under SUMLMA Pts 3 (unclaimed money paid to the ATO), 3B (low balances in inactive

accounts paid to the ATO) and 4A (lost member accounts paid to the ATO) in respect of a person into a single active account held by a superannuation provider in respect of the person. APRA and ATO guidelines The Regulators’ guidelines are available in Protect Your Super (letstalk.ato.gov.au/SuperCommunity/news_feed/protect-your-super) which contains the ATO’s advice and implementation documents on the PYSP changes, and in APRA’s letter of 8 May 2019 and FAQs to all RSE trustees about the PYSP reforms (www.apra.gov.au/sites/default/files/letter_protecting_your_super_legislative_amendments_implementation.pdf www.apra.gov.au/protecting-your-super-package-frequently-asked-questions). [SLP ¶3-036, ¶3-970, ¶30-000]

Pension Standards ¶3-390 Minimum standards for income streams Superannuation income streams must comply with the minimum standards set out in SISR reg 1.05 and 1.06, and related pre-commutation income payment requirements set out in reg 1.07A to 1.07D, in order to be an “annuity” or a “pension” for SISA purposes, and to be taxed as a superannuation income stream benefit (¶8-150). An annuity or pension is a benefit which meets the standards of reg 1.05(11A) and 1.06(9A) respectively (post-June 2007 standards), and which does not permit the capital supporting the income stream to be added to by way of contribution or roll-over once it has commenced. The income stream must also comply with rules requiring a minimum payment to be made for the year if the income stream is commuted during the year (reg 1.05(1); 1.06(1)). Annuities and pensions which commence before 20 September 2007 will satisfy the minimum standards if they meet the standards set out in reg 1.05(1A) and 1.06(1A) respectively (existing standards). Annuities and pensions which commence in the period between 1 July 2007 and 20 September 2007 can meet either the pre-July or post-June 2007 standards. Regulations 1.05(1B) and 1.06(1B) clarify that an annuity or pension includes a complying life expectancy or market linked income stream that commences on or after 20 September 2007 from the commutation of another complying income stream, provided the new income stream also meets the post-June 2007 standards. That is, these market linked annuities and pensions meet the standards in reg 1.05(9) or (10) and the post-June 2007 standards in reg 1.05(11A) in the case of an annuity, and reg 1.06(7) or (8) and the post-June 2007 standards in reg 1.06(9A) in the case of pensions. In practice, where the new market linked income streams meet the relevant standards, the allowable term of the new market linked annuities or pension has to be chosen such that the total value of payments in each year is at least equal to the minimum payment amounts in SISR Sch 7 (see below). Lifetime annuities and pensions which meet the existing standards in reg 1.05(2) or 1.06(2) also meet the post-June 2007 standards (see below). Topics • SISR minimum standards for pension and annuities and classes • Minimum pension payment standards under reg 1.05(11A) and 1.06(9A) • Schedule 7 — minimum payment amounts • Pre-commutation payment rule • Transition to retirement income streams • Restriction on factors for converting lifetime or life expectancy pensions

• Minimum standards under reg 1.06A for innovative income stream products — 1 July 2017 onwards • ATO guidelines — superannuation interests and minimum standards • ATO guidelines — compliance with SISR minimum standards • ATO guidelines — commencement and cessation of income streams • Non-compliance with pension standards — tax consequences. SISR minimum standards for pension and annuities and classes The pre-July 2007 minimum standards cover annuities and pensions of the following classes: • lifetime annuities or pensions — where the annuity or pension is paid at least annually throughout the life of the primary beneficiary (and of the reversionary beneficiary, if any) and the size of the payment in a year is fixed, allowing for variation only as specified in the contract or rules. That is, these income streams meet the standards in reg 1.05(2) or 1.06(2) • life expectancy annuities or pensions — where the annuity or pension is paid at least annually to the primary beneficiary (or a reversionary beneficiary, if any) and the total amount of the payments in the first year and subsequent years is fixed, allowing for variation only as prescribed. For annuities or pensions which commenced before 20 September 2004, the primary beneficiary must purchase the annuity or be entitled to the pension on or after the beneficiary’s age pension age or service pension age, and the annuity or pension must be payable for a term equal to the beneficiary’s life expectancy (where life expectancy is less than 15 years) or a term that is at least 15 years but not greater than life expectancy (where life expectancy exceeds 15 years). Annuities or pensions commencing on or after 20 September 2004 can have the same term options as market linked products (see below). That is, these income streams meet the standards in reg 1.05(9) or 1.06(7) • market linked annuities or pensions (also commonly called “term allocated annuities or pensions”) — where the annuity or pension is paid at least annually. For annuities or pensions which commenced on or after 20 September 2004 and before 1 January 2006, payments of the annuity or pension must be made to the primary beneficiary throughout a period of whole years that is not less than the beneficiary’s life expectancy on the commencement day (rounded up to the next whole number) and not greater than the beneficiary’s life expectancy on the commencement day calculated as if he/she were five years younger (rounded up to the next whole number). An annuity or a pension with a commencement day on or after 1 January 2006 may be paid until the primary beneficiary or reversionary beneficiary reaches age 100. Where the term of the annuity or pension is set using the life expectancy or age of the primary beneficiary, the maximum term is the difference between age 100 and the primary beneficiary’s age in years on the commencement day (or, where greater, the life expectancy of the primary beneficiary calculated as if they were five years younger on the commencement day). The total amount of a market linked annuity or pension to be made in a year (excluding payments by way of commutation but including payments under a payment split) must be determined in accordance with SISR Sch 6 (or RSAR Sch 4) and annual payments may vary between plus or minus 10% of the rounded-up amount as determined under Sch 6 cl 1 and 4. That is, these income streams meet the standards in reg 1.05(10), 1.06(8); or RSAR reg 1.07(3A) and 1.08 • allocated annuities or pensions — where the annuities or pensions do not meet the lifetime annuity or pension standards and the payment amount in a year is not fixed. Payment of the annuity or pension must be made at least once annually, and the payments in a year (excluding payments by way of commutation but including payments under a payment split) are subject to the maximum and minimum limits prescribed (SISR Sch 1AAB or RSAR Sch 1A; SISR Sch 1A or RSAR Sch 1). That is, these income streams meet the standards in reg 1.05(4) or 1.06(4) • defined annuities and pensions — where the annuities or pensions do not meet the lifetime annuity or pension standards, but the payments in a year are fixed in the contract or rules, allowing for variation only as provided by the contract or rules or to make payments under a payment split. That

is, these income streams meet the standards in reg 1.05(6) or 1.06(6), and • hybrid annuities — where the annuities have features of allocated annuities and defined annuities (ie those income streams meeting the standards in reg 1.05(8)). Benefits in this category must comply with the standards applicable to the relevant component of the annuity as described above. Lifetime, life expectancy and market linked income streams (ie annuities and pension complying with their relevant standards) are commonly referred to as “complying pensions” under the social security law. These income streams enjoy an exemption from the social security assets test when determining entitlement to social security benefits (¶16-500). The minimum standards for complying pensions provide, among other things, that commutation can only occur in limited circumstances, including where the commutation amount is applied to commence another “complying” income stream. Summary of income stream classes Income streams effectively fall into two classes: • account-based income streams, where there is an account balance attributable to the beneficiary, and • non-account-based income streams — where there is no attributable account balance. Essentially, a benefit is taken to be a pension for the purposes of the SISA if: • it is provided under fund rules or a contract that meet the standards of reg 1.06(9A) (see “Minimum standards under reg 1.05(11A) and 1.06(9A)” below), and the rules do not permit the capital supporting the pension to be added to by way of contribution or roll-over after it has commenced • in the case of rules to which reg 1.06(9A)(a) applies, the rules also meet the pre-commutation payment standards of reg 1.07D, and • in the case of rules to which reg 1.06(9A)(b) applies, the rules also meet the pre-commutation payment standards of reg 1.07B (see “Pre-commutation payment rule” below). To provide for the income streams which had already commenced earlier, a benefit that commenced to be paid before 20 September 2007 is taken to be a pension if: • it is provided under fund rules that meet the standards of reg 1.06(2), (4), (6), (7) or (8) (see above) • where the primary beneficiary became entitled to the benefit on or after 20 September 1998 under the rules for life expectancy pensions, those rules provide that the commencement day is the day when the primary beneficiary became entitled to the pension, and • the rules also meet the minimum payment requirements if a commutation occurs, as provided in reg 1.07A, 1.07B and 1.07C, based on the type of pension involved (reg 1.06(1A)). Similarly, a benefit that commenced to be paid on or after 20 September 2007 is taken to be a pension if: • the benefit arises under fund rules that meet the standards of reg 1.06(7) or (8) and 1.06(9A) • the benefit was purchased with a roll-over superannuation benefit that resulted from the commutation of: (i) an annuity provided under a contract that meets the standards of reg 1.05(2), (9) or (10); (ii) a pension provided under rules that meet the standards of reg 1.06(2), (7) or (8); or (iii) a pension provided under terms and conditions that meet the standards of RSAR reg 1.07(3A), and • for a benefit that arises under rules that meet the standards of reg 1.06(7) or (8), the rules also meet the standards of reg 1.07B or 1.07C, respectively (reg 1.06(1B)). Similar deeming rules to the above for pensions apply where the primary income stream is an annuity (reg 1.05(1A), (1B)). Minimum standards under reg 1.05(11A) and 1.06(9A)

Under SISR reg 1.06(9A), the rules of the superannuation fund that provides the benefit (the pension) must ensure that payment of the pension is made at least annually, and that: (a) for a pension where there is an account balance attributable to the beneficiary — the total of payments in any year (including under a payment split) is at least the amount calculated under cl 1 of Sch 7 (see “Schedule 7 — minimum payment amounts” below), and (b) for a pension not covered by item (a) (ie non-account-based pensions): (i) both of the following apply: (A) the rules do not provide for a residual capital value, commutation value or withdrawal benefit greater than 100% of the purchase price of the pension (B) the total of payments in any year (including under a payment split) is at least the amount calculated under cl 2 of Sch 7, or (ii) each of the following applies: (A) the pension is payable throughout the life of the beneficiary (primary or reversionary), or for a fixed term of years that is no greater than the difference between the primary beneficiary’s age on the commencement day and age 100 (B) there is no arrangement for an amount (or a percentage of the purchase price) prescribed by the rules to be returned to the recipient when the pension ends (C) the total of payments from the pension in the first year (including under a payment split) is at least the amount calculated under cl 2 of Sch 7 (D) the total of payments from the pension in a subsequent year cannot vary from the total of payments in the previous year unless the variation is as a result of an indexation arrangement (see below) or the transfer of the pension to another person (E) if the pension is commuted, the commutation amount cannot exceed the benefit that was payable immediately before the commutation, or (iii) the standards of reg 1.06(2) are met, or (iv) for rules in existence on 29 June 2007, the standards of reg 1.06(2) would be met, except for the circumstances in which those rules allow for either or both of the following: (A) the pension to be commuted (B) the variation or cessation of pension payments in respect of a child of the deceased, and (c) the pension is transferable to another person only on the death of the beneficiary (primary or reversionary, as the case may be), and (d) the capital value of the pension and the income from it cannot be used as a security for a borrowing. The post-June 2007 minimum standards for an annuity under reg 1.05(11A) are similar to those above for a pension. A pension must satisfy the requirements of either reg 1.06(9A)(a) or 1.06(9A)(b) throughout its life. A single pension cannot satisfy one or the other, or purport to satisfy the requirements of both, at different points in time (see “ATO guidelines — superannuation interests and minimum standards” and “ATO guidelines — compliance with SISR minimum standards” below). A restriction applies to prevent an annuity or pension from being transferred or paid to a person who is ineligible to be paid a benefit in that form by the SISR payment standards (reg 1.05(11B); 1.06(9B)). Briefly, a deceased member’s benefits can only be cashed in annuity or pension form in favour of particular classes of recipients, and death benefits being paid in the form of an annuity or pension to a

child of a deceased member have to be cashed as a lump sum no later than the time at which the child attains the age of 25, unless the child has a permanent disability (reg 6.21(2A), (2B): ¶3-286). In addition, a pension must meet the minimum standards in reg 1.06(9A) if the pension is paid from a successor fund in accordance with rules to which reg 1.06(9A)(b)(iv) (see above) applied in the original fund (reg 1.06(9C)). Where applicable for the purpose of the minimum standards, an “indexation arrangement” is defined as an arrangement that results in the amount of annuity or pension payments increasing by the same percentage each year, or which results in the amount of annuity or pension payments in each year being adjusted in line with the consumer price index or a measure of average weekly earnings published by the Australian Statistician. Unless APRA otherwise approves, the indexation arrangement must result in payments from the annuity or pension being adjusted at least annually (reg 1.05(13); 1.06(11)). Schedule 7 — minimum payment amounts Schedule 7 contains the minimum payment rules for annuities and pensions under the minimum standards in reg 1.05(11A) and 1.06(9A). There is no maximum payment required annually and the maximum payment is effectively the account balance, except in the case of transition to retirement pensions in which case the total amount of payments in any year for the pension is limited to no greater than 10% of the account balance at the start of each year (see “Transition to retirement income streams” below). If an income stream commences on a day other than 1 July, the minimum payment amount for the first year of the income stream is to be applied proportionately to the number of days remaining in the financial year that include and follow the commencement day (cl 3). If the commencement day is on or after 1 June in a financial year, no payment is required to be made for that financial year (cl 4). The minimum payment amounts as determined under Sch 7 are rounded to the nearest 10 whole dollars. For an account-based income stream, the minimum annual payment amount is calculated by multiplying the account balance of the income stream on 1 July of the relevant year (or the commencement day in the case of the first year of the income stream where that is a day other than 1 July) by the percentage factor (see below) that corresponds to the beneficiary’s age on 1 July in the financial year (or on the commencement day in the case of the first year of the income stream) (cl 1(1)). The “account balance” is the amount of the annuity or pension account balance on 1 July in the financial year in which the payment was made, or the day of commencement (if the annuity or pension commenced in that year). This would be the total consideration paid to purchase the annuity or pension, including any returns and less any fees, charges, taxes or payments to the annuitant or pensioner, or payments made under a payment split. If the value of the annuity or pension as noted above is less than the withdrawal benefit to which the beneficiary would be entitled if the annuity or pension were to be fully commuted, the account balance is the value of the withdrawal benefit. The table below sets out the percentage factor for each age group. Age of beneficiary Percentage factor Under 65

4%

65–74

5%

75–79

6%

80–84

7%

85–89

9%

90–94

11%

95 or more

14%

For a non-account based income stream, the minimum annual payment amount is calculated by

multiplying the purchase price of the income stream by the percentage factor that corresponds to the beneficiary’s age on the commencement day (in the case of the first year of the income stream) or on the anniversary of the commencement day. The “purchase price” means the total amount paid as consideration to purchase the income stream (cl 2(2)). Pre-commutation payment rule In the financial year in which a commutation is to take place, an annuity or pension must pay a minimum amount of at least the pro rata of the minimum annual payment that would have been required under the SISR or RSAR as calculated under the following provisions: • reg 1.07A for allocated annuities or pensions • reg 1.07B for other annuities or pension (not allocated or market linked) • reg 1.07C for market linked annuities or pensions • reg 1.07D for account-based income streams. The formula for calculating the pro-rata minimum payment amount is as follows: Minimum annual amount × days in payment period ÷ days in financial year For income streams that commence in the year in which they are commuted, the pro-rata minimum payment amount is calculated using the number of days in the payment period from the commencement day of the income stream to the day on which the commutation takes place. For commutations in subsequent years, the pro-rata minimum payment amount is calculated using the number of days in the payment period from 1 July in the financial year in which the commutation takes place to the day on which the commutation takes place. Example Jaylee commenced an account-based pension from her superannuation fund on 1 July 2008 when she was age 60. She decides to commute the pension on 31 July 2009. The account balance of the pension on 1 July 2009 is $100,000. The minimum required payment from the pension in 2009/10 is $4,000 (4% of $100,000: see Sch 7) (note that this has been halved to $2,000 for the 2009/10 year: see below). The pro-rata minimum payment amount for the pension before commutation will be $2,000 × 31 ÷ 365 = $169.86. If Jaylee has not received any pension payment at the time of the commutation, the fund will need to pay her a minimum pension payment of $169.86 before the commutation.

The pro-rata payment requirement does not apply to a commutation resulting from the death of an annuitant or pensioner or a reversionary annuitant or pensioner, or to a commutation for the purpose of paying a superannuation contributions surcharge, giving effect to an entitlement of a non-member spouse under a payment split, or meeting the rights of a client to return a financial product under the cooling-off period provisions in the Corporations Act 2001. A further exception to this rule applies where the income stream account balance, immediately after the commutation, is equal to or greater than the required minimum payment for the year as reduced by the amount of income payments already made in the year (reg 1.07A(2)(ba); 1.07C(2)(ba)). For this purpose, any payments already made from the income stream (either as income or by way of commutation) to the recipient in the relevant year count for purposes of determining whether the exception to the pro-rata minimum payment rule applies. Commutations cannot satisfy minimum draw-down requirements From 1 July 2017, the minimum draw-down requirements in the annuity and pension standards in the SIS Regulations 1994 (and RSA Regulations 1997) prevent a partial commutation of a pension or annuity from being counted as towards the minimum drawn-down requirement. The table below sets out the legislative references of the relevant annuity and pension standards. Pension or annuity provided under and pre-

Relevant SISR or RSAR provisions

commutation payment rule SISR reg 1.05(11A)(a), 1.05(11A)(b)(i), 1.05(11A) (b)(ii)

reg 1.05(11A)(a), 1.05(11A)(b)(i)(B), 1.05(11A)(b) (ii)(D)

SISR reg 1.06(9A)(a), 1.06(9A)(b)(i), 1.06(9A)(b)(ii) reg 1.06(9A)(a), 1.06(9A)(b)(i)(B), 1.06(9A)(b)(ii) (C) SISR reg 1.07A(1), 1.07C(1), 1.07D(1)

reg 1.07A(2)(ba), 1.07C(2)(ba), 1.07D(1)(c)

RSAR reg 1.07(3D), 1.08(2), 1.08A(1)

reg 1.07(3D)(a), 1.08(2)(ba), 1.08A(1)(c)

The change preventing a partial commutation from counting towards the minimum payment (draw-down) requirement are necessary because of the “debit” rules introduced in respect of the transfer balance cap from 1 July 2017. These rules provide an individual with a debit against their transfer balance account when they receive a superannuation lump sum because of the commutation of a superannuation income stream of which they are a retirement phase recipient (ITAA97 s 294-80(1), table item 1). Debits are available in respect of partial or full commutations. That is, if partial commutations were to continue to count towards the minimum draw-down requirements and give rise to a debit in an individual’s transfer balance account, the individual could ultimately refresh their retirement phase superannuation income streams by the value of their past minimum draw-downs without having additional amounts count towards their transfer balance cap (as new credits would be neutralised by the debits). This outcome is inconsistent with the policy intent of the transfer balance cap which does not take into account earnings or losses on assets that are retirement phase interests, or amounts paid from the interests (including but not limited to minimum draw-down amounts). This does not arise for full commutations of income stream products because of the requirement that all minimum draw-down requirements must first be satisfied before a superannuation income stream can be fully commuted. Payments that are made under a payment split continue to count towards the minimum draw-down requirements in the amended regulations. Although the partial commutation of a superannuation income stream will reduce the value of that income stream, the way in which a trustee calculates the minimum pension payments that must be made from the income stream will not be affected by the partial commutation. That is, the same amount of pension payments that were required to be made before the commutation must still be made after the commutation. Where a commutation authority involving a partial commutation is issued in relation to superannuation income stream, trustees will need to determine whether the minimum pension payments will still be able to be met for the income year after they comply with the commutation authority. Where this is not the case, the trustee would be expected to make the minimum pensions payments before complying with the commutation authority, and then commute the remaining balance of the account to comply with the commutation authority. In such cases, s 136-85(1) of Sch 1 to the TAA 1953 would require that the trustee notify the Commissioner that they have commuted the maximum release amount for the superannuation interest that supported the superannuation income stream identified in the commutation authority (being the amount they are required to commute under s 136-80(1)(b)). As noted above, from 1 July 2017, a payment by way of a commutation of a pension is specifically excluded from being counted towards the minimum annual payment amount that is required to be paid from the pension account (reg 1.06((A)(a)). Former SMSFD 2013/2 (withdrawn effective 1 July 2017) previously stated that certain payments made as a result of a partial commutation of an account based pension could count towards the minimum annual amount but payments made as a result of a full commutation could not. See also former SMSFD 2014/1 (withdrawn effective 1 July 2017) about counting commutation payments of an account based pension that is a transition to retirement income stream (see below) towards the maximum and minimum annual amount). Transition to retirement income streams Under the SISR preservation rules, a condition of release allows a member who has reached preservation age (ie age 55 or more) to access his/her preserved and restricted non-preserved benefits from a superannuation fund by way of a transition to retirement pension while continuing gainful employment, ie

without having to retire (see ¶3-280). A “transition to retirement income stream” means an account-based income stream that meets the standards of reg 1.05(11A) or reg 1.06(9A) and, from 1 July 2017, that meets the standards in reg 1.06A (see below). In addition, the total amount of pension payments in any year is limited to a maximum amount of no greater than 10% of the account balance at the start of each year (ie 1 July) (reg 6.01(2)). The 10% limit is discussed further below. Restrictions apply where these income streams are commuted in that the resulting benefit payment cannot be taken in cash except where: • the annuitant/pensioner has satisfied a condition of release with a “nil” cashing restriction (see “Conditions of release/cashing restrictions” table in ¶3-280) • the commutation is to cash an unrestricted non-preserved benefit • the commutation is to pay a superannuation contributions surcharge • the commutation is to give effect to a payment split under the family law, or • the commutation is to make a payment for the purpose of giving effect to an ATO release authority under the ITAA97 in connection with excess contributions tax. In addition, the restriction on commutation does not prevent commutations for the purpose of returning a benefit to the accumulation phase. This is because where the resulting amount from the commutation is rolled over or transferred, it will retain its preservation status so that the annuitant/pensioner is not able to cash the benefit until a condition of release with no cashing restriction is satisfied. Alternatively, the resulting commutation amount may be used to purchase another non-commutable income stream or transition to retirement income stream. The restrictions described above are the same as those applying to non-commutable allocated annuities and pensions generally (¶3-280). The value of payments from an income stream which is taken into account for purposes of the 10% limit excludes payments by way of commutation of the income stream. This rule ensures, for example, that commutations of a transition to retirement income stream which are permitted for the purpose of paying a superannuation contributions surcharge or to give effect to a release authority for tax on excess contributions (see above) are not constrained by the operation of the maximum 10% limit on annual payments. Also, the 10% annual payment limit from a transition to retirement income stream does not apply where the annuitant or pensioner has satisfied a condition of release with a “Nil” cashing restriction. That is, the 10% limit on total annual payments from a transition to retirement income stream is a temporary restriction which is lifted once the recipient of the income stream has satisfied a condition of release with a “Nil” cashing restriction. In light of amendments preventing commutation payments from being counted (see “Commutations cannot satisfy minimum draw-down requirements” above), former SMSFD 2014/1 about counting commutation payments of an account based pension that is a TRIS towards the maximum and minimum annual amount has been withdrawn with effect from 1 July 2017. Restriction on factors for converting lifetime or life expectancy pensions A regulated superannuation fund must not use a factor, for converting a lifetime or life expectancy pension to a lump sum, that is greater than the pension valuation factor that would apply under SISR Sch 1B if the commencement day of the pension were the day on which it was commuted (reg 1.08(1)). The restriction does not apply to the use of a factor that APRA has approved in writing, or a factor for conversion in relation to a commutation to pay a superannuation contributions surcharge or to give effect to a non-member spouse’s entitlement under a payment split. Minimum standards under reg 1.06A for innovative income stream products — 1 July 2017 onwards

From 1 July 2017, an income stream product which meet the standards in reg 1.06A (and reg 1.06B about commutation restrictions: see below) is an annuity under reg 1.05(1) or a pension under reg 1.06(1) for the purposes of the SIS Act and for tax purposes, and payments under these income streams are superannuation income stream benefits for tax purposes. The standards in reg 1.06A are intended to cover lifetime products that do not meet the annuity and pension standards in reg 1.05(11A) and 1.06(9A) (which set out the standards for account-based and non-account-based income streams: see above). Examples of these lifetime products include deferred superannuation income streams and other innovative income stream products which commence from 1 July 2017. Regulation 1.06A applies to either a contract by a life insurance company or a registered organisation or the governing rules of a superannuation fund for the provision of a benefit supported by a superannuation interest of a member (eg income streams). The income streams provided under the reg 1.06A standards must be payable for a beneficiary’s remaining lifetime and the income stream payments can be guaranteed in whole or part by the income stream provider, or determined in whole or part through returns on a collective pool of assets or the mortality experience of the beneficiaries of the asset pool. The income streams may also have a deferral period for annual payments and are permitted to be commuted subject to a declining capital access schedule and the SISR preservation rules. A contract for the provision of an annuity benefit, or the rules for the provision of a pension benefit (the governing conditions) under reg 1.06A(2) and 1.06A(3) must meet four key elements: • benefit payments must not commence until a primary beneficiary has retired, has a terminal medical condition, is permanently incapacitated or has attained the age of 65 (these are the conditions for the release of benefits under items 101, 102, 102A, 103 and 106 in SISR Sch 1 where there is also no cashing restriction) • benefit payments, of at least annual frequency, must be made throughout a beneficiary’s lifetime following the cessation of any payment deferral period • after benefit payments start, there must be no unreasonable deferral of payments of the income stream • the income streams must comply with restrictions on amounts that can be commuted to a lump sum or for roll-over purposes based on a declining capital access schedule commencing from the retirement phase. Element 1 — Benefit payments can only commence after a relevant condition of release is satisfied The first element ensures that income streams payments can only commence once the primary beneficiary has met a condition of release mentioned in SISR Sch 1 items 101, 102, 102A, 103 or 106 (see above). It also ensures that providers of these income streams do not receive an earnings tax exemption until the primary beneficiary has satisfied a relevant condition of release which does not have any cashing restriction. The general standards for an income stream benefit to be taken as a pension or an annuity for the purposes of the SIS Act require the contract or governing conditions under which the income stream to not permit the capital supporting a superannuation income stream to be added to by way of contribution or roll-over after the income stream has commenced (reg 1.05(1)(a)(ii) and 1.06(1)(a)(ii)). This requirement continues to apply to superannuation income streams covered by reg 1.06A. Element 2 — Recognition of deferred income streams and an annual payment requirement The second element requires payment of the income stream benefit to be made at least annually unless the income stream is a deferred superannuation income stream and payment of the benefits have not yet started. After benefit payments for any income stream have started, they must continue throughout the life of a beneficiary. A “deferred superannuation income stream” is a benefit supported by a superannuation interest if the contract or rules for the provision of the benefit provide for benefit payments to start more than 12 months after the superannuation interest supporting the benefit is acquired, and for benefit payments to be made at least annually afterwards (SISR reg 1.03(1)).

The above requirements are consistent with the income tax law which applies in relation to superannuation income streams from 1 July 2017. Under ITAA97, the earnings tax exemption in relation to superannuation income streams from 1 July 2017 can only apply to complying superannuation funds, RSA providers and life insurance providers if the superannuation income stream is in the retirement phase. A superannuation income stream is in the retirement phase at a time if: • a superannuation benefit is payable from it at that time (ITAA97 s 307-80(1)) • it is a deferred superannuation income stream and a superannuation income stream benefit will be payable to a person after that time, and that person has retired, has a terminal medical condition, is permanently incapacitated or has attained the age of 65 (see ¶7-153). Element 3 — No unreasonable deferral of income stream payments Under this element, the amount of benefit payments must be determined using a method that ensures there is no unreasonable deferral of benefit payments after payment of the income stream has started, ie a genuine retirement income stream must be provided to a beneficiary, with benefit payments being set in a manner that does not circumvent the commutation rules or provide estate planning benefits. Specifically, reg 1.06A(3)(c) applies the following factors to determine whether there is any unreasonable deferral of benefit payments: • To the extent payments depend on the returns on an investment of the assets supporting the benefit — when the payments are made and when returns are derived. • To the extent that payments depend on the ages, life expectancies, or other factors relevant to mortality, of other individuals — the age, life expectancy, or other factors relevant to mortality, of those individuals. Factors that are relevant to mortality could include an individual’s gender, occupation or risk factors relating to their health. • To the extent that payments do not depend on returns, age or life expectancies — the relative sizes of annual total payments from year to year. • Any other relevant factors. The above factors: • provide some flexibility to enable benefit payments to be varied between years having regard to an indexation method, or investment returns and/or the mortality experience of beneficiaries, of a collective pool or of the fund, and • enable benefit payments to be set within a targeted but not guaranteed range, with scope for reserving to be applied to meet future payment targets. The overarching rule to ensure that payments are not unreasonably deferred requires a method for determining the amount of benefit payments to have an objective basis, and for the relevant factors applying to the method to be set out in the governing conditions for the income stream. For example: • a reversionary annuity purchased for $250,000 at age 60 with payments starting at age 80 would likely be considered unreasonable if the payments for the first twenty years were $1,000 per annum, but after that become substantial (eg $50,000 per annum for any following payment year) • an unreasonable deferral might be a pooled product where the payments, although not necessarily wholly deferred for any period, are very heavily-weighted to higher payments in later years and do not represent any alignment with investment returns or mortality experiences. Element 4 — Restrictions on accessing capital supporting the income stream The fourth element of the standards restricts the amount of capital from the income stream that can be accessed through a lump sum commutation or a commutation of an amount that is then rolled over within the superannuation system. These restrictions apply from the day that the primary beneficiary of the income stream enters the retirement phase.

A “retirement phase start day” for a benefit supported by a superannuation interest (within the meaning of the ITAA97) is: • for a deferred superannuation income stream — the later of the day that the primary beneficiary has satisfied a relevant condition of release that has a nil cashing restriction, and the day the superannuation interest is acquired • otherwise — the day that payments of the benefit supported by the superannuation interest start to be payable (reg 1.03(1)). This day aligns with the point in time that a credit for the superannuation income stream is applied to the transfer balance account of the beneficiary under ITAA97 Subdiv 294-B. SISR reg 1.06B provides a formula that restricts the maximum commutation amount that can be accessed (access amount) after 14 days from the retirement phase start day, on a declining straight line basis over the primary beneficiary’s life expectancy, or where a primary beneficiary is not alive on their retirement phase start day an eligible reversionary beneficiary’s life expectancy, on the retirement phase start day. The “access amount” is defined in reg 1.03(1) as the maximum amount payable on commutation of an interest on the retirement phase start day as determined by the governing rules or conditions for the annuity or pension rules. Any instalment amounts paid for an interest in a deferred superannuation income stream after the retirement phase start day are added to the access amount at the point in time that an instalment is paid. The maximum commutation amount is worked out by dividing the “access amount” by the beneficiary’s life expectancy period on the retirement phase start day and multiplying this by the remaining life expectancy at the time of commutation. If the primary beneficiary of a deferred superannuation income stream dies, before otherwise reaching his/her retirement phase start day, and the income stream reverts to an eligible beneficiary, the reversionary beneficiary’s life expectancy period is then used. To be an eligible beneficiary under SISR reg 6.21(2)(b), the reversionary beneficiary must have reached their own retirement phase start day on the death of the primary beneficiary to be an eligible reversionary beneficiary of a deferred superannuation income stream that has yet not started payments. If the reversionary beneficiary is a dependent beneficiary who does not satisfy this requirement, the compulsory cashing rule for death benefits in reg 6.21 requires that the trustee cash out the benefit as soon as practicable. This can be done by commuting the deferred superannuation income stream and either paying the deceased’s superannuation interests out as a lump sum to the beneficiary or paying it through one or more new pensions or annuities. The payment of the deceased’s interests by way of a pension or annuity will satisfy the compulsory cashing requirements if the new pension or annuity is in the retirement phase (see above). However, transition to retirement income streams and deferred superannuation income streams can only be in the retirement phase when the person to whom benefits are (or will be) payable has satisfied a relevant condition of release. The life expectancy period for an income stream is rounded down to a whole number of years then multiplied by 365 days. The remaining life expectancy is the life expectancy period less the number of actual days since the retirement phase start day. The reference to “actual days” takes account of all of the days in a leap year which is intentionally different to the approach in working out the life expectancy period (which uses a general 365-day multiplier). The maximum commutation amount is also reduced by the sum of all amounts previously commuted from the income stream prior to the time of the commutation. An income stream provider can set, or provide a method for calculating, the access amount on the retirement phase start day in the rules or contract for the income stream. Any such amount is the maximum amount that may be paid on commutation of the superannuation interest on the retirement phase start day or within 14 days starting on the retirement phase start day. The full access amount may be paid as a commutation amount if the income stream is commuted on the death of a beneficiary within the first half of the life expectancy period of the primary beneficiary.

Similarity to other income stream standards Commutation amounts are not restricted before the retirement phase start day, but the circumstances under which a commutation can be made remain subject to the SISR preservation rules. To ensure that income stream contracts cannot be used for early release purposes, the governing conditions for income streams covered by reg 1.06A must include the relevant SISR preservation rules. In addition, reg 1.06A also requires the governing conditions to ensure that a death benefit can only be transferred or paid to another person who is eligible to be paid or transferred a death benefit in a given form under the SISR cashing rules (reg 1.05(11B) and 1.06(9B)). Regulation 1.06A(4) permits an interest in a deferred superannuation income stream, which had not started payments prior to the death of a primary beneficiary, to revert (transfer) to a surviving spouse provided the surviving spouse is in the retirement phase. However, if the surviving spouse is not in the retirement phase, a reversion of the interest will only be permitted if the deferred superannuation income stream has commenced payments before the death of the primary beneficiary. In circumstances where a deferred superannuation income stream cannot revert to a surviving spouse, an annuity provider can still roll over any death benefit amount arising from the commutation of the income stream, so as to commence a new income stream which is immediately payable, to the surviving spouse. Ensuring innovative income stream do not overlap with existing standards The standards in reg 1.06A and 1.06B only apply to annuities or pensions that are not superannuation income streams which meet the existing standards in reg 1.06A or reg 1.05(11A) (see above). An income stream offered under reg 1.06A may also inadvertently meet the standards for a non-account based income stream in reg 1.06(9A) or reg 1.05(11A), and therefore not be governed under the reg 1.06A standards. To remove this uncertainty, reg 1.06A(5) permits the governing conditions for an income stream provided under reg 1.06A to state that they do not meet the standards in reg 1.05(11A)(b)(i) or (ii) or reg 1.06(9A) (b)(i) or (ii) for the purposes of the SISR annuity and pension standards. Such statements continue to have effect whether or not the statement is later changed or removed. Hybrid income streams Superannuation interests in innovative income stream products can still be offered as an investment option for, or as a separate interest as an add-on to, an interest in an income stream meeting the existing standards in reg 1.06(9A) or reg 1.05(11A). For example, an individual with an account-based pension can request that their fund trustee purchase a deferred annuity as part of the investment strategy of the fund. In these circumstances, the deferred annuity policy will be held by the fund, and income stream payments from the annuity will be paid to the trustee and credited to the member’s account. If these payment amounts are later on-paid to the member, they will need to be included in the minimum payment drawdown amount from the allocated pension account for the year. As the deferred annuity will be held as an investment of the fund, it will not count towards a member’s transfer balance account balance. Alternatively, the individual can commute part of his/her allocated pension and roll-over an amount to purchase a separate interest in a deferred annuity, in their own right. In these circumstances, the member would receive annuity payments directly from the annuity provider and these payments would not count towards the minimum drawdown amounts for their allocated pension. Deferred superannuation income streams, PIP and PIA A “deferred superannuation income stream” means a benefit supported by a superannuation interest if the rules or contract for provision of the benefit provides for payments of the benefit to start more than 12 months after the superannuation interest is acquired and for payments to be made at least annually afterwards (SISR reg 1.03(1)). A pooled investment pension (PIP) is a pension provided under the rules of a superannuation fund where those rules ensure that once income stream payments start, they continue for the remainder of an individual’s life (ITR97 reg 307-205.02D(2)). In addition, pension payments must be determined having regard to the age, life expectancy or other factors relevant to the mortality of each individual who has that kind of interest in the fund, and the pool of assets in the fund held for the collective benefit of those individuals. A pooled investment annuity (PIA) is a comparable product to a PIP but is instead provided by

a life insurance company (ITR97 reg 307-205.02E(2)). ATO guidelines — superannuation interests and minimum standards A “superannuation interest” in the SISA means a beneficial interest in a superannuation entity, while a superannuation interest in the ITAA97 means an interest in a superannuation fund, ADF, RSA, or an interest in a superannuation annuity, as affected by the ITAR (SISA s 10(1); ITAA97 s 307-200; 995-1(1); ITAR Pt 3 Div 307 Subdiv 307-D). Essentially, a member’s superannuation interest represents the member’s entitlement in the relevant superannuation entity or product, regardless of whether a lump sum or income stream is or will be paid from that interest. The Commissioner considers that the definition of “superannuation interest” generally refers to the rights of persons who have proprietary interests in trusts, interests under a trust that confer no proprietary interest in the assets of the trust, purely contractual rights (for example to a right to an annuity) and statutory rights to superannuation benefits. Accordingly, “interest in” a fund refers to a distinct claim of any kind against a fund, whether it be proprietary in character or not. However, various regulations made under the income tax law modify this general principle by creating special rules for what constitutes a superannuation interest (ATO fact sheet How many superannuation interests does a member of a superannuation fund have in their fund?: www.ato.gov.au/super/self-managed-superfunds/in-detail/smsf-resources/smsf-technical/interest-in-a-super-fund). The concept of superannuation interest for taxation purposes is discussed further in ¶8-165. In relation to superannuation interest, the key points are summarised below: • SMSFs – an amount that supports a superannuation income stream that is commenced from an SMSF is treated as a separate interest from immediately after the income stream commences (reg 307200.05) – in the case of multiple income streams commenced from the same SMSF, each income stream commenced gives rise to a separate interest from the interest to which each other income stream gives rise. Except for that case, a member of an SMSF always has just one interest in the SMSF (reg 307-200.02) • Other superannuation funds (non-SMSFs and non-public sector superannuation schemes) – an amount that supports a superannuation income stream that is commenced from such a fund is treated as a separate interest from immediately after the income stream commences (reg 307200.05) – in the case of multiple income streams commenced from the same fund, each income stream commenced gives rise to a separate interest from the interest to which each other income stream gives rise. Except for that case, it is a question of fact whether the various amounts, benefits and entitlements that a member has in a fund constitute one interest or several interests in the fund • Public sector superannuation schemes, including constitutionally protected funds (PSSSs) – the same principle (as above for other superannuation funds) applies, subject to an additional rule. However, for many PSSSs, the source of the various rights and obligations of scheme members is the legislation establishing the scheme, rather than a trust deed or a contract. An objective basis for discerning separate interests in the one scheme is likely therefore to be found in the relevant legislation than in any equitable or contractual relationship between trustee and member – additional rule — if a benefit is partly sourced from contributions to the scheme and earnings on those contributions and partly from some other source, the member’s interest is separated into two interests: one interest that consists of the contributions to the scheme and the earnings on those contributions; and one interest consisting of the remainder of the interest. For this purpose the “contributions and earnings” are reduced by the amount specified in any notice given under

ITAA97 s 307-285 for the benefit (reg 307-200.03). Superannuation income streams A superannuation fund is taken to be paying two distinct “superannuation income streams” (as defined in ITAA97 s 307-70(1)) if the superannuation product offered by the fund provides a member a single superannuation income stream, where the product provides for an agreed level of payments (supported by an investment in a life insurance policy) in the event the assets (other than the life insurance policy) supporting the member’s pension are exhausted (ID 2009/151). In this ID, the fund offered its members the option to receive pension benefits determined in the manner set out in reg 1.06(9A)(a) (see above). The fund offered its members a further option to ensure that a minimum level of payments would continue to be made for the member’s lifetime in the event the investments, held for the purpose of supporting the member’s pension benefits as determined in the manner set out in reg 1.06(9A)(a), were exhausted. The fund trustee purchased an insurance policy to cover the fund’s additional obligations to members under this further option. A member chose to receive benefits under both options. The trustee created and maintained an account in respect of the member, which recorded the trustee’s obligation to the member based upon the value of the investments held by the fund to support its obligation. The account did not include any amount in relation to the option, supported by the life insurance policy, to provide a minimum level of payments for the member’s life. However, the trustee reduced the value of the account by the amount of premiums payable on the insurance policy. The Commissioner explains that the structure of reg 1.06(9A) makes it clear that a particular pension is meant to be capable of satisfying only one pension type — a pension attributable to an account balance or one of the several pension types that are not attributable to an account balance. A pension must satisfy the requirements of either reg 1.06(9A)(a) or 1.06(9A)(b) throughout its life. A single pension cannot satisfy one or the other, or purport to satisfy the requirements of both, at different points in time. If a pension is to satisfy reg 1.06(9A)(a) of the SISR, it must be attributable to an account balance throughout its life. A hallmark of such a pension is that the account balance accurately measures the fund’s liability to a member. Consequently, it would be usual that once an account balance is reduced to nil, the fund’s liability to the member ceases. A further hallmark is that the amounts payable to the member are not fixed. In ID 2009/151, the arrangement results in two separate pensions payable to the member, the terms and conditions under which each is payable differ. Prior to the guaranteed pension phase, there is a pension for which there is an account balance. In the guaranteed pension phase, as long as the pension is payable for the member’s life it satisfies the requirements of a lifetime pension in relation to which there is no account balance. Under the arrangement, a member initially has a pension in relation to which there is an account balance. When the balance is reduced to nil, and only then, a separate pension becomes payable. That separate pension is one in relation to which there is no account balance. It is also a pension which is not payable until the contingent event triggers payment of the annuity from the life company to the superannuation fund. As these benefits are identified as separate pensions respectively in reg 1.06(9A)(a) and 1.06(9A)(b), they are separate superannuation income streams as defined in ITAA97 s 307-70(1). ATO guidelines — compliance with SISR minimum standards Pre-July 2007 pensions — conversion to account-based pension There is no need to commute a pre-July 2007 allocated pension for the purpose of converting it to an account-based pension under the pension standards which commenced from 1 July 2007 (ATO fact sheet Pension standards for self-managed super funds: www.ato.gov.au/Super/Self-managed-super-funds/Indetail/SMSF-resources/SMSF-technical/Pension-standards-for-self-managed-super-funds). Superannuation pensions which commenced before 20 September 2007 and complied with the pension rules at that time should continue to be paid under the former rules. This includes allocated pensions, market linked pensions, lifetime pensions, life expectancy pensions and transition to retirement pensions. Market linked, lifetime and life expectancy pensions as at 1 July 2007 generally cannot be commuted in order to commence another pension to adopt the minimum pension standards from that date (see

exception below). However, allocated pensions which commenced before 1 July 2007 can operate under the 1 July 2007 minimum pension standards without the need to commute and restart a new pension. Example Janet commenced an allocated pension on 1 January 2007 which complied with the rules for allocated pensions at the time. Janet decides to have her allocated pension operate under the post-June 2007 (new) minimum pension standards from 1 November 2007. Subject to the trust deed of the fund, Janet can do this without having to commute the allocated pension and recommence an account-based pension. For the account-based pension, the new minimum payment standards will apply from 1 November 2007 and the minimum annual payment amount will be based on the pension account balance at 1 July 2007. The fund trustee will need to keep a record of Janet’s request to change the payment rules for her pension. If Janet decides to continue the pension under the pre-1 July 2007 rules for allocated pensions, the SISR minimum and maximum drawdown limits that applied to the allocated pension would continue.

Generally, complying pensions (market linked, lifetime and life expectancy pensions) which commenced before 1 July 2007 cannot be commuted to start another pension to adopt the post-June 2007 pension rules. An exception applies to complying pensions (existing before 1 July 2007) which are commuted after 19 September 2007 in order to purchase a market linked pension. In these circumstances, the post-June 2007 minimum pension standards will apply to the new market linked pension, in addition to the rules that normally apply to market linked pensions. Example Robert commenced a market linked pension on 1 March 2007 and continues to receive the pension after 19 September 2007 under the former rules. On 1 December 2007, Robert decides to commute and roll over the pension to purchase a new market linked pension. Robert must ensure that the pension complies with the post-June 2007 minimum payment standards as well as the normal standards for market linked pensions.

ATO guidelines — commencement and cessation of income streams In the SISA, a “pension” includes a benefit provided by a superannuation fund that is taken under the SISR to be a pension. Essentially, this means that an income stream benefit provided by a superannuation fund to a member will be a “pension” for SIS and tax purposes only if the benefit is provided under the fund rules which comply with the minimum standards set out in SISR reg 1.06 and the relevant Schedule. For tax purposes, a “superannuation income stream benefit” is a superannuation benefit specified in the ITAR that is paid from a “superannuation income stream” (ITAA97 s 307-70; 995-1(1): ¶8-150). The ITAR provides that a “superannuation income stream” means an annuity or a pension for the purposes of the SISA in accordance with reg 1.05(1) or 1.06(1), or an income stream that is an annuity or pension within the meaning of the SISA which commenced before 20 September 2007 (ITAR reg 995-1.01). Taxation ruling TR 2013/5 sets out the ATO’s views on when a superannuation income stream commences and when it ceases, and consequently when a superannuation income stream is payable where a member with an accumulation interest in a taxed complying superannuation fund commences an income stream which is taken to be a pension under the SISR standards in reg 1.06(1) and 1.06(9A)(a). Determining when an income stream commences and ceases is important as there are tax consequences for both the superannuation fund and the member in relation to superannuation income stream benefits paid. For instance, a fund enjoys the current pension income exemption and CGT exemption for current pension assets only when the fund has current pension liabilities, ie from the time the income stream commenced until its cessation (see “Non-compliance with pension standards — tax consequences” below). A superannuation income stream commences on the first day of the period to which the first payment of the income stream relates, as determined by reference to the terms and conditions of the income stream agreed by the trustee and member, the fund rules and the SISR standards. Once an income stream commences, it is payable (ie there is an obligation to pay the benefits under that superannuation income stream) until such time as that income stream ceases. An income stream ceases when there is no longer a member who is entitled, or a dependent beneficiary of a member who is automatically entitled, to be paid an income stream benefit from the superannuation interest supporting the income stream, as determined by reference to the fund’s trust deed, the SISR standards and the particular facts and circumstances of the payment of the member’s or dependent beneficiary’s benefits. It is not the effect of ITAR reg 307-200.05 to ensure that, once an income stream commences, it can only cease once the amount in the relevant interest is exhausted. The common circumstances in which an income stream ceases are: • failure to comply with SISR pension standards and payment standards in an income year — this is the case even if a member remains entitled to receive a payment from the fund in relation to the purported income stream under the fund’s trust deed or general trust law concepts • exhaustion of capital — ie when the capital supporting the income stream has been reduced to nil, and the member’s right to have any other amounts applied (other than by way of contribution or roll over) to his/her superannuation interest has been exhausted • commutation — ie upon receipt of a valid request from a member or a dependent beneficiary to fully commute his/her entitlements to future superannuation income stream benefits for a lump sum entitlement • death — ie when the member in receipt of the income stream dies, unless a dependent beneficiary of the deceased is automatically entitled under the fund’s deed or income stream rules to receive an income stream at that time. The ATO fact sheets below provide additional information and answers to topical questions: • SMSFs: starting and stopping a pension (www.ato.gov.au/super/self-managed-super-funds/indetail/smsf-resources/smsf-technical/funds--starting-and-stopping-a-pension)

• APRA-regulated funds — starting and stopping a superannuation income stream (pension) (www.ato.gov.au/super/apra-regulated-funds/in-detail/apra-resources/apra-funds-starting-andstopping-a-super-income-stream-(pension)). On commutation, and whether the commutation payment counts towards the minimum pension amount, the ATO states: • a partial commutation payment that is not rolled over (that is, not transferred to another superannuation fund) can count towards the annual minimum pension payment amount • the payment that results from a partial commutation is a lump sum for the purposes of the superannuation laws and a lump sum payment includes a payment made by way of an asset transfer, known as an in-specie payment. This means that a partial commutation payment that is not rolled over counts towards the annual minimum pension amount, regardless of whether the payment is made in cash or in specie • a full commutation takes effect as soon as the trustee’s liability to pay periodic pension payments to a member is substituted in full with a liability to pay the member a lump sum. The account-based pension therefore ceases at this time. The liability to pay the lump sum arises as a consequence of the full commutation taking effect and therefore the superannuation income stream ceases before the time the lump sum payment to the member is made. As the payment of the commutation lump sum is made after the cessation of the account based pension, it cannot count towards the minimum annual pension amount. Non-compliance with pension standards — tax consequences A pension from a superannuation fund that does not comply with the relevant SISR pension standard applicable to it is not a pension for tax and SIS purposes. This may have tax and other consequences as discussed below. If an income stream fails to comply with the relevant pension standards in a year (eg account-based pensions failing to make minimum pension payments in a year or a transition to retirement pension exceeding the maximum 10% payment limit in a year as discussed above), the income stream ceases and this would mean that the superannuation benefit in question would neither qualify as a pension for SISA purposes nor a superannuation income stream benefit for tax purposes. A potential consequence is that the benefit does not qualify for concessional tax treatment as a superannuation income stream under ITAA97 Div 301 (eg the tax exemption for persons aged 60 or more or tax concession for those below age 60). Other potential consequences are that the benefit will also technically fail to satisfy any ITAA97 provision in which the expressions “superannuation income stream” or “superannuation income stream benefit” are used, such as s 295-385 dealing with exemptions for the income from assets set aside to meet current pension liabilities or s 295-390 dealing with income from other assets used to meet current pension liabilities and related tax provisions, or s 118-320 dealing with the CGT exemption for segregated current pension assets (¶7-130, ¶7-153). It is important to note that the concessional taxation of superannuation benefits and death benefits under ITAA97 Div 301 and 302 does not apply where a person receives an amount or benefit that does not meet the payment standards prescribed under the SISR or RSAR (ITAA97 s 304-10) (¶8-500).

Investment Rules ¶3-400 Investment strategy standard — covenants, insurance, and reserves The trustee of a regulated superannuation fund must undertake all of the investment activities of the fund with four overriding principles in mind — the sole purpose test (¶3-200), the fund’s investment strategy (see below), the arm’s length rule (¶3-440) and the general trustee covenants (¶3-100). In addition, the trustee must have regard to other SISA or SISR provisions that deal specifically with the

particular investment concerned (eg investing in in-house assets, borrowing or lending money: ¶3-410 – ¶3-450), or other specific investment controls that may apply in a particular case or circumstance (¶3405). From time to time, the Regulators issue specific warnings about particular types of investments by superannuation funds (eg instalment warrants, hedge funds) which must also be taken into consideration (¶3-405). The concept of “investment” has a wide meaning in the SISA. An “asset” means any form of property and, to avoid doubt, includes money (whether Australian currency or currency of another country). To “invest” means apply assets in any way, or make a contract, for the purpose of gaining interest, income, profit or gain (SISA s 10(1)). Trustees must not recognise or sanction an assignment over a member’s interest or give a charge over a member’s benefits or the assets of the fund, except in specified circumstances (¶3-260). Setting up an investment strategy The trustee of a superannuation entity must formulate and give effect to an investment strategy that has regard to the whole of the entity’s circumstances, including: (a) the risk involved in making, holding and realising, and the likely return from, the entity’s investments, having regard to its objectives and its expected cash flow requirements (b) the composition of the entity’s investments as a whole, including the extent to which the investments are diverse or involve exposure of the entity to risks from inadequate diversification (c) the liquidity of the entity’s investments, having regard to its expected cash flow requirements (d) the ability of the entity to discharge its existing and prospective liabilities (SISR reg 4.09(2)). Generally, the trustees may evidence that they have addressed their minds to the relevant matters by documenting decisions in the fund’s investment strategy or minutes of trustee meetings that are held during the income year. From 7 August 2012, the scope of the operating standard was expanded to require the trustee to formulate, review regularly and give effect to an investment strategy that has regard to the relevant circumstances. The expression “review regularly” is not defined. Therefore, the regularity of reviews will depend on the facts and circumstances of the fund and its members in each case, such as annually, quarterly or on a “needs basis” based on the fund’s investments and/or investment activities, the contribution and benefit payment flows, and the members’ profile. The regular review requirement thus compels the trustees to take into account factors such as the changing circumstances of the fund and its members. Also, from 7 August 2012, the trustees of SMSFs must give consideration to members’ insurance as part of the fund’s investment strategy (see “Insurance in investment strategy” below). The above requirement is both a trustee covenant and a prescribed operating standard (see below). A practical approach A systematic approach for trustees to adopt when setting or reviewing a fund’s investment objective and strategy will include consideration of at least the following matters: • the statutory limitation or constraints on investments, eg the sole purpose test (¶3-200) or the inhouse asset rules (¶3-450) • any non-statutory limitations or constraints on investments in the fund’s trust deed, eg ethical or environmental issues • relevant reports from experts • in the case of defined benefit funds, benefit design, fund solvency, employer support and the general economic climate, as well as assumptions about contribution levels, salary escalation and investment earnings used in the actuarial reports, and

• the trustee duties and obligations under general trust law and SISA trustee covenants (eg to act in the best interest of all members: ¶3-100) and actual or potential trustee/member conflicts of interest, if any. A regulated superannuation fund’s investment in a geared unit trust may result in a reduction in the security of members’ entitlements. Consequently, the existence of a unit trust borrowing is a relevant consideration to be taken into account by the trustee in the formulation and implementation of the investment strategy of a fund under s 52(2)(f). Investment strategy — a covenant and operating standard The governing rules of a superannuation entity are deemed to contain a covenant requiring the trustee to formulate and give effect to an investment strategy for the entity in identical terms to the operating standard in SISR reg 4.09(2) as set out above (covenants are discussed at ¶3-100). The replication of a SIS covenant as a prescribed operating standard gives rise to different consequences where there is a breach. Specifically, where a trustee fails to comply with a covenant, this may only give rise to a civil liability action, whereas a trustee who intentionally or recklessly contravenes the operating standard in reg 4.09(2) is guilty of an offence punishable on conviction by a fine. Penalties under SISA are discussed in ¶3-820. Insurance in investment strategy From 7 August 2012, in addition to having regard to the four circumstances (see points (a) to (e) in SISR reg 4.09(2) above) when formulating, reviewing regularly and giving effect to an investment strategy for the fund, the trustees of an SMSF are required to consider whether they should hold a contract of insurance that provides insurance cover for one or more members of the fund, such as life insurance (reg 4.09(2)(e)). The additional requirement is a consequence of the Cooper Review in 2010 which noted that less than 13% of SMSFs have insurance, and that SMSF members were more likely to hold appropriate levels of insurance, or be able to hold insurance outside their superannuation, than members of other superannuation funds. Accordingly, the Review panel recommended that SMSF trustees be required to consider life and total and permanent disability insurance as part of their investment strategy (Recommendation 8.29). The trustees of SMSFs are expected to be self-reliant in determining the type and level of insurance cover members might require whether within or outside their SMSF and must have regard to the personal circumstances of their members and other legislative requirements, such as the sole purpose test in SISA s 62 (¶3-200). Members’ investment strategy choice Trustees of superannuation funds (other than those with fewer than five members) and ADFs generally must not be subject to direction in the exercise of their powers (SISA s 58: ¶3-150). Certain superannuation funds (eg those under a master trust arrangement) may offer their members with a choice of investment strategies which allow for investment in various combinations of different asset classes (eg property trusts, international shares). In such a case, a member may direct the trustee on the investment strategy to be followed in respect of his/her benefits (SISA s 52(4); SISR reg 4.02). The information regarding investment strategies is usually provided in product disclosure statements that are issued in accordance with the Corporations Regulations 2001 (reg 4.02(2), Note). Effectively, the above allows members to choose one or more investment strategies from a range of strategy choices formulated and provided by the trustee (ie a “beneficiary investment choice”) without breaching s 58. However, fund members (other than a member of a fund with fewer than five members) cannot direct the trustee to invest in a particular asset (ie a “beneficiary-directed investment”) as, in such a case, the trustee would be taken to be subject to a direction by the member. Reserves A superannuation entity may maintain reserves unless prohibited by its governing rules (SISA s 115). If an entity maintains reserves, the SIS covenant requires the trustee to formulate and give effect to a strategy for the prudential management of those reserves consistent with its investment strategy and

capacity to discharge its liabilities as and when they fall due (s 52(2)(g): ¶3-100). The common types of reserves that may be found in superannuation funds are: • investment fluctuation reserve — this is maintained to minimise the impact of market fluctuations on members’ account balances and smooth crediting rates over the years, thus enabling a higher or lower return to be distributed than actually received • operational risk or contingency reserve — this is maintained to mitigate operational risks such as errors in allocating investment earnings (unit pricing/crediting rate errors). Contingency reserves allow funds to meet costs of rectification of errors not met by third parties (eg insurance), or recoverable only at a later stage. Such reserves may be used to meet excesses applicable under insurance or indemnity arrangements • self-insurance reserve — funds (generally non-public offer defined benefit or hybrid funds) that selfinsure death and disability benefits are expected to maintain such reserves to fund current and future insurance claims and to allow for the inherent uncertainty regarding size, timing and credit risk aspects of claims. The term “reserves” is not defined in the SIS legislation. There is also no definition of reserve in ITAA97 or regulations. A reserve is commonly understood to be an account held within a superannuation fund that holds amounts that have not been allocated to a particular member. Such accounts have been used by superannuation funds for a number of different purposes. For both superannuation and income tax purposes, it is necessary to first determine whether such an account held by superannuation fund is a genuine reserve as opposed to a general account or mere accounting practice of the fund. The term “reserve” is referred to in both the SIS and income tax provisions. What constitutes a reserve under these provisions may differ and affect a range of matters including those relating to the operation of the fund and taxation consequences faced by members (SMSF Bulletin 2018/1) (see also “ATO guidelines on reserves of SMSFs” below). APRA’s Prudential Practice Guide SPG 222 — “Management of Reserves” (www.apra.gov.au/superannuation-standards-and-guidance: ¶9-720) provides guidelines to assist RSE licensees and their directors in complying with the SISA provisions relating to the maintenance and management of reserves by RSE licensees and, more generally, to outline sound practices in relation to this particular area of a licensee’s superannuation operations (for RSE licensee conditions, see ¶3-485). The APRA guide deals specifically with the management of the above types of reserves. The meaning of “reserves” for the purposes of SISA was discussed in Re VBN and APRA (No 5) [2006] AATA 710 by Deputy President Forgie and Senior Member Pascoe of the AAT. In a joint decision they considered at paragraph 442 that the word “reserves” in section 115 of the SISA did not have a specialised meaning that differs from its ordinary English meaning. They observed that both standard and specialist dictionaries gave consistent meanings that conveyed the notion of “actual monetary funds or assets” that were “put aside to meet future contingencies and demands”. Therefore, for the purposes of subregulation 292-25.01(4) of the ITAR 1997, “reserve” includes an amount set aside from the amounts allocated to particular members to be used for a certain purpose or on the happening of a certain event … … This conclusion does not rely upon the fact that the reserve was created by deducting amounts from the accounts of members. The process by which any amount is set aside is not central to determining if there is a reserve. It follows that allocations by the trustee from the self-insurance reserve to a member’s account are allocations from a reserve for the purposes of subregulation 292-25.01(4) of the ITAR 1997. ATO guidelines on reserves for certain tax purposes ATO guidelines on “reserves” may be found in ID 2015/21 (about concessional contributions and reserves) (replacing former ID 2012/32 which applied for the 2012/13 and earlier financial years) and ID 2015/22 (about excess contributions tax: concessional contributions and allocation from pension reserve account) (replacing ID 2012/84 which applied for the 2012/13 and earlier financial years). In ID 2015/21,

the ATO concluded that “reserve” as used in reg 292-25.01 of ITAR has a broad meaning and includes an amount set aside from the amounts allocated to particular members to be used for a certain purpose or on the happening of a certain event. The ATO stated in ID 2015/21 that in determining the amount of a person’s concessional contributions covered under ITAA97 s 291-25(3), the self-insurance reserve maintained by the trustee of the fund is a “reserve” for the purpose of reg 292-25.01(4) of the ITAR 1997. Relevantly, the ATO noted the following: “… According to the Macquarie Dictionary, 3rd edition 1998 a ‘reserve (noun)’ is ‘an amount of capital retained by a company to meet contingencies, or for any other purpose to which the profits of the company may be profitably applied … something reserved, as for some purpose or contingency; a store or stock’. The APRA has issued Prudential Practice Guide SPG 222: Management of reserves (SPG 222) which discusses the use of reserves in superannuation entities for the purposes of complying with Superannuation Industry (Supervision) Act 1993 (SISA) and Superannuation Industry (Supervision) Regulations 1994 (SISR). It describes reserves as monies which form part of the net assets of the fund and which have been set aside for a clearly stated purpose. It lists the most common types of reserves as operational risk reserves, self-insurance reserves and investment reserves. However, SPG 222 also states that while reserves in superannuation funds are monies that have not been allocated to members not all unallocated monies are reserves. Unallocated monies that are not reserves include suspense accounts used to record contributions and roll-overs pending allocation to members.” ATO concerns about the use of reserves by SMSFs The ATO has issued SMSF Regulator’s Bulletin SMSFRB 2018/1 which outlines the ATO’s concerns on the use of reserves by SMSFs, particularly in strategies that are designed to circumvent restrictions imposed in the superannuation and income tax legislation. The ATO expects that the use of reserves by SMSFs will be in limited circumstances and only for specific and legitimate purposes. Where an SMSF purports to hold an amount in a reserve as opposed to allocating directly to a member’s superannuation interest for the benefit of the member and their beneficiaries, outside these circumstances, the ATO will consider whether the trustee is acting in accordance with their obligations under the SIS Act. The use of reserves by SMSFs outside limited and legitimate circumstances may suggest that they are being used as part of a broader strategy to circumvent SIS and tax restrictions and the ATO will closely scrutinise such arrangements and consider the potential application of the sole purpose test under SISA s 62 and the anti-avoidance provisions under ITAA36 Pt IVA. The ATO states that the use of a reserve in an SMSF may raise the following regulatory concerns: a. whether the use of a “general” reserve to which a trustee allocates amounts (eg earnings) without a clearly articulated purpose that gives effect to a strategy consistent with the SMSF’s investment strategy and ability to discharge its liabilities is a reserve permitted by SISA s 115 b. whether the use of a reserve or an account by the trustee adheres to the sole purpose test in SISA s 62, and c. whether the trustee has satisfied SISA s 52B(2)(g) of the SISA, which requires trustees to formulate, review regularly and give effect to a strategy for the prudential management of reserves consistent with the fund’s investment strategy and its capacity to discharge liabilities (see also SISR reg 4.09). The types of arrangements that the ATO will scrutinise carefully with a view to determining whether ITAA36 Pt IVA applies will include (but not be limited to) the following (2017 superannuation reform measures): a. the intentional use of a reserve to reduce a member’s total superannuation balance to enable them to make non-concessional contributions without breaching their non-concessional contributions’ cap. The earnings from these non-concessional contributions may be taxed at a lower tax rate than would have been the case if the earnings were derived outside of the concessionally-taxed superannuation environment

b. the intentional use of a reserve to reduce a member’s total superannuation balance below $500,000 in order to allow the member to access the catch-up concessional contributions arrangements. This may allow the member to either claim a higher personal superannuation contributions deduction or have a higher amount of their salary and wage income subject to a salary sacrifice arrangement for an income year. Further, the earnings from these concessional contributions may be taxed at a lower tax rate than would have been the case if the earnings were derived outside of the concessionallytaxed superannuation environment c. the intentional use of a reserve to reduce the balance of a member’s transfer balance account below the member’s transfer balance cap to allow the member to allocate a greater amount to retirement phase and thereby having a greater amount of earnings within the SMSF being exempt current pension income, and d. the intentional use of a reserve to reduce a member’s total superannuation balance below $1.6m in order to allow the SMSF to use the segregated method to calculate its exempt current pension income. The ATO will not apply compliance resources to review arrangements entered into by SMSFs as described in the Bulletin before 1 July 2017 provided: a. the reserve was permitted by SISA s 115 and the governing rules of the SMSF, and b. the facts and circumstances do not indicate that the use of the reserve by the trustee was a means of circumventing the restrictions imposed by the 2017 superannuation reform measures. Other guidelines Prudential standards for RSE trustees which have been determined under SISA and superannuation prudential practice guides are discussed in ¶9-700 and following. [SLP ¶3-410]

¶3-405 Investment controls The trustee of a superannuation entity must comply with various other prudential requirements relating to its investments or investment function, including the following: • not to make a non-written appointment of an investment manager (SISA s 124) • not to have individuals as the fund’s investment manager (SISA s 125) (not applicable to SMSFs) • ensuring that the investment manager is not a disqualified person, and arranging for the dismissal of a disqualified investment manager (¶3-620) • ensuring that the investment management agreement made with the investment manager: (a) allows the trustee to obtain adequate information about the entity’s investments and investment performance and allows for termination of the agreement without liability (SISA s 102); and (b) does not exempt or limit the investment manager’s liability for negligence (SISA s 116) • ensuring that the proper records and accounts for investments are maintained for at least five years (¶3-340) • immediately informing the Regulator of “significant adverse events” (¶3-310) • complying with the rules about unclaimed money and superannuation benefits (¶3-380) (not applicable to PSTs) • taking all reasonable steps to immediately dispose of any investments in a PST if the fund becomes a non-complying superannuation fund or non-complying ADF, unless directed otherwise by the Regulator (SISR reg 4.10; 4.11) (not applicable to PSTs)

• complying with prescribed operating standards relating to investments, eg determination of costs and investment returns (SISR reg 5.01A) (not applicable to PSTs), reporting on member benefits and the fund’s financial situation (¶3-290), and giving members an investment strategy choice (see above). Penalties are imposed under the SIS legislation when any of the above prudential requirements are breached. Market value and valuation of assets The meaning of “market value” in SISA and ATO guidelines on the valuation of assets for various purposes are noted at ¶18-775. Co-ownership of property Several parties may co-own property under a “joint tenancy” (ie as joint tenants) or a “tenancy in common” (ie as tenants in common). The use of the word “tenant” indicates the way in which a freehold interest in property is held. It does not imply a leasehold interest in the property. Co-ownership of the property as joint tenants or tenants in common provide the owners with different rights based on the form of ownership. Joint tenants jointly own the same property. A joint tenant has a right to the whole property, not a right to an individual share of the property. When one joint tenant dies, the surviving joint tenant becomes the sole owner of the property (known as survivorship). Tenants in common jointly own a property. Unlike joint tenancy, each tenant in common is entitled to a distinct share of the property. That is, each tenant has a separate and individual title to the property, which is limited according to the estate or term granted to or acquired by the tenant. Interests in property owned by tenants in common can be in even proportions (eg two tenants, with each having a half share or interest) or uneven proportions (eg two tenants, with one holding a three-quarter share and other a quarter share). The interest proportions in the property must amount to 100%. These proportions are specified in the title to the property and recorded in the relevant registry. Tenants in common are generally not restricted in their dealings with their individual shares. For example, they may grant interests over the share or encumber it in any way, provided this does not interfere with or diminish the rights that the other tenants would otherwise have. Ownership of property as joints tenants is not considered appropriate for superannuation entities due to the lack of a separate share of an asset attributable to the entity. A superannuation fund that owns property with another party must, therefore, hold the property as tenants in common so as to preserve its interest in the property at all times. When a superannuation fund is formulating its investment strategy and is considering an investment as tenants in common, the Regulator’s view is that the trustee should weigh any risk that the strategy would be subordinated to the circumstances of the other party (eg in respect of a forced sale where the other titleholder is required to liquidate its asset). While effectively a forced sale would only be in respect of the other tenant’s share, it is commercially more realistic to expect that the whole property may be adversely affected by the sale, such as a forced sale, the timing of the sale, the price, and so on. For the purposes of the “business real property” definition (¶3-430), an eligible freehold interest in real property may be a partial interest in the real property, such as an interest held as a tenant in common. Rules and guidelines on particular investments Diversification and non-traditional investments The appropriate level of diversification and the method by which it is achieved will depend on the particular circumstances of each superannuation fund. Diversification to manage the risk and variability of returns involves spreading investments over a number of individual assets, asset classes (including property, fixed interest, cash and equities), countries and/or investment managers. This may also be achieved within each asset class (eg commercial and residential property, domestic and foreign equities, and long- and short-term fixed-interest investments). A well-formulated investment strategy would not ordinarily provide that all or a large proportion of the fund’s assets be invested in one asset (such as a single property) or a single asset class. The onus is on the trustees to justify the chosen investment

strategy in each case after taking into account the sole purpose test, all the matters specified in SISA s 52(2)(f) and the fund’s own circumstances. Investments in non-traditional assets (eg infrastructure, private equity and public-private partnerships) are acceptable in a diversified portfolio, provided the trustee has considered their expected return and diversification effect on the portfolio and can demonstrate appropriate expertise and process to manage such asset classes within the funds portfolio (former ID 2004/248: works of art; SMSFR 2008/2). SMSF investments in collectables and personal use assets SMSFs which have investments in “collectables” and “personal use assets” (eg artworks, jewellery, wine, cars recreational boats, etc) must comply with rules prescribed in SISR reg 13.18AA (s 62A). Instalment warrants and assets acquisition under limited recourse borrowing Superannuation funds can borrow money on a limited recourse basis to acquire an asset that the fund would be permitted to invest in directly (¶3-410, ¶3-415). As a related (bare) trust will be used in the majority of cases to hold the asset acquired under the borrowing arrangement, special rules provide that an investment in a related trust forming part of an eligible instalment warrant arrangement will be an inhouse asset only where the underlying asset would itself be an in-house asset of the fund if it were held directly (¶3-450). Contracts for differences (CFDs) Trustees of regulated superannuation funds are not prohibited by SISA from investing in CFDs and a fund’s investment strategy may permit such investments for hedging purposes. However, trustees will need to examine the product disclosure statement of the individual CFD product that the fund is investing in and the contract itself to ensure they do not breach the SIS legislation in any way (eg reg 13.14 which prohibits a charge on fund assets: ¶3-260). CFDs are synthetic financial products which enable an investor to access the price movement in shares and other instruments, such as stock indices, stock options, currencies and futures contracts, without owning the underlying product (ie it is a derivative product). When a CFD is opened, the investor pays a deposit into a CFD bank account and may be required to make additional margin payments to cover running losses on open positions. The money in the CFD bank account is the property of the CFD provider and the fund (investor) has no beneficial interest in the account. CFDs have a leveraging effect with consequent exposure to potentially large gains and losses stemming from exposure to short-term financial risk in relation to a relatively small deposit. A CFD provider may, under a related agreement, permit an investor to deposit assets with the provider as security against their obligations to pay deposits or margins. The ATO considers that superannuation funds investing in CFDs have not contravened SISA if they have not deposited fund assets with the CFD provider or entered into any collateral agreement that places a charge over any fund asset as: • there is no loan between the CFD provider and the fund (and, therefore, the borrowing prohibition in s 67 does not apply: ¶3-410). The requirement to pay a deposit and meet margin calls does not represent borrowing, but are contractual liabilities to make payments if and when required and are not repayments (Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (NSW) 97 ATC 5015; (1997) 37 ATR 479), and • the operation of a CFD bank account and obligation to pay deposits and margins does not create a charge over any assets of the fund as the parties are relying on the contract and not on any security interest to be created by the contract (ID 2007/56). A fund investing in CFDs will breach reg 13.14 where, under a separate written agreement with the CFD provider, fund assets are deposited with the provider as security in relation to the fund’s obligations to pay margins and the agreement sets out the circumstances under which the assets will be realised (ID 2006/57). Regulation 13.15A, which allows a fund to give a charge over assets in relation to options and futures contracts in accordance with the rules of an approved body, and in accordance with the fund’s derivatives risk statement, does not apply as a CFD is not an options contract or a futures contract and

the charge was not given in relation to the rules of an approved body (¶3-260). Maintenance of fund assets A superannuation fund’s assets (especially real property) must generally be held in the name of the trustees (eg as the trustee of a particular fund). The ATO’s view is that if the fund name does not appear on the registration of ownership of real estate, a caveat on the title should be lodged by the fund. The caveat may not be required if: • it is clear that fund assets have been used to acquire the property • the decisions relating to the acquisition have been appropriately documented, and • the contract refers to the trusteeship (ie there is sufficient supporting evidence that the property is a fund asset). The ATO explained that there was a need to ensure sufficient evidence of the ownership of fund assets in cases where liquidators and trustees in bankruptcy attach superannuation fund assets in liquidation or bankruptcy proceedings. However, caveats and declarations of trust should be seen as examples, and not the only form, of evidence acceptable to the ATO (NTLG Superannuation Subcommittee, 8 May 2006). The requirement to keep fund assets separate from those of the trustees personally or of the standard employer-sponsor is prescribed operating standard for SMSFs (¶5-433).

¶3-410 Borrowings by superannuation funds Subject to certain exceptions (see below), the trustee of a regulated superannuation fund must not borrow money, or maintain an existing borrowing of money. A transitional exemption from the borrowing restriction allowed public sector funds to maintain pre-existing borrowings until 1 July 2000 (s 67(6)). Similar restrictions on borrowings apply to ADFs and PSTs (¶3-680, ¶3-730). Section 67 is a civil penalty provision (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 if the provision is contravened (¶3-820). Borrow The term “borrow” is not defined in the SISA and therefore takes its ordinary meaning in its statutory context. While, the term “borrow” may apply to all appropriations from another party, whether in the form of money or any other type of assets, the prohibition in SISA s 67 restricts the scope of the types of borrowings to transactions involving the fund borrowing money or maintaining an existing borrowing of money. SMSFR 2009/2 states that, for the purposes of s 67(1), a borrowing is an arrangement under which there is a temporary transfer of money from one party (lender) to the fund (borrower) where there is an obligation or intention that the money (the principal amount) transferred will be returned or repaid (plus any interest payable as stipulated under the arrangement between the parties, whether payable in advance or during the term of the borrowing). It is not strictly necessary that money is ultimately repaid for the arrangement to be a borrowing of money. For example, a fund providing money’s worth to the lender (such as transferring an asset) to satisfy or fulfil the obligation or intention to repay the money borrowed. Further, where an obligation to repay is forgiven or is otherwise waived, or if an intention to repay on the part of the fund changes and there is otherwise no obligation to repay, the arrangement is a borrowing up until the point where an obligation or intention to repay no longer exists. While an obligation or intention to repay is a necessary feature of a borrowing, a limitation on the lender’s capacity to recover the amount lent on default by the borrower does not mean an arrangement is not properly characterised as a borrowing. A limited recourse loan is an example of a borrowing even though the lender’s recourse on default is limited to assets whose value may be less than the principal amount outstanding at that time.

Liabilities and borrowings Not all liabilities of a superannuation entity are borrowings. Whether a particular transaction constitutes a borrowing depends on the facts and applicable legal principles in any given case. In general, a transaction that gives rise to a debtor/creditor relationship does not necessarily give rise to a lender/borrower relationship and, hence, may not necessarily be a borrowing for the purposes of the restriction. Examples of borrowings Amounts paid on behalf of, or owed by, superannuation entities which would constitute borrowings include: • a loan, whether secured or unsecured • in normal circumstances, a bank overdraft, or • a transaction where the borrower and lender are the same legal entity. Examples of transactions involving amounts paid on behalf of, or owed by, regulated superannuation funds which generally would not constitute borrowings include: • amounts payable by a superannuation fund because of expenses paid on behalf of the fund by an agent or other person entitled to reimbursement • normal commercial delays in the payment of expenses incurred by a superannuation fund • financial leasing arrangements and hire purchase transactions in general (see “Example — instalment purchase agreement” below) • liability of a fund to pay benefits to members as they fall due • prepaid contributions (which are properly characterised at the time of payment as contributions) • purchases of assets by a fund where ownership of the assets passes to the trustee before the instalments are finalised (eg investment in endowment warrants or instalment receipts). Example — margin lending account As part of its investment strategy, an SMSF maintains a margin lending account with a cash and a loan component which are used in combination for the acquisition of shares. As part of the margin account arrangement, the SMSF can draw down additional amounts to finance the acquisition of additional shares. Each draw down under the account involves a temporary transfer of money to the SMSF with an obligation to repay and is a borrowing. Each additional amount drawn from the account gives rise to a further borrowing. The SMSF will contravene s 67(1)(a) each time it draws down the margin lending account unless one of the exceptions apply.

Example — contracts for difference As part of its investment strategy, an SMSF invests in contracts for difference. The investment requires the fund to make additional payments if a loss arises from movements in the prices of the asset or indices underlying the investment. This requirement to pay a deposit and meet margin calls does not represent borrowing. No money has been temporarily transferred to the SMSF under the arrangement. The payments made by the SMSF are pursuant to contractual liabilities that do not involve repayments, and therefore, the SMSF has not contravened s 67(1)(a).

Example — instalment purchase agreement An SMSF acquires an asset from a vendor (not a related party of the SMSF) under an agreement where the SMSF will make 10 equal payments to the vendor and in return title to the asset will pass from the vendor to the SMSF. The agreement and surrounding circumstances do not reflect a transfer of money from the vendor to the SMSF.

This agreement does not give rise to a borrowing of money. Instead the arrangement provides for the acquisition of an asset by the SMSF by way of instalment payments. Even though the agreement provides financial accommodation to the SMSF, not all forms of such accommodation are borrowings of money. Accordingly, the SMSF trustees have not contravened s 67(1)(a). Note that arrangement involving the SMSF borrowing money, including making a similar series of payments as repayment of the borrowing, may satisfy the requirements of an “instalment warrant borrowing arrangement” under s 67(4A) (see below). In such a case, while the arrangement will involve a borrowing by the SMSF, the exception in s 67(4A) may apply so that the borrowing is not prohibited.

Example — sale and repurchase arrangement To have access to money to increase its investments, an SMSF enters into an arrangement with a financier as follows: • the SMSF sells shares to the financier for an amount of money, and • the SMSF and the financier enter into a forward purchase agreement under which the SMSF will re-purchase shares from the financier at a specified time for a price equal to the money paid by the financier plus a further amount calculated by applying an interest rate. This arrangement effects a borrowing of money by the SMSF and is prohibited by s 67(1). The two necessary features of a borrowing — the temporary transfer of money from the financier to the SMSF, and the obligation or intention on the part of the SMSF to repay the money — are both present.

Exception: temporary borrowing to pay benefits, surcharges or settlements As exceptions to the borrowing rule, a fund may borrow: • to enable the fund to pay a benefit or superannuation surcharge liabilities, or • to settle contracts to acquire certain investments. Conditions of borrowing to pay benefits or surcharge • The borrowing is to enable the trustee to make benefit payments to members as required by law or the trust deed, or payments of the surcharge required under the Superannuation Contributions Tax (Assessment and Collection) Act 1997 which, apart from the borrowing, the trustee would not be able to make. • The period of the borrowing does not exceed 90 days. • If the borrowing were to take place, the total amount borrowed by the trustee would not exceed 10% of the value of the assets of the fund (SISA s 67(2), (2A)). Conditions of borrowing to make contract settlements A trustee may also obtain temporary borrowings, for a period not exceeding seven days, if: • the purpose of the borrowing is to cover settlement of transactions to acquire certain securities (eg shares, bonds, etc) • at the time the relevant investment decision was made, it was likely that the borrowing would not be needed • the borrowing is not covered by an exemption determination made by the Regulator • the period of borrowing does not exceed seven days • if the borrowing were to take place, the total amount borrowed by the trustee would not exceed 10% of the value of the assets of the fund (s 67(3)). Exception: borrowing under limited recourse arrangements From 24 September 2007 to 7 July 2010, SISA former s 67(4A) provided an exception to the general prohibition in s 67 for limited recourse borrowings that meet certain conditions commonly found in

instalment warrant arrangements. For such borrowings, the in-house asset rules (¶3-450) also provide that an investment in a related trust forming part of an instalment warrant arrangement which meets the borrowing exception would be an in-house asset only where the underlying asset would itself be an inhouse asset if it were held directly by the fund (s 71(8), (9)). This means that an investment in a related trust instalment warrant is not automatically counted against the in-house asset limit. Former s 67(4A) was repealed from 7 July 2010. In its place, s 67A and 67B provided a revised limited recourse borrowing exception applicable to arrangements entered into on or after 7 July 2010 (including an arrangement that is a refinancing of a borrowing of money under an arrangement entered into before, on or after that date). The limited recourse borrowing exception under s 67A and 67B is discussed in ¶3415. The replacement of former s 67(4A) addressed prudential concerns in limited recourse borrowing products and practices, including: • the use of personal guarantees to underwrite the lender’s risk in the borrowing arrangement • borrowing arrangements over multiple assets which can potentially allow the lender to choose which assets are sold in the event of a default on the loan, and • arrangements where the asset subject to the borrowing can be replaced at the discretion of the trustee or the lender. The rules under s 67A and 67B are intended to provide better protection for superannuation funds by ensuring that: • the recourse of the lender and of any other person against the superannuation fund trustee for default on the borrowing is limited to rights relating to the acquirable asset • the asset within the arrangement can only be replaced in prescribed circumstances that arise from owning the original asset, and • the borrowing is referable and identifiable only over a single asset (excluding money) or, in prescribed circumstances, a collection of assets which are identical and are treated as a single asset. [SLP ¶3-490]

¶3-415 Limited recourse borrowing arrangements As an exception to the restriction on borrowings in SISA s 67(1) (¶3-410), the trustee of a regulated superannuation fund (RSF trustee) may borrow money, or maintain a borrowing of money, under an arrangement covered by s 67A and 67B (commonly called a “limited recourse borrowing arrangement” (LRBA)). The s 67A and 67B borrowing exception replaced that provided by former s 67(4A) (¶3-410). It applies to an “arrangement entered into on or after 7 July 2010 (including an arrangement that is a refinancing of a borrowing of money under an arrangement entered into before, on or after 7 July 2010)”. That is, while the exception does not apply retrospectively to existing limited recourse borrowing arrangements under former s 67(4A), it applies to a refinancing of a borrowing of money under a pre-7 July 2010 arrangement. A refinancing does not cover a re-negotiation of an existing borrowing with the same lender involving simply a variation of a loan contract that continues to exist, unless the re-negotiation amounts to a rescission or replacement of the original contract. Refinancing is also not the only way that a new arrangement may arise. For example, a change to the terms and conditions of an arrangement that fundamentally alters the character of the arrangement may mean that the new arrangement must comply with s 67A. The following topics are discussed in this paragraph: • Conditions under s 67A

• Examples of limited recourse borrowing arrangements • Acquirable asset and collection of assets • When is an acquirable asset “acquired” under s 67A(1)(a) • Protection of fund assets — trustee guarantees and indemnity • RSF trustee breach of duty • Replacement asset • Trust deed and investment strategy • Interaction with in-house asset rules • Stamp duty • GST • ATO guidelines • Taxpayer Alert — property investments using LRBA or related unit trust. For the ATO’s safe harbour rules to avoid adverse taxation consequences in LRBAs, see ¶5-448. Conditions under s 67A A limited recourse borrowing arrangement under SISA s 67A must meet the following conditions: (a) the money is or has been applied for the acquisition of a single acquirable asset, including: (i) expenses incurred in connection with the borrowing or acquisition, or in maintaining or repairing the acquirable asset (eg conveyancing fees, stamp duty, brokerage or loan establishment costs, as these are considered to be intrinsically linked to the purchase of the acquirable asset), but not expenses incurred in improving the acquirable asset, and (ii) money applied to refinance a borrowing (including any accrued interest on a borrowing or because of a replacement asset under s 67B) in relation to the single acquirable asset (and no other acquirable asset) (b) the acquirable asset is held on trust so that the RSF trustee acquires a beneficial interest in the acquirable asset (c) the RSF trustee has a right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest (d) the rights of the lender or any other person against the RSF trustee for, in connection with, or as a result of (whether directly or indirectly) default on the borrowing (or the sum of the borrowing and charges related to the borrowing) are limited to rights relating to the acquirable asset (for example, under condition (d), any right of a person to be indemnified by the RSF trustee because of a personal guarantee given by that person in favour of the lender is limited to rights relating to the acquirable asset) (e) if, under the arrangement, the RSF trustee has a right relating to the acquirable asset (other than a right described in item (c)) — the rights of the lender or any other person against the RSF trustee for, in connection with, or as a result of (whether directly or indirectly) the RSF trustee’s exercise of the RSF trustee’s right are limited to rights relating to the acquirable asset, and (f) the acquirable asset is not subject to any charge (including a mortgage, lien or other encumbrance)

except as provided by item (d) or (e) (see ID 2010/185 below). The ATO has issued SMSF Ruling SMSFR 2012/1 which explains key concepts relevant to the application of the limited recourse borrowing arrangement (see “ATO guidelines” below). Examples of limited recourse borrowing arrangements Direct loan from bank

Indirect loan from bank

Charge on asset, SMSFs as joint borrowers, terms of borrowing and arm’s length rule Section 67A(1)(f) of SISA requires that the asset being acquired under the arrangement must not be subject to a charge other than in relation to the borrowing by the SMSF. If the trustee of the holding trust in a limited recourse borrowing arrangement grants a charge over the asset in the holding trust in favour of a person other than the lender under the arrangement, the SMSF (the borrower) will contravene the borrowing prohibition in s 67(1) (ID 2010/185). In ID 2010/185, the SMSF enters into a borrowing arrangement on 15 July 2010 where the corporate trustee of a holding trust will acquire a residential property from a party unrelated to the SMSF. The trustees (ie members) of the SMSF are the directors of the corporate trustee of the holding trust. To facilitate the acquisition, one member of the fund borrows money from a financial institution and on-lends the money to the SMSF for investment into the holding trust. Under the terms of the arrangement, the corporate trustee of the holding trust holds the residential property on trust for the SMSF subject to a charge in favour of the financial institution to secure the loan to the member. As the charge in this case is granted to secure the borrowing by the member from the financial institution, rather than the borrowing by the SMSF from the member, the arrangement fails the requirement of in s 67A(1)(f). Two SMSFs who jointly borrows under a limited recourse borrowing arrangement involving a single holding trust will contravene s 67(1) (see ID 2010/172: ¶3-410). Where the other party to a transaction is not at arm’s length to the SMSF, s 109(1)(b) requires that the

terms and conditions of the transaction must not be more favourable to the other party than would be reasonably expected if the parties were at arm’s length (¶3-440). In ID 2010/162, an SMSF entered into a limited recourse borrowing arrangement on 1 June 2009 to acquire an income producing asset for the SMSF. The lender was a related party of the SMSF and the interest rate under the arrangement was lower than the rate that would be available to the SMSF from an arm’s length lender for an otherwise similar loan. In this case, the SMSF’s borrowing does not contravene s 109(1)(b) as the terms and conditions of the borrowing are not more favourable to the other party than would be reasonably expected if the parties were dealing with each other at arm’s length. It is expected that establishing the arrangement and borrowing are both documented and conducted in a business-like manner in the same way as an arrangement when dealing with an arm’s length lender. Acquirable asset and collection of assets An asset is an “acquirable asset” if it is not money (whether Australian or foreign currency) and the SISA or any other law does not prohibit the RSF trustee from acquiring the asset (SISA s 67A(2)). The most common example of any other law is the Trustee Act of a state and territory. The definition of acquirable asset excludes limited recourse borrowing arrangements that involve money as an asset (eg arrangements over multiple assets that are traded for money and managed in a similar fashion to margin accounts). The term “asset” is to be read in the singular, so that it is not interpreted as permitting borrowing arrangements over multiple non-identical assets. The policy intent of s 67A is to prohibit borrowing arrangements over multiple assets that can potentially allow the lender to choose which assets are sold in the event of a default on the loan. An asset can cover a collection of assets that are identical and have the same market value (s 67A(3)). Examples of a collection that can be treated as a single “acquirable asset” include: • a collection of shares of the same type in a single company (eg a collection of ordinary shares in X Ltd) • a collection of units in a unit trust that have the same fixed rights attached to them • a collection of economically equal and identical commodities (eg a collection of gold bars, irrespective of whether they might, for example, have different serial numbers). Examples of collections that would not be permissible include: • a collection of shares in a single company that have different rights (eg ordinary and preference shares) • a collection of units in a unit trust of different classes that have different rights attached to them or are potentially subject to differing trustee discretion • a collection of shares in different entities, and • a collection of buildings each under separate strata title, irrespective of whether the buildings are substantially the same at the time of acquisition. To ensure that an acquirable asset is always interpreted in the singular, the words “collection” and “identical” should be interpreted as ensuring that an acquirable asset is one or more things that within the arrangement are seen and treated as a whole. For example, a collection of shares must be acquired and disposed of as a collection and could not, for example, be sold down over time. In the case of the purchase of real property for example, a single title for land and the accompanying house on it would be considered a single acquirable asset, but additional items such as furnishings would not be allowed to be purchased through the same limited recourse borrowing arrangement. Furnishings (or “non-fixtures” of the property) can be acquired through separate limited recourse borrowing arrangements over a single acquirable asset or bought outright (but not held as security under the borrowing arrangement over the property).

The acquisition of leased property may be covered. For the purposes of s 67A, the lease itself should not be considered as a separate asset as long as it is dealt with together with the property under the arrangement (and therefore does not need to satisfy the requirements of s 67A(3)). When is an acquirable asset “acquired” under s 67A(1)(a) An acquirable asset is acquired at the time when the trustee of the holding trust (security trustee) gains a legal interest in the asset. At the same time, the RSF trustee gains a beneficial interest in the asset as required by SISA s 67A(1)(b). The “beneficial interest” arises on creation of the security trust over the acquirable asset. The RSF trustee has a right to acquire the legal interest upon repayment of the loan. The purpose of s 67A(1)(a)(ii) is to clarify that the RSF trustee can refinance an existing limited recourse borrowing. This may allow the RSF trustee to minimise the risk of default on a borrowing resulting from a temporary inability to make a repayment, eg due to solvency issues from benefit payment obligations. Protection of fund assets — trustee guarantees and indemnity Some lenders providing limited recourse borrowing arrangements to superannuation funds require the fund trustees, or third parties such as fund members, to provide guarantees of the borrowing to underwrite the lender’s risk from the limited recourse nature of an instalment warrant arrangement. Such an issue was raised in TA 2008/5 (¶3-410). The SISA does not prevent a lender exercising rights under a guarantee given by a third party since the lender’s rights under such guarantees are not rights against the trustee of the fund. Accordingly, the lender has rights against the guarantor’s assets if there is a default on the borrowing. The guarantor subsequently has a common law right to recover losses (which may exceed the value of the asset which was the subject of the borrowing) from the principal debtor (ie the trustee of the fund) and the trustee may then arguably seek indemnity out of the fund’s assets. Where a guarantee is given by a trustee in a personal capacity, one issue that arises is whether a lender’s entitlement to recourse against the trustee’s personal assets may lead to the trustee claiming indemnity out of the fund’s assets. The conditions in SISA s 67A do not explicitly refer to guarantees given the variety of ways that collateral agreements may be used to circumvent the limited recourse nature of the arrangement. However, conditions in s 67A(1)(d), (e) and (f) are intended to protect fund assets from such claims by limiting the rights of the lender or any other person against the RSF trustee for, or in connection with, or as a result (direct or indirect) of a default on a borrowing or charges related to the borrowing, to rights relating to the acquirable asset. The acquirable asset under a s 67A borrowing arrangement must be held in trust (s 67A(1)(b)). This trust structure is a feature of traditional instalment warrants that helps to quarantine the other assets of the superannuation fund from the investment risk that the limited recourse borrowing arrangement presents. In summary: • a guarantor’s rights against the RSF trustee are limited as the rights of the lender are limited, so that no claim against the RSF trustee should arise which could give rise to a claim for indemnity from fund assets (s 67A(1)(d)) • the rights of the lender or any other person against the RSF trustee are limited to rights relating to the acquirable asset. No guarantee arrangement can be enforceable against the RSF trustee other than the rights relating to the acquirable asset (s 67A(1)(e)) • the acquirable asset cannot be subject to any other charge than that associated with the direct borrowing arrangement (s 67A(1)(f)). The ATO has suggested that one way in which the rights of a guarantor may be excluded or limited is by the express terms of the guarantee (see ID 2010/170: ¶3-410). TR 2010/1 (on superannuation contributions) states (at para 38): “38. When a guarantor makes a contribution by paying a debt of a superannuation provider the timing

of the contribution will be determined by whether or not the guarantor has a right to be indemnified by the superannuation provider. If the guarantor has no right of indemnity, the contribution is made when the guarantor satisfies the provider’s liability. If the guarantor has a right of indemnity, a contribution is only made when the guarantor takes formal steps to forgo that right, for example by executing a deed of release, or the guarantor is barred under the law from enforcing the right of indemnity.” The ATO’s view is that where the acquirable asset in a limited recourse borrowing arrangement is forgone by the SMSF trustee in circumstances where there is no longer a debt payable by the SMSF trustee, then a subsequent payment under the guarantee does not result in a contribution. That view is consistent with the first sentence of para 38 of TR 2010/1 which concerns the guarantor satisfying the trustee’s debt. The ATO also states that the content below published on its website on 29 July 2010 clarifies the position: “Personal guarantees and contributions to the SMSF If a guarantor makes a payment to the lender under an arrangement where they have foregone [sic] their usual rights of indemnity against the principal debtor (the SMSF trustee) in respect of the guarantee, this is a contribution to the SMSF if it satisfies a liability of the SMSF. This might happen, for example, if the guarantor paid the borrowing and the acquirable asset was transferred to the SMSF trustee under the arrangement. In contrast, there is no contribution if the SMSF trustee has exercised a right to ‘walk away’ from the arrangement (and has lost the acquirable asset to the lender) and has no further liability, but the lender still exercises a right to call on the guarantee for a shortfall after disposal of the original asset.” Effect of unlimited guarantee for a post-6 July 2010 arrangement If there is a third party guarantee in relation to a borrowing by an SMSF trustee that does not satisfy the requirements of s 67A(1)(d) and (e), then that borrowing and the maintenance of it are in contravention of s 67(1) irrespective of whether the borrowing is part of an arrangement that would otherwise satisfy the requirements of s 67A. Section 67A does not by its own operation affect the rights of the parties to the guarantee. RSF trustee breach of duty Section 67A(1)(d) and (e) of SISA do not apply to a right of a member or another trustee of the regulated superannuation fund to damages against the RSF trustee for a breach by the RSF trustee of any of the RSF trustee’s duties as trustee (s 67A(5), (6)). That is, members and co-trustees may pursue a claim for damages against a trustee that makes a decision to acquire an asset under a limited recourse borrowing arrangement in breach of its obligations as trustee, bearing in mind that the trustee is prevented from seeking any indemnity against fund assets by s 56 and 57 (¶3-150). Replacement asset Former s 67(4A)(b) of SISA previously required that a superannuation fund borrowing must be used or maintained to acquire “the original asset, or another asset (the replacement)”. That condition created uncertainty over what constituted the replacement asset and gave rise to arrangements that could place fund assets at risk. For example, a lender could require a trustee to replace an asset within an arrangement if its value fell below a certain level, with an asset of greater value than the outstanding loan. For borrowing arrangements under s 67A, the specific circumstances permitting a replacement asset are set out in s 67B(3) to (8), or as prescribed by the SISR. For example, if the original asset consists of a share in a company or a collection of shares in a company (or a unit in a unit trust or a collection of units in that unit trust), the replacement asset consists of a share in that company or a collection of shares in that company (or a unit in a unit trust or a collection of units in that unit trust), and the original asset and the replacement asset have the same market value at the time the replacement occurs (s 67B(3)). The replacement asset may be a share or a collection of shares in another company, or a unit or a collection of units in another unit trust, if the replacement occurs as a result of a takeover, merger, demerger or restructure of the company or unit trust (s 67B(5)).

If the original asset consists of a share or a collection of shares in a company and the replacement asset consists of a stapled security or a collection of stapled securities: • each of those stapled securities consists of a single share or a single collection of shares of the same class, stapled together with a single unit, or a single collection of units of the same class, in a unit trust, and • the replacement occurs under a scheme of arrangement of the company (s 67B(6)). If the original asset consists of a unit or a collection of units in a unit trust and the replacement occurs as a result of an exercise of a discretion granted under the trust deed of that unit trust to the trustee of that unit trust, the replacement asset must consist of a unit or a collection of units in that unit trust (s 67B(7)). If the original asset consists of an instalment receipt that confers a beneficial interest in a share in a company or a collection of shares in a company, the replacement asset must consist of that share or collection (s 67B(4)). An instalment receipt means an investment under which: • a listed security is held in a trust until the purchase price of the security is fully paid, and • the security, and property derived from the security, is the only trust property (s 10(1)). As commonly understood, an instalment receipt is a product that does not ordinarily involve a borrowing; rather, it is the purchase of another asset by instalments. The use of “instalment receipt” in s 67B(4) in the context of replacement assets specifically means a limited recourse borrowing arrangement over an instalment receipt as the acquirable asset. This is not the same as a superannuation fund using an instalment receipt to purchase an asset without any borrowing, which is not relevant to s 67A or 67B. The following examples of circumstances that do not permit a replacement asset are given in the explanatory memorandum to Act No 100 of 2010: • securities liquidated or traded or both for different assets only as a consequence of implementing an investment strategy • money or cash is not eligible as a replacement asset under any circumstances. This includes circumstances where the original asset would otherwise be replaced with an eligible replacement asset plus cash, for example shares in X Ltd replaced by shares in Y Ltd and a pool of cash as a result of a takeover of X Ltd by Y Ltd • replacement asset arising from an insurance claim covering the loss to the original asset • the replacement by way of improvement of real property • a series of titles over land replacing a single title over land that has been subdivided, and • a replacement of a title over real property as a result of government action such as the resumption of all or part of a property or rezoning. Trust deed and investment strategy Trustees should ensure any such asset acquisition under the borrowing arrangements are permitted by the fund’s trust deed and have been taken in consideration when formulating the fund investment strategy as required by SISA s 52(2)(f) (¶3-400). Interaction with in-house asset rules If an asset (investment asset) of a superannuation fund is an investment in a related trust (as described in SISA s 67A(1)(b)) in connection with a fund borrowing under s 67A(1) and the only property of the related trust is the acquirable asset, the investment asset is an in-house asset only if the acquirable asset would be an in-house asset if it were held directly by the fund (s 71(8), (9)). This means that an investment in a related trust under s 67A is not automatically counted against the in-house asset limit. This is to facilitate the majority of cases where the holding trust under the limited recourse borrowing arrangement is a related (bare) trust.

Example The Family Superannuation Fund has invested 5% of its assets in in-house assets. As such, the fund is prohibited from acquiring further in-house assets by s 83 (¶3-450). The fund trustee cannot use a s 67A borrowing arrangement to acquire a beneficial interest in another in-house asset, for example, where the acquirable asset is a share in a company controlled by a member of the Family Superannuation Fund, as this would breach the in-house asset restriction. However, the fund trustee can use the borrowing arrangement to acquire a beneficial interest in an unrelated asset, for example, listed shares in an unrelated company. As the underlying asset would not be an in-house asset if held directly, the investment in the related holding trust will not be an in-house asset and there will be no breach of the in-house asset restriction.

An ATO determination made pursuant to s 71(1)(f) provides certainty on the operation of in-house asset exception in s 71(8) at the beginning of an LRBA where a borrowing has not yet begun or the related trust does not yet hold the acquirable asset, or where the asset continues to be held in the related trust after a borrowing has been repaid (SMSF (Limited Recourse Borrowing Arrangements — In-House Asset Exclusion) Determination 2014). Specifically, an investment in a related trust held by an SMSF as a required part of an LRBA is not an in-house asset of the SMSF in the circumstances described in the instrument. The circumstances include: • where an SMSF holds the investment asset before both the commencement of a borrowing referred to in s 71(8)(b) and the related trust beginning to hold the asset referred to in s 71(8)(c). This includes where it is intended for there to be more than one such borrowing under one LRBA (eg a borrowing to fund the payment of a deposit under the contract for the acquisition of the acquirable asset and another borrowing to fund payment of the balance of the acquisition cost of the acquirable asset), but none of those borrowings has yet begun and the related trust does not yet hold the asset referred to in s 71(8)(c) • when the related trust does not yet hold the asset referred to in s 71(8)(c) even though one or more borrowings referred to in s 71(8)(b) have begun • where the asset is still held in the holding trust after the s 71(8)(b) borrowing has been repaid (in practice, the transfer of the asset referred to in s 71(8)(c) from the holding trust to the SMSF trustee is unlikely to happen at the same time as the borrowing under the LRBA is repaid) • where there are multiple borrowings covered by s 67A(1) (or, as relevant, former s 67(4A) under one LRBA). In this case, the investment asset will be excluded, through the operation of s 71(8), from being an in-house asset of the fund until the last of such borrowings under the LRBA is repaid, provided the requirements of s 71(8) are continually met until that time. Stamp duty Each state and territory imposes stamp duty on dutiable property (or on conveyances of property). Duty is imposed either on a fixed rate ad valorem (according to value) basis or on a nominal basis, subject to exemptions and concessions which may apply. The current stamp duty Acts are: • New South Wales — Duties Act 1997 (NSW) • Victoria — Duties Act 2000 (Vic) • Western Australia — Duties Act 2008 (WA) • Queensland — Duties Act 2001 (Qld) • Tasmania — Duties Act 2001 (Tas) • Australian Capital Territory — Duties Act 1999 (ACT) Non-Rewrite States

• South Australia — Stamp Duties Act 1923 (SA) • Northern Territory — Stamp Duties Act 1978 (NT). Coverage of the stamp duty Acts is outside the scope of this Guide. Stamp duty commentary may be found in the Wolters Kluwer Australian Master Tax Guide or Stamp Duties services. Stamp duty in the “non-Rewrite States” is imposed largely in the traditional manner, ie on “instruments” necessary to evidence transfers of property, although the legislation has been widened over time to impose duty even where no written document is brought into existence. Generally, duty is payable by the transferee and is levied on the higher of the consideration for the dutiable transaction and the unencumbered value of the dutiable property. Stamp duty will, in most cases, apply to the GST inclusive amount of the consideration. For example, if the agreed purchase price is $1m and, in addition to this amount, the vendor collects from the purchaser $100,000 on account of GST, duty will be payable on $1.1m. The converse does not apply, ie GST will not have to be paid on stamp duty payable on a dutiable matter. Duty is payable within three months after a transfer. This period begins for a written instrument when the instrument is first executed, ie when any party signs or seals an instrument regardless of whether the other parties have done so. Duty may be payable on any instrument whereby property is legally or equitably transferred to or vested in a person. For example, in NSW, the following transactions in relation to dutiable property are also potentially dutiable: (a) agreements for sale or transfer; (b) declarations of trust; (c) surrenders of interests in land; (d) foreclosures of mortgages; and (e) vesting of dutiable property by, or as a consequence of, a court order (s 9). Stamp duty concessions In particular cases, superannuation operations may enjoy special concessions in the form of an exemption or a fixed, rather than an ad valorem, rate of duty (eg duty of $50 is chargeable on a transfer of, or an agreement to transfer, dutiable property from a person (transferor) to a single member SMSF. See, eg the following provisions in the Duties Act 1997 (NSW): • s 60 — Instruments relating to superannuation • s 61 — Transfers of property in connection with persons changing superannuation funds (Nifuno Pty Ltd atf Stephen Forbes Pension Fund v Chief Commissioner of State Revenue [2019] NSWCATOD 3) • s 62 — Transfers between trustees and custodians of superannuation funds or trusts • s 62A — Transfers to self managed superannuation funds • s 62B — Declaration of trust by custodian (see below) Instalment warrant arrangements In an instalment warrant arrangement, whether a stamp duty exemption or nominal stamp duty is available on the eventual transfer of the property (asset) from the custodian (security trust) to the trustee of the SMSF will be based on the actual instalment warrant documents and the relevant stamp duty legislation in each case. For example, on the ultimate transfer of the property from the custodian to the SMSF and based on the particular facts of the instalment warrant arrangement, either of the exemptions below may apply. • If the initial declaration of trust has been exempted from duty, stamp duty would apply to the subsequent transfer of the property to the SMSF. • Alternatively, no duty is payable on the subsequent transfer of the property from the custodian to the trustee of the SMSF if evidence is produced which proves that: – duty was paid when the property was acquired by the custodian, and

– for the whole period from the time the trust was declared by the custodian to the time when the property was transferred to the trustee of the SMSF, the trustee of the SMSF was always the only beneficiary and the beneficiaries (who are natural persons) of the SMSF were always the only beneficiaries of the SMSF. An instalment warrant arrangement with a bare trust structure in most cases appears to be consistent with the “apparent purchaser” provision in some duties legislation under which an exemption from duty is available if: • the instalment warrant trustee is a mere “apparent purchaser”, and • the SMSF is the real purchaser which has provided all the money for the purchase of the dutiable property. Under such provisions, either a nil or nominal duty liability arises (eg s 34 and 36 of the Duties Act 2000 (Vic); s 55 and s 62B of the Duties Act 1997 (NSW); s 117 of the Duties Act 2008 (WA); s 39 of the Duties Act 2001 (Tas) and s 56 of the Duties Act 1999 (ACT)). GST The GST regime under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is discussed in ¶7-800 and following. Where an SMSF enters into a bare trust instalment warrant arrangement to purchase commercial property, and all of the conditions for a supply of a going concern in GST Act s 38-325 are met, it may be possible for the supplier of the commercial property and the SMSF (as the recipient) to treat the supply as GST-free. Briefly, the entity that makes an acquisition, in a bare trust arrangement, is the beneficiary, rather than the trustee (GSTR 2008/3, para 52, 78). Whether this is the case will depend on the circumstances of the case. It should be added that in the context of a bare trust arrangement, the writing requirement in s 38-325(1) (c) is met if the trustee agrees in writing that the supply is of a going concern. In such a case, the trustee will be treated as acting on behalf of the beneficiary. Thus, the beneficiary will meet the requirement for a supply of a going concern, if all of the other requirements of a supply of a going concern are met (GSTR 2008/3, para 81–83). Accordingly, if the instalment warrant trustee agrees with the vendor of a commercial property, in writing, that the supply of the property is a supply of a going concern, and all of the other conditions for a supply of a going concern are also met, the supply will be GST-free. A discussion of the conditions to be met for a supply to be a supply of a going concern is found in GSTR 2002/5. Otherwise, if GST is payable/claimable on the purchase of the property, and all of the conditions for a creditable acquisition in GST Act s 11-5 are met, it would seem that the SMSF, as the beneficiary trust, may be entitled to claim input tax credits on the purchase of the commercial property. ATO guidelines ATO SMSF Ruling SMSFR 2012/1 explains key concepts relevant to the application of the limited recourse borrowing arrangement (LRBA) provisions as they apply to an SMSF that enters into an LRBA, including: • what is an “acquirable asset” and a “single acquirable asset” • “maintaining” or “repairing” the acquirable asset as distinguished from “improving” it, and • when a single acquirable asset is changed to such an extent that it is a different (replacement) asset. Although the analysis and examples developed in the ruling focus primarily on real property, the principles discussed can also apply to other types of assets. This ruling does not discuss other issues arising from

an LRBA, such as the application of the in-house asset rules if an asset remains in the holding trust once the borrowing has been repaid. The ruling also sets out the ATO’s opposition to the alternative view that the reference to an “asset” in SISA s 67A and 67B is concerned not with the physical properties of the object but only with the legal proprietary rights which are acquired. Under the legal proprietary rights approach, if borrowed funds are applied to acquire an estate in land under an LRBA, and subsequently a substantial improvement is made to that land, for example the erection of a building, this would not result in an improvement to the asset, nor a different asset, as the relevant asset is the proprietary rights which have not changed. While accepting that the alternative view has merit, the ATO considers that it is not the preferred view. The accounting approach to determining what is the single acquirable asset is also not preferred. The ATO considers that it is necessary to have regard to both the legal form and substance of what has been acquired in order to determine whether it is an acquirable asset as defined in s 67A(2) and whether it is a single acquirable asset. Taxpayer Alert — property investments using LRBA or related unit trust Taxpayer Alert TA 2012/7 warns SMSF trustees and advisors to exercise care so as to ensure any arrangements entered into by an SMSF to invest in property are properly implemented, particularly those involving LRBAs or the use of a related unit trust. The ATO is concerned that some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified, and unwinding the arrangement may involve a forced sale of the asset which could cause a substantial loss to the fund. Background — property investments using LRBA and using a related unit trust Different conditions apply for LRBAs entered between 25 September 2007 and 6 July 2010 inclusive and those entered into on or after 7 July 2010. Some of the requirements of the borrowing exception for SMSFs under SISA are that the investment is made through a holding trust and not held directly by the SMSF trustee, and that the investment is in a single acquirable asset. These arrangements are commonly referred to as LRBA. Subject to limited exceptions, the trustee or investment manager of an SMSF is prohibited from intentionally acquiring assets from a related party. One exception is where the asset is an investment in or loan to a related party, commonly referred to as an “in-house asset”. However the total market value of the SMSF’s in-house assets must not at any time exceed 5% of the total market value of the fund’s assets. Where in-house assets for an SMSF exceed the 5% limit, the trustee needs to rectify the breach, usually within 12 months. An SMSF’s investment in a related unit trust is excluded from the definition of an in-house asset where the unit trust complies with the regulatory requirements contained in SISR Div 13.3A. Therefore, such investments are excluded from the calculation of the 5% limit. Furthermore, the general prohibition on SMSFs acquiring assets from a related party does not apply where the SMSF’s investment is in a unit trust which complies with those requirements. LRBAs covered by the Alert TA 2012/7 applies to arrangements with features substantially equivalent to the following: Arrangement 1 — Property investments using LRBA 1. An SMSF enters into an LRBA post-7 July 2010 to acquire an asset. 2. The arrangement has at least one of the following features: (a) the borrowing and the title of the property is held in the individuals’ name and not in the name of the trustee of the holding trust. The SMSF funds part of the initial deposit and the ongoing loan repayments (b) the title of the property is held by the SMSF trustee, not the trustee of the holding trust (c) the trustee of the holding trust is not in existence and the holding trust is not established at the

time the contract to acquire the asset is signed (d) the SMSF trustee acquires a residential property from the SMSF member (e) the acquisition comprises two or more separate titles and there is no physical or legal impediment to the two titles being dealt with, assigned or transferred separately, or (f) the asset is a vacant block of land. The SMSF intends to use the same borrowing to construct a house on the land. The land is transferred to the holding trust prior to the house being built. Arrangement 2 — Property investments using related unit trust 1. An individual or individuals (“the fund members”) establish an SMSF and roll over their existing superannuation benefits into the SMSF. Alternatively the individual or individuals are a member of an existing SMSF. 2. A unit trust (“the unit trust”) is established for the purpose of acquiring a property. Alternatively an existing unit trust can also be used for the same purpose. 3. The unit trust is a related unit trust. 4. The fund members subscribe for units in the unit trust. 5. The fund members may borrow money from a commercial lender to fund the subscription to units in the unit trust. 6. The SMSF also subscribes to units in the unit trust. 7. The trustee of the unit trust purchases an asset (“the asset”) such as a property which is rented out. 8. The arrangement has one or more of the following characteristics: (a) the asset acquired by the unit trust is used as a security for the money borrowed by the members to subscribe units in the unit trust (b) the assets of the unit trust include an asset that was acquired from a related party of the superannuation fund which is not business real property, and/or (c) the assets of the unit trust include real property which is leased to a related party of the superannuation fund, and the real property subject to the lease is not a business real property.

The ATO’s concerns — SIS regulatory issues

The ATO considers that these arrangements give rise to possible issues, being whether: Arrangement 1 — Property investments using LRBA (a) the investment arrangements may be in breach of the sole purpose test in s 62 (¶3-200) (b) s 67 which prohibits the SMSF trustee from borrowing money or maintaining an existing borrowing may have been breached (¶3-410) (c) the asset acquired is not a single acquirable asset as required under s 67A(2) as it is comprised of two or more proprietary rights (see “Acquirable asset and collection of assets” above) (d) the acquirable asset is subject to a charge which would prohibit an SMSF trustee from borrowing money, or maintaining a borrowing of money under s 67A(1)(f), and (e) the deposit paid by the SMSF and/or loan repayment by the SMSF may be considered as a payment of superannuation benefits which contravenes SISR Pt 6 where the title of the property is not held by the trustee of the holding trust Arrangement 2 — Property investments using related unit trust (f) the investment arrangements may be in breach of the sole purpose test in s 62 (g) the SMSF’s investment in the unit trust fails to meet the requirements of reg 13.22C (¶3-450), and (h) the SMSF’s investment in the unit trust is an in-house asset under s 71, therefore counting towards the 5% limit under s 83 (¶3-450). The ATO’s concerns — taxation issues The ATO considers that these arrangements may give rise to possible issues, being whether: Arrangement 1 — Property investments using LRBA (a) the member(s) may be required to include the SMSF loan repayments in their assessable income, and (b) the income and its associated deductions from the investment should be declared by the individual member(s), rather than by the SMSF where the investment is not held for the beneficial interest of the SMSF Arrangement 2 — Property investments using related unit trust (c) the SMSF may become a non-complying superannuation fund for tax purposes and must include amounts of income from previous years in its assessable income under ITAA97 s 295-325 (¶7-250) (d) the unit trust may incur a CGT liability in relation to the disposal of the property (e) the members and the SMSF may be required to include a capital gain in their assessable income an amount on redemption of their units in the unit trust.

¶3-420 Loans/financial assistance to superannuation fund members Except as permitted by the SISA, the trustee (or investment manager) of a regulated superannuation fund is prohibited from lending money of the fund or giving any other financial assistance using resources of the fund to a member or a relative of a member of the fund (SISA s 65; SMSFR 2008/1). Section 65 is a civil penalty provision (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 if the provision is contravened (¶3-820). The prohibition in s 65 applies to dealings with a member or a relative, rather than the wider concept of

“related party” (¶3-470). While loans to related parties are permitted, and are treated as in-house assets under SISA Pt 8 (¶3-450), the lending of money or provision of financial assistance to a member or relative remains prohibited under s 65 (s 65(7)). This is to remove any doubt about the interaction of the Pt 8 in-house asset provisions and the s 65 prohibition. Relative and member A “relative” of an individual means: (a) a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his/her spouse (b) a spouse of the individual or of any other individual referred to in item (a) (SISA s 10(1)). For the purposes of item (a), if one individual is the child of another individual because of the definition of child in s 10(1) (¶3-020), relationships traced to, from or through the individual are to be determined in the same way as if the individual were the natural child of the other individual (s 10(5)). The definition of “member” is modified by regulations for the purposes of particular SISA provisions (s 15B). In particular, if a superannuation interest in a fund is subject to a payment split, or a non-member spouse interest has been created under SISR reg 7A.03B, and before the payment split the non-member spouse was not a member of the fund, the non-member spouse is treated as being a member of the fund in which the interest is held for the purposes of the prohibition on lending to members in s 65 (and the inhouse asset rules in SISA Pt 8 and various other provisions) (reg 1.04AAA). Scope of s 65 A “loan” includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings (SISA s 10(1)). “Giving financial assistance” is not defined, but the expression under its ordinary meaning would cover transactions such as providing guarantees for private loans of members, charging fund assets for the benefit of members, the release of an obligation and the forgiveness of a debt (SMSFR 2008/1, see “ATO guidelines” below). A partnership does not have a separate legal identity; rather, it is two or more persons carrying on a business in common. Therefore, a loan by a fund to a partnership made up of fund members would breach s 65, as the loan to the partnership is actually a loan to the members (ID 2003/711). For other examples, see SMSFR 2008/1 below, ID 2002/516 (no breach when fund money was unintentionally deposited in member’s bank account) and former ID 2002/702 (a breach occurs where free residential accommodation was provided by an SMSF to a member). In SMSFR 2008/1 (see “ATO guidelines” below), the Commissioner takes a very broad view of the scope of the s 65 prohibition. Among other things, the Commissioner states that: • the expression “financial assistance” … extends beyond other kinds of disposition of money or property … and can take the form of the giving of a security, charge or guarantee or the taking on of an obligation, or any other arrangement that, on an objective assessment of the purpose of the arrangement, is in substance a financial accommodation (para 7) • the requirement in s 65(1)(b) that assistance must be given to “a member of the fund or a relative of a member of the fund” for paragraph 65(1)(b) … does not limit the application to transactions directly between the SMSF and a member or relative of a member. Paragraph 65(1)(b) is also contravened if the SMSF enters into an arrangement whereby SMSF resources are used to give financial assistance to a member or a relative of a member through a third party or an interposed entity (para 10, 18) • assistance is given to a member or a relative of a member if there is some benefit, aid or help given to that person. … it is not necessary to determine the purpose for which the financial assistance is given. Paragraph 65(1)(b) will be contravened if financial assistance is given to a member or a relative of a member using the resources of the SMSF irrespective of the purpose for which such

assistance might be given or whether the member or member’s relative sought such assistance (para 51). Additional restrictions for public offer funds The trustee of a public offer superannuation fund (¶3-500) must not lend money of the fund to, or invest money of the fund in, the trustee itself or a related body corporate (SISR reg 13.17A). The restriction does not prevent investments by a fund in a related body corporate if the investments relate to the issue of a life insurance policy by a life insurance company that is a related body corporate, to a deposit with an authorised deposit-taking institution (ADI) or approved non-ADI financial institution, or the related body corporate is an ADI, an approved non-ADI financial institution and the investments (prescribed investments) comply with the rules and limits specified in reg 13.17AA. An ADI means a body corporate that is an ADI for the purposes of the Banking Act 1959 or a state bank. ATO guidelines SMSFR 2008/1 explains the meaning of “any other financial assistance”, what constitutes “using the resources of the fund” and what constitutes the giving of financial assistance to “a member of the fund or a relative of a member of the fund” for the purposes of SISA s 65(1)(b). In the Commissioner’s view, assistance is given to a member or a relative of a member if some aid or help or a benefit is given to that person whether or not such assistance was requested and the assistance given is financial in nature. The expression “financial assistance” has no technical meaning; therefore, it has its ordinary meaning so as to extend beyond the provision of loans or other kinds of disposition of money or property, eg the giving of a security, charge or guarantee or the taking on of an obligation, or any other arrangement that, on an objective assessment of the purpose of the arrangement, is in substance a financial accommodation. The Commissioner considers that the resources of a fund are used if an arrangement relies on the fund’s assets, whether or not there is a positive, negative or nil effect on the net assets as a result of that arrangement. Thus, this can include any arrangement if the assets of the fund are converted into other assets, diverted, diminished or put at risk, or if there is any prejudice to the financial position of the fund. The assistance must be given to “a member of the fund or a relative of a member of the fund”. This condition does not limit the application of the prohibition to transactions directly between the fund and a member or relative of a member, that is, s 65(1)(b) is contravened if the fund enters into an arrangement whereby the fund’s resources are used to give financial assistance to a member or a relative of a member through a third party or an interposed entity. Another entity can give financial assistance to a member or relative of a member in any of the ways that an SMSF can give financial assistance to a member or relative (see SMSFR 2008/1, para 12–16). There is a sufficient connection between the financial assistance given by another entity to a member or relative of a member and using the resources of an SMSF to give that financial assistance if: • the financial assistance would not have been given by the entity had the SMSF not entered into an arrangement with that entity that relies on SMSF resources • the entity is in effect passing on financial assistance given to it by the SMSF. This also includes money or assets flowing from the SMSF through a chain of related entities to the member or a relative of a member of the SMSF, or • there is something else to indicate that financial assistance given by the entity relied upon, or was in some way conditional or dependent upon, SMSF resources. For example, financial assistance is indirectly given if the SMSF agrees to sell an asset (at market value) to another entity and as part of that arrangement, the other entity releases the member or relative from a financial obligation owed to it by the member or relative, or if the SMSF transfers an asset to another entity and the other entity transfers the asset to the member or relative. Arrangements or transactions that by their nature contravene s 65(1)(b) include the trustee or investment manager of an SMSF doing any of the following:

• giving a gift using the resources of the SMSF to a member or a relative of a member • selling a fund asset to a member or relative of a member for less than its market value, or purchasing an asset for greater than its market value • acquiring services from a member or a relative of a member on non-arm’s length terms (eg paying for unnecessary services or paying an amount for services in excess of an arm’s length amount) • providing security or a charge over the fund’s assets or giving a guarantee or an indemnity for the benefit of a member or a relative of a member • forgiving a debt of a member or a relative of a member, or releasing a member or a relative of a member from an obligation to the SMSF, including where the amount is not yet due and payable, or delaying recovery action for a debt owed to the SMSF, and • satisfying or taking on a financial obligation of a member or a relative of a member (SMSFR 2008/1, para 86). The factors that indicate that the purpose of an arrangement or transaction is in substance to provide financial assistance using the resources of an SMSF include: • the arrangement or transaction exposes the SMSF to a credit risk, or exposes the SMSF to a financial risk, from a member or a relative of a member • the arrangement or transaction is on non-arm’s length terms that are favourable to the member or relative of a member • the arrangement or transaction is not a usual or normal commercial arrangement in the context in which SMSFs operate • the arrangement or transaction is not consistent with the investment strategy of the SMSF • under the arrangement or transaction an amount is paid by the SMSF, and later repaid to the SMSF, in amounts or in a manner that may be equated in a commercial sense with the repayment of a loan whether with or without an interest component, and • the arrangement or transaction results in a diminution of the assets of the SMSF whether immediately or over a period of time (SMSFR 2008/1, para 15). ATO warnings on LRBA with related parties The ATO’s warnings deal with SMSF loan arrangements where the trustees provide loans or other direct or indirect financial assistance from the fund to a member or a member’s relative, for example, using assets of the fund to guarantee a personal loan of a member. The ATO gives the following advice to SMSF trustees considering lending arrangements: “Before lending any money, you should consider your fund’s investment strategy and determine whether the investment is legal and, in particular, whether lending money to people providing you with services or advice is in the best long-term interests of your members. If you are not sure about making these types of investments choices, we recommend that you seek advice before entering into such arrangements.” If a decision is made to go ahead and lend money from the SMSF, the ATO’s advice on implementing the arrangement includes having an appropriate written loan agreement with all relevant terms and ensuring it is conducted on an arm’s length basis with interest and repayments received (see also www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsf-technical/limitedrecourse-borrowing-arrangements---questions-and-answers). Taxpayer Alert — investing in an unrelated trust which on-lends to a member

TA 2010/5 describes an arrangement where an SMSF invests funds in an unrelated trust which on-lends the funds to a member or a relative of the member of the fund so as to circumvent the SISA s 65 prohibition. This alert applies to arrangements with features that are substantially equivalent to the following: 1. An organiser sets up a trust (the trust) which purports to offer fixed rate interest yielding investments to allegedly unrelated entities. 2. An SMSF invests in the trust. 3. The organiser (who may also be the trustee of the trust) or a licensee/franchisee of the organiser, sources borrowers (the borrowers) to borrow funds from the trust. 4. The borrowers may include a member of the SMSF that invested in the trust or a relative of an SMSF member. 5. Each borrower enters into a loan agreement (the loan) with the trust. The loan amount (or total loan amounts of all borrowers associated with the SMSF) may be comparable to the amount the SMSF invested in the trust. 6. The terms of the loan may include: • a range of available interest rates • a range of interest payment terms, including flexibility in the repayment date (provided the funds are paid sometime in the future) • security over the loan in the form of a mortgage, personal guarantee or caveat, and/or • the use of borrowed funds for multiple purposes, including business, investment or personal use. 7. Each borrower makes interest only repayments on the loan to the trust for a substantial period of the loan. 8. The trustee of the trust pays the SMSF an interest yield on their purported investment. 9. Investment and loan fees payable under the arrangement may be considered excessive. The basic structure of the arrangement can be summarised diagrammatically as below.

The ATO considers that arrangements of this type give rise to the SIS regulatory issues and taxation issues, being whether: SIS issues • the sole purpose test in s 62 may have been breached, eg a purpose is to obtain a present day benefit for members or a related party, rather than for the purpose of providing retirement benefits for the members (¶3-200) • the trustee of the SMSF may have breached the s 65 lending prohibition • the members of the SMSF may have illegally accessed superannuation benefits if they do not repay the loan from the trust • the trustee of the SMSF may have contravened s 109 which requires that investments to be made and maintained on an arm’s length basis (¶3-440) • the SMSF’s investment in the trust may be an in-house asset under s 71(1) and, therefore, subject to the 5% limit (¶3-450) • s 85 may apply to a person undertaking an arrangement where the arrangement artificially reduces the market value ratio of the SMSF’s in-house assets to avoid application of the in-house asset restrictions (¶3-450) Tax issues • income derived by the SMSF may be “non-arm’s length income” for the purposes of ITAA97 s 295550 (¶7-170) • payment of interest above the commercial rate to the trust by the member or relative, which is subsequently paid to the SMSF as an investment yield, may in fact be superannuation contributions and therefore should be reported for excess contributions tax purposes under ITAA97 Div 292 (¶6500, ¶12-530) • any fee or commission received by the trust, licensee/franchisee and/or organiser of this arrangement may be assessable income for the relevant income year • the borrowing expense incurred by the borrower (member or relative) may be deductible under ITAA97 s 8-1 or 25-25, and the extent to which it is deductible • any investment fee purportedly incurred by the SMSF may be deductible under s 8-1 and the extent to which it may be so deductible (¶7-150) • the general anti-avoidance provisions in ITAA36 Pt IVA (¶16-080) may apply to all or part of the arrangement, and • any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of TAA Sch 1 Div 290 (¶16-070). [SLP ¶3-470]

¶3-430 Acquisition of assets from a related party The trustee (or investment manager) of a regulated superannuation fund must not intentionally acquire an asset from a related party of the fund, except as permitted by the SISA (SISA s 66(1)). Special exemptions also apply to a fund with fewer than five members, such as an SMSF or a small APRA fund. A “related party” of a fund means a member or a standard employer-sponsor of the fund, and their Part 8 associates (this is discussed in detail at ¶3-470). The meaning of “member” is also modified in relation to

superannuation interests in a fund subject to a payment split, or where a non-member spouse interest has been created under SISR reg 7A.03B (reg 1.04AAA: ¶3-420). There are anti-avoidance provisions which apply to prevent a fund from setting up or undertaking a scheme which would result in the fund acquiring assets through interposed entities having a connection with a related party (s 66(3)) (see “Prohibition of avoidance schemes” below). A person who contravenes s 66(1) or (3) is guilty of an offence punishable on conviction by a term of imprisonment not exceeding one year (s 66(4)). The prohibition covers the intentional acquisition of an asset. Therefore, the prohibition will be breached only if the trustee knowingly acquires the asset from a related party; an inadvertent acquisition will usually not offend s 66 unless an avoidance scheme is involved. This qualification appears to provide some relief to trustees, particularly of large funds, who may not always be aware of the identity of a vendor, nor of any association between the vendor and a related party. The term “acquire” is not defined. Generally, “acquire” is taken to mean the trustee becoming the legal or equitable owner through the purchase or transfer of any asset. Subject to a contrary intention (see further below), the term “asset” means “any form of property”, and it includes money, whether Australian currency or foreign currency (s 10(1)). The phrase “any form of property” has a very wide meaning and includes every type of right, interest or thing of value that is legally capable of ownership and can be alienated or transferred to the trustees. The property may be personal or proprietary, legal, equitable or statutory, or tangible or intangible. Examples of asset or property include an estate or interest in land, a house, a car, a boat, machinery, shares, a chose in action, a mining exploration licence, a mining lease, a rental lease, and intellectual property rights. All forms of in specie contributions to a superannuation fund would therefore be covered. The issue of units in a unit trust to a trustee of a regulated superannuation fund, in consideration for the payment of subscription moneys for those units, amounts to an acquisition of an asset in terms of s 66. This view is consistent with the decision of the Full Federal Court in Allina 91 ATC 4195. Accepting money, cheques and promissory notes For the purposes of s 66, the phrase “acquire an asset” does not include accept money (s 66(5)). A trustee or investment manager, therefore, does not contravene s 66(1) by accepting a contribution of money, eg Australian or foreign currency (cash), a money order, or an account held by the fund is credited with funds by way of an electronic funds transfer (SMSFR 2010/1, para 132). SMSFR 2010/1 provides extensive guidelines and examples on the application of s 66(1) to contribution of assets (in specie contributions) by a related party to an SMSF. One issue that arises is whether a trustee accepts money, or an asset other than money, if the trustee accepts a cheque (including a bank cheque) or a promissory note from a related party. According to the ATO, a cheque (whether a personal cheque or a bank cheque and whether it is post-dated or is able to be presented immediately) is “money” for the purposes of s 66 and its acquisition by fund does not contravene s 66(1). This view recognises that typically a cheque is a medium of exchange, and that the value of a cheque to the fund is in the payment of a sum of money to the fund and not as an asset other than money (SMSFR 2010/1). A promissory note is an unconditional promise in writing (and signed) that is made by one party (the maker) to another (the payee or bearer) to pay on demand or at a fixed or determinable future time a sum certain in money. If a promissory note is an object of exchange rather than a medium of exchange, it is not money for the purposes of s 66. A promissory note is an object of exchange if, for example, it is issued at a discount from face value to raise finance and/or is traded at a discount from face value on a secondary market. Further, as value has been given for the promissory note its payment can be enforced. The acquisition of such a promissory note is the acquisition of an asset other than money and contravenes s 66(1) unless an exception applies (SMSFR 2010/1). If a promissory note is issued to a fund by the maker (eg a member of the SMSF) for no consideration and the note is payable at face value at a certain future date or on demand, it is the Commissioner’s view that the promissory note is money for the purposes of s 66. Therefore, its acquisition by the fund does not contravene s 66(1). However, this does not mean that the contribution of a promissory note does not give rise to other compliance issues, for example, s 65 (which prohibits lending to members (¶3-430)) may be relevant if contribution of a promissory note gives rise to an amount owing by a member or a relative of a

member to the fund. Example Linda is a member and trustee of her SMSF. Linda (as the maker) issues a promissory note to the SMSF (payee) that is payable at face value at a specified future date. The SMSF does not provide any consideration to Linda for the promissory note. The promissory note is a medium of exchange and is not in this case an object of exchange. Linda acquires the promissory note in her role as trustee of the SMSF. Linda as trustee of the SMSF does not contravene s 66(1) by acquiring the promissory note.

The ATO has issued TA 2009/10, which discusses in detail arrangements involving the non-commercial use of negotiable instruments (promissory notes) by superannuation funds — see ¶5-450. Acquisition of “services” The issue of the acquisition of “services” is discussed in SMSFR 2010/1 (para 17–19). Such a case may arise, for example, where an SMSF engages a related party on commercial terms to do work on land owned by the fund, ie a contract for services using goods and materials supplied by the related party. Although the provision of “services” (the substance of the transaction) will not breach s 66(1), care must be taken if the goods and materials are not insignificant in value and function as this may be taken to be an acquisition of assets (ie the goods and materials) from the related party. Exceptions to prohibitions — permitted acquisitions The trustee (or investment manager) of a regulated superannuation fund can intentionally acquire an asset from a related party of the fund under the following exceptions: • the asset is a listed security acquired at market value (s 66(2)(a)) • for a fund with fewer than five members (ie an SMSF or a small APRA fund) — the asset is business real property and is acquired at market value (s 66(2)(b)) • the asset is acquired under a merger between regulated superannuation funds (s 66(2)(c)) • the Regulator has determined in writing that the asset is of a kind that may be acquired by the fund, or a class of funds of which the fund is included (s 66(2)(d)) • the asset is an in-house asset that is acquired at market value and the acquisition does not result in the fund breaching the in-house asset threshold (s 66(2A)) • the asset is acquired for the member of the acquiring fund because of reasons directly connected with a relationship breakdown of the member (s 66(2B)). The permitted acquisition categories are discussed below. The “market value” of an asset means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made: • the buyer and the seller dealt with each other at arm’s length in relation to the sale • the sale occurred after proper marketing of the asset • the buyer and the seller acted knowledgeably and prudentially in relation to the sale (s 10(1)). Exception: Acquiring listed securities (s 66(2)(a)) A “listed security” means a security listed for quotation in the official list of: • a licensed market within the meaning of the Corporations Act 2001 (CA), s 761A (ie a financial market the operation of which is authorised by an Australian market licence) • an approved stock exchange within the meaning of ITAA97 (or ITAA36 former s 470), or

• a market exempted under the CA s 791C (SISA s 66(5)). The most common examples of listed securities for the purposes of s 66(2)(a) are shares, units, bonds, debentures, options, interests in managed investment schemes or other securities that are listed on the Australian Securities Exchange or a foreign stock exchange. A “security” generally means an instrument (document) issued by a government, semi-government body, statutory body, or public company in return for funds invested for a specified purpose by purchasers. It includes bonds, debentures, shares, units and interests in managed investment schemes. A “licensed market” under CA s 761A means a financial market the operation of which is authorised by an Australian market licence. A “financial market” (as defined in CA s 767A) is, broadly, a facility through which transactions involving financial products, including securities, are made. Under CA s 791A, an entity operating a financial market must be the holder of an Australian market licence to operate legally as a financial market in Australia unless exempted under CA s 791C from the licensing requirement. An example of a holder of an Australian market licence is ASX Limited (formerly the Australian Stock Exchange Limited and now operating as the “Australian Securities Exchange”). An “approved stock exchange” means a stock exchange listed in Sch 5 of the Income Tax Regulations 1997 (ITAR reg 995-1.05). They include both domestic exchanges (ie the Australian Stock Exchange Limited, the Bendigo Stock Exchange Limited and the National Stock Exchange of Australia Limited) and foreign exchanges (such as the New York Stock Exchange, the NASDAQ Stock Exchange, the London Stock Exchange, the Shanghai Stock Exchange, the Singapore Stock Exchange, etc). For the ATO’s views on acquisition of shares acquired by a superannuation fund under an employee share scheme where the fund pays less than the market value of the asset, see Factsheet Employee share scheme options and acquisition of shares by self-managed super funds (www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsf-technical/employeeshare-scheme-options-and-acquisition-of-shares-by-self-managed-super-funds). Exception: Acquiring business real property (s 66(2)(b)) The trustee (or investment manager) of a fund with fewer than five members (ie an SMSF or small APRA fund) may use 100% of its assets to acquire business real property of a related party at market value (SISA s 66(2)(b)). (Prior to 23 December 1999, acquisition of such assets was restricted to a limit of 40% of total assets of the fund.) “Business real property” in relation to an entity means: • any freehold or leasehold interest of the entity in real property • any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer, or • any class of interest in relation to real property, as prescribed by the Regulations, that is held by the entity (s 66(5)), where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate. The Commissioner has issued detailed guidelines on the business real property exception in SMSFR 2009/1 (see below and ¶5-450). Real property refers to interests in or over land, including fixtures attached to the land such as buildings. Accordingly, investments in licences (eg a water licence, fishing licence) and contractual arrangements (eg leasehold interest in real property with non-severable interest in an afforestation arrangement attached) cannot qualify as business real property. It is possible for two or more separate parties to have a legal interest in the same piece of real property by virtue of being registered as co-owners. Co-ownership or property sharing occurs where two or more persons share the same interest in land simultaneously. This indicates that the business real property exception will apply in situations where an SMSF obtains a partial interest in the real property, provided the real property is used wholly and exclusively in one or more businesses.

The definition of business real property includes property on which the entity conducts business (eg a shop or factory) or property which is the subject of the entity’s business (eg land where the entity is in the business of buying or selling land). Shares in a property-owning company are not business real property as shares are not real property. Business real property specifically includes real property used in one or more “primary production business” (as defined in ITAA97) where a portion of the property (not exceeding two hectares) contains a dwelling that is used primarily for domestic or private purposes (s 66(5)). As noted above, the real property must be used wholly and exclusively in one or more businesses, whether carried on by the entity or not, including a business which has temporarily ceased operating. “Business” includes any profession, trade, employment, vocation or calling carried on for the purposes of profit, including the carrying on of primary production and the provision of professional services, but not occupation as an employee (s 66(5)). Whether an entity is in fact running a business is determined on a case-by-case basis, having regard to certain factors. Essentially, there must be some organised activity, which may be demonstrated by: • the keeping of separate records • the size of the operation and the capital investment involved • whether transactions are conducted continuously or systematically, or merely ad hoc • the time spent on the activity • whether a business plan exists • whether there is a reasonable expectation of profit, and • whether employees are involved. As the definition of “business” is inclusive, the question of whether a business as ordinarily understood is in existence remains one of fact and degree requiring the consideration of all the ordinary indicators of business noted above. An activity that is not designed or carried out for the primary or specific purpose of profit may still, after consideration of all relevant factors, be regarded as a business for the purpose of s 66(5). In the case of a not-for-profit enterprise, it is typically a requirement that the entity’s stated purpose is something other than to produce profit. However, if the activity otherwise satisfies the ordinary indicators of a business, a not-for-profit enterprise may still be classified as a “business” for the purposes of s 66(5). For additional guidelines on what activities constitute a “business” or “primary production business”, see TR 97/11 and SGR 2005/1 (SMSFR 2009/1, para 37, 119, 120). Residential property will generally not satisfy the business use requirement and, therefore, will not qualify as business real property. The mere renting out of a property is not considered to constitute the carrying on of a business. Where residential property forms part of a business of owning and leasing residential properties, the business real property exception may be satisfied (SMSFR 2009/1, para 192). Exception: Mergers and Regulators’ determinations (s 66(2)(c) and (d)) From 12 May 1998, there are two further exceptions to the general prohibition on acquisition of assets from related parties. The first covers assets acquired by the trustee of a regulated superannuation fund under a merger between regulated superannuation funds, where this would result in the acquisition of assets from a related party (SISA s 66(2)(c)). The term “merger” is not defined in the SISA. A merger in this context refers to all the assets and liabilities of two or more separate funds being transferred into either one of the funds or into a new fund. This will generally result in one fund ceasing to exist and the combined entity operating under one or other of the original trusts. The same situation applies to SMSFs, for example where a family group has more than one fund and these are consolidated via a merger. Again, the process is effected as a roll-over from one fund to the other. In the context of s 66(2)(c), the following situations would be considered mergers:

• all the assets and liabilities of SMSFs A, B and C (transferor funds) are transferred to the trustee(s) of new SMSF D (transferee fund) and SMSFs A, B and C are wound up, or • SMSF E transfers its assets and liabilities to the trustee of existing SMSF F and SMSF E is wound up (National Tax Liaison Group (NTLG) Superannuation Technical Sub-group minutes, September 2010, Issue 6.10). Note that while income tax loss relief may be available under ITAA97 Div 310 where an SMSF merges with an APRA regulated superannuation fund with five or more members, it is not available for mergers between SMSFs or small APRA funds as at least one of the merging funds is required to have five or more members just before the merger (¶7-130 “Loss transfer and CGT roll-over relief for merging superannuation funds”). The second exception applies if APRA (or the Commissioner in respect of SMSFs) makes a written determination that an asset is of a kind that may be acquired by any fund or by a class of funds in which a particular fund is included (s 66(2)(d)(i)). An APRA determination allows a regulated superannuation fund to acquire from a related party of the fund, at market value, units in a unit trust that is registered as a managed investment scheme under the Corporations Act 2001 where the trustee of the unit trust is the responsible entity of the registered scheme and is a related party of the fund (Superannuation Industry (Supervision) (Related Party Assets) Determination No 1 of 2010). An ATO determination allows an SMSF to acquire an asset from a related party in the following circumstances: • the asset is acquired for the benefit of a particular member of the acquiring fund by way of a transfer or roll-over from another regulated superannuation fund (the transferor fund) • the asset represents the whole or part of either: – the member’s own interests in the transferor fund, or – the member’s entitlements as determined under Pt VIIIB of the Family Law Act 1975 (FLA) in relation to the interests of the member’s spouse or former spouse in the transferor fund, and • the transfer or roll-over occurs as a result of that member’s marriage breakdown (Self Managed Superannuation Funds (Assets Acquired on Marriage Breakdown) Determination 2006, 28 August 2006) (Determination SPR 2006/MB1). This exception for in specie acquisitions resulting from a marriage breakdown applies retrospectively from 28 December 2002 (the commencement date of the FLA regime allowing the splitting of a member’s interest in a superannuation fund on marriage breakdown: see Chapter 14). The exception provided by the ATO determination had limitations as: • it did not apply to opposite-sex or same-sex de facto relationships, and • it did not cover transfers or roll-overs made to APRA-regulated superannuation funds. The ATO determination was also inconsistent with legislative changes which extended the CGT roll-over on a marriage and relationship breakdown under the ITAA97 to in specie transfers of a member’s personal superannuation interests from a small superannuation fund to another complying superannuation fund (¶14-980). The deficiencies in the exception under the ATO determination have been addressed, from 17 November 2010, for acquisitions of assets which occur because of a member’s relationship breakdown (s 66(2B), (2C)). A “relationship” covers a marriage, and opposite-sex and same-sex de facto relationships (s 71EA). Exception: Purchase of in-house assets This exception provides for the interaction between the prohibition on acquisition of assets from a related party under SISA s 66 and the in-house asset provisions (¶3-450) which allow a certain percentage of

fund assets to be invested in, or lent or leased to, related parties. The exception applies where the trustee or investment manager of a superannuation fund acquires assets from a related party of the fund and the acquisition: • constitutes an investment that is an in-house asset (as defined in s 71), or would be an in-house asset if not for the in-house asset transitional arrangements in s 71A to 71D, or is covered by any of the exceptions set out in s 71(1)(b) to (f), (h) and (j), or is a life insurance policy issued by a life insurance company other than a policy acquired from a member of the fund or a relative of a member • is at market value • does not result in the level of in-house assets exceeding the level permitted by the in-house asset rules (s 66(2A)). For example, under s 66, a fund would be prohibited from acquiring shares in a private company that is a related party, such as a company associated with a standard employer-sponsor. However, under the inhouse asset provisions, the fund can make an investment in a related party (in this case, buy shares in the private company) provided the investment does not cause the fund’s in-house asset level to exceed the in-house asset limit (5% of the market value of fund assets for 2002/03 and later years). The exception in s 66(2A) will therefore permit the acquisition of the in-house asset from the related party if the relevant conditions are met. Another example is where a regulated superannuation fund with fewer than five members jointly owns business real property with a related party by investing in the related entity that holds the property where the entity complies with the prescribed conditions in SISR reg 13.22A to 13.22D (¶3-450). As these regulations were made under s 71(1)(j)(ii), the exception in s 66(2A) will operate to allow the acquisition of the asset (in this case, shares or units in the related entity) from the related party without breaching the general prohibition on acquisition of assets from related parties under s 66. Prohibition of avoidance schemes A person must not enter into, commence to carry out, or carry out a scheme if the person entered into, commenced to carry out, or carried out the scheme or any part of the scheme with the intention that: • the scheme would result, or be likely to result, in the acquisition of an asset by a trustee or an investment manager of a regulated superannuation fund, where the asset is acquired from a person who has a connection (either direct or indirect through one or more interposed companies, partnerships or trusts) with a related party of the fund, and • that acquisition would avoid the application of the prohibition in s 66(1) to the fund (s 66(3)). A “scheme” means: • any agreement, arrangement, understanding, promise or undertaking: – whether express or implied, or – whether or not enforceable, or intended to be enforceable, by legal proceedings, and • any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise (s 66(5)). To determine if there is a contravention of s 66(3), the Regulator will examine the scheme as a whole, and not just the isolated transactions within the scheme (Lock 03 ESL 06). That case involved a scheme where superannuation funds (Funds) were used to acquire all of the units in a unit trust that had previously acquired land from persons who later became members of the Funds. At the time of the relevant transactions, s 66(1) prohibited acquisitions from members or their relatives and did not apply more broadly to acquisitions from related parties. The Commissioner contended that each Fund was part of a scheme that was implemented with the intention that the applicants, as trustees of a regulated superannuation fund, would acquire or be likely to acquire an asset from a member of the Fund in a

manner which would avoid the prohibition in s 66(1). The principle in Lock’s case was applied in ID 2011/84 where the ATO decided that, considering the arrangement as a whole, it was a scheme to which s 66(3) applied as it was structured with the intention of enabling the SMSF’s acquisition of units in a unit trust from a party that is not a related party of the SMSF. The facts in ID 2011/84 are as follows: “An entity established an arrangement (the trade exchange) that facilitated the provision of goods and services through barter transactions between its members. Members who participate in the arrangement become entitled to receive credits in the form of ‘trade dollars’ for the goods or services they provide. The entity acts as a third party record keeper, using the ‘trade dollars’ to monitor the value of cashless barter transactions. A trustee of a unit trust is a member of a trade exchange. The trustee of the unit trust is empowered by the trust deed to accept a mixture of trade dollars and Australian currency as consideration for the issue of units in the trust. That is, another member of the trade exchange can purchase a unit for X dollars in Australian currency and Y trade dollars, the permitted ratio being set by the trustee of the unit trust according to particular criteria. The unit trust invests in income producing assets using both trade dollars and Australian currency. Distributions to unit holders can be made in a mixture of trade dollars and Australian currency. The trustee of the unit trust indicated that it was prepared to enter into an arrangement with a company that is a member of the trade exchange and the trustee of an SMSF that has as a member an employee of that company. The trustee of the unit trust is not a related party of the SMSF; nor is the unit trust a related trust of the SMSF. The company is a related party of the SMSF because a member of the SMSF together with her relatives have a majority voting interest in the company (see definition of ‘related party’ in SISA s 10(1) and ‘Part 8 associate of an individual’ in SISA s 70B). The parties to the arrangement agreed to take the following steps:   Step 1: the company purchases a number of units in the unit trust (P units) using the prescribed ratio of Australian currency and trade dollars (say X dollars and Y trade dollars)   Step 2: the company contributes an equivalent amount in Australian currency as an employer superannuation contribution to the SMSF (X + Y dollars) with a view to claiming a tax deduction for the contribution   Step 3: the SMSF uses the amount of the contribution (X + Y dollars) to purchase P units from the unit trust   Step 4: the unit trust redeems the units owned by the company for the same amount of Australian currency (X + Y dollars). The net result of the arrangement is that: • the SMSF owns units in the unit trust • the unit trust has accepted X dollars Australian currency and Y trade dollars in consideration for the issuing of the units, and • the company has converted X dollars and Y trade dollars into (X + Y) dollars Australian currency. The company also made a superannuation contribution for which it intends to claim an income tax deduction of $(X + Y).” [SLP ¶3-480]

¶3-440 Fund investments — arm’s length rule

The arm’s length rule in SISA s 109 for investments or the maintenance of investments by the trustee or investment manager of a superannuation entity has two components. The rules do not prevent trustees or investment managers from dealing with related or associated parties, but are intended to ensure that investments are made or maintained on a commercial basis or on such terms (eg the sale and purchase price of an investment should be at full market value and returns on the investment reflect a true market rate of return). Firstly, the trustee or investment manager of a superannuation entity must not invest money of the entity unless either the trustee or manager and the other party to the relevant transaction are dealing with each other at arm’s length in respect of the transaction. If the trustee or investment manager and the other party are not dealing with each other at arm’s length in respect of the transaction, the terms and conditions of the transaction must be no more favourable to the other party than those that are reasonable to expect would apply if the parties were dealing at arm’s length in the same circumstances (s 109(1)). Secondly, if at any time during the term of any investment, the trustee or investment manager is required to deal in respect of the investment with another party that is not at arm’s length, the trustee or investment manager must deal with the other party in the same manner as if that party were at arm’s length with the trustee or investment manager (s 109(1A); ID 2010/162: lower interest rate on limited recourse borrowing, see ¶3-415). There is no definition of “arm’s length” in the SISA. Whether a transaction is undertaken on an arm’s length basis is determined based on all the circumstances of the investment. The general test is whether a prudent person acting with due regard to his/her own commercial interests would have made such an investment. Some factors to consider are whether: • the purchase price is fair, given the expected return on the asset, the risks to which the asset is exposed, and the relative liquidity of the asset • the projected returns of income and/or capital, and whether they are in line with market expectations • the contract or agreement adequately protects the interests of the superannuation fund, with clear legal identification of all parties and their rights and obligations • valuations have been obtained, where appropriate. While none of the above factors by itself will determine an investment as being on an arm’s length basis, they constitute evidence in support of that inference. SMSFR 2009/3 sets out the Commissioner’s views on the potential contravention of the arm’s length rule if an SMSF is presently entitled to a distribution from a related or non-arm’s length trust and payment of this amount is not sought (¶5-435). Section 109 is a civil penalty provision (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 if the provision is contravened (¶3-800). A contravention does not affect the validity of a transaction (s 109(3)). For a case where the court dismissed an application for penalties for a breach of s 109 on the basis of the statutory defences afforded by s 221(2) and 323(3)(2) (acting honestly, reliance of incorrect advice), see the Dolevski v Hodpik case at ¶3-820. Market value and valuation of assets The meaning of “market value” in SISA and ATO guidelines on the valuation of assets for various purposes are noted at ¶18-775. [SLP ¶3-460]

¶3-450 In-house asset rules A regulated superannuation fund is subject to restrictions on its investments in in-house assets (SISA s 69 to 85).

Subject to certain exceptions (see below), an “in-house asset” is defined in s 71(1) as an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund (see below “Assets — what are in-house assets?”). The in-house asset rules are prescribed in SISA Pt 8 and they: • impose a maximum limit of investments in in-house assets of 5% of total fund assets based on market value (or 10% in pre-2000/01 years) (s 82(1)) • require a fund with in-house assets in excess of the 5% limit as at the end of the 2000/01 year of income or a later year of income, to dispose of the excess in accordance with a written plan (s 82(2)) • prohibit the acquisition of new in-house assets if the market value ratio of the fund’s in-house assets exceeds 5% (s 83; 84(1)) • prohibit a fund from entering into any scheme which would avoid the application of the in-house asset rules (s 85(1)). The in-house asset rules are civil penalty provisions (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 if any provision is contravened (¶3-820). A contravention does not affect the validity of a transaction (s 84(2); 85(2)). The in-house asset rules are discussed under the headings below: • Market value and in-house asset ratio • Assets — what are in-house assets? • What are excluded as in-house assets? • Widely held unit trust • Deemed in-house assets • Investment in a related trust • Investments in unit trusts • Exception — LRBA and investment in related trust • Exception — investment in non-geared unit trusts and companies • Conversion of a geared unit trust to a non-geared unit trust • Lease and lease arrangements • Alternative in-house asset rules — defined benefit funds • Sub-funds, unrelated employer-sponsor in group of employer-sponsors • Cases of breach of in-house asset rules. Market value and in-house asset ratio A regulated superannuation fund must not acquire an in-house asset if the market value ratio of its inhouse assets exceeds 5%, or would exceed 5% if the asset was acquired (SISA s 83(2), (3)). Therefore, periodic valuation of a fund’s in-house asset investments must be carried out as required to monitor compliance with this requirement. In addition, valuation of assets is necessary as s 82 requires the fund to dispose of in-house assets if, at the end of an income year, the market value ratio of its in-house assets exceeds the 5% limit.

The general formula for working out a fund’s market value ratio of in-house assets is set out in s 75(1) as below: Number of whole dollars in value of in-house assets of the fund ×100  Number of whole dollars in value of all the assets of the fund  The term “value” in the formula means “market value” which is defined to mean, in relation to an asset, the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made: • the buyer and the seller dealt with each other at arm’s length in relation to the sale • the sale occurred after proper marketing of the asset, and • the buyer and the seller acted knowledgeably and prudentially in relation to the sale (s 10(1)). For example, at the time of purchasing units in a related unit trust, the cost of the units to the superannuation fund will typically be equivalent to the market value of the units. At some later point in time, the market value of the units may or may not be equivalent to that historical cost (purchase price) of the units. It is therefore necessary to undertake a market valuation of the units so as to determine the market value of the units held by the fund in the related unit trust (SMSFD 2008/2). It is not intended that obtaining a market valuation should be onerous or expensive for the trustees. A market valuation may be undertaken by either a qualified valuer or a person without formal qualifications (including the fund trustees), provided the valuation is based on reasonably objective and supportable data. However, using a qualified valuer should be considered where the value of the asset represents a significant proportion of the fund’s value or where the nature of the asset indicates that the valuation is likely to be complex or difficult. Under the ATO’s general valuation principles, a valuation must be arrived at using a “fair and reasonable” process. Generally, a valuation is considered fair and reasonable where it: • takes into account all relevant factors and considerations likely to affect the value of the asset • has been undertaken in good faith • results from a rational and reasoned process, and • is capable of explanation to a third party (ATO’s Valuation guidelines for self-managed superannuation funds: ¶18-775). Assets — what are in-house assets? In the SISA, an “asset” means any form of property and, to avoid doubt, includes money (whether Australian currency or currency of another country), and “invest” means to apply assets in any way, or make a contract, for the purpose of gaining interest, income, profit or gain (SISA s 10(1)). A “loan” includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings. It would not cover, for example, the situation where a fund pays its own administrative expenses and is subsequently reimbursed by an employer-sponsor. A “lease arrangement” means any agreement, arrangement or understanding in the nature of a lease (other than a lease) between a trustee of a superannuation fund and another person, under which the other person is to use, or control the use of, property owned by the fund, whether or not the agreement, arrangement or understanding is enforceable, or intended to be enforceable, by legal proceedings (s 10(1)). The in-house asset rules originally covered only assets of a superannuation fund that were loans to, or investments in, a standard employer-sponsor or an associate of the standard employer-sponsor of the fund. The meaning of “in-house asset” was extended, from 12 August 1999, to apply to loans to, or investments in, a “related party” of the fund, an investment in a related trust of the fund, or an asset of the

fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund, subject to certain transitional arrangements which are discussed below (s 71). A “related party” of a fund means a member or a standard employer-sponsor of a fund and their Part 8 associates (¶3-470). The meaning of “member” is also modified in relation to superannuation interests in a fund subject to a payment split, or where a non-member spouse interest has been created under SISR reg 7A.03B. Essentially, a non-member spouse who was not a member of the fund before the payment split is treated as being a member of the fund in which the interest is held for the purposes of the in-house asset rules and the prohibition on lending to members in s 65 and various other provisions (reg 1.04AAA). The definition of “related party” is extensive and complex, and is discussed at ¶3-470. A “related trust” of a superannuation fund means a trust that a member or a standard employer-sponsor of the fund “controls”, other than an excluded instalment trust of the fund. The ATO’s Ruling SMSFR 2009/4 discusses in detail the core concepts in the definition of “in-house asset” — “asset”, “loan”, “investment in”, and “lease and lease arrangement”. The Commissioner states that the object of the in-house assets rules in SISA Pt 8 is to limit the inherent risks to superannuation assets posed by investment in related parties or related trusts. It is therefore the risks associated with the reliance on those entities for the return on the investment that Pt 8 is concerned with. Where fund money or assets are applied to the benefit of a related party or trust for the purpose of receiving income, interest, profit or gain from that entity, a sufficiently close connection will be established between the investment and that entity to enable it to be described as an investment “in” that entity. It is the reliance on the related party or related trust for payment on the investment which will be determinative as this is what gives rise to the financial risk that the rules in Pt 8 are designed to reduce (SMSFR 2009/4, para 88). Example — annuity arrangement The trustees of an SMSF enter into an annuity contract with a related party, Johnson Pty Ltd. The contract stipulates a purchase price of $75,000 to be paid by the SMSF in exchange for four annual payments of $25,000 payable on 30 June of each year. The annuity contract entered into by the SMSF for the purpose of providing an income stream is an investment of the SMSF. In addition, the responsibility for payment of this income is with Johnson Pty Ltd. Consequently, the annuity is an investment in Johnson Pty Ltd and is an in-house asset of the SMSF (if no in-house asset exception applies).

If a superannuation fund makes a contractual funding contribution in exchange for contractually enforceable rights to receive payments from a related party, that will constitute an investment in the related party (see also “Joint venture arrangements — related trusts” below). Example Under a contract, Joe (as trustee of his SMSF) contributed money towards the acquisition of an asset by Joseph Pty Ltd (a company controlled by Joe’s family and, therefore, a related party of the SMSF). Under the contract: • Joseph Pty Ltd controls and manages the asset and is entitled to all receipts from the asset • the SMSF is entitled to receive payments from Joseph Pty Ltd, calculated as a proportion of the proceeds from sale, lease or use of the asset. The relevant proportion equals the SMSF’s contributions to the asset’s acquisition cost • the SMSF acquires no legal, equitable or other interest in the asset and is not required to guarantee or indemnify the repayment of any of Joseph Pty Ltd’s borrowings or other obligations • the SMSF’s pecuniary interest in the arrangement is limited to its entitlement to receive the contractual payments from Joseph Pty Ltd. The arrangement is considered to be an investment by the SMSF in Joseph Pty Ltd. The SMSF contributes capital to Joseph Pty Ltd which is utilised for commercial benefit by the company; and in exchange, the SMSF obtains rights to a share of the profits obtained from the commercial usage of that asset in proportion to the SMSF’s contribution. Therefore, the return on the investment is reliant on Joseph Pty Ltd and the financial risk of that investment is with it. Consequently, as the SMSF has entered into a contract to receive income from Joseph Pty Ltd, this arrangement is an investment in Joseph Pty Ltd.

What are excluded as in-house assets?

Assets which are specifically excluded as in-house assets are (SISA s 71(1)(a)–(j)): • a life policy issued by a life insurance company • a deposit with an authorised deposit-taking institution (eg a bank) • an investment in a PST, where the trustees of the fund and the PST acted at arm’s length in relation to the investment • an asset of a public sector fund consisting of an investment in securities issued under the authority of: (a) the Commonwealth or a state or a territory government; or (b) a public authority constituted under a Commonwealth, state or territory law, where the public authority is neither a standard employersponsor nor an associate of a standard employer-sponsor of the fund • an asset which the Regulator (APRA or the Commissioner) determines by written notice to a fund is not an in-house asset of the fund (PS LA 2009/8 outlines the circumstances where the Commissioner would exercise his discretion to issue a determination that an asset is not an in-house asset: ¶5-455) • an asset which the Regulator determines by legislative instrument is not an in-house asset of any fund or a class of funds in which the fund is included (see “Exception — LRBA and investment in related trust” below) • if the superannuation fund has fewer than five members (ie an SMSF or a small APRA fund) — real property subject to a lease, or to a lease arrangement enforceable by legal proceedings, between the trustee and a related party of the fund if, throughout the term of the lease or lease arrangement, the property is “business real property” of the fund (see “Leases and lease arrangements” below) • an investment in a widely held unit trust (see below) • property owned by the superannuation fund and a related party as tenants in common, other than property subject to a lease or lease arrangement between the trustee and a related party of the fund (for discussion of tenancies in common, see ¶3-400), or • an asset included in a class of assets prescribed by the Regulations (see SISR Div 13.3A) not to be an in-house asset of any fund or a class of funds to which the fund belongs (see “Exception — investment in non-geared unit trusts and companies” below). Despite the above exceptions provided in s 71(1)(a) to (j), the Regulator may deem that a loan, investment or an asset of a superannuation fund subject to a lease or lease arrangement is an in-house asset in circumstances (see “Deemed in-house assets” below). Also, an anti-avoidance provision allows the Regulator to treat a loan, investment or an asset of a superannuation fund subject to a lease or lease arrangement as an in-house asset. This applies where the persons who entered into or carried out an agreement were aware that the result would be that a loan would be made to, or an investment made in, or an asset would become subject to a lease with, a related party of the fund (not applicable to investments in life policies, deposits with banks and other approved institutions, investments in PSTs and widely held unit trusts). An example of this when a fund invests in a non-associated entity which in turn invests in related party (s 71(2) to (2B)). Widely held unit trust A trust is a “widely held unit trust” (for the purposes of the exception to the in-house asset definition in SISA s 71(1)(h), see above) if: • it is a unit trust in which entities have fixed entitlements to all of the income and capital of the trust • no fewer than 20 entities between them have fixed entitlements to 75% or more of the income or capital of the trust (s 71(1A)). For this purpose, an entity and the Part 8 associates (¶3-470) of the entity are taken to be a single entity.

A hybrid trust will not come within the definition of a widely held trust. For the purposes of determining an in-house asset of a public sector superannuation fund, a reference to a Part 8 associate of an employer-sponsor of the fund is a reference to a body corporate where either of the following conditions is satisfied: • the body corporate is sufficiently influenced by, or a majority voting interest (¶3-470) in the body corporate is held by, the employer-sponsor, or • the employer-sponsor is sufficiently influenced by, or a majority voting interest in the employersponsor is held by, the body corporate (s 71(7)). Deemed in-house assets A loan or investment of a superannuation fund, or an asset subject to a lease or lease arrangement, other than an in-house asset, may be deemed to be an in-house asset if: • the loan, investment, lease or lease arrangement was made under an agreement, and the persons who entered into or carried out the agreement were aware that, as a result of the agreement, a loan or investment would be made to or in a related party, or an asset would be subject to a lease or lease arrangement with a related party, or an investment would be made in a related trust of the fund (see example below) (s 71(2)), or • the Regulator, by written notice, determines that the loan, investment or asset subject to a lease or lease arrangement with a specified related party or related trust of the fund (including a person taken to be a standard employer-sponsor of the fund under s 70A) is an in-house asset of the fund (s 71(4)) (see Aussiegolfa case below). Determination under s 71(2) Example ABC Trust and ABC Company are the employer-sponsors of a superannuation fund (the “Fund”). The Fund invests $100,000 under an agreement in XYZ Company, which is not a related party. As a result of the agreement, XYZ Company makes a loan of $60,000 to ABC Trust and a loan of $40,000 to ABC Company. The $100,000 investment by the Fund in XYZ Company is an in-house asset under s 71(2). The in-house asset is treated as one of $60,000 with respect to the ABC Trust and one of $40,000 with respect to ABC Company, and both amounts are taken into account when determining the in-house asset limits.

The deeming rule in s 71(2) does not apply to investments in life policies, deposits with banks and other approved institutions, investments in PSTs and widely held unit trusts. However, where it applies, the asset can be treated as two or more assets for the purposes of the in-house asset rules. An “agreement” includes any arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings. Aussiegolfa case In Aussiegolfa Pty Ltd As Trustee of the Benson Family Superannuation Fund 2018 ATC ¶10-471, the trustee of the Benson Fund (an SMSF) sought review by the AAT of the Commissioner’s determination under SISA s 71(4)(b) that units it held in a fund were to be treated as an investment in a related trust. The matter before the AAT was heard after the Federal Court (in Aussiegolfa Pty Ltd (Trustee) 2017 ATC ¶20-643) had dismissed the trustee’s application seeking declarations that the Benson Fund was not in breach of the “sole purpose test” and the “in-house asset test” under SISA s 62 and 83 respectively. The Benson Fund had participated in an investment scheme involving fractional interests in property. It invested in a studio apartment through the acquisition of units in a fund (the Burwood Sub-Fund) managed by DomaCom Australia Ltd. The studio apartment was leased to a daughter of a Benson family member. The purpose of this arrangement was to test the impact of a residential property held by an SMSF being used by a related party on the SMSF’s status as a complying superannuation fund. The Commissioner had made a determination under s 71(4)(b) deeming the arrangement an in-house asset, and had also decided that the Benson Fund breached the in-house asset test and the sole purpose test.

The primary judge in the Federal Court (2017 ATC ¶20-643) held that the Sub-Fund was a separate trust, and not a widely held trust within the meaning of SISA s 71(1A). The units in the Sub-Fund were in-house assets and this meant that the precondition for a s 71(4) determination was not satisfied and the determination was not valid. Notwithstanding that, the court said that the Sub-Fund was a related trust. The primary judge also found that the Benson Fund was in breach of the sole purpose test as it was maintained at least partly for the purpose of providing accommodation to Mr Benson's daughter. The AAT (in 2018 ATC ¶10-471) set aside the Commissioner’s decision to make determination under s 71(4)(b) and revoked the determination. The AAT said [at 15]: “15. In the present case the objective condition that needs to exist before a determination can be made under s 71(4)(b) is absent because the reasons and conclusions in the Federal Court proceedings would also lead the Tribunal to decide that the investment by Aussiegolfa in DomaCom was in units which are assets that consist of an in-house asset. The facts and reasons in the decision of the Federal Court should be read with these reasons to the extent that they relate to whether the investment in the Burwood Sub-Fund consists of an in-house asset. It follows, therefore, that the condition for making a determination under s 71(4)(b) is absent and that the Tribunal should set it aside. It is desirable, however, to say that the Commissioner’s determination would have been affirmed if the asset had been found to have consisted of an investment other than an in-house asset. That is because the investment would be in substance, and in practical effect, the same as an in-house asset and within the purpose sought to be achieved by limiting investments in in-house assets to 5%, even though it might in legal form not be an in-house asset.” The full Federal Court (in 2018 ATC ¶20-664; [2018] FCAFC 122) allowed an appeal in part. It held that the Sub-Fund units constituted an in-house asset; the primary judge was correct to conclude that there was a distinct trust associated with the Sub-Fund units and that the units held by the taxpayer in the DomaCom Fund (or the Sub-Fund) constituted an investment in a “related trust” of the Benson Fund. As the units constituted an in-house asset, the precondition for the s 71(4) determination was absent and the AAT's decision to set aside the determination was correct. However, the primary judge was wrong to conclude that the leasing of the property to Mr Benson’s daughter breached the sole purpose test. As the property would be leased at market rent, there did not appear to be any financial or other non-incidental benefit to be obtained by Ms Benson or Mr Benson. Accordingly, the court concluded that the fund would be maintained solely for the core purposes, or the core purposes and the ancillary purposes set out in s 62 upon the leasing of the property to Ms Benson. Investment in a related trust A superannuation fund’s investment in a related trust of the fund is an in-house asset, subject to certain exceptions. A “related trust” means a trust that a member or a standard employer-sponsor of the fund controls (¶3470), other than an excluded instalment trust of the fund. An “excluded instalment trust” is a trust: • that arises because the trustee or investment manager of the fund makes an investment under which a listed security (the underlying security) is held in trust until the purchase price of the underlying security is fully paid • where the underlying security, and property derived from the underlying security, is the only trust property • where the investment in the underlying security held in trust is not in itself an in-house asset of the fund. The excluded instalment trust exception prevents the in-house asset definition applying to trust arrangements set up to hold shares payable in instalments (eg instalment receipts or similar arrangements). The extension of the in-house asset definition to investments in a related trust of a superannuation fund applies from 12 August 1999, subject to the transitional arrangements discussed below. Joint venture arrangements — related trusts

TA 2009/16 warns about circumvention of in-house asset rules by SMSFs using related party arrangements under which the fund enters into an agreement (sometimes referred to as a joint venture agreement) with a related trust to acquire assets such as rental property in order to obtain certain taxation and superannuation benefits. These arrangements and the ATO concerns are discussed further at ¶5455. Investments in unit trusts An investment in a unit trust is a popular investment strategy for superannuation funds, with the unit trust being used as a vehicle for purchasing property (whether or not on a geared basis) or for the unit trust to purchase assets which it then leases back to the fund on a commercial basis. A typical example would be a fund investing in a unit trust which, in turn, purchases real property. The trustee of the unit trust would usually borrow for the purchase with the property as collateral. A fund’s investment in a widely held unit trust (see above) is not an “in-house asset”. Trustees should have regard to the potential application of the public trading trust provisions in ITAA36 Pt III Div 6C. Certain unit trusts, called “public trading trusts” are treated as if they are companies for tax purposes and are taxed at the company rate of tax with any distributions to unitholders assessable on the same basis as dividends. Basically, a “public trading trust” must have two limbs — it is a “public unit trust” (as defined in ITAA36 s 102P) and it is also a “trading trust” (as defined in ITAA36 s 102N). A unit trust is deemed to be a public unit trust where an exempt entity holds a beneficial interest in 20% or more of the property or income of the unit trust (ITAA36 s 102P(2)). An “exempt entity” is defined to mean, among other things, a complying superannuation fund, complying ADF or PST (ITAA36 s 102M). The 20% test requires the beneficial interest of the units to be traced through any other interposed trusts (ITAA36 s 102P(10)). From 5 May 2016, membership interests held in a trust by tax exempt entities and complying superannuation entities which are entitled to a refund of franking credits are disregarded for the purposes of applying the 20% tracing rule. This means that complying superannuation funds are no longer included in the tracing rule and unit trusts with these investors will not invoke Div 6C. For example, a unit trust owned by an SMSF which owns real estate that is primarily used for development purposes (rather than only rental income) will not be taxed as a company. Former ATO ID 2001/66 stated that the terms of the fund’s trust deed in that case meant that its members could not be said to be the holders of the units in the unit trust. As a result, the unit trust could not rely on s 102P(10) to avoid being taxed as a company. A public unit trust will be a public trading trust if it is carrying on a trading business or controls or is capable of controlling a trading business carried on by another party (ITAA36 s 102N). A “trading business” is any business that is not wholly one of investment in land for rental, or investment or trading in loans, securities, shares, units in unit trusts, future contracts, forward contracts, currency swaps, interest rate swaps, or rights or options in respect of any of these or any similar instruments (ITAA36 s 102M). Unit trusts which are confined to investment in property to derive rental income would not normally come within the trading trust limb as noted above. However, this would not be the case, for example, if the unit trust were to be engaged in land development (former ID 2001/66). As noted above, investments in widely held trusts are not in-house assets. Most other superannuation fund investments in a related trust would be caught by the in-house asset rules. However, small superannuation funds are permitted to continue to invest in a trust (or company) which invests only in business real property or other approved assets if certain conditions are met (see “Exception — investment in non-geared unit trusts and companies” below). It should be noted that any investment in a geared unit trust may result in a reduction in the security of members’ entitlements. Consequently, the existence of a unit trust borrowing is a relevant consideration to be taken into account by the trustee of a superannuation fund in the formulation and implementation of the fund’s investment strategy under s 52(2)(f) (¶3-400). Exception — LRBA and investment in related trust Section 71(8) provides an exception to the definition of “in-house asset” that is relevant to an SMSF’s investment in a holding trust (related trust) as part of a limited recourse borrowing arrangement (LRBA).

If, at a time, an asset (the investment asset) of a superannuation fund is an investment in a related trust of the fund: • the related trust is one described in s 67A(1)(b) in connection with the LRBA under s 67A(1), and • the only property of the related trust is the acquirable asset mentioned in s 67A(1)(b). In the circumstances above, the investment asset is an in-house asset of the fund at the time only if the acquirable asset would be an in-house asset if it were an asset of the fund at the time. This exception and LRBAs are discussed further in ¶3-415 (see “Interaction with in-house asset rules”). Exception — investment in non-geared unit trusts and companies Certain investments of a superannuation fund are excluded from the meaning of “in-house asset” in SISA s 71(1) if the requirements of SISR reg 13.22B (which applies to assets acquired before 28 June 2000) or reg 13.22C (which applies to assets acquired on or after 28 June 2000) are met (SISA s 71(1)(j)(ii); SISR Div 13.3A). These provisions effectively allow investments made by superannuation funds with fewer than five members in related companies and unit trusts to be excluded as in-house assets in the prescribed circumstances. Generally, the conditions in reg 13.22B or 13.22C (in Div 13.3A) are: • the company or trust does not borrow • there is no charge over an asset of the company or trust • the company or trust does not invest in or loan money to individuals or other entities (other than deposits with authorised deposit-taking institutions) • the company or trust has not acquired an asset from a related party of the superannuation fund (after 11 August 1999) other than business real property acquired at market value • the company or trust had not acquired an asset (apart from business real property acquired at market value) that had been owned by a related party of the superannuation fund in the previous three years (not including any period of ownership prior to 11 August 1999) • the company or trust does not, directly or indirectly, lease assets to related parties, other than business real property • the company or trust does not conduct a business • the company or trust conducts all transactions on an arm’s length basis. The above concession means that an SMSF or small APRA fund (ie funds with fewer than five members) may jointly invest with members and employer-sponsors in a company or unit trust that owns real property which is used for business purposes, and the business real property may be leased to members and employer-sponsors. This provides greater flexibility to funds which prefer to have such joint investments using a company or a trust, rather than a tenancy in common arrangement (which is also an exception to the in-house asset definition, as discussed above). This flexibility allows a fund to effect a change in ownership of the investments by selling the shares in the company or units in the unit trust instead of disposing of the business real property itself. Regulation 13.22B or 13.22C ceases to apply to a fund’s investment in a company or unit trust if an event in reg 13.22D(1) happens. In addition, if that happens, neither reg 13.22B nor 13.22C can apply to any other existing or future investment by the fund in that company or unit trust, ie any such investment of the fund is not excluded from being an in-house asset of the fund (reg 13.22D(3)). The events specified in reg 13.22D(1)(a) to (n) happen if the number of members in the fund increases to five or more, or if the particular company or the trustee of the unit trust (in which the fund has invested in): • acquires an interest in another entity (for example, acquiring shares or units in another company or unit trust respectively) • makes a loan to another entity, unless the loan is a deposit with an authorised deposit-taking

institution • gives a charge, or allows a charge to be given, over, or in relation to, a company or unit trust asset • borrows money • conducts a business • becomes a party, either directly or indirectly, to a lease arrangement involving a related party of the fund that does not involve business real property • conducts a transaction other than on an arm’s length basis • acquires an asset (other than business real property acquired at market value) from a related party of the fund, or • acquires an asset (other than business real property acquired at market value) from any party if the asset had been an asset of a related party of the fund since the later of: – the end of 11 August 1999, or – the day three years before the day on which the asset was acquired by the fund. SMSFD 2008/1 states that the happening of an event in reg 13.22D(1) (eg the fund ceases to have fewer than five members) does not necessarily mean that reg 13.22B or 13.22C ceases to apply to all investments held by the fund in related companies or unit trusts, or that reg 13.22C cannot apply to future investments in other related companies or unit trusts, as the scope for reg 13.22B or 13.22C applying or continuing to apply to the fund’s investments will depend on the nature of the event that happens. Example 1 — the number of members of SMSF increases to five On 1 June 2000, an SMSF invests in related unit trusts (Trust A and Trust B). At that time the SMSF had four members and its investments in Trust A and Trust B satisfy all the requirements of reg 13.22B. Therefore, the investments are not in-house assets of the SMSF. On 1 February 2007 the number of members in the SMSF increases to five for the period until 31 July 2007, when the number reduces to four members and has subsequently remained at four members since. The effect of the event in reg 13.22D(1)(a) (ie increase in members to more than four) is that reg 13.22B ceases to apply to the investments in Trust A and Trust B. By virtue of reg 13.22D(3), neither reg 13.22B nor 13.22C can apply to the existing investments, or any future investments, by the SMSF in Trust A or Trust B. Therefore, the existing investments, and any future investments, in Trust A and Trust B are not excluded from being in-house assets of the SMSF. That is, assuming that no other exception in s 71(1) applies, the fund’s investments in Trust A and Trust B are in-house assets of the fund. On 15 August 2007, the SMSF invests in another related unit trust (Trust C). The investment in Trust C would be an in-house asset of the SMSF but for s 71(1)(j)(ii) and reg 13.22C. As the number of members of the SMSF is less than five at the time of the investment in Trust C, reg 13.22C can apply to the fund’s investment in Trust C provided all the other requirements of reg 13.22C(2) are met. If that is the case, the SMSF’s investment in Trust C is excluded from being an in-house asset of the fund.

Example 2 — a unit trust in which the SMSF has an investment borrows money On 1 June 2000, an SMSF invests in a related unit trust (Trust D). On 1 January 2007 the SMSF invests in another related unit trust (Trust E). Both investments would be in-house assets of the SMSF but for s 71(1)(j)(ii) and reg 13.22C and 13.22D. Assume that the SMSF’s investment in Trust D satisfies all the requirements of reg 13.22B (and therefore is not an in-house asset) and that the investment in Trust E satisfies all the requirements of reg 13.22C (and therefore is also not an in-house asset). On 15 May 2007, the trustees of Trust D borrow money, which is an event listed in reg 13.22D(1)(c)(i). The effect of this is that reg 13.22B ceases to apply to the SMSF’s investment in Trust D, and reg 13.22D(3) ensures that neither reg 13.22B nor 13.22C can apply to the existing investment, or any future investments by the SMSF, in Trust D. Therefore, the existing investment, and any future investments, in Trust D are not excluded from being in-house assets of the SMSF. Assuming that no other exception in s 71(1) applies, the fund’s investments in Trust D are in-house assets of the fund. However, the SMSF’s investment in Trust E is not affected by the borrowings by the trustees of Trust D. Therefore, reg 13.22C continues to apply and the SMSF’s investment in Trust E is excluded from being an in-house asset of the fund. Any later investments made by the SMSF in a related company or unit trust other than Trust D can also be excluded from being an in-house asset of the SMSF provided that the conditions in reg 13.22C are met in relation to that investment.

In specie distributions from a unit trust to an SMSF An anomaly appears to trigger the in-house assets rules where a related unit trust (which satisfies the Div 13.3A conditions) makes an in specie distribution to an SMSF unitholder because Div 13.3A refers only to the SMSF’s investment in the unit trust without referring to in specie distributions received from the trust. With in specie distribution of additional units in the related trust, the ATO’s view is that this “acquisition of assets” will be allowed if the fund does not already own all of the units in the trust and the trust is issuing additional units in the trust, or if the fund reinvests its entitlement to the trust income in the trust. Provided the Div 13.3A requirements are satisfied, the exception in s 66(2A)(a)(iv) will apply to the acquisition. That exception applies to an asset that is taken not to be an in-house asset under s 71(1)(j), which in turn links with Div 13.3A. In a case where there is an in specie distribution of the unit trust’s other assets, the general acquisition rules apply and such an acquisition can only take place if it is covered by an exemption in s 66 (NTLG Superannuation Subcommittee, 8 May 2006). Other ATO guidelines Under Div 13.3A, an asset of a fund that is an investment in a related company or unit trust will not be included as an in-house asset provided the conditions in reg 13.22B or 13.22C are met. Regulations 13.22B(2)(f)(i) and 13.22C(2)(f)(i) require that the assets of the related company or unit trust do not include an interest in another entity, and reg 13.22D(1)(b)(i) states that reg 13.22B or 13.22C will cease to apply if an interest in another entity becomes an asset of the company or unit trust, ie the investment will cease to be excluded from the in-house assets of the SMSF. The term “interest” is not defined in the SISA. If a related unit trust of an SMSF has assets including units in a unit trust that is not related to the SMSF, the related trust has an interest in another entity for the purposes of Div 13.3A (ID 2008/51). Similarly, if a related unit trust of an SMSF has assets including shares in a listed company, the related unit trust has an interest in another entity for the purposes of Div 13.3A. A share in a listed security is an interest in that company and, therefore, an interest in another entity for the purposes of Div 13.3A (ID 2008/52). SMSFR 2009/3 sets out the Commissioner’s views on the potential contravention of the in-house asset rules if an SMSF is presently entitled to a distribution from a related or non-arm’s length trust, and payment of this amount is not sought (¶5-455). Conversion of a geared unit trust to a non-geared unit trust The SISA provides transitional in-house asset arrangements in SISA s 71A to 71E to facilitate the change in the definition of in-house asset from 12 August 1999 (see “Assets — what are in-house assets?” above). Briefly, under s 71A, units in a unit trust held by a superannuation fund as at 11 August 1999 are not included in the fund’s in-house assets. Reinvestments of distributions from the unit trust in additional units may also not be included in the fund’s in-house assets (see s 71D), and where an election had been made under s 71E, certain additional units in the unit trust can be purchased by the fund up to the value of loans outstanding in the unit trust as at 11 August 1999. The provisions of s 71D apply unless the election is made to apply s 71E. Under SISR Div 13.3A, certain units acquired by funds in certain unit trusts or companies are excluded as in-house assets if the requirements of either reg 13.22C or 13.22D are met. Division 13.3A commenced on 28 June 2000 and apply to fund investments in ungeared unit trusts or companies at that date, or to new investments made by funds in unit trusts or companies subsequent to that date (see above). ATO guidelines — borrowings As noted above (see “Exception — investment in non-geared unit trusts and companies”), certain SMSF and small APRA fund investments in a related company or related unit trust in accordance with reg 13.22B and 13.22C in Div 13.3A are excluded from the meaning of in-house asset (SISA s 71(1)(j)(ii); reg 13.22B applies to investments before 28 June 2000, the commencement date of Div 13.3A, and reg 13.22C applies to investments on or after 28 June 2000). If any of the events set out in reg 13.22D(1)

happen in respect of an asset to which reg 13.22B or 13.22C apply, those provisions will cease to apply to all current and future investments in that company or unit trust. Of particular relevance is reg 13.22D(1) (c)(i) which applies where the company or unit trust borrows money. ATO ID 2012/52 states that s 71(1)(j)(ii) applies to an additional investment in a related unit trust by an SMSF where s 71A applies to the SMSF’s original investment in the unit trust, the trustee of the unit trust did not borrow any additional money after 28 June 2000 and all borrowings were discharged before the additional investment was made, as the requirements of reg 13.22C are met. The facts of ID 2012/52 are as follows: • An SMSF acquired units in a related unit trust prior to 12 August 1999 and continued to hold the units. • On 28 June 2000, the trustee of the unit trust (TUT) had an amount of outstanding borrowings. The TUT did not borrow any further money after 28 June 2000 and later discharged all outstanding borrowings. • Subsequent to the TUT repaying all outstanding borrowings, the SMSF acquired additional units in the unit trust. Neither s 71D nor 71E applies to the additional investment. In the above case, the ATO states that reg 13.22D(1) applies to events which happen on or after 28 June 2000. For this reason the borrowing made prior to 28 June 2000 will not trigger the operation of reg 13.22D notwithstanding that it was not discharged prior to 28 June 2000. As the additional units in the unit trust were acquired on or after 28 June 2000 and an event in reg 13.22D has not occurred, reg 13.22C applies to these new units. Regulation 13.22C(2)(e) requires that the unit trust does not have outstanding borrowings when the trust units were acquired by the SMSF. This requirement is satisfied in the present case because the borrowings were discharged in full before the units were acquired. On the basis that the other paragraphs of reg 13.22C(2) are also satisfied and that none of the events listed in reg 13.22D(1) has occurred since 28 June 2000, the new units in the trust are excluded from being in-house assets under s 71(1)(j)(ii). While reg 13.22B would not exclude the original units in the trust acquired prior to 12 August 1999 from being in-house assets because of the borrowing which existed on 28 June 2000, s 71A still applies to exclude those units from the definition of in-house asset. By contrast, the ATO decided in ID 2012/53 that s 71(1)(j)(ii) does not apply to an additional investment in a related unit trust by an SMSF where s 71A applies to the SMSF’s original investment in the unit trust, the trustee of the unit trust borrowed additional money after 28 June 2000 and the total borrowings were discharged before the SMSF acquired the additional trust units. The sequence of events in ID 2012/53 is noted below: • 12 August 1999 — SMSF holds related unit trust (RUT) • 28 June 2000 — RUT has outstanding borrowings • on or after 28 June 2000 — RUT makes further borrowings • after further borrowings but before additional units are acquired — RUT repays all outstanding borrowings • after RUT repays outstanding borrowings — SMSF acquires additional units in RUT. Regulation 13.22D(1) applies to events which happen on or after 28 June 2000. For this reason, the borrowing made prior to 28 June 2000 will not trigger the operation of reg 13.22D notwithstanding that it was not discharged prior to 28 June 2000. When the RUT borrowed money after 28 June 2000, the event set out in reg 13.22D(1)(c)(i) happened in relation to the original units in the related unit trust to which reg 13.22B applied. Consequently, reg 13.22B ceased to apply to the SMSF’s original investment in the unit trust at that time. In addition, reg 13.22D(3) has the effect of excluding any other investments in the unit trust from the application of reg 13.22C.

As reg 13.22C does not apply to the acquisition of additional units in the unit trust, those units will not be excluded from being in-house assets by s 71(1)(j)(ii). Notwithstanding that reg 13.22B no longer applies to the SMSF’s original investment in the unit trust, s 71A continues to apply to exclude those units from the definition of in-house asset. Leases and lease arrangements The in-house asset definition in SISA s 71(1) was extended from 12 August 1999 to cover an asset of a superannuation fund subject to a lease or lease arrangement (subject to the transitional arrangements provided by SISA s 71A to 71E; see earlier editions of the Guide for the transitional rules). For funds with fewer than five members (eg an SMSF or a small APRA fund), an important exception that a fund asset that is real property subject to a lease or to a lease arrangement enforceable by legal proceedings between the trustee and a related party of the fund, which, throughout the term of the lease or lease arrangement, is “business real property” (¶3-430, ¶5-450) of the fund is not an in-house asset (s 71(1)(g)). That is, any other property of such funds that is subject to a lease or lease arrangement is an in-house asset. The term “lease” is not defined in the SISA and, therefore, is given its ordinary meaning. In respect of real property, a lease is a “demise” that grants a leasehold estate in the property to the lessee for a term. That is, the lessee has an interest in the land (a “chattel real”) (this may be contrasted with a licence to enter land which confers no interest in the land). The key test of a lease is one of whether exclusive possession of the property is granted, ie the tenant has not only the right to occupy the property, but to exclude access to all others, including the legal owner. A key difference between a lease of real property and a lease of non-real property (a lease of chattels) is that no proprietary interest in the asset is created in respect of a chattel lease. However, the right of possession granted to the hirer under the agreement, although not referred to as “exclusive possession”, nonetheless includes the right to debar or exclude others, including the legal owner, from possession. The Commissioner’s view is that the term “lease” in s 71(1) in respect of non-real property means a legally enforceable hiring agreement involving the payment of consideration by the hirer in exchange for enforceable temporary possession of the asset (SMSFR 2009/4, para 23). A “lease arrangement” means any agreement, arrangement or understanding in the nature of a lease between the trustee of a superannuation fund and another person under which the other person uses or controls the use of property owned by the fund, whether or not the agreement, arrangement or understanding is enforceable or intended to be enforceable by legal proceedings (s 10(1)). An arrangement “in the nature of” a lease will therefore resemble a lease and have some, but not necessarily all, of the characteristics of a lease. This will include informal arrangements under which a person uses or controls the use of fund assets, even where no rent is payable for that possession, but not arrangements for the holding of assets on a custodial basis or where the only purpose is for repairs to be made to the assets. Where a fund enters into a lease or lease arrangement with respect to part of a property, only that part of the property that is leased to a related party of the fund is an in-house asset (eg one flat in a block of flats or part of a paddock is leased to a relative). Example An SMSF owns a residential home which is leased to an unrelated third party, except for the garage at the rear of the property with its own street access. This garage is specifically excluded from the residential lease and the tenant has no access to it. Instead, one of the members of the fund uses the shed for storage of a vintage car and holds the keys and alarm to the garage. No rent is paid but the member pays for insurance and a monitored alarm. The part of the property comprising the garage is subject to a lease arrangement with the member (a related party) and consequently is an in-house asset of the SMSF.

Where an asset is leased or subject to a lease arrangement for part of a year, the full value of the asset is an in-house asset for the period that it is leased or subject to the lease arrangement.

Example A superannuation fund owns a beach house with a market value of $300,000 which it leased to a member for two months of the year. The full market value of the beach house is included in the in-house asset ratio of the fund during that two-month period that the property was leased to the member.

Alternative in-house asset rules — defined benefit funds Defined benefit funds with large accumulated surpluses may comply with alternative in-house asset rules which will enable them to retain their existing in-house assets rather than to sell them, as required under the primary in-house asset rules described above (SISA Pt 8 Div 3A s 83A to 83E). For the alternative rules in Div 3A to apply: • the fund must be a defined benefit fund with an employer-sponsor that is a listed public company or an associate of a listed public company • the market value of the fund’s assets is not less than the “base amount” (120% of the greater of the fund’s liabilities in respect of vested benefits or the fund’s accrued actuarial liabilities) • the trustee has decided that Div 3A is to apply to the fund in respect of the year of income (s 83B) • the market value of the fund’s in-house assets at the end of the year of income must not exceed the “maximum permitted amount” in relation to the fund (effectively the total amount of in-house assets that the fund may hold is: (a) 5% for 2000/01 (10% in earlier years) of 120% of the fund’s liabilities; plus (b) any amount of assets exceeding 120% of the fund’s liabilities (s 83C): see example below) • at the end of the year of income: – the market value of the fund’s in-house assets (other than shares in the capital of listed public companies) must not exceed 5% of the base amount for 2000/01 (or 10% in earlier years), ie the market value of any in-house assets exceeding the prescribed percentage of the base amount must consist of shares in the capital of listed public companies – the fund’s in-house assets must not include more than 5% of the voting shares in any listed public company that is the employer-sponsor or an associate of the employer-sponsor (s 83D) • the fund is prohibited from acquiring in-house assets unless the market value of the fund’s in-house assets has ceased to exceed 5% of the base amount for 2000/01 (or 10% in earlier years) (s 83E). Example A defined benefit fund has liabilities of $100m. For Div 3A to apply, the fund must have assets of at least $120m (the “base amount”). If the market value of the fund’s assets is $150m, the “maximum permitted amount” of in-house assets that the fund may have is calculated as follows:

5%×$120m+($150m −$120m) ie $6m+$30m=$36m Any amount of in-house assets exceeding 5% for 2000/01 (or 10% in earlier years) of the base amount must consist of shares in the capital of a listed public company which is the employer-sponsor or an associate of the employer-sponsor.

Sub-funds, unrelated employer-sponsor in group of employer-sponsors Sub-funds within a regulated superannuation fund which have separately identifiable assets and beneficiaries are to be treated as regulated superannuation funds in their own right, so that the in-house asset rules will apply to the individual sub-funds (SISA s 69A). Where a fund has two or more unrelated employer-sponsors, the employer-sponsors are treated separately for the purposes of the in-house asset rules. This rule does not apply to SMSFs (s 72).

For example, if a fund has two unrelated employer-sponsors, the in-house asset ratio for each unrelated employer-sponsor is calculated by dividing the costs of the in-house assets in the employer-sponsor (or an associate) by the costs of total fund assets and multiplying by 100. In each case, the in-house asset ratio as calculated must not exceed the 5% in-house asset ratio (for 2000/01 and later years). Example A superannuation fund has two unrelated standard employer-sponsors, A and B. The in-house asset ratio in respect of the in-house assets of A and B are calculated as:

In-house assets of A ×100 Total funds assets In-house assets of B ×100 Total funds assets In each case, the ratio as calculated must not exceed the 5% in-house asset limit (for 2000/01 and later years).

Similarly, unrelated groups of associated employer-sponsors are treated separately for the purposes of the in-house asset rules. Example A, B, C and D are four standard employer-sponsors, where A and B are related (group 1) and C and D are related (group 2) and groups 1 and 2 are unrelated. The in-house asset rules will apply to each unrelated group’s in-house assets as follows:

In-house assets of A and B Total funds assets

×100

In-house assets of C and D ×100 Total funds assets In each case, the in-house asset ratio as calculated above must not exceed the prescribed ratio for the year (5% in 2000/01 and later years; 10% in earlier years).

Cases of breach of in-house asset rules The in-house asset rules are civil penalty provisions in the SISA and trustees may be subject to severe penalties where the rules are breached (¶3-820). For a case where the court dismissed an application for penalties for a breach of the in-house asset rules on the basis of the statutory defences afforded by SISA s 221(2) and 323(3)(2) (acting honestly, reliance of incorrect advice), see the Dolevski v Hodpik case at ¶3-820. In many cases, a breach of the in-house asset rules will also result in a superannuation fund losing its complying fund status and entitlement to tax concessions (Re QX971 v APRA 99 ESL 1). For a case where several superannuation funds were found to have breached s 85 (which prohibits a fund from entering into any scheme which would avoid the application of the in-house asset provisions), see APRA v Holloway 01 ESL 12. There, the funds were part of a scheme involving the use of unit trusts (which made loans to the employer-sponsors) and the leasing of fund assets to the employer-sponsors (see further ¶3-200). The following interpretative decisions provide further examples of the application of the in-house asset rules: ID 2002/388 — arrangements involving a lease of residential property from a related unit trust; former ID 2002/697 — loan to property trust. [SLP ¶3-510]

¶3-470 Related party The term “related party” of a superannuation fund is relevant for the purposes of the prohibition on the

acquisition of assets by funds (¶3-430) and the in-house asset investments of a fund (¶3-450). A related party of a superannuation fund means any of the following: • a member of the fund or a Part 8 associate of a member • a standard employer-sponsor of the fund or a Part 8 associate of a standard employer-sponsor of the fund (SISA s 10(1)). The term “member” has its ordinary meaning. In the SISA, a “member” includes a person who receives a pension from the fund or a person who has deferred his/her entitlement to receive a benefit from the fund (s 10(3)). The meaning of “member” can be modified by regulations to provide that a person is to be treated, or is not to be treated, as being a member of a superannuation fund for the purposes of the SISA or specified provisions of the Act (s 15B). If a superannuation interest in a fund is subject to a payment split under the family law, or a non-member spouse interest has been created under SISR reg 7A.03B, and before the payment split the non-member spouse was not a member, reg 1.04AAA provides that the non-member spouse is treated as being a member of the fund in which the interest is held for the following purposes: • the definition of SMSF in s 17A, except s 17A(5) (¶5-200, ¶5-220) • the prohibition on lending to members in s 65 (¶3-420) • the in-house asset rules in SISA Pt 8 (¶3-450). A “Part 8 associate” of a member or a standard employer-sponsor is defined in terms of an individual, partnership or company as the primary entity (s 70B to 70E). In broad terms, Part 8 associates are those entities that are relatives of the individual, partners, companies that are controlled or majority-owned, or entities that control the primary entity, as discussed further below. A separate definition of a “related trust” is used to cover an investment in a controlled trust (¶3-450). A “standard employer-sponsor” is an employer who contributes to the fund (or has ceased only temporarily to contribute) for the benefit of a member or a member’s dependants wholly or partly pursuant to an arrangement between the employer and the trustee of the fund (s 16(2)). A typical standard employer-sponsored fund would be a company superannuation fund or an industry fund covering employees. However, where an employer allows employees to select the fund to which the employer will contribute, and the employer has no other association with the fund, the fund is not a standard employersponsored fund. Examples of such funds are personal superannuation funds operated by banks and life offices and certain master trusts. Note, however, that for the purposes of the in-house asset rules, the Regulator may also determine that a person is taken to be a standard employer-sponsor. Part 8 associate of an individual Each of the following is a Part 8 associate of an individual (the “primary entity”), whether or not the primary entity is in the capacity of trustee (SISA s 70B): (1) a relative of the primary entity (2) if the primary entity is a member of a superannuation fund with fewer than five members (ie an SMSF or a small APRA fund): (a) each other member of the fund (b) if the fund is a single member SMSF whose trustee is a company — each director of that company (c) if the fund is a single member SMSF whose trustees are individuals — those individuals

(3) a partner of the primary entity or a partnership in which the primary entity is a partner (4) if a partner of the primary entity is an individual — the spouse or a child of that individual (5) a trustee of a trust (in the capacity of trustee of that trust) where the primary entity controls the trust (6) a company that is sufficiently influenced by, or in which a majority voting interest is held by: (a) the primary entity (b) another entity that is a Part 8 associate of the primary entity, or (c) two or more entities covered by (a) or (b).

The meaning of “relative” is defined in s 10(1) (or before 1 July 2008, in former s 70E(4)) (¶3-020). The terms “company” and “partnership” have the same meanings as in ITAA97. Subject to a contrary intention, a “company” means a body corporate, or any other unincorporated association or body of persons, but does not include a partnership or a non-entity joint venture, and a “partnership” means: • an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly, or • a limited partnership (ITAA97 s 995-1(1)). Sufficient influence, majority voting interest and control The expressions “sufficient influence”, “majority voting interest” and “controls a trust” are relevant for the purposes of the definition of a Part 8 associate of an individual, company or partnership. A company is “sufficiently influenced” by an entity or entities if the company, or a majority of its directors, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts) (s 70E(1)(a)). An entity or entities hold a “majority voting interest” in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company (s 70E(1)(b)). An entity “controls a trust” if: • a group in relation to the entity has a fixed entitlement to more than 50% of the capital or income of the trust • the trustee or a majority of the trustees of the trust is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts), or • a group in relation to the entity is able to remove or appoint the trustee, or a majority of the trustees, of the trust (s 70E(2); ID 2002/697). For the above purposes, a “group”, in relation to an entity, means: • the entity acting alone • a Part 8 associate of the entity acting alone • the entity and one or more Part 8 associates of the entity acting together, or • two or more Part 8 associates of the entity acting together. Part 8 associate — primary entity is an individual The following diagram shows the Part 8 associate of a primary entity that is an individual (ie a member or an employer-sponsor).

Part 8 associate of a company Each of the following is a Part 8 associate of a company (the primary entity), whether or not the primary entity is in the capacity of a trustee (SISA s 70C): (1) a partner of the primary entity or a partnership in which the primary entity is a partner (2) if a partner of the primary entity is an individual — the spouse or a child of that individual (3) a trustee of a trust (in the capacity of trustee of that trust), where the primary entity controls the trust (4) another entity (the “controlling entity”) where the primary entity is sufficiently influenced by, or a majority voting interest in the primary entity is held by: (a) the controlling entity (b) another entity that is a Part 8 associate of the controlling entity, or (c) two or more entities covered by (a) or (b) (5) another company (the “controlled company”) which is sufficiently influenced by, or in which voting interest in the controlled company is held by: (a) the primary entity (b) another entity that is a Part 8 associate of the primary entity, or (c) two or more entities covered by (a) or (b) (6) if a third entity is a Part 8 associate of the primary entity because of (4) above — an entity that is a Part 8 associate of that third entity because of s 70B, 70C or 70D. Part 8 associate — primary entity is a company The following diagram shows the Part 8 associate of a primary entity that is a company (ie an employersponsor).

Part 8 associate of a partnership Each of the following is a Part 8 associate of a partnership (the primary entity) (SISA s 70D): (1) a partner in the partnership

(2) if a partner in the partnership is an individual — any entity that is a Part 8 associate of that individual because of s 70B (see above) (3) if a partner in the partnership is a company — any entity that is a Part 8 associate of that company because of s 70C (see above). Part 8 associate — primary entity is a partnership The following diagram shows the Part 8 associate of a primary entity that is a partnership (ie an employersponsor).

¶3-475 Trustees must not offer inducements to influence employers From 6 April 2019, a trustee of a regulated superannuation fund (or an associate of a trustee) must not: • supply, or offer to supply, goods or services to a person, or a relative or associate of a person, or • supply, or offer to supply, goods or services to a person, or a relative or associate of a person, at a particular price, or • give or allow, or offer to give or allow, a discount, allowance, rebate or credit in relation to the supply, or the proposed supply, of goods or services to a person, or a relative or associate of a person, if that action could reasonably be expected to: • influence the choice of the fund into which the person pays superannuation contributions for employees of the person who have no chosen fund, or • influence the person to encourage one or more of the person’s employees to remain, or apply or agree to be, a member of the fund (s 68(1)). Also, a trustee of a regulated superannuation fund (or an associate of a trustee) must not refuse to: • supply, or offer to supply, goods or services to a person, or a relative or associate of a person, or • supply, or offer to supply, goods or services to a person, or a relative or associate of a person, at a particular price, or • give or allow, or offer to give or allow, a discount, allowance, rebate or credit in relation to the supply, or the proposed supply, of goods or services to a person, or a relative or associate of a person, if it is reasonable to conclude that the refusal is given because: • the person has not chosen the fund as the fund into which the person pays superannuation contributions for employees of the person who have no chosen fund, or • the person has not encouraged one or more of the person’s employees to remain, or apply or agree to be, a member of the fund (s 68A(3)). The prohibition applies as part of the integrity rules in conjunction with the choice of fund regime under which employers are required to provide their employees with a choice of superannuation funds to which their superannuation guarantee contributions would be paid (¶12-052). A similar prohibition applies to RSA providers under the RSA Act.

The above prohibitions are similar to those imposed under s 68A (as it then read before 6 July 2019) with two main changes: • a lower test applies for connecting the actions of the funds by using an objective or “reasonableness” standard to determine the intended effect of that action on the employer, and • civil and criminal consequences can apply as s 68A has been recategorised as a civil penalty provision (see below). Exceptions Sections 68(1) and (3) do not apply in relation to a supply of a kind prescribed in the regulations. SISR reg 13.18A allows a trustee (or an associate) to: • supply a business loan on a commercial arm’s length basis to an employer where only the employer is required to be a member of the fund • supply a “clearing house” service (¶3-220, ¶12-230) to an employer which forwards the contributions and related information made by the employer on behalf of their employees to their chosen funds • provide an employer or the employer’s employees with advice or administrative services • supply goods or services to an employer where the supply is also available to all of the employer’s employees who are members of the fund on terms not less favourable than the terms offered to the employer. Examples of goods and services under the last exception are providing members with discounted computers, low cost health insurance, or a discounted shopping service (so as to enable members to acquire discounted accommodation or entertainment) as a result of becoming a member of the superannuation fund concerned. Penalty for contravention Sections 68A(1) and (3) are civil penalty provisions (as defined in SISA s 193), and SISA Pt 21 therefore provides for civil and criminal consequences of contravening, or being involved in a contravention of, those subsections. ASIC has general administration of s 68A and can apply to the Court for a civil penalty order when a contravention of a civil penalty provision occurs. SISA Pt 21 specifies a maximum penalty amount of 2,000 penalty units.

RSE Licensing and Registration ¶3-480 Trustee licensing and RSE registration The SISA requires superannuation entities to be licensed by APRA and registrable superannuation entities (RSEs) to be registered with APRA. A “constitutional corporation” (ie a trading or financial corporation formed within the limits of the Commonwealth) or other body corporate or a group of individual trustees may apply for an RSE licence. A “group of individual trustees” is licensed as a group, ie each individual trustee is not required to have a licence (¶3-485). A “RSE” means a regulated superannuation fund, an ADF or a PST, but not an SMSF (SISA s 10(1)). An RSE, therefore, includes a public offer superannuation fund (¶3-500), a small APRA fund (¶5-650) or an eligible rollover fund (¶3-520). In summary: • all trustees operating an APRA-regulated superannuation entity must hold an RSE licence (therefore, trustees of SMSFs or public sector superannuation schemes are excluded)

• an “RSE licence” means a licence granted by APRA under s 29D and an “RSE licensee” means a constitutional corporation, body corporate or group of individual trustees that holds an RSE licence granted under that section • all superannuation entities, other than SMSFs and exempt public sector superannuation schemes (EPSSSs), must be registered with APRA (only an RSE licensee can register a superannuation entity: ¶3-490) • in order to obtain an RSE licence, the trustee or group of individual trustees must have a risk management strategy • in order to register a fund or trust, the trustee or group of individual trustees must have a risk management plan for that fund or trust. The RSE licence is not the same as the Australian financial services licence (AFSL) issued by ASIC to providers of financial services under the Corporations Act 2001 (¶4-600 and following). The RSE licence has a different focus which enables the licensee to conduct different business operations. However, trustees should note that holding an AFSL is a requirement for undertaking certain types of business activities under an RSE licence, eg where the trustee is dealing in a financial product or providing advice about financial products. For information on the interaction of RSE and AFS licensing, see ASIC INFO Sheet 86 “How do the RSE and AFS licensing application processes work together?” (available at www.asic.gov.au). Entities applying for RSE licences and RSE registration should note that stringent penalties are imposed for providing false or misleading information (Criminal Code Act 1995, s 137.1). Also, where information that is disclosed to APRA appears to indicate a breach of the law, APRA is authorised under Australian Prudential Regulation Authority Act 1998, s 56 to pass that information to ASIC or any other financial sector supervisory agency specified in the regulations. Authorisation to issue MySuper products An RSE licensee that wishes to offer a MySuper product is required to apply to APRA for authorisation to do so under SISA Pt 2C. An authorisation will include conditions requiring the RSE licensees to comply with additional duties and obligations (see ¶9-100).

¶3-485 Applying for an RSE licence Part 2A of SISA provides for the granting of a registrable superannuation entity (RSE) licence to constitutional corporations, other bodies corporate and groups of individual trustees. An RSE licensee that wants to offer MySuper products must have APRA authorisation under SISA Pt 2C and must comply with additional obligations under their RSE licences (the MySuper regime is discussed in Chapter 9). A person commits an offence if the person makes a representation that the person is, or is a member of a group that is an RSE licensee and the representation is false (s 29JCA). This is a strict liability provision, with a penalty of 60 penalty units. Group of individual trustees A “group of individual trustees” means a group of trustees each of whom is an individual trustee. A group of individual trustees can collectively hold a single RSE licence, which licenses the members of the group. Therefore, an RSE licence given to a group of individual trustees resides with the group (the RSE licensee) and is not affected by changes in the composition of the group (SISA s 13A). The following rules apply in relation to how the group/individual trustees fulfil their obligations under the SIS legislation when an RSE licence is given to a group. • The duties and obligations of trustees in respect of the regulated superannuation funds under the group continue to reside with each of the individual members of the group.

• Any individual trustee who is a member of a group of individual trustees may discharge any duty or obligation for all of the other members of the group, except where documents must be signed by the RSE licensee in which case all members are required to sign the documents. • It is sufficient for a direction, notice or other document given to an RSE licensee that is a group of individual trustees to be given to any one member of the group, who then has an obligation to appropriately inform the other members of the group of the direction, notice or document. • For the purposes of the SISA penalty provisions, the obligations and duties of the RSE licensee fall separately and individually upon each member of the group. Therefore, each member of the group is considered a principal and is liable for his/her own acts and omissions in ensuring that the RSE licensee has fully discharged its obligations and duties. • A “due diligence” defence is available to a member of the group who has exercised due diligence in the event that an RSE licensee does not discharge its obligations and duties. Classes of licence The two main classes of RSE licence are: (1) a public offer entity licence — this enables the holder to operate public offer RSEs (2) a non-public offer entity licence — this enables the holder to operate RSEs that are not public offer entities (eg an employer superannuation fund) (SISA s 29B; SISR reg 3A.01; 3A.02). The SISR may provide for other classes of RSE licences. If a trustee is licensed to operate one or more non-public offer entity funds in addition to a public offer entity fund, the trustee will be given a single licence known as an “extended public offer entity licence” (reg 3A.03). Only a body corporate that is a constitutional corporation can apply for a licence in respect of a public offer entity, or in respect of a fund where the primary benefit paid is a lump sum, rather than a pension. APRA may appoint an acting trustee to a superannuation entity where the trustee of the entity is either suspended or removed under s 134 (¶3-130). The acting trustee must have an RSE licence approved by APRA. Requirements for RSE licence application An application for an RSE licence must be in the approved form, contain the information required by the approved form, and be accompanied by the application fee prescribed by the SISR (see below) (SISA s 29C(4)). While an application is pending, changes to the information or documents which have been provided must be notified to APRA. APRA may also request specified information relating to the application from the applicant (s 29C). Licence application fees and variation fees The fees for RSE licence application fees are set out in SISR reg 3A.06. A reduced fee of half of the prescribed fees is payable if an applicant is re-applying for a particular class of RSE licence, where the initial application was refused or withdrawn within the preceding 12 months of the re-application. The fees which are payable for an application for variation of an RSE licence are specified in SISA s 29F(2)(c): APRA must approve application if conditions are met APRA must grant an RSE licence to an applicant for a licence (whether a body corporate or group of individual trustees) if the following requirements are met. • APRA has no reason to believe that the applicant would fail to comply with the RSE licensee law if the RSE licence were granted.

• APRA has no reason to believe that the applicant would fail to comply with any condition imposed on the RSE licence if it were granted. • APRA is satisfied that: – if the application is made by a body corporate — the body corporate meets the requirements of the prudential standards relating to fitness and propriety for RSE licensees, or – if the application is made by a group of individual trustees — the group as a whole meets the requirements of the prudential standards relating to fitness and propriety for RSE licensees and each of the members of the group meets the requirements of the prudential standards relating to fitness and propriety for members of groups of trustees that are RSE licensees (for APRA prudential standards, see ¶9-700). • If the applicant is not a constitutional corporation, APRA is satisfied that the body corporate or each member of the group of individual trustees only intends to act as a trustee of one or more superannuation funds that have governing rules providing that the sole or primary purpose of the fund is the provision of old-age pensions. • The application has not been withdrawn, refused or treated as withdrawn or refused (s 29D). Compulsory conditions on all licences The following conditions are imposed on all RSE licences (SISA s 29E(1)). • The RSE licensee (if the RSE licensee is a group of individual trustees, each of the members of the group) must comply with the RSE licensee law. • The duties of a trustee in respect of each RSE of which it is an RSE licensee must be properly performed by the body corporate and each of the members of the group of individual trustees. • The RSE must have an ABN, or must have made an ABN application that has not been refused. • The RSE licensee must ensure that each RSE of which it is the RSE licensee is registered under SISA Pt 2B (¶3-490). • The RSE licensee must ensure that each RSE of which it is the licensee has an ABN. • The RSE licensee must notify APRA of any change in the composition of the RSE licensee within 14 days after the change takes place. • The RSE licensee must comply with any other conditions prescribed by the SISR. Additional conditions are imposed on various types of RSE licences or licensees, as specified in s 29E(3) to (7), or on a particular RSE licence under s 29EA. A condition may be expressed to have effect despite anything in the prudential standards (s 29EA(2A)). An “RSE licensee law” means the SISA or SISR, the FSCDA, the Financial Institutions Supervisory Levies Collection Act 1998 and: • prudential standards (as defined in s 34C(4): ¶9-700) • the provisions of the Corporations Act 2001 listed in the definition of “regulatory provision” (¶2-140) and their prescribed Regulations • any other provisions of any other Commonwealth law specified in regulations (s 10(1)). For RSE licensees who apply for authority to offer MySuper product, an additional condition is imposed on each RSE licensee who makes an application under s 29S for authority to offer a class of beneficial interest in a regulated superannuation fund as a MySuper product (¶9-100) which requires RSE licensee to give effect to elections made in accordance with s 29SAA, 29SAB and 29SAC as discussed in ¶9-120

(s 29E(6B)). Reporting “significant” breach of licence conditions An RSE licensee that becomes aware that it has breached or will breach a condition imposed on its RSE licence, and the breach is or will be “significant”, must give APRA a written report about the breach as soon as practicable, and in any case no later than 10 business days, after becoming aware of the breach (s 29JA(1)). A breach is or will be “significant” if the breach is or will be significant having regard to any one or more of the following factors: • the number or frequency of similar previous breaches • the impact the breach has or will have on the RSE licensee’s ability to fulfil its obligations as trustee of the superannuation entity • the extent to which the breach indicates that the RSE licensee’s arrangements to ensure compliance with the RSE licensee law might be inadequate • the actual or potential financial loss arising or that will arise from the breach to the beneficiaries of the entity or to the RSE licensee, and • any other matters prescribed by the SISR (s 29JA(1A)). A breach must be notified within 10 business days after becoming aware that a breach has occurred. Failure to notify APRA of a breach of a prudential requirement is a strict liability offence (50 penalty units). APRA breach reporting form and method APRA’s guidelines and form for breach notification may be found at www.apra.gov.au/breach-notification. Variation, cancellation of licence and other matters An RSE licensee may apply to APRA for one or both of the following: • variation of its RSE licence so that the RSE licence is an RSE licence of a different class • variation or revocation of a condition that APRA has imposed on its RSE licence. A variation application must be in the approved form, contain the required information and be accompanied by the application fee (if a variation of licence, see above) (SISA s 29F). APRA may, in writing, cancel an RSE licence if: • requested by the RSE licensee in the approved form • the RSE licensee is a disqualified person (¶3-130) • the RSE licensee has breached a licence condition or APRA has reason to believe that the RSE licensee will breach a licence condition • the RSE licensee has failed, or APRA believes the RSE licensee will fail, to comply with an APRA direction under s 131D(1) or DA(1) (s 29G).

¶3-488 Approval to hold controlling stake in an RSE licensee Part 2A Div 8 of SISA deals with: • application to APRA for approval to hold a controlling stake • approval to a person to hold a controlling stake in an RSE licensee • APRA’s directions to a person to relinquish control over an RSE licensee

• consequences of a direction to relinquish control. Division 8 commenced on 6 July 2019. The provisions in Div 8 only apply to RSE licensees that are body corporates. A person commits an offence if the person holds a controlling stake in an RSE licensee without approval from APRA under s 29HD to hold a controlling stake in the RSE licensee (s 29JCB). This is a strict liability offence. A penalty of 400 penalty units applies for each day on which the person holds a controlling stake in the RSE licensee without approval. The offence is subject to an infringement notice (s 223A(1)(aa)). This is to address the situation where the person holding a controlling stake in an RSE licensee has not been aware of the requirement to obtain approval but is otherwise considered to be satisfying their fiduciary obligations. Application to APRA for approval to hold a controlling stake A person may apply to APRA for approval to hold a controlling stake in an RSE licensee (29HA(1)). The application must be in the approved form and contain the information required by the firm. A person holds a “controlling stake” in an RSE licensee that is a body corporate if the person holds a stake of more than 15% in the RSE licensee (s 10(1)). A stake in an RSE licensee is a person’s shareholding (including the shareholdings of their associates) and votes associated with that shareholding. APRA must make a decision on the application within 90 days of receiving the application or, where APRA requested further information from the applicant, within 90 days of receiving all the information requested, unless APRA has extended the period by another 30 days (s 29HC(1), (2)). Approval to hold a controlling stake in an RSE licensee APRA must approve an application to hold a controlling stake in an RSE licensee if and only if: • the application is in the form required and with the correct information • the applicant has provided all the information requested or the request has been disposed, and • APRA has no reason to believe that, because of the person’s controlling stake in the RSE licensee, or the way in which that controlling stake is likely to be used, the RSE licensee may be unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A (s 29HD). If APRA gives a person approval to hold a controlling stake in an RSE licensee, APRA must notify the RSE licensee in writing of the approval (s 29HE). Refusal to approve If APRA refuses the application, APRA must take all reasonable steps to ensure that the applicant is given a notice of the decision and the reasons for the refusal (s 2(HF)). APRA’s decision to refuse to give approval is reviewable by the AAT (s 10(1) of definition of “reviewable decision” para (dla)). Where APRA does not decide on an application within 90 days (or 120 days for extensions) of receiving the application, the application is taken to be refused (s 29HC(4)). Direction to relinquish control APRA may direct a person to relinquish control of an RSE licensee in the three situations set out in s 131EB(1) to (3). Situation 1 APRA may direct a person to relinquish control of an RSE licensee if: (a) the Regulator has reason to believe that:

(i) the person has a controlling stake in the RSE licensee, or (ii) the person has practical control of the RSE licensee, and (b) the Regulator has reason to believe that because of: (i) the person’s controlling stake, or practical control, of the RSE licensee, or (ii) the way in which control has been, is or is likely to be exercised, the RSE licensee has been, is or is likely to be unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A (s 131EB(1)). The above requirements are similar to the conditions for APRA to approve an application for controlling stake in the RSE licensee (see above). The likelihood of interference with the RSE licensee’s ability to fulfil its obligations, due to the person controlling the RSE licensee, is the key consideration in APRA’s assessment of either approval of an application or the issue of a direction to relinquish control. The main difference between the conditions for an approval of an application and the giving of a direction is that a direction can be given to a person’s practical control over an RSE licensee who does not have a controlling stake in the RSE licensee. Practical control A person has “practical control” over an RSE licensee if the person does not hold a controlling stake in the RSE licensee and either of the following is satisfied: • the directors of the RSE licensee are accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person, or • the person, alone or together with their associates, is in a position to exercise control over the RSE licensee (s 10(1), s 131EC). Practical control therefore occurs irrespective of whether the person’s directions, instructions or wishes or their position to exercise the control originate from the person alone, or together with their associates. Situation 2 APRA may give a person a direction to relinquish control of an RSE licensee if: (a) the Regulator has reason to believe that the person has a controlling stake in the RSE licensee, and (b) the person does not have approval under s 29HD to hold a controlling stake in the RSE licensee (s 131EB(2)). Situation 3 APRA may give a person a direction to relinquish control of an RSE licensee if: (a) the Regulator has reason to believe that the person has a controlling stake in the RSE licensee (b) the person has approval under s 29HD to hold a controlling stake in the RSE licensee, and (c) information given to the Regulator in relation to the application for approval was false or misleading in a material particular (s 131EB(3)). To avoid doubt, a direction under s 131EB(1) or (3) to a person to relinquish a controlling stake in an RSE licensee may be given even if the person has approval to hold a controlling stake in the RSE licensee (s 131EB(4)). The s 131EB direction must be in writing, and APRA must give the person subject to the direction a copy of the direction and a statement of APRA’s reasons (s 131EB(5) and (6)). APRA may revoke a direction to relinquish control of an RSE licensee in writing and a copy of the revocation must be given to the person subject to the direction (s 131EB(7) and (8)).

APRA’s decision to give a person a direction under s 131EB is reviewable by the AAT (s 10(1) definition of “reviewable decision” in s 10(1) para (taac)). Consequences of a direction to relinquish control A person who receives a direction to relinquish control of an RSE licensee must take necessary steps to ensure that: • the directors of the RSE licensee are not accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person (either alone or together with associates) • the person (either alone or together with associates) is not in a position to exercise control over the RSE licensee, and • the person does not hold a controlling stake in the RSE licensee (s 131ED(10)). That is, a person receiving the direction must take necessary steps so that the person does not hold a controlling stake or have practical control of the RSE licensee. Action must be taken within 90 days of being given a copy of the direction or before the end of the longer period where APRA has given written notice allowing a longer period to comply with the direction (s 131ED(2)). A person who intentionally or recklessly contravene the direction is guilty an offence punishable on conviction by a penalty of 400 penalty units (s 131ED(3)). Interim orders Where the AAT has made an order to stay (or otherwise affect the operation or implementation of the decision to give the direction or part of the direction), APRA may apply to the Federal Court of Australia to seek orders that the person not exercise control until the AAT completes its review of the direction (s 131EE(1)). The Federal Court may make such orders as the court considers appropriate to ensure that the person does not, during the period to which an order of the Tribunal relates, exercise control over the RSE licensee in a manner that results in the RSE licensee being unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A (s 131EE(2)). The Regulator may apply to the Federal Court of Australia for orders under s 131EE(4) if: (a) a direction to relinquish control over an RSE licensee is in force in relation to a person, and (b) the Regulator has reason to believe that the person may, during the period under s 131ED(2) during which the person is required to take steps under the direction (the compliance period), exercise control over the RSE licensee in a manner that results in the RSE licensee being unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A (s 131EE(4)). Under s 131EE(4), the Federal Court may make such orders as the court considers appropriate to ensure that the person does not, during the compliance period, exercise control over the RSE licensee in a manner that results in the RSE being unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A. Remedial orders If the direction is in force, APRA may apply to the Federal Court to seek an order to enforce the direction (s 131EF(1)). The Federal Court may make such orders as the court considers appropriate to ensure that: • the directors of the RSE licensee are not accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person (either alone or together with associates)

• the person (either alone or together with associates) is not in a position to exercise control over the RSE licensee, and • the person does not hold a controlling stake in the RSE licensee (s 131EF(2)). The Court may make orders under s 131EF only if it is satisfied that the conditions in 31EF(3) are met. The Federal Court’s orders include: (a) an order directing the disposal of shares, or (b) an order restraining the exercise of any rights attached to shares, or (c) an order prohibiting or deferring the payment of any sums due to a person in respect of shares held by the person, or (d) an order that any exercise of rights attached to shares be disregarded (s 131EF(4)). In addition to the powers under s 131EF(2) and (4), the Federal Court also has the power to: • make an order to direct any person to do or refrain from doing a specific act for the purpose of securing compliance with any order the court has made, and • make an order containing ancillary or consequential provisions that the court thinks just (s 131EF(6)).

¶3-490 Registering an RSE Part 2B of SISA provides for the registration of a registrable superannuation entity (RSE) (s 29K to 29QC). There is no fee payable for registering an RSE. Only the holder of an RSE licence can apply for registration of an RSE (s 29L(1)). The s 29QB and 29QC requirements to ensure trustee remuneration information is made publicly available and for consistent information reporting are discussed in ¶9-650 and ¶9-660. An RSE licensee may breach the licence condition imposed by s 29E(1)(d) if an RSE of which it is the RSE licensee is not registered. A breach of a licence condition may lead to a cancellation of the licence (¶3-485). RSE trustees that want to offer MySuper products must have APRA authorisation under SISA Pt 2C and must comply with additional obligations under their RSE licences (see Chapter 9). Requirement for RSE registration An application for registration of an RSE must be made on the approved form (see “APRA guidelines” below), contain the information required by the approved form, and be accompanied by: • an up-to-date copy of the trust deed by which the RSE is constituted (except to the extent that the trust deed is constituted by the governing rules of the entity) • an up-to-date copy of the governing rules of the RSE (except to the extent that the governing rules are constituted by a Commonwealth law or by unwritten rules) (SISA s 29L). If the applicant (RSE licensee) is a group of individual trustees, the copy or statement must be signed by each of the members of the group (s 13A(6)). While an application is pending, changes to the information or to documents which have been provided, must be notified to APRA. APRA may also request specified information relating to the application from the applicant (s 29LA). APRA must decide an application by an RSE licensee for registration of an RSE: • within 21 days after receiving the application, or

• if the applicant was requested to provide additional information — within 21 days after receiving all of the information requested. The period for deciding an application may be extended by up to seven days if APRA informs the RSE licensee of the extension in writing and within the period in which it would otherwise be required to decide the application. In this case, APRA must decide the application within the extended period. If an application has not been decided by the period by which it is required to have been decided, APRA is taken to have decided to refuse the application (s 29LB).

¶3-495 RSE licensees must provide information about RSE at AMM From 6 April 2019, SISA imposes an obligation on RSE licensees to hold an annual members’ meeting (AMM) to discuss the key aspects of the fund and to provide members with a forum to ask questions about all areas of the fund’s performance and operations (Pt 2B Div 5 s 29P to 29PE). The chair of the board of directors, a director and an executive officer of an RSE licensee (if the RSE licensee is a body corporate), an individual trustee (if the RSE licensee is a group of individual trustees), relevant auditors and actuary must attend the AMM. At the AMM, the members must be given reasonable opportunity to ask questions about the RSE, the RSE licensee (and its responsible officers) or each individual trustee, the audit or the actuarial investigation of the entity, and any other information included with the notice of the meeting. To minimise compliance costs, superannuation funds can hold the AMM by electronic means. The AMM requirements do not apply in relation to an RSE that is: (a) a superannuation fund with fewer than five members, or (b) an excluded approved deposit fund, or (c) a pooled superannuation trust, or (d) an eligible rollover fund. Annual Members’ Meeting The RSE licensee of an RSE must hold an annual meeting of members of the entity for each year of income of the entity (s 29P(1)). The meeting must be held within three months of the notice of the meeting having been given and the notice must be given within six months after the end of the entity’s income year (s 29P(3), (4)). An RSE licensee therefore has up to nine months after the end of the entity’s income year in which to hold an AMM. The requirement to hold an AMM does not limit the RSE licensee’s ability to hold more than one AMM, or to hold AMMs in multiple locations. Furthermore, the RSE licensee is able to determine the platform in which the AMM is to be held — in person, electronically or a combination of both. This is to ensure that the RSE licensee has sufficient flexibility to engage with their members in a way that suits their members and minimises cost. It is an offence to contravene the obligation to hold an AMM. The penalty for the RSE licensee or an individual trustee (if the RSE licensee is a group of individual trustees) committing the offence is 50 penalty units (s 29P(8)). Notice of AMM The RSE licensee must give notice of the meeting 21 days before the AMM to: • all members of the RSE • all responsible officers of the RSE licensee that is a body corporate

• any person who has been an auditor of the entity for the income year, and • any person who has been an actuary of the entity during the income year. A responsible officer includes a director and an executive officer of the RSE licensee (s 10(1)). The notice must also include the agenda of matters to be discussed at the AMM. Regulations may prescribe any other information that must be included with the notice (eg that the annual report or information on operational matters of the fund be included with the notice of the AMM). A failure to comply with the obligation to provide the AMM notice and the information to be included in or with the notice is an offense (penalty: 50 penalty units) (s 29P(8)). Obligation to attend the AMM The chair of the board of directors, a director and an executive officer of an RSE licensee, relevant auditors and actuaries must attend the AMM, if they are given the notice of the AMM (s 29PAA). A director is not required to attend the AMM if other directors would be attending and those directors would constitute a quorum of directors for a board of directors meeting. Where the RSE licensee is a group of individual trustees, each of the individual trustees must attend the AMM. Unless there is a reasonable excuse for not attending, the persons who are required to attend will be subject to a penalty of 50 penalty units for non-attendance. Whether a reason for non-attendance is considered a reasonable excuse is considered on a case-bycase basis in light of the circumstances. Conduct at the AMM At the AMM, the RSE licensee must give members reasonable opportunities to ask questions about: • the RSE • the RSE licensee and its responsible officers, where the RSE licensee is a body corporate • each individual trustee where the RSE licensee is a group of individual trustees • any audit of the entity for the income year • any actuarial investigation of the entity for the income year, and • any information included with the notice of the AMM. It is an offence to contravene the obligation to give members reasonable opportunity to ask questions (penalty: 50 penalty units). If the chair of the board of directors, a director or an executive officer of an RSE licensee is asked a question by a member at the AMM, they must answer the question at the AMM unless it is not reasonably practicable to do so. Otherwise, the question must be answered within one month. The same obligation applies for questions to an individual trustee or an auditor or an actuary (s 29PC(1) and (2), 29PD(1) and (2), 29PE(1) and (2)). Unless a defence is available, the responsible officer, individual trustee, auditor or actuary will be subject to a penalty of 50 penalty units for not answering the questions at the AMM or within one month of the AMM. Defences to not answering the questions A responsible officer of an RSE licensee, an individual trustee, an auditor or an actuary does not need to answer a question if: • the question is not relevant to an action or failure or act by the RSE licensee in relation to the RSE or

one or more of its members • the question is not relevant to the RSE • it would be in breach of the governing rules of the RSE, the SIS Act or any other law to answer the question • answering the question would result in detriment to the members taken as a whole, or • any other circumstances prescribed by regulations (s 29PB(3), 29PC(3), 29PD(3) and 29PE(3)). An auditor or an actuary also does not need to answer a question if: • the question is not relevant to an audit or an actuarial investigation of the RSE • the question is not relevant to any matter that might reasonably be expected to be apparent to the auditor or actuary in relation to the entity • it would be in breach of the governing rules of the RSE, the SISA or any other law to answer the question, or • answering the question would result in detriment to the members of the RSE, taken as a whole, or • in any other circumstances prescribed by the regulations (s 29PD(3) and 29PE(3)). Recording of the AMM The RSE licensee must ensure that the minutes of AMM are prepared and made available on the RSE’s website to all members, including those that were not able to attend (s 29P(6)(a) and (c)). The minutes would include material matters raised at the AMM, the answers to any questions asked at the meeting that a person is obliged to answer, either at or after the AMM (s 29P(6)(b)). It is an offence to contravene the obligation to prepare the minutes or to make them available on the entity’s website to all members (penalty: 50 penalty units) (s 29P(8)).

Public Offer Entities and ERFs ¶3-500 RSE licensing and other rules A public offer entity is subject to additional rules under the SISA, which require it to have an RSE licensee as its trustee and which impose restrictions on its dealings in superannuation interests (see below). What is a public offer entity? A public offer entity is a public offer superannuation fund, an ADF other than an excluded ADF, or a PST (¶3-010). A “public offer superannuation fund” is: • a regulated superannuation fund that is not a standard employer-sponsored fund (¶3-120) • a standard employer-sponsored fund which has at least one member who is: (a) not a standard employer-sponsored member, ie a member in respect of whom an employer-sponsor contributes or would contribute pursuant to an arrangement between the employer-sponsor and the trustee of the fund; and (b) not a member of a “prescribed class” • a standard employer-sponsored fund which has made a written election in the approved form to be treated as a public offer fund (an election is irrevocable, but APRA may declare that a fund is not a public offer fund), or

• a superannuation fund which APRA has declared to be a public offer fund (SISA s 18). A fund that is declared by APRA not to be a public offer fund may be subject to certain conditions. A trustee must not fail to notify APRA if a specified condition has been breached (s 18(7B)). This is a strict liability offence (¶3-820). A member of a prescribed class means: (a) a former standard employer-sponsored member who, on ceasing to be such a member, has remained a member of the fund at all times; (b) a spouse or former spouse of an existing or former standard employer-sponsored member of the fund in relation to whom the fund has accepted eligible spouse contributions from the member; or (c) a spouse or former spouse of an existing or former standard employer-sponsored member of another fund which has the same standard employer-sponsor as the fund that has accepted eligible spouse contributions (SISR reg 3.01). Examples of public offer funds are personal superannuation funds, master trusts, and employersponsored funds which have a personal superannuation section or have elected to become a public offer fund. RSE licensing A person must not be, or act as, a trustee of a registrable superannuation entity (RSE) unless the person holds an RSE licence (¶3-480) that enables the person to be the trustee of the entity or the person is a member of a group of individual trustees that enables the members of the group to each be a trustee of the entity (SISA s 29J(1)). A person must not be, or act as, a trustee of an RSE if the person is a body corporate and is not the only trustee of the RSE (s 29J(4)). A failure to comply is an offence which is punishable upon conviction by a term of imprisonment or a fine, or both. The licensing of corporate trustees, or groups of individual trustees, under the SISA is significant for the reasons below. • A fund cannot be an ADF unless it is maintained by an RSE licensee that is a constitutional corporation (¶2-320). • The trustee of a public offer entity cannot offer superannuation interests under SISA s 152 (see below) unless it is a constitutional corporation. • A person must not be, or act as, the trustee of a small APRA fund (ie a fund with fewer than five members that is not an SMSF: ¶5-650), unless the person is an RSE licensee that is a constitutional corporation. • A person contravenes SISA s 29J(1) if the person does not hold an RSE licence. RSE trustees that want to offer MySuper products must have APRA authorisation under SISA Pt 2C and must comply with additional obligations under their RSE licences (see Chapter 9). Trustee representation A public offer superannuation fund must comply with trustee representation rules which require policy committees to be set up in respect of each employer-sponsor in the fund and equal member and employer representation on the committees (¶3-120). Dealings in superannuation interests The trustee of a public offer entity must comply with provisions relating to the issuing, offering or making of invitations of superannuation interests set out in SISA Pt 19 and the Corporations Act 2001. A “superannuation interest” means a beneficial interest in a superannuation entity (s 10(1)). Basically, the trustee of a public offer entity: • must not engage in conduct involving issuing, offering to issue or inviting the making of applications for the issue of superannuation interests in the entity unless the trustee is an RSE licensee (see above) and the entity is constituted by a deed as a trust (this prohibition does not prevent the trustee from engaging or authorising persons such as agents or brokers to act on its behalf) (SISA s 152)

• must not issue a superannuation interest to a person or permit a person to become a standard employer-sponsor of the entity, except pursuant to an eligible application and the application form was included in or accompanied by a Product Disclosure Statement, or where the issue gives effect to a transfer to a successor fund (CA s 1016A: ¶4-150) • must comply with the prescribed rules in relation to commission and brokerage payments, and rules on fair dealing in relation to issue and redemption of superannuation interests (SISA s 154 to 156) • must provide ongoing disclosure of material changes or of significant events (CA s 1017B: ¶4-150) • must comply with stop orders issued by ASIC and with prescribed rules in relation to receipt of money for applications for the issue of superannuation interests (CA s 1017E; 1020E; 1021O) • must provide a “cooling-off” period during which superannuation interests issued to a person may be redeemed at the person’s request (CA s 1019A; 1019B: ¶4-180) • must not make a statement or disseminate information that is false or materially misleading (CA s 1041E: ¶4-500). Superannuation entities are also subject to provisions in the CA which prohibit fraudulently inducing a person to become a member or employer-sponsor (CA s 1041F), dishonest conduct (CA s 1041G), misleading or deceptive conduct in relation to a product or in dealings in superannuation interests (CA s 1041H) and “insider trading” in connection with the issue of superannuation interests (CA s 1043A) (¶4500). [SLP ¶2-360, ¶4-000]

¶3-520 ERF prudential requirements An eligible rollover fund (ERF) is a superannuation entity that operates as temporary repositories for the superannuation of members who have lost connection with their superannuation accounts. ERFs are subject to prudential regulation under the SISA (see below). An RSE licensee of a prescribed class may apply to APRA for authority to operate a regulated superannuation fund as an ERF (SISA s 242A). Approved deposit funds cannot operate an authorised ERF (29E(6D)). An application for authority to operate a regulated superannuation fund as an ERF must be in the approved form, contain the information required by the approved form and RSE licensee’s and the fund’s ABNs, and be accompanied by an election made under s 242B and 242C. The election under s 242B must be in writing and in the approved form in which the RSE licensee elects: (i) to take the action required under the prudential standards in relation to amounts held in the ERF, if the authority to operate the fund as an ERF is cancelled under s 242J(1), and (ii) to do so before the end of a period of 90 days beginning on the day on which notice of the cancellation is given to the RSE licensee under s 242J(3). A trustee of a regulated superannuation fund is not subject to any liability to a member of the fund for an action taken to give effect to an election made in accordance with s 242B (s 242R). The election under s 242C must be in writing and in the approved form in which the RSE licensee elects that, if the authority is given, the RSE licensee will not charge any member of the fund a fee all or part of which relates directly or indirectly to costs incurred by a trustee of the fund: (i) in paying conflicted remuneration to a financial services licensee, or a representative of a financial services licensee, or (ii) in paying an amount to another person that a trustee of the fund knows, or reasonably ought to know, relates to conflicted remuneration paid by that other person to a financial services licensee, or

a representative of a financial services licensee. “Conflicted remuneration” has the same meaning as in Pt 7.7A of the Corporations Act 2001 (¶4-530). Section 242C(3) gives “conflicted remuneration” an extended meaning to also have the meaning it would have if: (a) financial product advice provided to the RSE licensee mentioned in s 242C(1) by a financial services licensee, or a representative of a financial services licensee, mentioned in s 242C(1)(a)(i) or (ii) were provided to the RSE licensee as a retail client, and (b) financial product advice provided to the other person mentioned in s 242C(1)(a)(i) or (ii) by a financial services licensee, or a representative of a financial services licensee, mentioned in that subparagraph were provided to the other person as a retail client (a similar extended meaning applies in s 29SAC: see ¶9-120). Obligations of an ERF An ERF operates like any other regulated superannuation fund and is subject to the same conditions and prudential requirements applying to those funds (¶3-000). In addition, an ERF must comply with operating standards specifically prescribed for ERFs (SISR reg 10.06) and with additional obligations apply as below: • each trustee of an ERF must promote the financial interests of the beneficiaries of the fund, in particular returns to those beneficiaries (after the deduction of fees, costs and taxes) (s 242K), and • each director of a corporate trustee of an ERF must exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the obligations referred to in s 242K (s 242L). The reference to a reasonable degree of care and diligence is a reference to the degree of care and diligence that a superannuation entity director would exercise in the corporate trustee’s circumstances. A person must not contravene s 242K or 242L (s 242M(1)) (this is a civil penalty provision, as defined by s 193). There are civil and criminal consequences for contravening, or of being involved in a contravention of, a civil penalty provision (¶3-820), but a contravention does not result in the invalidity of a transaction (s 242M(3)). A prudential standard determined under s 34C may require an RSE licensee whose authority to operate a regulated superannuation fund as an ERF is cancelled under s 242J(1) to transfer any amounts held in the ERF to a regulated superannuation fund that is an ERF or offers a MySuper product (s 242Q). The prudential standard may also set out requirements that must be met for such transfers and deal with other matters relating to such amounts. For prudential standards made under s 34C, see ¶9-720. Transfers to ERFs The trustee of a regulated superannuation fund or ADF (transferor fund) may, on behalf of a beneficiary of the fund, apply to an ERF for the issue of a superannuation interest in the ERF, ie for the beneficiary to become a member of the ERF. The consideration for the issue of the superannuation interest in the ERF is the amount of the beneficiary’s withdrawal benefits in the transferor fund that is transferred to the ERF (SISA s 243; SISR reg 10.02(3)). Once an ERF issues a superannuation interest in accordance with an application, the beneficiary in the transferor fund ceases to have any rights against the transferor fund, and a person who has a contingent right against the transferor fund to a death or disability benefit also ceases to have the contingent right against the transferor fund. At the same time, corresponding rights are acquired by the beneficiary or other person against the ERF (s 243; 251). A person claiming entitlement to a benefit held by an ERF may apply in the approved form to the trustee of the fund for payment of the benefit (s 248; 252).

Transfer from ERF to another fund From 10 May 2016, a member’s benefits in an ERF may also be transferred to another superannuation fund or RSA without the member’s consent if the ERF trustee believes on reasonable grounds that the member has an interest in the receiving fund or EPSSS or with the RSA provider, and the receiving fund or RSA provider has received at least one contribution or roll-over in respect of the member within the last 12 months (reg 6.29(1)(ba)) (¶3-284).

Superannuation Service Providers ¶3-600 Auditors and actuaries A “superannuation actuary” means an RSE actuary (ie a person who is appointed as an actuary of a registrable superannuation entity) or an SMSF actuary. An “SMSF actuary” means a person who is a Fellow or an Accredited Member of the Institute of Actuaries of Australia. A “superannuation auditor” means an RSE auditor (ie a person who is appointed as an auditor of a registrable superannuation entity) or an approved SMSF auditor (¶5-508). An “approved auditor” means a person included in a class of persons specified in the SISR but does not include: • a person who is disqualified from being or acting as an auditor of all superannuation entities under SISA s 130D (which allows the court to disqualify an auditor or actuary in relation to an APRAregulated superannuation entity), or • a person in respect of whom a disqualification order is in force under SISA s 131 (which allows the Commissioner to disqualify an auditor or actuary in relation to an SMSF) (SISA s 10(1)). A person who is a disqualified person commits an offence if he/she is or acts as superannuation auditor or superannuation actuary of a superannuation entity (see “Offence for disqualified person to be an auditor or actuary” below). To be an “approved auditor” of an APRA-regulated superannuation entity, a person must be: (a) the Auditor-General of the Commonwealth, a state or territory or a delegate of the Auditor-General; or (b) a registered auditor under Div 2 of Pt 9.2 of Corporations Act 2001. The requirement (which applied before 24 September 2007) that the approved auditor must be associated with a professional accounting organisation (as prescribed in SISR Sch 1AAA) is no longer relevant given that auditing standards now have the force of law (¶15-650). To be the approved auditor of an SMSF, the person may be one of the persons above (as for an APRAregulated entity) or be associated in a specified manner with a professional accounting organisation (as prescribed in Sch 1AAA) (reg 1.04(2)(a)). To be able to audit an SMSF on or after 1 July 2013, a person must be registered by ASIC as an “approved SMSF auditor” as discussed in ¶5-508. A person who holds himself/herself out as an actuary or an approved auditor when he/she is not is guilty of a strict liability offence, punishable by a fine of up to 50 penalty units (s 131B: ¶5-500). Disqualification under s 130D and 131 The Commissioner may disqualify a person from being an approved auditor or actuary of an SMSF if: • the person has failed, whether within or outside Australia, to carry out or perform adequately and properly: (a) the duties of an auditor or actuary under the SIS legislation or FSCDA; (b) any duties required by law to be performed by an auditor or actuary; or (c) any functions an auditor or actuary is entitled to perform in relation to the SIS legislation or FSCDA, or • the person is otherwise not a fit and proper person to be an approved auditor or actuary for the purposes of the SISA (SISA s 131).

On application by APRA, the Federal Court has a similar power of disqualification in relation to a person who is the approved auditor or actuary of an APRA-regulated superannuation entity (s 130D). Regardless of whether a s 130D or 131 disqualification order has been issued, the Regulator may refer details of the matter to the professional association relevant to the person. The Regulator has a similar power of referral in the case of an actuary who has failed to carry out adequately and properly the duties of an actuary under the SIS legislation or any law or is otherwise not a fit and proper person to be an actuary (s 131A(3)). APRA may give a written direction to the trustee of a superannuation entity to end the appointment of a person as the approved auditor or actuary of the entity if satisfied that the person is disqualified under s 130D or 131, or the person is not a fit and proper person to hold the appointment, or the person has failed to perform adequately and properly the duties or functions of the appointment under the SIS legislation or the FSCDA (s 131AA). Offence for disqualified person to be an auditor or actuary A person commits an offence if the person, knowing that he/she is disqualified under SISA s 130D or 131 from being or acting as an auditor or actuary of a superannuation entity, is, or acts as, an auditor or actuary of a superannuation entity for the purposes of the SISA (s 131C). This is a two-tier fault liability and strict liability provision, and the penalties as specified in the provision apply in case of a breach. Actuarial investigation A defined benefit fund is required to have an actuarial investigation, at least once every three years, by an actuary who is required to give the trustee an actuarial report. Other actuarial functions in connection with superannuation funds are discussed at ¶3-330. Financial audit In respect of each year of income, the financial statements and accounts of a superannuation entity must be audited by an approved auditor who is required to give a report, in the approved form, of the operations of the entity, and the registrable superannuation entity (RSE) licensee (if any) of the entity to the trustee of the entity within the prescribed time (SISA s 35AC; 35C; former s 113; SISR reg 8.03(a)). Auditors should choose the appropriate report — one applicable to a fund applying Australian Accounting Standards and the other applicable to a fund adopting a financial reporting framework other than Australian Accounting Standards. Compliance audit The approved auditor of a superannuation entity must undertake a mandatory compliance audit of the entity in addition to the normal audit of the entity’s accounts, statements and financial position (SISA s 35AC; former s 113(3)(b)). The compliance audit requires the auditor to give a statement as to whether the entity, and the RSE licensee (if any), has complied with provisions of the SIS legislation and the FSCDA, as identified in the compliance audit form, for the whole of the entity’s year of income. The approved form for the auditor’s report (for 1996/97 onwards) incorporates the concept of materiality when forming an opinion on a fund’s compliance with specific provisions of the SIS legislation. In this regard, auditors will need to measure materiality against the appropriate guidelines issued by their professional bodies in terms of the qualitative and quantitative matters which must be considered. Audit report to be given to trustees The auditor of a superannuation entity must give an audit report, in the approved form, to each trustee on the financial and compliance audit of the entity within the prescribed period after the end of the year of income (¶3-315, ¶5-500). Reporting contraventions to trustees and Regulator If, in connection with the audit or actuarial function of a superannuation entity, an auditor or actuary considers that a contravention of the SIS legislation or the FSCDA may have occurred, may be occurring or may occur, the auditor or actuary must, as soon as practicable, tell a trustee of the entity about the matter in writing. If the superannuation entity is not an SMSF and the contravention is of such a nature

that it may affect the interests of members or beneficiaries of the entity, the auditor or actuary must also tell the Regulator in writing (SISA s 129(3)). If the superannuation entity is an SMSF and the matter is specified in the approved form issued by the ATO, the auditor or trustee must tell the Regulator about the matter in the approved form (¶5-530) (s 129(3)(c)). An offence against s 129(3) is a strict liability offence. The auditor or actuary need not inform the trustee or Regulator if he/she honestly believes that the trustee or Regulator has already been told of the matter (s 129(3A)). Penalties apply for misrepresentation by any person in this regard. An auditor or actuary is not liable in a civil action or civil proceeding in relation to telling the trustee or the Regulator about a matter under s 129(3). Section 129 does not apply if the auditor or actuary honestly believes that the opinion that he/she has formed is not relevant to the performance of audit or actuarial functions. A similar notification obligation arises if, in connection with the audit or actuarial function of a superannuation entity, an auditor or actuary forms the opinion that the financial position of the entity may be, or may be about to become, “unsatisfactory” (as defined in SISR reg 9.04: ¶3-330). In that case, the auditor or actuary must, as soon as practicable after forming the opinion, tell the Regulator and a trustee of the entity about the matter in writing (s 130). The approved form Auditor/Actuary contravention report (NAT 11239) and Completing the auditor/actuary contravention report (NAT 11299) are available at www.ato.gov.au/Forms/Auditor-actuary-contraventionreport-instructions. Self-incrimination A person is not excused from complying with a requirement under SISA s 129 or 130 to give information on the ground that doing so would incriminate the person or make the person liable to a penalty. However, the information given in compliance with such a requirement is not admissible in evidence against the person in a criminal proceeding or a proceeding for imposing a penalty, other than a proceeding in respect of the falsity of the information, in certain circumstances (s 130B). Providing information to assist Regulators An auditor or actuary of a superannuation entity may give to the Regulator information about the entity or a trustee of the entity obtained in the course of, or in connection with, the performance audit or actuarial functions under the SIS legislation or the FSCDA if the auditor or actuary considers that giving the information will assist the Regulator in performing its functions under the legislation. A person who, in good faith, gives such information to the Regulator is not subject to any action, claim or demand by, or any liability to, any other person in respect of the information (SISA s 130A). An auditor must notify APRA in writing as soon as practicable, and in any case within 28 days, of becoming aware of circumstances that amount to an attempt by any person to: • unduly influence, coerce, manipulate or mislead the auditor in connection with the performance of the auditor’s functions or duties, or • otherwise interfere with the performance of the auditor’s functions or duties (s 130BA). It is an offence for an employee, officer or trustee of a regulated superannuation entity to knowingly give false or materially misleading information relating to the affairs of the entity to an auditor of the entity, or to knowingly allow such information to be so given. Likewise, it is an offence to allow such information to be so given, in circumstances where the person did not take reasonable steps to ensure the information was not false or materially misleading (s 130BB). [SLP ¶4-400]

¶3-620 Investment managers and custodians An “investment manager” of a superannuation entity for the purposes of the SISA means a person appointed by a trustee of a fund or trust to invest on behalf of the trustee or trustees of the fund or trust. “Invest” means apply assets in any way or make a contract for the purpose of gaining interest, income,

profit or gain. A “custodian” of a superannuation entity means a person (other than the trustee) who performs custodial functions in relation to the entity’s assets under a contract with the entity’s trustee or investment manager. Eligibility and appointment The rules for appointment as an investment manager or custodian of a superannuation entity include the following: • the trustee of the entity must not make a non-written appointment of an investment manager (SISA s 124) • an investment manager must not appoint or engage a custodian without the written consent of the trustee of the entity (SISA s 122) • an investment manager or custodian must be a body corporate (not applicable to an SMSF) • the body corporate custodian of the superannuation entity must have at least $5m in net tangible assets, or the trustee of the entity is entitled to the benefit of an approved guarantee for the due performance of the body corporate’s duties as a custodian, where the sum of the approved guarantee and the value of net tangible assets of the body corporate is not less than $5m (SISA s 123; 125; 11E “approved guarantee”) • a person must not intentionally be or act as an investment manager, a custodian, or a responsible officer of a body corporate that is an investment manager or a custodian of a superannuation entity if the person is, and knows that he/she is, a disqualified person (SISA s 126K). The meaning of “disqualified person” is the same as that discussed in relation to the eligibility rules for appointment as the trustee of a superannuation entity (¶3-130). An individual who is a disqualified person because of a conviction for an offence which does not involve serious dishonest conduct may apply under the SISA for a waiver of the disqualified person status (s 126B to 126F). Prudential requirements The investment manager of a superannuation entity is subject to a number of prudential requirements (some of which are identical to those applying to trustees) under the SISA. These include: • a prohibition on loans to members, subject to exceptions (SISA s 65) • a prohibition on acquisition of members’ assets, subject to exceptions (SISA s 66) • a requirement that investments must be on an arm’s length basis (SISA s 109) • a requirement that the investment management agreement between the trustee and investment manager must not limit the investment manager’s liability (SISA s 116) • a requirement to provide information to the trustee or the Regulator (SISA s 102; 255; 264). APRA prudential standards and practice guides Prudential Standard SPS 231 Outsourcing requires all outsourcing arrangements involving material business activities entered into by an RSE licensee to be subject to appropriate due diligence, approval and ongoing monitoring. Investment management is a material business activity of a trustee that is an RSE licensee and all risks arising from outsourcing material business activities must be appropriately managed to ensure that the RSE licensee is able to meet its obligations to its beneficiaries. Trustees of superannuation entities must ensure that proper selection processes and due diligence examinations are undertaken, including the identification and consideration of conflicts of interest. For prudential standards for RSE trustees which have made under SISA and APRA prudential practice guides, see ¶9-720 and following. [SLP ¶4-200, ¶4-270]

ADF Prudential Requirements ¶3-650 Prudential requirements for ADFs The trustee of an ADF must comply with all the prudential requirements under the SIS legislation applicable to ADFs as well as with the duties and obligations imposed on superannuation entities generally. As an ADF may be a public offer entity or an eligible rollover fund, the special rules in the SIS legislation applying to those entities (see below) may also be relevant. The main prudential requirements affecting ADFs and service providers to ADFs are discussed at the paragraphs noted below: • disclosure of information and reporting requirements under the Corporations Act 2001 and its Regulations (see Chapter 4) • prescribed operating standards and reporting requirements under SISA (¶3-658 – ¶3-662) • investment rules and controls, including restrictions on loans and borrowings (¶3-680) • public offer entity rules (¶3-500) • eligible rollover fund rules (¶3-520) • governing rules of ADFs (¶3-100) • unclaimed money rules (¶3-380) • appointment and removal of trustees (¶3-130) • protection for trustees (¶3-140 – ¶3-150) • other administration obligations (common to trustees of all superannuation entities) (¶3-340) • auditors’ duties (¶3-600) • investment managers’ and custodians’ duties (¶3-620) • ASIC’s prudential requirements (¶3-860). An ADF for which there is a registrable superannuation entity (RSE) licensee must not accept deposits unless it is registered under the SISA (¶3-490) (SISR reg 4.11A). An excluded ADF (ie a single beneficiary fund: ¶3-010) is exempted from some or all of the above prudential requirements. Penalties may be imposed for breaches of the SIS legislation (¶3-800) and, in certain circumstances, the ADF will not qualify for concessional tax treatment as a complying ADF (¶2-300). All of the SIS prudential requirements continue to apply to an ADF regardless of whether it satisfies or has failed to satisfy the conditions for concessional tax treatment as an ADF in a particular year. [SLP ¶3-290]

¶3-658 ADFs providing information to the Regulators The trustee of an ADF is required under the SISA to provide information periodically, and in specified circumstances, to APRA or ASIC, such as: • the provision of annual returns and quarterly returns under the FSCDA (¶9-750) • the provision of information by new ADFs (SISA s 254(1); SISR reg 11.05)

• immediately notifying APRA in writing after being aware of the occurrence of an event which has a significant adverse effect on the ADF’s financial position (s 106) • providing information or reporting on matters requested by APRA or ASIC (s 254(2)) • notifying changes in the ADF’s contact details or a decision or resolution to wind up the ADF (reg 11.07). The requirements are common to superannuation entities regulated by APRA (except where noted otherwise) and are discussed at ¶3-310. [SLP ¶3-690 – ¶3-710, ¶5-000]

¶3-660 Minimum benefits of ADF members The trustee of an ADF must comply with operating standards dealing with a member’s “minimum benefits” which ensure that costs and investment returns are determined in a fair and reasonable manner as between members, and that members’ minimum benefits are kept in the fund until they are cashed, rolled over or transferred in accordance with the SISR (SISR Pt 5). The minimum benefits rules are identical to those applying to regulated superannuation funds as discussed at ¶3-230. A member’s “minimum benefits” in an ADF are the amount of the member’s accumulated deposit in the fund, plus investment earnings, reduced by costs applicable to those amounts (reg 5.01(1); 5.07). [SLP ¶3-300]

¶3-662 Preservation and payment of benefits by ADFs Like regulated superannuation funds, ADFs are required to comply with rules for the preservation, portability and payment of members’ benefits (SISR Pt 6). A member’s benefits in an ADF will consist of preserved benefits (PBs) and/or unrestricted non-preserved benefits (UNPBs). Unlike superannuation funds, ADFs do not have restricted non-preserved benefits (RNPBs). A member’s PBs in an ADF are the amount of the member’s total benefits less the amount of the member’s UNPBs (reg 6.05). An employment termination payment (called an eligible termination payment (ETP) before 1 July 2007) rolled over to an ADF is a PB (previously, such ETP roll-overs were UNPBs). A member’s benefits transferred to an ADF (the transferee fund) that were PBs in the source from which they were received continue to be PBs in the transferee fund (reg 6.06). A member’s UNPBs in an ADF are the sum of: (1) the amount of the member’s benefits in the fund at the end of the day immediately before the commencement day, less the amount of the member’s benefits in the fund that were required to be preserved by the Occupational Superannuation Standards Regulations (OSSR), reg 21 (2) the amount of the member’s benefits that have become UNPBs in the fund because the member has satisfied a “condition of release” and there is no “cashing restriction” in relation to those benefits as provided in SISR reg 6.12 (3) rolled-over amounts under ITAA36 former s 27D (as in force before 1 July 2007) received by the fund in respect of the member on or after the commencement day (but before 1 July 2004) where those amounts arise from eligible termination payments (ie ETPs) by employers before 1 July 2007 (ie rolled-over ETPs from superannuation funds, ADFs or RSAs, or from deferred annuities within the meaning of the SISA or OSSR are not included) (4) any amount of UNPBs received by the fund in respect of the member on or after the

commencement day (5) the amount of any investment earnings for the period before 1 July 1999 on the amounts mentioned in (1) to (4) above (SISR reg 6.11). The conditions of release and cashing restrictions applicable to benefits in ADFs are set out in SISR Sch 1 (¶3-280). Payment standards The payment standards for ADFs are similar to those for regulated superannuation funds (¶3-286) but differ in relation to the cashing of benefits. In essence, “cashed” means payment out of the “superannuation system” (as defined in SISR reg 5.01(1)). Compulsory cashing of benefits — a member’s benefits in an ADF must be cashed as soon as practicable after the member reaches age 65 or dies. The benefit must be cashed as a single lump sum or in two lump sums (eg an interim lump sum payment of the benefit when the member’s entitlement arises and the remainder of the benefit when that amount is finally ascertained). In certain cases, a roll-over to a regulated superannuation fund or an RSA may be allowed (SISR reg 6.25). Voluntary cashing of benefits — a member’s UNPBs may be cashed at any time. PBs may only be cashed after a condition of release and cashing restrictions, if any, are satisfied (reg 6.23; 6.24). These restrictions are identical to those applying to regulated superannuation funds (¶3-286). Temporary residents who have left Australia may access their superannuation benefits held in an ADF if they comply with the procedures in reg 6.24A (¶3-280). Limitations apply on the cashing of a member’s benefits in ADFs in favour of persons other than the member or the member’s legal personal representatives, or unless the benefits are cashed in favour of the Commissioner under a release authority under ITAA97 s 292-410, or the benefits are paid to the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (reg 6.26). Also, the trustee of an ADF must not cash an amount of a member’s benefit that is less than $500 except to close a member’s account or to give effect to an ATO release authority (see SISR Sch 1 in ¶3-380) or to pay an amount under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (reg 6.27). [SLP ¶3-305]

¶3-680 ADF investment rules and controls The trustee of an ADF is subject to restrictions in its investment function generally and to specific restrictions in relation to loans and borrowings under the SIS legislation. These restrictions, as outlined below, are broadly identical to those which apply to regulated superannuation funds (¶3-400 and following). Investments at arm’s length The investments of an ADF must be made or maintained on an arm’s length basis (SISA s 109(1), (1A): ¶3-440). Restriction on borrowings ADFs are prohibited from borrowing money except where APRA has approved of the borrowing because of special circumstances. Another exception is where the borrowing is to cover the settlement of securities transactions and at the time the relevant investment decision was made it was likely that the borrowing would not be needed, the borrowing does not exceed seven days, and the total amount borrowed does not exceed 10% of the value of the fund’s assets if the borrowing were to take place (SISA s 95). Restriction on loans The trustee of an ADF must not lend money, or provide any other financial assistance, to a member or relative of a member of the fund, and must take all reasonable steps to ensure that the investment manager of the fund does not breach the prohibition (SISR reg 4.13).

In addition, except as permitted by the SISR, the trustee must not lend money of the fund to, or invest money of the fund in, the trustee itself or a related body corporate (reg 13.17). Divesting investment in PSTs Unless otherwise directed by APRA, the trustee of an ADF which receives a notice of non-compliance under the SISA must take all reasonable steps to immediately dispose of any units held by the trustee in a PST (SISR reg 4.11). Assignments and charges The trustee of an ADF must not recognise, encourage or sanction any assignments of and charges over beneficiaries’ interests or assets of the fund, unless permitted expressly or implicitly by the SIS legislation. This restriction is the same as that applying to regulated superannuation funds (¶3-260). Investment strategy and controls The trustee of an ADF must comply with prudential requirements which: • require the fund’s governing rules to contain covenants by the trustee to formulate and give effect to an investment strategy for the fund as a whole and for management of reserves, if any • govern the appointment of investment managers and agreements made with them • ensure proper maintenance of investment records and reporting to members, APRA and ASIC. These requirements are the same for all other superannuation entities and are discussed at ¶3-400. [SLP ¶3-310, ¶3-550]

PST Prudential Requirements ¶3-700 Prudential requirements for PSTs The trustee of a PST must comply with all the prudential requirements under the SIS legislation applicable to PSTs as well as with the duties and obligations imposed on superannuation entities generally. As a PST is a public offer entity, the special rules in the SIS legislation applying to those entities (see below) are also relevant. The main prudential requirements for PSTs and their service providers are similar to those for regulated superannuation funds and are discussed at the paragraphs noted below: • provision of information requirement under the Corporations Act 2001 and its Regulations and SIS legislation (¶3-710) • investment rules and controls, including restrictions on loans and borrowings (¶3-730) • public offer entity rules (¶3-500) • governing rules of PSTs (¶3-100) • appointment and removal of trustees (¶3-130) • protection for trustees (¶3-150) • other administration obligations of PST trustees (¶3-340) • auditors’ duties (¶3-600) • investment managers’ and custodians’ duties (¶3-620). A PST that is established on or after 1 July 2004 for which there is a registrable superannuation entity (RSE) licensee must not offer ownership of units in the PST unless it is registered under the SISA (¶3-

490) (SISR reg 4.10A). Penalties may be imposed for breaches of the SIS legislation (¶3-800) and, in certain circumstances, an entity will lose its concessional tax treatment as a PST (¶2-400). All of the SIS prudential requirements continue to apply to a PST regardless of whether it satisfies, or has failed to satisfy, the conditions for concessional tax treatment as a PST in a particular year. [SLP ¶3-350]

¶3-710 PSTs providing information to the Regulators The trustee of a PST is required to comply with the product disclosure requirements in the Corporations Act 2001 and its Regulations from 11 March 2002, as summarised at ¶3-290. Information to APRA or ASIC The trustee of a PST is required to provide information periodically, and in specified circumstances, to APRA or ASIC. The main requirements are: • the provision of an annual return or quarterly return under the FSCDA (¶9-750) • the provision of information by new PSTs (SISA s 254(1); SISR reg 11.05) • immediately notifying APRA in writing after being aware of the occurrence of an event having a significant adverse effect on the financial position of the PST (s 106) • providing information or a report on such matters as are requested by APRA or ASIC (s 254(2)) • notifying changes in the trust’s contact details or a decision or resolution to wind up the trust (reg 11.07). The requirements are common to superannuation entities regulated by APRA (except where noted otherwise) and are discussed at ¶3-310. [SLP ¶3-380]

¶3-730 PST investment rules and controls The trustee of a PST is subject to restrictions in its investment function generally and to specific restrictions in relation to loans and borrowings under the SIS legislation. These restrictions are broadly identical to those which apply to regulated superannuation funds (¶3-400 and following). Investments at arm’s length The investments of a PST must be made or maintained on an arm’s length basis (SISA s 109(1), (1A): ¶3440). Restriction on borrowings A PST is generally prohibited from borrowing money, except where the borrowing is to enable the trustee to make specific payments to beneficiaries which are required by law or under the governing rules, the borrowing does not exceed 90 days, and the PST’s total borrowings does not exceed 10% of the value of the PST’s assets if the borrowing were to take place. Another exception is where the borrowing is to cover settlement of securities transactions where, at the time the relevant investment decision was made, it was likely that the borrowing would not be needed, the borrowing does not exceed seven days and, if the borrowing were to take place, the total amount borrowed does not exceed 10% of the value of the PST’s assets (SISA s 97). Restriction on loans The trustee (or investment manager) of a PST must not lend money of the trust, or give any financial assistance using the resources of the trust, to a beneficiary of the trust (SISA s 98).

Investment strategy and controls The trustee of a PST must comply with prudential requirements which: • require the PST’s governing rules to contain covenants by the trustee to formulate and give effect to an investment strategy for the trust as a whole and for management of reserves, if any • govern the appointment of investment managers and agreements made with them • ensure proper maintenance of investment records and reporting to members, APRA and ASIC. These requirements, which similarly apply to other superannuation entities, are discussed at ¶3-400. [SLP ¶3-570]

Penalties ¶3-800 SIS penalty regime Penalties may be imposed under the SISA for a contravention of the SIS legislation. In all cases, a penalty can only be imposed by a court of law. When the SISA was enacted in 1993, there were four categories of penalty provisions — civil penalty, strict liability, fault liability and civil liability provisions. A fifth category two-tier liability provision was introduced into the SISA from 18 January 2001, with a strict liability limb and a fault liability limb. Many then existing fault liability provisions were converted to two-tier liability provisions from that date. In addition, administrative penalties may be imposed for certain contraventions of SISA. The penalty provisions are discussed at ¶3-820, ¶3-840 and ¶3-845. The Criminal Code Act 1995 applies to offences against the SISA and other Commonwealth Acts (¶3810). The penalty for a contravention of a SISA offence provision may be a pecuniary penalty or a penalty of imprisonment. A pecuniary penalty is specified as a number of penalty units. A “penalty unit” equals $210 (increased from $180) for offences committed on or after 1 July 2017 (Crimes Act 1914, s 4AA). If a body corporate is convicted of an offence, the Crimes Act s 4B(3) allows a court to impose a fine that is not greater than five times the maximum fine that could be imposed by the court on an individual convicted of the same offence. A person against whom a civil penalty order is made, or who is convicted of an offence (whether a strict liability, fault liability or two-tier strict and fault liability offence), will generally be disqualified from acting as a trustee or investment manager of a superannuation entity (¶3-130, ¶3-620). This is in addition to the civil or criminal prosecution. In certain circumstances, a contravention of a regulatory provision in the SISA may also result in the loss of the “complying” status of a superannuation fund, ADF or PST (¶2-140, ¶2-340, ¶2-430). The Regulator may accept enforceable undertakings by trustees in some circumstances to remedy “problems” within certain time frames as an alternative to instigating immediate enforcement action (SISA s 262A: ¶3-850). Proceedings for an offence against the SISA may be commenced within five years after the date of the offence, or with the Minister’s consent at any later time, despite anything in any other law (s 324A; AG v Oates [1999] HCA 35). A period greater than five years may also apply where this is allowed by another law (eg the Crimes Act). In addition to imposing penalties, the court is empowered under the SISA to grant compensation orders for recovery of loss or damage (¶3-820), or to grant relief and other orders to prevent the continuance of a contravention or to prevent a contravention in the future. These orders include injunctions, orders prohibiting the payment or transfer of money or property, and disclosure orders (s 310 to 318; Interhealth Energies 12 ESL 04; s 313 order prohibiting payment or transfer of property for breach of enforceable undertaking: ¶3-850; Interhealth (No 2) 12 ESL 09: orders granted pursuant to s 262A).

[SLP ¶4-600]

¶3-810 Application of the Criminal Code The Criminal Code Act 1995 is a Commonwealth Act which alters the way in which criminal offence provisions are interpreted. It applies to offences contained in deferral legislation, including the income tax Acts, the superannuation Acts, SGA Act and most of the other Acts which are referred to in this Guide. The Criminal Code is set out as a Schedule to the Criminal Code Act. The Criminal Code Act was enacted in 1995, but it applies to new offence provisions from 1 January 1997 and to pre-existing offence provisions from 15 December 2001. All offence provisions in Commonwealth legislation are now drafted in accordance with the Criminal Code. Chapter 2 of the Criminal Code codifies the common law principles of criminal responsibility under Commonwealth laws. The Chapter contains the principles of criminal responsibility that apply to an offence, irrespective of how the offence arose. These principles cover the physical and fault elements of the offence (see below), the circumstances in which there is no criminal responsibility, the extensions of criminal liability (eg attempts, innocent agency or conspiracy), corporate criminal responsibility and the relevant burdens of proof of criminal responsibility. The application of the Criminal Code ensures that persons who are accused of and prosecuted for federal offences are subject to the same principles in Australia, and that an offence has to be proved in the same way no matter where the trial is held. The Criminal Code does not of itself impose any liabilities or penalties. The Criminal Code contains subjective, fault-based principles of criminal responsibility. The defendant’s guilt will depend on what he/she thought or intended at the time of the offence, rather than what a “reasonable person” would have thought or intended in the defendant’s circumstances. The Criminal Code thus reflects the view that proof of a “guilty mind” is generally necessary before a person can be found guilty of an offence. The most significant effect of the application of the Criminal Code is that it clarifies and sets out the traditional distinction between the actus reus and mens rea of each type of offence. The actus reus is the “physical element” of the offence, ie the physical acts, and the mens rea is the “fault element” of the offence, ie what the defendant thought or intended. Physical elements of an offence In the Criminal Code, the physical elements of an offence are the conduct, the circumstances in which it occurs, and the result of the conduct. Each offence must contain at least one of these physical elements, but any combination of physical elements may be present in an offence provision. The prosecution bears the onus of proving each of the physical elements. For every physical element of an offence, the prosecution must also prove a corresponding fault element. The Criminal Code establishes four basic fault elements — intention, knowledge, recklessness and negligence. This does not prevent an offence provision from specifying an alternative fault element, but the default fault element specified in the Criminal Code will apply in the absence of another specified fault element. For conduct, the Criminal Code provides that the default element is intention. For circumstance or result, the default fault element is recklessness. It may be noted that most SISA fault liability offences require the elements of intention or recklessness. Conduct Under the Criminal Code, “conduct” means an act, an omission to perform an act or a state of affairs, and “engage in conduct” means to do an act or to omit to perform an act (Criminal Code s 4.1). Conduct must be voluntary in order to be a physical element. Conduct is voluntary if it is a product of the will of the person whose conduct it is. Examples of involuntary conduct include an act performed during unconsciousness or during impaired consciousness depriving the person of the will to act. An omission to perform an act is only voluntary if the act omitted is one which the person is capable of performing. If the conduct constituting an offence consists only of a state of affairs, the state of affairs is only voluntary

if it is one over which the person is capable of exercising control. Fault elements A “fault element” for a particular physical element may be intention, knowledge, recklessness or negligence (Criminal Code s 5.1). As noted earlier, if the law creating the offence does not specify a fault element for a physical element that consists only of conduct, intention is the default fault element for that physical element, and if the law does not specify a fault element for a physical element that consists of a circumstance or a result, recklessness is the default fault element for that physical element. Intention A person has intention with respect to conduct if the person means to engage in that conduct. A person has intention with respect to a circumstance if the person believes that it exists or will exist, and a person has intention with respect to a result if the person means to bring it about or is aware that it will occur in the ordinary course of events. Knowledge A person has knowledge of a circumstance or a result if the person is aware that it exists or will exist in the ordinary course of events. Recklessness A person is reckless with respect to a circumstance or a result if: • the person is aware of a substantial risk that the circumstance exists or will exist or that the result will occur • having regard to the circumstances known to the person, it is unjustifiable to take the risk. The question of whether taking a risk is unjustifiable is one of fact. Note that recklessness can be established by proving intention, knowledge or recklessness. Thus, if recklessness is the fault element for a physical element of an offence, proof of intention, knowledge or recklessness will satisfy that fault element. Negligence A person is negligent with respect to a physical element of an offence if the person’s conduct falls short to a greater extent of the standard of care that a reasonable person would exercise in the circumstances, and involves such a high risk that the physical element exists or will exist, that the conduct merits criminal punishment for the offence. Burden of proof and standard of proof The general rule is that the prosecution bears a legal burden (ie the burden of proving the existence of the matter) of proving every element of an offence relevant to the guilt of the person charged with the offence. That legal burden of proof on the prosecution must be discharged on the criminal standard, ie “beyond reasonable doubt”. The prosecution also bears a legal burden of disproving any matter in relation to which the defendant has discharged an evidential burden of proof that is imposed on the defendant. “Evidential burden”, in relation to a matter, means the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. The question whether an evidential burden has been discharged is one of law. A burden of proof that a law imposes on the defendant is a legal burden if, and only if, the law expressly so provides, or the law creates a presumption that the matter exists unless the contrary is proved. A legal burden of proof on the defendant must be discharged on the balance of probabilities. [SLP ¶4-605]

¶3-820 SIS penalty provisions

The application of the penalty provisions in the SISA are discussed below. Administrative penalties under SISA are discussed in ¶3-840 and ¶3-845. Civil penalty The provisions dealing with the following matters in relation to a superannuation entity are civil penalty provisions (SISA s 193): • s 62(1) — the sole purpose test (¶3-200) • s 54B(1) and (2) — covenants in s 52 and 52A (¶3-100) • s 65(1); 98 — lending money and giving financial assistance to members (¶3-420, ¶3-730) • s 67(1); 95(1); 97(1) — borrowings by trustees of superannuation funds, ADFs, and PSTs (¶3-410, ¶3680, ¶3-730) • s 68B(1) — promotion of illegal release of superannuation benefits scheme (¶3-280) • s 84(1); 85(1) — in-house asset rules (¶3-450) • s 106(1) — notifying the Regulator of significant adverse events (¶3-310) • s 109(1), (1A) — investments to be at arm’s length (¶3-440) • s 117(3) — refund of surplus to employers (¶3-350) • s 242M — contravention of s 242K or 242L (additional obligations of a trustee or a director of the corporate trustee of an eligible rollover fund) (ERF) (¶3-520) • s 388 — RSE licensee to transfer members’ accrued default amount to a MySuper product (¶3-360) • s 394 — ERF trustee moving amounts held in ERF (¶3-360). Applying to court for a civil penalty order The Regulator may apply to the Federal Court or Supreme Court for a civil penalty order to be made against a person who has breached a civil penalty provision within six years of the breach (s 197; 198). In dealing with an application for a civil penalty order, the court will apply the civil standard of proof (ie on the “balance of probabilities”), which requires the Regulator to show that it is more likely than not that the breach occurred. If the court is satisfied that a person has breached a civil penalty provision, the court may make a civil penalty order against the person and, if the “contravention is a serious one”, impose a monetary penalty. The maximum monetary penalty is 2,000 penalty units for an individual, or 10,000 penalty units for a corporation (s 196). A person may also be subject to criminal prosecution if the person contravenes a civil penalty provision, either dishonestly and intending to gain (whether directly or indirectly) an advantage, or intending to deceive or defraud someone. Such an offence is punishable on conviction by a term of imprisonment of up to five years (s 202). In both civil and criminal proceedings, a court may make a compensation order against the person who contravened the civil penalty provision for the loss or damage suffered by a superannuation entity (s 215; 216). In DFC of T v Ryan [2015] FCA 1037, the Federal Court imposed pecuniary penalties of $20,000 each on two trustees of an SMSF for related party loans who were found to have contravened SISA s 62(1) (sole purpose test), s 65(1) (prohibition against giving financial assistance to members), s 84(1) (in-house asset rules) and s 109(1) (prohibition against non-arm’s length dealings). Over a three-year period from June 2009 to June 2012, the trustee had made related party loans to themselves of $209,677. The loans were unsecured, had no interest rate, no repayment term and only $28,313 was repaid. The moneys were used by the Ryans to meet some of their everyday personal expenses and to service a line of credit relating to

their unsuccessful dry cleaning business. The Federal Court, after taking into account the seriousness of the contraventions, their deliberate nature, the amount of money involved, the financial position of the Ryans and their co-operation with the Commissioner, decided to on the penalty to be paid in monthly instalments over three years. Fixing civil penalties In Olesen v Eddy 11 ESL 02 (where a fund contravened s 62(1) and 65(1)), the Federal Court said that the following principles relating to the fixing of civil penalties under s 196 emerge from the authorities mentioned below: “(a) Those that take advantage of the utilisation of a self-managed superannuation fund have a responsibility to manage that fund in accordance with the terms of the Deed and the legislation: Fitzgeralds 2007 ATC 5105; [2007] FCA 1602 (Fitzgeralds at [30]). (b) A civil penalty for contravention of that obligation needs to be sufficiently high to deter contravention by others, but not so high as to be oppressive: Australian Prudential Regulatory Authority v Holloway (2000) 45 ATR 278 (Holloway) per Mansfield J at [12]. (c) General deterrence is a very significant factor: Holloway at [11]; Fitzgeralds at [29]; other objectives include denunciation and punishment: Australian Prudential Regulation Authority v Derstepanian (2005) 60 ATR 518 (Derstepanian) per Weinberg J at [26]. Contravening conduct under the Act may be difficult to detect and its investigation can be complex and expensive; Holloway at [21]; Fitzgeralds at [29]. (d) The total penalty must not exceed what is proper having regard to the conduct of the person in respect of all the contraventions: Holloway at [19]; Fitzgeralds at [31]–[33]. (e) Relevant factors in determining an appropriate civil penalty include: (i) the nature and extent of the contravening conduct; (ii) the amount of any loss or damage caused; (iii) the size of the organisation; (iv) the deliberateness or otherwise of the contravention(s); (v) the period over which the contravention(s) extended; (vi) the degree of co-operation of the person concerned, either in the investigation or the subsequent hearing; (vii) the past record of the person; (viii) the person’s financial position; (ix) any amounts already paid by way of compensation or legal costs; and (x) contrition. (see generally, Derstepanian at [30]–[37]: Holloway at [11]–[12]; [32]; Fitzgeralds at [35] and [43].)” In a case where penalties were imposed on the directors of the trustee of a regulated superannuation fund for a breach of the sole purpose test, the in-house asset rules and the arm’s length rule in s 62(1), 84(1) and 109(1), the court said it had no doubt that the contraventions were serious when reviewed from a regulatory perspective. They were deliberate, repetitive and took place over a period of four years. Further, the fund assets were clearly put at risk by being lent to a business which was under financial stress. However, the fund did not suffer any loss of capital and the foregone interest income was not

significant. In addition, the trustee and all the directors had admitted to the contraventions and cooperated fully with the Commissioner. Having regard to all of the relevant circumstances, the court concluded that the quantum of penalties was appropriate (Olesen v Early Sunshine Pty Ltd [2015] FCA 12). Similarly, on an application for a civil penalty order by the Commissioner under s 196, the Federal Court imposed pecuniary penalties of $20,000 each on two trustees of an SMSF for contraventions of s 62(1) (sole purpose test), 65(1) (prohibition against giving financial assistance to members), 84(1) (in-house asset rules), and 109(1) (prohibition against non-arm’s length dealings) (DFC of T v Ryan [2015] FCA 1037). The court imposed the penalty taking into account the seriousness of the contraventions, their deliberate nature, the amount of money involved, the financial position of the trustees and their cooperation with the Commissioner. Agreed penalties — approach The approach to agreed penalties was examined in DFC of T (Superannuation) v Graham Family Superannuation Pty Ltd 14 ESL 17 where there were contraventions of s 62, 65, 84 and 109. There, the scope of the contraventions and penalties to be imposed were agreed between the parties, including penalties and costs to be paid in quarterly instalments over a period of 24 months. The court stated that it is accepted doctrine that the court has an independent role in assessing whether penalties proposed (even jointly) by parties fall within an acceptable range, having regard to the particular circumstances of the case. On the facts of the present case, the court agreed with the Applicant’s submission that the proper way to approach the matter was as follows: “30.1. A separate and single penalty should be assessed for each of the contraventions relating to the lease of the residential premises to the son of the Second and Third Respondents (sections 62, 84 and 109). 30.2. A single penalty should be imposed on a ‘course of conduct’ basis for the making of the eighty loans. Although there were multiple separate contraventions for each of these loans (sections 62, 65, 84 and 109), the circumstances of the present case are such that it is appropriate to impose one penalty for each such course of conduct. … The parties have agreed that the Second Respondent should pay a total penalty of $30,000 ($21,000 and $9,000), that the Third Respondent should pay a total penalty of $10,000 ($7,000 and $3,000) and that each should be responsible for half of the agreed costs of $10,000. I accept those proposed penalties as within the proper range of penalties appropriate to the circumstances of the present case and as ones which do not require adjustment under the totality principle. I propose to order that they be paid in the amounts, and at the times, agreed by the parties.” Court’s discretion for relief In proceedings for the contravention of a civil penalty provision (other than in criminal proceedings), the court has a discretion to relieve a person from liability if the court believes that the person acted honestly and in all the circumstances of the case ought fairly to be excused (s 221). In certain cases, the defences of reasonable mistake, reasonable reliance on information supplied by another person, or an accident or some other cause beyond control, may also be available (s 323). In Dolevski v Hodpik Pty Ltd 11 ESL 07 (where a superannuation fund was found to have contravened s 62(1) (the sole purpose test), s 84(1) (the in-house asset rules) and s 109(1)) (the arm’s length rule), it was held that s 221(2) specifically requires that the court should have regard to all the circumstances of the case in considering whether a person who has nevertheless acted honestly ought fairly to be excused for the contravention. The applicant, as delegate of the Commission of Taxation, had sought declarations and civil penalties to be imposed on the first respondent (the trustee of the Hodpik Superannuation Fund) and the second and third respondents (directors of the first respondent). Each respondent sought to rely on the defence under s 323(2) that the contraventions were due to reasonable reliance on information supplied by another person or were due to reasonable mistake. Alternatively, absent any such defence, they relied on s 221(2) in that they acted honestly and ought fairly to be excused for the contraventions having regard to all the circumstances of the case. In finding for the respondents, the court found that, in all the circumstances, it was reasonable for the

second and third respondents (and hence the first respondent) to rely on information provided by their accountant, who was a trusted adviser on taxation matters and for the transactions in the case. Although the second and third respondents did not consult the trust deed or seek advice in relation to the making of the second, third and fourth loans that comprised part of the circumstances of the case, the court did not see those matters as being, of themselves, of such significance that s 221(2) could not be applied in the present case. The court stated that mistakes have been made, but those mistakes could be seen to have their genesis in the fact that the second and third respondents did in fact seek advice which led them to believe that the Fund could make loans of the kind that were in fact made. There was nothing in the evidence to suggest that the second and third respondents acted in any underhand way. Quite to the contrary; they documented the loans believing that they were doing the right thing and believing, no matter how mistakenly, that they were acting legally and appropriately. The court believed that they have tried to do the right thing, but have fallen significantly short of what the Act requires of them. Nevertheless, in all the circumstances, this seemed to be an appropriate case in which the respondents were entitled to the benefit of s 221(2) to the extent that s 323 itself did not relieve them from liability. Strict liability Strict liability is defined in s 6.1 of the Criminal Code Act 1995. This generally refers to liability which may arise regardless of fault, ie fault elements are not required for the physical elements of the offence (¶3810). A number of provisions in the SISA which were originally fault liability provisions were converted to strict liability, or to two-tier strict and fault liability provisions (see below), from 18 January 2001. A strict liability provision must expressly state that a breach of the provision is an offence of strict liability. The strict liability provisions in the SISA include: • s 18(7B) — failure by trustee to inform the Regulator of breach of conditions for a fund declared not to be a public offer fund (¶3-500) • s 63(7) to (9) — failure by trustee to comply with direction from Regulator not to accept contributions from employer-sponsors, to inform employer-sponsors or refund contributions (¶3-220) • s 103(3) — failure by trustee to keep and retain minutes of trustee meetings/records of trustee decisions for 10 years (¶3-340) • s 104(2) — failure by trustee to keep and retain records of trustee matters/consents to act for 10 years (¶3-340) • s 105(2) — failure by trustee to keep and retain members’ reports for 10 years (¶3-340) • s 126K(7) — failure by a trustee who is a disqualified person to inform the Regulator (¶3-130) • s 131B — holding oneself out as auditor or actuary when not qualified (¶3-600) • s 303(1) — keeping incorrect accounts or records (¶3-340). If a provision of the SISA creating an offence provides that the offence is an offence of strict liability: • there are no “fault elements” for any of the “physical elements” of the offence (¶3-810) • the defence of mistake of fact under the Criminal Code s 9.2 is available. In all SISA strict liability offences, notes under the provision draw attention to the Criminal Code Ch 2 relating to general principles of criminal responsibility and the Criminal Code s 6.1 relating to strict liability. The reasonable “mistake of fact” defence is that a person is not criminally responsible (for an offence that has a physical element for which there is no fault element) if: • at or before the time of the conduct constituting the physical element, the person considered whether or not facts existed, and is under a mistaken but reasonable belief about those facts • had those facts existed, the conduct would not have constituted an offence.

A person may be regarded as having “considered whether or not facts existed” if the person had considered, on a previous occasion, whether those facts existed in the circumstances surrounding that occasion, and the person honestly and reasonably believed that the circumstances surrounding the present occasion were the same, or substantially the same, as those surrounding the previous occasion. Other defences The existence of strict liability does not make any other defence unavailable. In addition to the reasonable mistake of fact defence, the statutory defences of intervening conduct or event, duress, sudden or extraordinary emergency or self-defence are also available (Criminal Code s 10.1; 10.2; 10.3). It should be noted that these defences arise in circumstances involving external factors and some defences may not be relevant for superannuation entities or trustees, eg self-defence. Also, in a prosecution for an offence against SISA s 303 for incorrectly keeping records, it is a defence if the person charged with the offence proves that he/she did not know or could not reasonably be expected to have known that the records were incorrectly kept. In a prosecution of a strict liability offence (as in any other criminal prosecution), the Regulator will be required to prove beyond reasonable doubt that the relevant offence (eg a particular act or omission) occurred. The burden of proof on the defendant is an evidential burden, and the defendant will only have to adduce evidence that suggests a reasonable possibility that the defence applies. This is a considerably lower standard of proof than for the prosecution. An administrative penalty regime is also available for certain strict liability provisions in relation to SMSFs. Fault liability Fault liability provisions in the SISA cover many of the duties and obligations imposed on trustees, investment managers, auditors, actuaries and other persons who may be connected with or involved in the operation of a regulated superannuation fund, an ADF or a PST. The majority of the penalty provisions in the SISA when it was enacted were fault liability provisions. A number of these provisions have been converted to strict liability, or two-tier fault and strict liability provisions, since 18 January 2001. One reason for the change was that many fault liability offences were difficult to prove, particularly where the conduct that constitutes the offence involves a failure to act (eg a trustee failing to provide information to the Regulator). The requirement to prove a mental element was a substantial impediment to proving such offences as evidence of intention or recklessness is often difficult to obtain in the absence of admissions or independent evidence. For a person to be found guilty of a fault liability offence, the prosecution must prove beyond reasonable doubt the existence of the physical elements (as provided in the relevant provision) and, in respect of each physical element, one of the fault elements for the physical element (Criminal Code s 3.2). Most SISA fault liability offences require the fault elements of intention or recklessness. It should be noted that if the provision does not specify a fault element for a physical element that consists only of conduct, intention is the fault element, and if the provision does not specify a fault element for a physical element that consists of a circumstance or a result, recklessness is the fault element. The meanings of “physical element” and “fault element” are discussed at ¶3-800. The more prominent fault liability provisions are the operating standards prescribed for superannuation entities under SISA s 31(1), 32(1) and 33(1) which cover most aspects of fund operation (eg accepting contributions, paying benefits; see ¶3-220 and following). Each trustee of a superannuation entity must ensure that the prescribed operating standards applicable to the operation of the entity are complied with at all times. A person who intentionally or recklessly fails to do so is guilty of an offence (s 34). A contravention does not affect the validity of a transaction (s 34(3)). Other examples of fault liability provisions in the SISA are: • victimisation of trustee or responsible officer (s 68(1): ¶3-150) • failure by trustee to establish inquiries and complaints arrangements (s 101(2): ¶3-300) • failure by trustee to ensure investment agreement with manager contains, or be amended to contain,

provisions for monitoring investments (s 102(4): ¶3-400) • failure by trustee of public offer entity to comply with prescribed requirements before issue of superannuation interests or to be satisfied that a person has received all prescribed information (¶3520) • contravening a civil penalty provision knowingly, intentionally or recklessly, and dishonestly intending to gain an advantage or intending to deceive or defraud (s 202(1): ¶3-820) • incorrectly keeping accounts and records, or doing so with intention to deceive or mislead (s 306; 307(2); 308(2): ¶3-340) • failure to report statistical information to APRA (s 347A(6): ¶3-310). Two-tier fault and strict liability Two-tier fault and strict liability provisions were introduced into the SISA from 18 January 2001, mainly through the conversion of a number of then existing fault liability and strict liability provisions in SISA. When a breach of a two-tier liability provision occurs, the Regulator has the choice of proceeding under the fault liability limb of the offence, if it considers that there is adequate evidence of the required mental element, or under the strict liability limb, if evidence of the mental element is not available or insufficient. The no “double jeopardy” rule applies and the Regulator cannot proceed under both limbs of the offence. If the Regulator pursues a prosecution under the fault liability limb of the offence and a conviction is not secured, the Regulator cannot then pursue a prosecution under the strict liability limb. As the strict liability limb places a lower burden of proof on the prosecution in relation to the offence (see above), the penalty is lower than that for the fault liability limb. Although there are concerns and uncertainty as to when fault liability, as opposed to strict liability, may apply under two-tier offence provisions, APRA has stated that it does not intend to prescribe guidelines in this regard as it “would not like to see the flexibility of a two-tier structure undermined by rigid guidelines” and “… the existence of guidelines may give rise to manipulation by trustees” (APRA submission to the Senate Select Committee on Superannuation prior to the passage of the Act which converted the SISA provisions to two-tier liability provisions). In addition, this also allows the Regulator to consider enforcement action according to the circumstances at the time on a case-by-case basis. Examples of two-tier liability provisions in the SISA are: • failure by trustee of superannuation entity to lodge annual return with APRA or the ATO (s 35D: ¶3315, ¶5-510) • failure by an employer to remit superannuation contributions deducted from member’s salary or wages to a fund (s 64(3), (3A): ¶3-220) • failure by trustee to establish/publish procedures for the appointment and removal of member representatives as trustee/director of corporate trustee (or of additional independent trustee/director) (s 107(3), (4); 108(3), (4): ¶3-130) • failure by trustee to keep and retain accounting records, or to prepare and retain proper accounts, for five years (s 35A(3), (4); 35B(5), (6): ¶3-315) • failure by trustee to make arrangements for audit of superannuation entity (s 35C(3), (4): ¶3-315) • failure by auditor of superannuation entity to give trustee an audit report in the approved form within the prescribed period (s 35C(7), (8): ¶3-315) • disqualified person intentionally acting as trustee, investment manager or custodian of a superannuation entity, or corporate trustee allowing a disqualified person to be a responsible officer (s 126K: ¶3-130)

• failure by trustee of public offer entity to comply with rules on payment of commission and brokerage relating to applications for issue of superannuation interest or to become a standard employersponsor, or with rules for dealing with application money for superannuation interests (s 154(2), (2A): ¶3-520) • failure by new superannuation entity to give prescribed information to the Regulator within seven days (s 254(4), (5): ¶3-310) • failure by trustee to comply with Regulator’s direction to appoint a person to investigate financial position of superannuation entity and make an investigation report in accordance with Pt 25 Div 3 (s 262(1), (2): ¶3-850) • failure by trustee to request for TFN and comply with use of TFN rules (s 299F; 299G; 299H; 299J; 299K; 299L; 299M; 299Y: ¶11-750). Civil liability A breach of a civil liability provision in the SISA does not carry with it any criminal penalty for the trustee. However, these provisions confer a statutory right of action on beneficiaries or members, and action may be taken against the trustee for any loss or damage suffered as a consequence of the breach. The Regulator may also take action under the civil liability provisions where it is in the public interest to do so. The following are examples of civil liability provisions: • election by a trustee for a fund to become a regulated superannuation fund (SISA s 19: ¶2-130) • obligation of a trustee to comply with statutory covenants (SISA s 55: ¶3-100) • obligation of a fund to comply with the trustee representation rules (SISA Pt 9: ¶3-120). In an action for recovery of loss or damage suffered by a person as a result of the trustee’s investment activities or management of reserves, it is a defence for the trustee to show that the investments or management of reserves had been undertaken in accordance with a properly formulated strategy (s 55). [SLP ¶4-630 – ¶4-680]

¶3-840 Infringement notices Part 22 of SISA provides a regime of administrative penalties under APRA’s general administration. APRA may issue infringement notices if an infringement officer (as defined in s 223B) reasonably believes that a SISA provision has been contravened, as follows: • An infringement notice in relation to a contravention of a provision that is subject to an infringement notice under Pt 22 (as specified in s 223A, see below) can be given to a person. The provision may be an offence provision or a civil penalty provision, or both. • Section 224 specifies when an infringement notice may be given, and s 224A specifies the matters that must be included in the infringement notice (eg details of the contravention, penalty amount payable, how the notice can be withdrawn), The time to pay may be extended and a notice may be withdrawn in certain circumstances (s 224B; 224C). • A person can choose to pay the penalty amount specified in the infringement notice as an alternative to having court proceedings brought against the person. • If the person does not choose to pay the amount, proceedings can be brought against the person in relation to the contravention. The Pt 22 regime is designed to provide a fast and effective remedy which is in proportion to a breach. Once the penalty amount specified in an infringement notice is paid, any liability of the person for the offence specified in the notice is taken to be discharged, and the person is not regarded as having been

convicted of the offence specified in the notice (s 224D). It should be noted that Pt 22 does not require an infringement notice to be given to a person for an alleged contravention of a provision subject to an infringement notice under Pt 22; nor does it prevent the giving of two or more infringement notices to a person or limit a court’s discretion to determine penalty amounts to be imposed on a person who is found to have contravened a provision subject to an infringement notice under Pt 22 (s 224E). A provision in the governing rules of a superannuation entity is void if it would have the effect of indemnifying a trustee or a director out of the assets of the fund in relation to the payment of an infringement notice which is issued under SISA or another Act (eg FSCDA or TAA) (s 56; 57). Provisions subject to an infringement notice Section 223A(1) of SISA provides that an offence against one of the following provisions is subject to an infringement notice under Pt 22: s 18(7B); 29W(1); 29WA(3); 29WB(3); 35A(7); 107(4); 108(4); 140(3); 242P(1); 260(3); and 262(2). The provisions above cover matters such as: not putting contributions into a MySuper product (in cases where the member has not given the trustee a direction in writing that the contribution is to be invested under one or more specified investment options); not notifying as soon as practicable each beneficiary about an acting trustee’s appointment; not having rules in place for the appointment of member or independent representatives where required to do so; and not meeting APRA’s deadline for receipt of a report relating to an investigation. Provisions jointly administered by APRA and the Commissioner can be subject to an infringement notice Section 223A(2) provides that an offence against one of the following provisions is subject to an infringement notice under Pt 22, unless the entity to which the offence relates is an SMSF: s 11C(2), (3) or (4); 63(7) or (10); 64(3A); 71EA(5); 103(3); 104(2); 105(2); 122(2); 124(2); 141A(3) or (6); and 252A(3). The provisions above cover a broad range of trustee duties such as: certain regulated superannuation funds accepting contributions by an employer-sponsor contrary to the Regulator’s written notice to the fund’s trustee; and an employer not paying a trustee the amount of the deduction from salary or wages before the end of the 28-day period beginning immediately after the end of the month in which the deduction was made, record-keeping and retention, appointment of custodians and investment managers, and notifying a change in the fund’s status. In addition, the regulations may provide that an offence against a SISA or SISR provision, or a civil penalty provision in SISA or SISR, is subject to an infringement notice under Pt 22 (s 223A(3)). The Chair of APRA may determine a class of APRA staff members as “infringement officers” who will have the power to issue infringement notices (s 223B; 223C). An infringement notice may be given where an infringement officer has reasonable grounds to believe that a person has contravened an enforceable provision (s 224(1)). The notice must be given with a 12month time period (s 224(2)). An infringement notice must relate to a single contravention of a single offence provision, except in cases where four conditions are satisfied: 1. the provision requires something to be done within a particular period or before a particular time 2. the person fails (or refuses) to do the required thing within the required time 3. the failure or refusal occurs on more than one day, and 4. each contravention is constituted by the failure or refusal on one of those days (multiple offences of this kind may arise as a result of the application of s 4K of the Crimes Act 1914) (s 224(3), (4)). The notice must also provide details of the alleged contraventions including: the provision that was allegedly contravened; the maximum penalty a court could impose if the provision were contravened; the time (if known) and day of, and the place of, the alleged contravention; and any other information specified by regulations (s 224A(1)).

If the provision that has allegedly been contravened is an offence provision, the amount stated in the infringement notice is one-fifth of the maximum penalty that a court could impose on the person for that contravention (s 224A(2)(a)). If civil penalty provisions are included in the provisions subject to fines in the future, by way of regulation, the amount stated in the infringement notice is one-fortieth of the maximum penalty that a court could impose on the person for that contravention (s 224A(2)(b)). A 28-day period applies for paying infringement notices, but a person may apply for an extension of time to pay the amount (s 224A(1)(h); 224B). An infringement notice may be withdrawn after taking into account a number of factors including written representations seeking the withdrawal and the circumstances of the alleged contravention. Where a notice is withdrawn, notice of the withdrawal must be given to the person (s 224C). Other administrative powers of APRA APRA is empowered under Div 3 of the Financial Sector (Collection of Data) Act 2001 to issue infringement notices in lieu of prosecution for certain offences under that Act.

¶3-845 Administrative directions and penalties for SMSF contraventions Part 20 of SISA provides a regime of administrative directions and penalties for contraventions relating to SMSFs by: • giving the Commissioner the power to give rectification directions and education directions, and • imposing administrative penalties for certain contraventions of the SISA by SMSFs. The Pt 20 regime applies in conjunction with the other enforcement powers under SISA (¶3-850). This effectively gives the ATO additional regulatory options, both educational and punitive, to deal with noncompliance by trustees of SMSFs which reflect the nature and seriousness of the breach in each case. The ATO has general administration of Pt 20 which applies to contraventions occurring on or after 1 July 2014. Rectification or education direction and penalty The ATO may give a rectification direction or an education direction where it reasonably believes that a trustee or director of a corporate trustee of an SMSF has contravened a provision of the SIS legislation. Also, a person will be liable to an administrative penalty if certain SISA provisions are contravened in relation to an SMSF. The amount of the penalty is an amount specified in SISA. and must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed (see further ¶5-550). Related provisions in SISA Trustee declaration A trustee or a director of a corporate trustee of an SMSF who undertakes a course of education in compliance with an education direction is required to sign a declaration that he/she understands his/her duties as a trustee of an SMSF (or as director of a body corporate that is such a trustee) no later than 21 days after completing the course of education (SISA s 104A(1)(c); 104A(2)(ba)) (¶5-300). Trustees and directors who fail to sign the declaration in accordance with s 104A will be liable to an administrative penalty. Rules void if they provide trustee exemption A provision in the governing rules of an SMSF is void in so far as it would have the effect of exempting a trustee of the SMSF from, or indemnifying a trustee or a director of the trustee of the SMSF against: • liability for the costs of undertaking a course of education in compliance with an education direction, or • liability for an administrative penalty (SISA s 56(2)(d), (e); 57(2)(d), (e)) (¶3-140).

Fund treated as SMSF For the purposes of the Pt 20, a superannuation fund is treated as an SMSF if it has ceased being an SMSF for the purposes of the SISA and the trustee of the fund is not a registrable superannuation entity licensee. This means that administrative directions and penalties remedies may be imposed on trustees and directors of corporate trustees of funds that do not meet the definition of an SMSF in SISA s 17A, but are nonetheless treated as an SMSF and remain regulated by the Commissioner. This will ensure that trustees and directors who contravene the SISA or SISR do not escape any sanction due to the fund no longer meeting the definition of an SMSF under s 17A as discussed in ¶5-200 (s 10(4)).

Powers of the Regulators ¶3-850 Role of the Regulators and powers APRA, ASIC and the Commissioner of Taxation are primarily responsible for administration of the SISA and supervision of the superannuation industry as “Regulators” (as specified in SISA s 6). They have extensive regulatory and investigative powers under the SISA, including the power to take representative action on behalf of members and to grant exemptions from, and make modifications of, certain provisions of the SIS legislation in respect of a fund or trust or class of funds or trusts (SISA Pt 25; 29). The scope of specific prudential regulation powers of ASIC under the Corporations Act and SISA is discussed in ¶3-860. APRA may determine prudential standards relating to prudential matters that must be complied with by RSE licensees of registrable superannuation entities and their connected entities (¶9-700). Additional obligations may be imposed on RSE licensees by APRA and ASIC in connection with their licensing under SISA or the Corporations Act. A summary of APRA’s and ASIC’s regulatory responsibilities in respect of RSE licensees may be found in the joint APRA and ASIC document “Regulation of superannuation entities by APRA and ASIC” (www.apra.gov.au/sites/default/files/regulation_of_superannuation_entities_by_apra_and_asic.pdf). The Commissioner, in consultation with APRA, may determine “data and payment standards” (SuperStream) covering contributions, roll-overs and other fund operations for superannuation entities and employers (¶9-790). For prudential regulation purposes, the primary means by which the Regulators review the management and operations of a superannuation entity are through the returns and reports which are required to be lodged by the entity, and auditors’ reports and contravention reports lodged by auditors and actuaries (¶3310, ¶3-600, ¶9-750), and through direct reviews or audits of the entity carried out by the Regulators. Among other things, the Regulators will examine: • whether the entity has complied with the SIS prudential requirements (ie the rules and obligations discussed in this chapter, as appropriate or applicable to the particular entity) • the entity’s investment strategy (which is required to be formulated and implemented) having regard to its size and circumstances, and compliance with the investment rules (¶3-400 – ¶3-475) • security of the entity’s assets • whether records (eg the governing rules, financial records and minutes of trustee meetings) are properly maintained (¶3-310, ¶3-340). Other reviews may be effected through monitoring compliance with the requirements of the Corporations Act 2001 (see Chapter 4) and the reporting standards under FSCDA (¶9-790), and with specific conditions or standards such as those dealing with licensing of registrable superannuation entity (RSE) trustees and registration of superannuation entities under the SISA (¶3-480) and with authorisation to issue MySuper products and their related obligations (see Chapter 9).

In an appropriate case, the Regulators can require the trustee of a superannuation entity to appoint an individual, or a committee, to investigate and report on the financial position of the entity (s 257). Specific powers under SISA Specific prudential powers that may be exercised by APRA (or the Commissioner with respect to SMSFs) include the following: • the determination of an entity’s status under the SISA as a complying or non-complying superannuation fund, complying or non-complying ADF, or a PST (Chapter 2) • the licensing of RSE trustees and registration of APRA-regulated superannuation entities (¶3-480) • the disqualification and/or removal of the trustee, investment manager or custodian of a superannuation entity, and the appointment of an acting trustee (see “Disqualification of trustees, investment managers or custodian” below) • the disqualification of an auditor or actuary of a superannuation entity (¶3-620) • an investigation of the superannuation entity if a contravention of the SIS legislation or FSCDA may have occurred, or the entity’s financial position may become unsatisfactory, or the entity refuses or fails to give effect to a Tribunal determination under s 37 of the Superannuation (Resolution of Complaints) Act 1993 (SISA s 263) • requiring the provision of information as specified, issuing directions about acquiring and/or disposal of asset, and issuing a direction to freeze a superannuation entity’s assets, if it appears to APRA or the Commissioner (as the case requires) that the entity’s conduct is likely to adversely affect the values of the interests of beneficiaries to a significant extent (SISA s 264) • appointing an inspector to conduct an investigation into the affairs of the superannuation entities (SISA s 265). From 6 April 2019, APRA has general powers to issue directions to an RSE licensee in relation to the licensee’s conduct (¶3-852). From 6 July 2019, APRA has power to direct a person holding a controlling stake (or who has practical control) of an RSE licensee to relinquish that control (¶3-488). APRA’s and the ATO’s investigation power under s 263 applies to a superannuation entity that is wound up, dissolved or terminated; or whose corporate trustee is or becomes an externally-administered body corporate (within the meaning of the CA) or, if an individual trustee, is or becomes insolvent under administration (s 263(3)). The Regulators may accept undertakings given by a person in connection with the administration of the SISA and enforce such undertakings by applying to a court (s 262A: see “Enforceable undertakings” below). Where breaches of a regulatory provision (¶2-140) occur, apart from the possible loss of complying fund status for the fund or trust concerned, the Regulators may also accept enforceable undertakings, impose penalties under infringement notices (¶3-840), or initiate proceedings under the relevant Acts against the individuals or entities responsible for the breach. The ATO may also give rectification directions and education directions and impose administrative penalties for certain contraventions of the SISA in relation to SMSFs (¶3-845). The penalties regime under the SIS legislation is discussed in detail in ¶3-800. The ATO guidelines dealing with disqualification of trustees under former s 120A (replaced by s 126A and 126H: see ¶3-130) and enforceable undertakings are noted below. Although the ATO guidelines are for SMSFs, the principles in the guidelines are similarly applicable to other regulated superannuation entities. For ASIC’s consumer protection role in relation to superannuation entities under the CA, see ¶3-860. Monitoring status of small funds

If a regulated superannuation fund has fewer than five members, APRA or the Commissioner may, by written notice, require the trustee of the fund to provide information within a specified period (which must not be shorter than 21 days) to ensure that the Regulator is informed: • whether the fund was an SMSF fund as at the date (the response date) on which APRA or the Commissioner was so informed • if the fund was not an SMSF as at the response date — whether the trustee considers that the fund is likely to become an SMSF within the period specified in the notice, and • if the fund was an SMSF as at the response date — whether the trustee considers that the fund is likely to cease to be an SMSF within the period specified in the notice (s 252A(2)). A person who contravenes s 252A(2) is guilty of an offence punishable on conviction by a fine not exceeding 50 penalty units (this is a strict liability offence). Disqualification of trustees, investment managers or custodian The Commissioner and the Federal Court (on application by APRA) may disqualify an individual under SISA s 126A and 126H from being a trustee, investment manager or custodian of a superannuation entity, or from being a responsible officer of a body corporate that is a trustee, investment manager or custodian, where: • the person or the corporate trustee has contravened the SISA or FSCDA, or • the individual is otherwise not a “fit and proper” person (¶3-130). In making the disqualification decision, the Regulator or court must take into account the nature or seriousness of the contraventions and the number of contraventions. If the nature, seriousness or number of contraventions do not justify a disqualification under those grounds, the Regulator or court may alternatively disqualify the individual if satisfied that the individual is otherwise not a fit and proper person. If an individual is disqualified under s 126A or 126H, the individual must be given written notice of the disqualification and cause details of the disqualification to be published in the Gazette. ATO guidelines for SMSFs PS LA 2006/17 (dealing with former s 120A, which has been replaced by s 126A: see ¶3-130) states that disqualifying an individual is not the only option available to the Commissioner in developing a compliance strategy in relation to a particular SMSF. The other options include: • accepting an undertaking from the trustee to rectify the contravention(s) (see below) • issuing the fund with a notice of non-compliance (¶2-150) • freezing the assets of the fund where there is a risk of the members’ benefits being eroded or further eroded (s 264: see above). PS LA 2006/17 reiterates that disqualification is not a punishment, penalty or sanction to the individual (AAT Case [2002] AATA 1233). The statement states that disqualification will be used where the Commissioner is concerned about the compliance attitude of an individual and/or his/her suitability to act as a trustee and outlines the factors to be taken into account in determining whether former s 120A should be applied. In assessing the nature or seriousness or number of contraventions for the purposes of s 120A(1) or (2), and making the decision to disqualify an individual, the Commissioner will: • look at the acts of the individual • consider all the facts of the case • act in accordance with the ATO compliance model and the taxpayers’ charter, and

• consider whether there is a future compliance risk. The number or seriousness of contraventions is a question of fact and degree, and the seriousness of an offence should be determined on a case-by-case basis having regard to the ability of the fund to meet the obligations it has to its members including: • the behaviour of the trustees in relation to the contravention • the extent to which the fund’s assets were affected by the contravention, ie the greater the proportion of the fund’s assets affected by the contravention, the more likely it is that the contravention is serious • the extent to which the fund’s assets were exposed to financial risk and whether there was any loss to the value of the fund • the number and extent of contraventions over a period of time. A single contravention on its own may not be considered serious, but a number of contraventions taken together may make the situation serious, and • the nature of the contravention in the overall scheme of the legislation. For example, a contravention involving an artificial arrangement intended to undermine the regulatory provisions or the tax concessions offered to SMSFs is likely to be serious. With respect to disqualifying an individual for not being a “fit and proper person” under s 120A(3), the Commissioner will take into account: • any contraventions of the SISA • where the individual has contravened the SISA, the circumstances surrounding the contravention • considerations other than the individual’s compliance with the SISA which go to establishing the character and repute of the person, such as: – non-compliance with other taxation laws, and – whether the individual has been subject to sanctions under any other relevant laws (including those laws dealing with financial responsibilities, honesty and business transactions) • the association the individual has with other trustees of the SMSF and the impact this relationship has on their ability to perform their duties as a trustee, and • all the circumstances of the case including the honesty, competence, diligence, knowledge and ability, soundness of judgment, reputation and character of the individual. The following explanation of “fit and proper” was provided in the case of Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 per Toohey and Gauldron at 380: “The expression ‘fit and proper person’, standing alone, carries no precise meaning. It takes its meaning from its context, from the activities in which the person is or will be engaged and the ends to be served by those activities. The concept of ‘fit and proper’ cannot be entirely divorced from the conduct of the person who is or will be engaging in those activities. However, depending on the nature of the activities, the question may be whether improper conduct has occurred, whether it is likely to occur, whether it can be assumed that it will not occur, or whether the general community will have confidence that it will not occur. The list is not exhaustive but it does indicate that, in certain contexts, character (because it provides indication of likely future conduct) or reputation (because it provides indication of public perception as to likely future conduct) may be sufficient to ground a finding that a person is not fit and proper to undertake the activities in question …” (emphasis added) The decision that a person is not fit and proper is based on an overall evaluation of the facts. It is a

question of fact and degree and requires a number of factors to be considered with no one particular factor being determinative in any given case. The fitness of an individual relates to all matters which affect the capacities of a person to perform their role as trustee (Monty Financial Services Ltd v Delmo [1996] 1 VR 65), and includes their qualifications and competence. The fitness of an individual is determined with reference to the particular skills required for them to satisfy their obligations as a trustee. The propriety of an individual refers to their general behaviour and conduct. This can be assessed by reference to such things as an individual’s conduct in the discharge of their duties (past and present) and the reputation and character of the individual, ie the ethical attributes of the individual. The factors must be assessed in light of how they will impact on the risks associated with allowing the individual to act as a trustee. These risks include the trustee misappropriating the funds, dealing with the assets in an illegal way, failing to keep proper records, and providing dishonest information to the ATO (see also Hart 18 ESL 05 at ¶3-130). Enforceable undertakings Section 262A of the SISA allows the Regulator to accept a written undertaking given by the trustee of a regulated superannuation fund in relation to a contravention of the SIS legislation (commonly referred to as an “enforceably undertaking”) as an alternative to the issue of the notice of non-compliances, thus providing a flexible and cost-efficient tool for managing contraventions. If the trustee breaches a term of the undertaking, the Regulator can apply to a court for an order under s 262A(4). The court may make all or any of the following orders if a person has breached a term of the undertaking: • an order directing the person to comply with that term of the undertaking • an order directing the person to pay to the Commonwealth an amount up to the amount of any financial benefit that the person has obtained directly or indirectly and that is reasonably attributable to the breach • any order that the court considers appropriate directing the person to compensate any other person who has suffered loss or damage as a result of the breach • any other order that the court considers appropriate (s 262A(4)). The court’s powers under the SISA are discussed in ¶3-800. In Interhealth Energies 12 ESL 04, the court granted an order prohibiting payment or transfer of money or property to protect the interests of beneficiaries under s 313 on application by the Commissioner following a breach of an undertaking given by Interhealth pursuant to s 262A. PS LA 2006/18 outlines the factors the Commissioner will consider in deciding whether to accept an enforceable undertaking proposed by SMSF trustees under s 262A. Where a contravention is identified, the Commissioner will normally give the trustee the opportunity to provide a written undertaking to remedy the contravention where this is possible. However, in developing a compliance strategy in relation to a particular SMSF, the other options that may be considered include issuing a fund with a notice of non-compliance, disqualifying, suspending or removing a particular trustee, freezing the fund’s assets if there is a risk of the members’ benefits being eroded, or seeking civil and/or criminal penalties through the courts (Pt 21). Whether an undertaking is appropriate will depend on the individual circumstances of the case. The factors to be considered include the following matters: • Can the contravention be rectified? For example, a contravention of the in-house assets rules can be rectified by the fund disposing of relevant assets. If a contravention cannot be rectified, an undertaking is not appropriate. • Does the contravention give rise to criminal consequences? Where there are criminal consequences it is not appropriate to accept an undertaking. This reflects the principle that a person may not contract out of criminal liability.

• Past behaviour of the trustee. Where the behaviour indicates that compliance with the undertaking is highly unlikely it would not be appropriate to accept an undertaking. • The nature and significance of the contravention indicates that it is inappropriate to accept an undertaking. For example, 100% of superannuation contributions, when received, are immediately lent to members. It is also not appropriate to accept an undertaking where there is evidence that the trustees/members have been knowingly involved in an arrangement where the anti-avoidance provisions in the tax laws may apply. If the Commissioner has accepted an undertaking to rectify a contravention, a notice of non-compliance will not be issued if the trustee is genuinely attempting to satisfy the terms of the undertaking (for cases, see below). An undertaking must contain, as a minimum, the essential terms listed below (a template to assist in the construction of an undertaking is provided in Attachment A to PS LA 2006/18). • How the contravention is to be rectified. The undertaking should specify the manner in which the contravention will be rectified and set out what actions the trustee will take to achieve this. • The time in which the contravention is to be rectified. Rectification should be completed within a reasonable period of time. What is a reasonable period will depend on the circumstances of the case. For example, it would be reasonable to give a longer period of time to dispose of an asset such as residential property, than shares in a publicly listed company. • How and when the trustee will report on the progress made towards completion of the undertaking. • A commitment to cease the behaviour which resulted in the contravention. • If appropriate, the strategies required to be implemented by the trustee to prevent the contravention from occurring again. The trustee should provide details of strategies to prevent a recurrence of the contravention. These could involve changes in accounting and management practices. Informal arrangements The nature of the contravention and the trustee’s behaviour may mean that the Commissioner can be satisfied by an informal arrangement to rectify the contravention, such as an oral undertaking or a written statement that does not contain all the essential elements for an enforceable undertaking. An informal arrangement can be accepted where the risk of the contravention not being rectified is considered to be low, eg the trustee has already commenced the action required to correct the contravention. The ATO expects that an informal arrangement will identify the rectification actions to be taken and the time frame for doing so. Informal arrangements should only be accepted from a trustee with a reasonable compliance history. The Commissioner will make a record of what has been proposed in discussions with the trustee for the purposes of reviewing the case for compliance with the informal arrangement. Cases — enforceable undertaking as an alternative to non-compliance notice An enforceable undertaking was accepted in XPMX 08 ESL 10. For cases where an enforceable undertaking was not accepted, see JNVQ 09 ESL 08 and ZDDD 11 ESL 01. In Interhealth Energies 12 ESL 04, the Commissioner successfully applied to the court for an order freezing the fund’s assets following a breach of an enforceable undertaking (see above). The court granted orders, including the payment of compound interest and that, at all material times, the fund be deemed to be a complying superannuation fund for the purposes of the SISA in Interhealth (No 2) 12 ESL 09.

APRA and ATO guidelines APRA issues “Superannuation Prudential Practice Guides” (PPGs) to provide guidance on APRA’s view of sound practice in particular areas and discuss legal requirements from legislation and APRA’s prudential standards) (¶9-720). PPGs do not provide legal advice and do not themselves create enforceable requirements. In addition, APRA issues letters and various forms of guidance notes and advices to superannuation trustees from time to time. Archived APRA guidance notes and superannuation circulars which are relevant to pre-1 July years are also available on the APRA website (www.apra.gov.au/superannuation-standards-and-guidance). The ATO issues a range of taxation rulings, determinations and interpretative decisions on its legal database on its website. From time to time, the Regulators issue guidance letters to superannuation trustees, SMSF rulings and determinations, releases and fact sheets which provide guidelines on the application of the SIS legislation. Unlike taxation rulings (¶16-090), not all Regulator releases have the force of law, but are based on the Regulators’ interpretation of the relevant legislation and its application. Users should also exercise caution when replying on the Regulators’ rulings and other guidelines as these may be affected by subsequent changes to the legislation. [SLP ¶4-600]

¶3-855 Powers of APRA to give directions From 6 April 2019, Pt 16 of the SISA gives APRA broad general powers to give a direction to an RSE licensee where: • APRA has a reason to believe that the RSE licensee either has, or is reasonably likely to, contravene its prudential obligations, or • certain financial risks are present, or there are risks to the interests of the beneficiaries of a superannuation entity or the financial system more generally (SISA Pt 16, s 131D to 131DD). APRA may also give a direction to: • an RSE licensee where it has concerns about one of the RSE licensee’s connected entities which raise prudential concerns, and/or • a connected entity of the RSE licensee directly (s 131DA(1), (2)). Where APRA has concerns about the actions of a third party (related or otherwise) that the RSE licensee has contracted with, APRA can direct the RSE licensee to do or not do something (including requiring the RSE licensee to cease dealing with a related body corporate where it has grounds under its direction powers). Connected entity A “connected entity”, in relation to an RSE licensee of an RSE, means: (a) an associated entity (within the meaning of the Corporations Act 2001) of the RSE licensee (b) if the RSE licensee is a group of individual trustees — an entity that has the capacity to determine or influence decisions made by one or more members of the group in relation to the RSE, and (c) any other entity of a kind prescribed by the regulations (SISA s 10(1)). When can APRA give a direction? The circumstances in which directions can be issued and the types of directions that can be issued are set out in s 131D (the RSE licensee own conduct) and s 131DA (the conduct of a connected entity). The circumstances in which APRA can give a direction of a kind mentioned in s 131D(2) are if APRA has reason to believe that: (a) the RSE licensee has contravened a provision of the SISA or SISR, the prudential standards or the

Financial Sector (Collection of Data) Act 2001 (b) the RSE licensee is likely to contravene a provision mentioned in para (a), and the direction is reasonably necessary to deal with one or more prudential matters in relation to the RSE licensee (c) the RSE licensee has contravened a condition or direction under SISA or the Financial Sector (Collection of Data) Act 2001 (ca) the RSE licensee, or the RSE of the RSE licensee, has failed to meet a “benchmark” (as defined in s 10(1)) that relates to the licensee or entity (d) the direction is necessary in the interests of beneficiaries of an RSE of the RSE licensee, or (e) the RSE licensee is, or is about to become, unable to meet its liabilities (whether as trustee of an RSE or otherwise) (f) there is, or there might be, a material risk to the security of the assets of the RSE licensee (whether held as trustee of an RSE or otherwise) (g) there has been, or there might be, a material deterioration in the financial condition of the RSE licensee or an RSE of which it is trustee (h) the RSE licensee is conducting its affairs or the affairs of an RSE of which it is trustee in an improper or financially unsound way (i) the failure to issue a direction would materially prejudice the interests or reasonable expectations of beneficiaries of an RSE of the RSE licensee, or (j) the RSE licensee is conducting its affairs or the affairs of an RSE of which it is trustee in a way that may cause or promote instability in the Australian financial system (s 131D(1)). Whether or not an RSE licensee has contravened a provision, condition or direction is a matter of fact. However, the requirement that APRA has “reason to believe” means that all of the formal proceedings that must be undertaken to establish that a contravention has actually occurred do not necessarily need to be resolved. This approach ensures that APRA is able to take early action to remedy or mitigate the impact of a contravention. Types of direction that may be given In the above circumstances, APRA may give a direction to do one or more of the following: (a) to comply with the whole or a part of the SISA or SISR, the prudential standards or the Financial Sector (Collection of Data) Act 2001 (b) to comply with the whole or a part of a condition or direction referred to in s 131D(1)(c) (c) if the RSE licensee is a body corporate, to do one or more of the following: (i) to remove a responsible officer of the RSE licensee from office (ii) to ensure that a responsible officer of the RSE licensee does not take part in the management or conduct of the business of the RSE licensee, or the business of an RSE of the RSE licensee, except as permitted by APRA (iii) to appoint a person as a responsible officer of the RSE licensee for such term as APRA directs. (d) to order an audit of the affairs of the RSE licensee or of an RSE of the RSE licensee at the expense of the RSE licensee, by an auditor chosen by APRA (e) to remove an auditor of the RSE licensee, or of an RSE of the RSE licensee, from office and appoint

another auditor to hold office for such term as APRA directs (f) to order an actuarial investigation of the affairs of an RSE of the RSE licensee, at the expense of the RSE licensee and by an actuary chosen by APRA (g) to remove an actuary of an RSE of the RSE licensee from office and appoint another actuary to hold office for such term as APRA directs (h) not to accept, or to cease to accept (permanently or temporarily), contributions to an RSE of the RSE licensee (i) not to borrow any amount (j) not to pay or transfer any amount or asset to any person, or create an obligation (contingent or otherwise) to do so (k) not to undertake any financial obligation (contingent or otherwise) on behalf of any other person (l) not to discharge any liability of the RSE licensee or an RSE of the RSE licensee (m) to make changes to the RSE licensee’s systems, business practices or operations (including the RSE licensee’s systems business practices or operations in relation to an RSE of the RSE licensee), or (n) to do, or refrain from doing, anything else in relation to the affairs of the RSE licensee or an RSE of the RSE licensee (s 131D(2)). Directions to RSE licensee about the conduct of a connected entity In certain circumstances, the conduct of a connected entity of an RSE will give rise to the same sorts of contraventions and risks that are set out in s 131D. Therefore APRA is also able to give a direction to an RSE licensee in respect of the conduct of one of its connected entities. The grounds on which such directions may be given are based on the ground on which directions about the conduct of an RSE licensee can be given (see s 131DA(1)). Each of the grounds for issuing a direction in respect of a connected entity is based on the grounds that apply in respect of the conduct of an RSE licensee (see s 131D(1)). However, unless the grounds relate to contraventions of particular provisions or to the interests of beneficiaries, APRA can only give a direction in respect of the conduct of a connected entity if APRA considers that the direction is reasonably necessary to ensure that the RSE licensees duties as trustee of an RSE are properly performed (s 131DA(2)). This additional requirement about the performance of the RSE licensee’s duties ensures that there is a nexus between the functions of the RSE licensee that are regulated and the activities of, or conduct undertaken, by the connected entity. To ensure that directions powers in respect of connected entities operate appropriately, regulations may be made to prevent APRA from giving directions to a particular type of connected entities. For example, regulations may carve out entities that are regulated under other legislation and subject to a separate directions powers regime (s 131DA(4)). Process — giving or varying or revoking a direction Section 131DB is the machinery provision for giving a direction. For example, s 131DB provides that: • the direction must be given by notice in writing • the notice must be given to the licensee for directions about the conduct of an RSE licensee, and, to both the connected entity and RSE licensee for directions about the conduct of a connected entity • the notice must specify the ground on which the direction was given.

An APRA direction under Pt 16A Div 1 is not a legislative instrument within the meaning of s 8(1) of the Legislation Act 2003 as they merely apply provisions of the SIS Act to an RSE licensee or connected entity (rather than determining the content of the law) (s 131DB(2)). APRA may vary or revoke a direction where it considers that it is necessary or appropriate to do so (s 131DC(1) and (3)). A direction continues to have effect according to its terms up until the time that APRA revokes the direction (s 131DC(2)). Consequences of failing to comply with a direction A failure to comply with a direction is a strict liability offence (s 131DD) (penalty: 100 penalty units). The entity that commits an offence for a failure to comply with a direction depends on the type of direction: • for directions given to RSE licensees — a person commits an offence if they are the RSE licensee, or if they are a member of a group of individual trustees that is an RSE licensee, and the RSE licensee does or fails to do something that results in a contravention of the direction • a person also commits an offence if they are an officer of an RSE licensee who is responsible for ensuring the licensee complies with directions, and the person fails to take reasonable steps to ensure that the licensee complies with a direction • for directions given to a connected entity, the connected entity commits an offence if it fails to do something that results in a contravention of the direction • a person also commits an offence if they are an officer of a connected entity who is responsible for ensuring the entity complies with directions, and the person fails to take reasonable steps to ensure that the connected entity complies with a direction (s 131DD(1)-(4)). General rules related to directions Part 16A Div 3 contains provisions that relate to all directions that may be issued under the SISA. These provisions: • ensure that APRA can give more than one direction (s 131F) • ensure that RSE licensees and connected entities can comply with directions, despite anything in the RSE licensee’s or connected entity’s constitution or any contract or arrangement to which the RSE licensee or connected entity is a party (s 131FA) • provide general protection from liability for complying with directions to any person in respect of anything done, or omitted to be done, in good faith and without negligence in the exercise or performance, or the purported exercise or performance, of powers, functions or duties under the SISA (s 131FB) • provide specific protection to an officer or employee of the RSE licensee, or of the connected entity of the RSE licensee. An action, suit or proceeding (whether criminal or civil) does not lie against the person in relation to anything done, or omitted to be done, in good faith and is for the purpose of complying with a direction under the SISA given by APRA to an RSE licensee, or a connected entity, and it is reasonable for the person to do the thing, or to omit to do the thing, in order to achieve that purpose (s 131FC) • provide that SISA s 336B (protections for disclosure by whistleblowers), s 131FB and 131FC, and s 58 of the APRA Act 1998 (protection for APRA, APRA members or agents), do not limit the operation of each other (s 131FD). This means that a person who is covered by more than one of the above protections can be protected from liability under more than one provision. Similarly, a failure to be protected by one of

the provisions does not affect the protection that a person may receive under another provision, and • provide for information about directions to be provided to the Treasurer, if requested (s 131FE). Acquisitions of property only on just terms Despite the general obligation to comply with a direction given under the SISA, a person is not required to comply with a direction in circumstances that would result in an acquisition of property otherwise than on just terms (SISA s 349B(6A)). This limitation supplements the general restriction contained in s 349B(1) about acquisitions of property and ensures that the rules about directions in the SISA do not purport to require a person to comply with a direction that would otherwise be inconsistent with para 51(xxxi) of the Constitution. However, any provision that requires a person to comply with a direction that does not result in an acquisition of property continues to apply in relation to a direction given under the SISA (s 349B(7)(f)).

¶3-860 Prudential regulation by ASIC ASIC has primary responsibility for consumer protection and market integrity regulation and supervision in Australia under the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001 (ASIC Act). ASIC’s key functions and powers cover: • regulation of information disclosure and reporting by superannuation entities (eg to the general public and to members of superannuation funds and RSA holders (¶4-100)) under the Corporations Act 2001 • licensing superannuation fund trustees and other financial services’ providers under the Corporations Act 2001 (¶4-600) • the registration of approved SMSF trustees under SISA Pt 16 Div 1A (¶5-508) • administrative support to the Superannuation Complaints Tribunal under the Superannuation (Resolution of Complaints) Act 1997 and SISA (¶13-000) • administrative support to and oversight role of the Australian Financial Complaints Authority (AFCA) under the Corporations Act 2001 (¶13-000) • information disclosure and consumer protection powers in relation to the provision of financial products and services under the CA and ASIC Act (¶4-500, ¶4-665, ¶4-680). The regulatory role of ASIC in relation to licensing, product disclosure and conduct of Australian financial services licensees and providers of financial products is discussed further in Chapter 4. SISA provisions for which ASIC has general administration responsibility ASIC has general administration of the following SISA provisions: • s 29SAA(3) (member notices about accrued default amount: ¶9-120) • s 29QB (RSE trustee remuneration disclosure: ¶9-650) and s 29QC (consistent calculation requirement: ¶9-660) • s 64A (compliance with SCT determinations: ¶13-540) and s 68A (inducements and conduct relating to fund membership: ¶3-475, ¶3-860, ¶12-040) • s 99F (passing cost of financial product advice: ¶3-245) • s 101 (duty to establish arrangements to deal with member inquiries and complaints: ¶3-300) and s 103 (duty to keep and retain minutes, records: ¶3-340)

• Pt 19 (public offer entity provisions on issuing interests, commission, fair dealing, etc: ¶3-500) to the extent that administration is not conferred on the Commissioner by s 6(1)(e) (s 6(1)(c)) • Pt 3 (operating standards generally) and Pt 6 (provisions in governing rules: ¶3-100) (other than s 60A about governing rules for dismissal of trustee of public offer entity) and s 105 (duty to keep member or beneficiary reports: ¶3-340) to the extent to which they relate to the keeping of reports and disclosure of information to members of, or beneficiaries in, funds, disclosure of information about funds, and any other matter prescribed by the regulations (s 6(1)(d)) • Pt 16 about registration of approved SMSF auditors (other than Div 2 about certain obligations of actuaries and auditors (¶3-600) and s 128P about the Commissioner referring matters to ASIC) to the extent that it relates to auditors of SMSFs (¶5-508) (s 6(1)(da)). Regulation of superannuation entities by APRA and ASIC A detailed discussion of the regulatory roles of APRA and ASIC and their approach to supervision and surveillance of superannuation entities (including a summary of APRA’s and ASIC’s regulatory responsibilities in respect of RSE licensees) may be found in www.apra.gov.au/sites/default/files/regulation_of_superannuation_entities_by_apra_and_asic.pdf.

¶3-880 Protection for whistleblowers From 1 July 2019, the regime for protection of whistleblowers in the corporate and financial sector is located in Pt 9.4AAA of the Corporations Act 2001 (CA). The CA regime replaced, among others, the whistleblowers regime in former Div 1 of Pt 29A of the SISA which had provided protection for whistleblowers in certain circumstances under former s 336A to 336E. These former provisions provided: • protection against civil and criminal liability for making the disclosure, enforcement of contractual remedies, liability for defamation, and termination of contract on the basis of the disclosure, and where detriment has occurred, suitable remedy as may be ordered by the court • protection against victimisation, and • use immunity protection. Division 2 in Pt 29A (comprising s 336F) which provides limited protection against self-incrimination is unaffected (see below). Transition to CA whistleblowers regime The repeal of Pt 29A Div 1 (former s 336A to 336E) was made by the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 (Act No 10 of 2019: ¶17-330), subject to transitional provisions and the continuing operation of the former SISA whistleblowers regime as follows: “Item 32 Application 32 Despite the repeal of Division 1 of Part 29A of the Superannuation Industry (Supervision) Act 1993 by item 30, that Division continues to apply, at and after the commencement of this item [1 July 2019], in relation to: (a) disclosures of information made before that commencement; and (b) conduct referred to in subsection 336C(1) of the Superannuation Industry (Supervision) Act 1993, as in force immediately before that commencement, that is engaged in before that commencement; and (c) a threat referred to in subsection 336C(2) of the Superannuation Industry (Supervision) Act 1993, as in force immediately before that commencement, that is made before that commencement”.

Commentary on Pt 29A former Div 1 may be found in the 2018/19 edition of the Guide or in other Wolters Kluwer superannuation products such as the Australian Superannuation Law & Practice service. Separate whistleblowers regime for reporting tax misconduct or tax breaches The Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 also inserted a comprehensive whistleblowers protection regime in TAA for individuals who report breaches or suspected breaches of the tax law and/or tax misconduct in relation to an entity’s tax affairs (TAA Sch 1 new Pt IVD — Protection for whistleblowers). The TAA whistleblowers protection regime will cover non-compliance with tax laws or tax avoidance behaviour. Self-incrimination Part 29A Div 2 of SISA provides that self-incrimination is not available in relation to a requirement to provide information to APRA under the SISA or the Financial Sector (Collection of Data) Act 2001 (FSCDA). That is, a person is not excused from complying with a requirement under the SISA or the FSCDA to give information to APRA on the ground that doing so would tend to incriminate the person or make the person liable to a penalty (s 336F(1)). In the above context, it is considered that APRA’s interest in receiving information that would assist to maintain the integrity of the prudential regulation framework outweighs the privilege against selfincrimination. However, if an individual provides information to APRA in compliance with a requirement of the SISA or FSCDA, the individual will enjoy “use immunity” in relation to the information provided (s 336F(2)). That is, if the person is an individual, the information given by the individual in compliance with the requirement is not admissible in evidence against the individual in criminal proceedings or in proceedings for the imposition of a penalty, other than proceedings in respect of the falsity of the information, if: (a) before giving the information, the individual claims that giving the information might tend to incriminate the individual or make the individual liable to a penalty, and (b) giving the information might in fact tend to incriminate the individual or make the individual liable to a penalty. Section 336 does not apply in relation to a requirement under s 129 or 130 in SISA Pt 16 (about obligations of actuaries and auditors) where s 130B provides specific rules about self-incrimination (¶3600) (s 336F(3)). Section 336F also does not apply to SISA Pt 25, which has its own regime setting out APRA’s monitoring and investigation powers (¶3-850) and where s 287 provides limited use immunity for information provided under Pt 25.

Superannuation Levies ¶3-900 Superannuation supervisory levy A supervisory levy is imposed on superannuation entities by the Superannuation Supervisory Levy Imposition Act 1998 (SSLIA) and is payable each year. A “superannuation entity” for levy purposes under the SSLIA means a regulated superannuation fund (other than an SMSF), an ADF or a PST. An entity’s liability to pay the levy in a financial year arises if it is a superannuation entity at any time during the financial year. Administrative provisions relating to the levy are set out in s 7 to 15 of the Financial Institutions Supervisory Levies Collection Act 1998 (FISLCA). The supervisory levy payable by SMSFs is discussed in ¶3-920. Levy amount and payment The levy amounts for 2019/20 and 2018/19 are set out below. The levy amount for earlier years may be found in ¶18-650 and earlier editions of the Guide. The levy is payable to APRA and may be recoverable as a debt due to the Commonwealth. APRA may, if

it “considers it appropriate to do so”, waive the payment of the whole or a part of the levy (FISLCA s 11; 12).

Levy payable by superannuation entities (not an SMSF) Levy base

Maximum levy

Minimum levy

Restricted levy %

Unrestricted levy %

PST

Note 1

$300,000

$5,000

0.00162%

0.000799%

SAF or SMADF

Note 1

$590

$590

0%

0%

$600,000

$5,000

0.00324%

0.003557%

Financial year 2019/20

Other superannuation entity Note 1 2018/19 PST

Note 1

$162,500

$5,000

0.00137%

0.0010401%

SAF or SMADF

Note 1

$590

$590

0%

0%

$325,000

$5,000

0.00274%

0.003911%

Other superannuation entity Note 1

“PST” means a pooled superannuation trust, “SAF” means a small APRA fund (ie a regulated superannuation fund that has fewer than five members other than an SMSF) and “SMADF” means a single member ADF. Levy determination instruments 2019/20 levy — Superannuation Supervisory Levy Imposition Determination 2019 (F2019L00913) 2018/19 levy — Superannuation Supervisory Levy Imposition Determination 2018 (F2018L00984). Note 1 — Superannuation entity’s levy base For levy determination purposes, the valuation day in relation to an entity, means: – for an entity that was a superannuation entity on 30 June in a year — 30 June – for an entity that became a superannuation entity after 30 June in a year — the day on which it became a superannuation entity. If the valuation day for a superannuation entity is 30 June, the entity’s levy base is the amount that is required to be reported as at that day in: (a) item 25 of Form SRF 320.0: Statement of Financial Position, in accordance with the instructions for the form, or (b) item 7 of Form SRF 800.0: Financial Statements, in accordance with the instructions for the form (see ¶9-750 for SRF 320.0 and SRF 800.0). If the valuation day for a superannuation entity is after 30 June, and the entity consists entirely of the life insurance policies of individual members of the fund, the entity’s levy base is to be worked out in the same way as the current value of the polices on the valuation day is assessed by the insurer. In any other case, if the valuation day for a superannuation entity is after 30 June, the entity’s levy base is to be worked out by determining the net balance of the entity on the valuation day based on the audited accounts of the entity. Despite the above, a superannuation entity’s levy base is to be worked out disregarding the superannuation entity’s employer-sponsor receivables. Tax deduction for levy The supervisory levy amount is deductible as a tax-related expense under ITAA97 s 25-5, but any late

lodgment amount or late payment penalty is not deductible (ITAA97 s 26-5). ASIC’s recovery cost levy Under an Industry Funding Model which commenced on 1 July 2017, a levy is payable by entities which are regulated by ASIC to recover its regulatory costs in each financial year. The levy is payable once ASIC has issued a notice to the entities setting out their liability to levy (ASIC Supervisory Cost Recovery Levy Act 2017, ASIC Supervisory Cost Recovery Levy (Collection) Act 2017). Leviable entities include superannuation trustees and Australian financial services licensees. The ASIC recovery cost levy is discussed in ¶4-900.

¶3-920 Levy payable by SMSFs An SMSF is liable to pay a supervisory levy under the Superannuation (Self Managed Superannuation Funds) Supervisory Levy Imposition Act 1991 (Levy Act). Administrative provisions relating to the levy are set out in the Superannuation (Self Managed Superannuation Funds) Taxation Act 1987 (s 15DAA to 15DF). In this paragraph, all references are to this latter Act unless otherwise indicated. The levy is a flat amount of $259 for 2013/14 and later years (for the levy amounts in earlier years, see ¶18-650). If any levy payable remains unpaid after its due date, the trustee of the SMSF is liable to pay general interest charge (GIC) on the unpaid amount for each day, as worked out under TAA Pt IIA and s 15DC. The Commissioner of Taxation can remit the whole or a part of an amount of levy (s 15DF). Tax deduction for levy The levy amount is tax-deductible under ITAA97 s 25-5(1) as the levy relates to the management or administration of the fund’s tax affairs (TR 93/17). GIC is also deductible (ITAA97 s 25-5(1)(c)).

¶3-930 Financial assistance funding levy The Superannuation (Financial Assistance Funding) Levy Act 1993 (Levy Act) and the Superannuation (Financial Assistance Funding) Levy and Collection Regulations 2005 (Levy Regulations) provide for a levy to be imposed on regulated superannuation funds and ADFs (other than a levy-exempt fund or an SMSF or a single member ADF). The levy is to recoup the financial assistance granted to superannuation entities which suffer losses due to fraudulent conduct or theft (SISA Pt 23). The Levy Act does not apply to SMSFs, PSTs or levy-exempt funds. Administrative provisions relating to the levy are set out in the Financial Institutions Supervisory Levies Collection Act 1998. Under Pt 23, a regulated superannuation fund (defined benefit and accumulation funds) or an ADF which suffers a loss as a result of fraudulent conduct or theft may apply to the Minister for a grant of financial assistance (s 229). From 24 September 2007, a superannuation fund eligible for financial assistance at the time a loss is suffered is not prevented from applying for assistance despite subsequently restructuring to an SMSF. Also, a fund may apply for financial assistance on behalf of all beneficiaries at the time the loss was suffered (ie both current and former beneficiaries). Levy imposition and amount Section 6 of the Levy Act provides that the Levy Regulations may impose a levy or levies on each fund other than those to which grants under SISA Pt 23 were made during the year in question. Each levy must be identified in the Levy Regulations by a unique number, and the Regulations may specify a maximum and/or a minimum levy amount (see below). The maximum levy which may be imposed on a fund in a year is 0.05% of the fund’s assets, subject to a minimum and maximum levy amount as determined by legislative instrument (s 8 (maximum rate), s 7 (maximum and minimum levy amount)). Under s 8(1), the amount of levy imposed on a fund is worked out by multiplying the applicable rate by the value of the fund’s assets.

For financial assistance funding levies which have been imposed in pre-2019 years, see earlier editions of the Guide. Tax treatment A financial assistance funding levy paid by a fund is an allowable deduction in the year in which the levy is incurred (ITAA97 s 295-490, item 3). A grant of financial assistance is exempt from income tax and a repayment of financial assistance is not an allowable deduction (ITAA97 s 295-405, item 1; s 295-495, item 5). [SLP ¶4-950]

4 FINANCIAL SERVICES REGULATION SUPERANNUATION AND FSR REGIME Corporations Act 2001 and superannuation

¶4-000

FINANCIAL SERVICES REGULATION Overview of FSR regime

¶4-050

Key concepts and definitions in FSR regime

¶4-060

SMSFs — modifications and exemptions

¶4-090

FINANCIAL PRODUCT DISCLOSURE Overview of financial product disclosure

¶4-100

Shorter PDS regime for certain superannuation products

¶4-130

Product Disclosure Statements

¶4-150

PDS relief — funds offering choice of investment strategies

¶4-160

Providing information on request

¶4-165

Ongoing disclosure of material changes and significant events

¶4-170

Information for existing holders of superannuation/RSA products

¶4-175

Periodic reporting

¶4-180

PDS guidelines for specific superannuation topics

¶4-220

MySuper products — additional disclosure obligations

¶4-250

Dollar disclosure — costs, fees, charges and benefits

¶4-300

Enhanced disclosure of fees and costs in PDS and periodic statements ¶4-320 Cooling-off period

¶4-400

ASIC stop orders

¶4-420

MARKET CONDUCT AND PROHIBITED CONDUCT Rules of conduct — superannuation providers

¶4-500

Best interests obligation and conflicted remuneration

¶4-530

Auditors’ reporting obligations

¶4-550

LICENSING Overview of ASIC licensing regime

¶4-600

Licensing prerequisites

¶4-610

Is superannuation carrying on a business?

¶4-620

Financial product advice and dealing

¶4-630

Exemptions from licence requirements

¶4-650

Exemption for service providers in certain circumstances

¶4-655

ASIC guidelines on limited AFS licensee obligations

¶4-657

Exemption for superannuation and generic calculators

¶4-658

Obligations imposed on AFS licensees

¶4-660

FINANCIAL SERVICES DISCLOSURE Financial services disclosure regime

¶4-665

Financial Services Guide

¶4-670

Statement of Advice

¶4-675

CONDUCT RULES Conduct — financial products and services

¶4-680

DESIGN AND DISTRIBUTION OBLIGATIONS • PRODUCT INTERVENTION Consumer protection measures in disclosures

¶4-700

Product design and distribution obligations

¶4-710

Product intervention power of ASIC

¶4-720

ASIC REGULATORY DOCUMENTS AND GUIDELINES Legislative instruments — interim or transitional relief

¶4-800

Regulatory documents

¶4-850

ASIC consultation papers and reports

¶4-860

ASIC LEVY ASIC’s regulatory cost recovery levy

¶4-900

Superannuation and FSR Regime ¶4-000 Corporations Act 2001 and superannuation In addition to the SIS legislation, the general trust law and a plethora of other laws govern or impact on the operation of superannuation entities. These laws cover a very broad area of superannuation operations, from disclosure of information, licensing of superannuation providers, regulation of market conduct, family law splitting of superannuation, protection of superannuation on bankruptcy and unclaimed superannuation money. The laws governing unclaimed superannuation, money laundering and superannuation on bankruptcy are discussed at ¶3-380, ¶15-100 and ¶15-300, respectively. The laws governing the splitting of superannuation interests on marriage/relationship breakdown are discussed in Chapter 14. This chapter outlines the main requirements of the Corporations Act 2001 and Regulations affecting superannuation funds and their service providers under the financial services regulatory (FSR) regime in Ch 7 of the Act and Regulations (¶4-050). The Corporations Act 2001 and SISA also impose additional disclosure requirements on trustees of superannuation funds which offer MySuper products under the MySuper regime in SISA Pt 2C (see Chapter 9). It is important to note that, as part of the SIS regulatory regime, certain provisions of the Corporations Act 2001 are “regulatory provisions” in SISA. A superannuation entity that fails to comply with a SISA regulatory provision in a year of income may jeopardise its complying fund status for SIS and tax purposes (¶2-140). In addition to administration of the Corporations Act 2001, the Australian Securities and Investments Commission (ASIC) has general administration of: • various parts of SISA (¶3-005), including approving applications from Australian resident natural persons for registration as approved SMSF auditors under SISA (¶5-508), and

• the Superannuation (Resolution of Complaints) Act 1993 (to be repealed at a date to be determined in the future) (Chapter 13). All legislative references in this chapter are to the Corporations Act 2001 (CA) and its Regulations (CR), unless otherwise indicated. Scope of commentary in this chapter The provisions of the Corporations Act 2001 and Regulations affecting superannuation interests, superannuation entities and their service providers are extremely complex and diverse. This chapter provides only brief commentary on the key provisions affecting superannuation products. Readers who seek detailed coverage and commentary in this area are advised to consult Wolters Kluwer publications which provide comprehensive commentary on the Corporations legislation, such as the Australian Company Law Commentary and the Australian Corporations & Securities Legislation services. This chapter also does not cover the education, training, and ethical standards of financial advisers providing personal advice to retail clients on “relevant financial products” (which are similar to the concept of Tier 1 financial products in Regulatory Guide RG 146 (¶4-850)) in the Corporations Act 2001 (as amended by the Corporations Amendment (Professional Standards of Financial Advisers) Act 2017). Under changes from 1 January 2019, only relevant providers who meet prescribed standards can call themselves a “financial adviser” or “financial planner” or similar terms.

Financial Services Regulation ¶4-050 Overview of FSR regime The Financial Services Reform Act 2001 (FSR Act) and the Financial Services Reform (Consequential Provisions) Act 2001 implemented changes to the regulatory system for financial products as part of the government’s Corporate Law Economic Reform Program (CLERP 6). Since then, many “refinement”, amendments and additions have been made to the financial services regulatory (FSR) regime. The FSR framework covers a wide range of financial products, including superannuation, RSAs, securities, derivatives, general and life insurance, deposit accounts and means of payment facilities, and the activities of financial and superannuation providers and any other person carrying on a financial services business. The FSR Act The FSR Act was originally intended to amend the then existing Corporations Law. However, the High Court’s decision in R v Hughes (2000) 18 ACLC 394; (2000) 74 ALJR 802; (2000) 171 ALR 155 in 2000 questioned the constitutional basis of certain aspects of the Corporations Law. As a consequence, and after reaching agreement with the states and territories on a referral of power to address the constitutional uncertainty, the government passed the Corporations Act 2001 to replace the Corporations Law. The FSR regime is contained in Ch 7 (replacing the Corporations Law, former Ch 7 and 8) for all financial products, including superannuation, and their issuers or providers and related entities (see ¶4-060). Superannuation and the FSR regime Chapter 7 deals with three key areas of financial services regulation: (1) product disclosure (2) licensing and conduct of financial services providers (3) licensing of financial markets and clearing and settlement facilities. This chapter contains commentary of the FSR regime only in the first two areas with a focus on the rules as they impact on superannuation entities and their products and service providers. The clearing and settlement facilities are unlikely to affect superannuation products, as RSA and superannuation benefits generally cannot be assigned or traded and transfers of benefits are not effected through a clearing and

settlement facility. The FSR regime generally replaced many of the provisions of SISA (¶3-005) and the RSA Act (¶10-015) which previously provided the product disclosure and market conduct rules. In addition to the corporations legislation, the ASIC Act also prescribes consumer protection measures in relation to the provision of financial services, such as those prohibiting misleading or deceptive conduct, false or misleading representation (¶4-500, ¶4-630), or unconscionable conduct (¶4-680). Parts in Ch 7 relevant to superannuation The following Parts in Ch 7 of CA and CR are relevant to superannuation entities and their products, and advisers and service providers: • Pt 7.1 — definitions and key terms • Pt 7.6 — licensing of providers of financial services • Pt 7.7 — financial services disclosure, covering the disclosure requirements for Australian financial services licensees, their representatives and certain people not required to be licensed • Pt 7.7A — best interests and related obligations and conflicted remuneration rules • Pt 7.8 — conduct connected with financial products and services, other than financial product disclosure (eg dealing with client money) • Pt 7.9 — financial product disclosure and other requirements relating to issue, sale or purchase of financial products (ie superannuation interests and RSAs) • Pt 7.10 — market misconduct and prohibited conduct relating to financial products and financial services. • Pt 7.10A — AFCA and the external dispute resolution scheme. Part 7.10A was inserted into the Corporations Act 2001 by the Treasury Laws Amendment (Putting Consumers First — Establishment of the Australian Financial Complaints Authority) Act 2018 (Act No 13 of 2018). That Act introduced an external dispute resolution (EDR) framework and an enhanced internal dispute resolution (IDR) framework in Pt 7.10A for the financial system. That Act also established the Australian Financial Complaints Authority (AFCA) as the external forum to resolve disputes about products and services provided by financial firms. The AFCA has replaced the Superannuation Complaints Tribunal (SCT) (¶13-000) and the existing EDR schemes approved by ASIC from 1 November 2018 (¶18-933), with the SCT having only residual functions to deal with complaints received before that date. Corresponding Parts in CR to the above CA Parts set out the detailed requirements for the purposes of the above CA Parts, together with the Schedules below: • CR Sch 10 — disclosure of fees and other costs • CR Sch 10A — modifications of CA Pt 7.9 • Sch 10BA — modifications of CA Pt 7.7, 7.8 and 7.9 relating to Short-Form PDSs • Sch 10D — form and content of PDS — superannuation products to which CR Pt 7.9 Div 4 Subdiv 4.2B applies. Not all superannuation products, providers, advisers or service providers are affected by the Ch 7 requirements in the same way. For example, some superannuation trustees and service providers do not need to be licensed because of specific exemptions and certain disclosure rules may not apply to certain types of entities (such as SMSFs). Modifications to Pt 7.9

It is important to note that CR Sch 10A contains modifications to specific provisions in CA Pt 7.9. In addition, ASIC makes legislative instruments (or class orders in pre-2015 years) which modify the application of particular CA or CR provisions and their Schedules, as well as provide exemptions and other relief (see ¶4-800). Shorter PDS regime for certain superannuation products The PDS regime in Ch 7 is modified for certain superannuation products to ensure that: • the PDS is limited to a maximum length of eight (A4) pages • section headings and the contents of the PDS are prescribed so that consumers are provided with the key information they need to make an investment decision, and • other material may be located outside the PDS document, either by way of incorporation by reference (IBR) or otherwise referred to. The modified (shorter) PDS regime is discussed in ¶4-130. Additional disclosure requirements for funds offering MySuper products Trustees of superannuation funds (RSE licensees) which offer MySuper products in the funds under their management have additional disclosure (and publication) obligations under CA and SISA, covering matters such as their product dashboard, details of remuneration of the executive officers of the RSE licensee, and details of portfolio holdings (¶4-250), as well as enhanced disclosure about fees and costs (¶4-320). MySuper products are discussed in ¶9-000 and following.

¶4-060 Key concepts and definitions in FSR regime The FSR regime in Ch 7 revolves around the concept of a financial product and the provision of financial products and financial services. The general definition of a financial product in s 763A is designed to be flexible and is focused on the three key functions provided by financial product issuers, namely making a financial investment, managing a financial risk and making non-cash payments (s 763B to 763D). The general definition is followed by a list of specific inclusions and exclusions (s 764A to 765A). A superannuation interest and an RSA are specific inclusions as financial products. A regulationmaking power provides further flexibility to include or exclude particular products as appropriate (see “What is a ‘financial product’?” below). A person provides a financial service if the person provides “financial product advice” (as defined in s 766B: ¶4-630), deals in or makes a market for a financial product or sells one’s own products, operates a managed investment scheme, or provides a custodial or depository service (s 766A). A financial product includes the issue of a superannuation interest or the opening of an RSA, but the operation of a regulated superannuation fund, an ADF or a PST does not amount to providing a custodial or depository service (s 766E(3)). This exception, dealing with when a custodial or depository service is provided, only applies to the operation of superannuation entities by the trustees of those entities, and not in respect of conduct engaged in by parties who are not the trustees (eg third party service providers). Retail or wholesale client Another key concept under the FSR regime is the distinction between a retail client and a wholesale client. Generally, the consumer protection provisions in Ch 7 apply only to retail clients as it is recognised that wholesale clients, who are better informed and better able to assess the risks involved in financial transactions, do not require the same level of protection. Accordingly, the underlying assumption is that financial products or financial services are provided to a person as a retail client except where the provision clearly states otherwise. Such a person is then also taken to acquire and dispose of the financial product or service as a retail client. A person who does not acquire a financial product or service as a retail client is a wholesale client (s 761G).

A mechanism provides for experienced investors (sophisticated investors) to be certified as wholesale clients by a financial services licensee (s 761GA). This mechanism does not apply to general insurance products, superannuation products or retirement savings account products, or where the product is provided for use in connection with a business (s 761GA(b), (c)). Meaning of retail client, wholesale client, and professional investor for the purposes of the FOFA provisions The Future of Financial Advice (FOFA) provisions are discussed in ¶4-530. The provisions below ensure that the wholesale and retail client distinction that currently applies in other Parts of the Corporations Act also applies to the FOFA provisions. For the purposes of the FOFA provisions: • a person that meets the net assets test, or the income test (both specified in the CR) is not treated as a retail client where they acquire a product or service for a company or trust that they control (s 761G(7)(ca); reg 7.6.02AB) • the net assets and gross income of a company, or trust that a person controls, can be included in determining the person’s net assets or income for the purpose of qualifying to be treated as a wholesale client under para 761G(7)(c) (s 761G(7A), (7B); reg 7.6.02AC) • where a financial product or service is acquired by a body corporate as a wholesale client, related bodies corporate of the client are also considered to be wholesale clients (s 761G(4A); reg 7.6.02AD) • a person is considered to be a professional investor if the person has, or is in control of, gross assets of at least $10m, including any assets held by an associate or under a trust that the person manages (reg 7.6.02AE). In relation to superannuation products, s 761G(6) provides that where a person acquires a superannuation product or an RSA product, or a financial service related to one of these, the person acquires the product as a retail client. This test is not restricted to individuals and small businesses, but applies to all persons, regardless of their circumstances. The reason for s 761G(6) is the difficulty in drawing any meaningful distinction based on product value between retail and wholesale clients in relation to superannuation and RSAs, given the large amounts frequently involved in superannuation payouts. However, if a trustee of a pooled superannuation trust (PST) provides a financial product that is an interest in the trust to a superannuation fund, ADF, PST, retirement savings account provider or public sector superannuation scheme that has net assets of at least $10m, these entities are not treated as a retail client of the PST (s 761G(6)(aa)). In general, retail clients are given additional protection by way of mandatory disclosures in the form of: • the Financial Services Guide (¶4-665) • the Statement of Advice (SOA) (¶4-665) • the Product Disclosure Statement (PDS) (¶4-150) • compensation and complaints handling arrangements (¶4-660). Other definitions Many former Corporations Law definitions were redrafted in CA so that they can apply to the full range of financial products that can come within the FSR regime. For example, the concept of “able to be traded” replaces the term “admitted to quotation” to reflect the fact that the FSR regime applies to all financial markets and not just the securities market. Similarly, the concepts of “acquire” and “dispose” have been defined broadly to capture the wide range of products subject to Ch 7. The disclosure obligations in Pt 7.7 apply to a providing entity, ie a financial services licensee or an authorised representative. A providing entity must prepare a Financial Services Guide which will have to

contain certain information so that consumers can make an informed decision about whether to acquire a financial service (s 941A; 942B: ¶4-670). A Statement of Advice has to be prepared by a providing entity (eg a financial adviser) who provides personal advice. It must contain information about the personal advice so a retail client can make an informed decision about whether to act upon that advice (s 946A; 947B: ¶4-675). Generally, the SOA must, if given separately to the personal advice, be provided to the client when, or as soon as practicable after, that advice is provided (s 946C). The product disclosure rules in Pt 7.9 impose obligations on a regulated person as defined in s 1011B. Basically, a regulated person in relation to a financial product means the issuer or seller of the product, and any financial services licensees and their representatives, as well as persons not required to hold an Australian financial services licence (eg because of an exemption). This broad definition of a regulated person means that all superannuation entities are subject to the product disclosure and other requirements in Pt 7.9 even though they may not be required to hold a financial services licence (eg an SMSF). Generally, a regulated person must provide a Product Disclosure Statement (¶4-150). The PDS must be prepared by or on behalf of either the product issuer or the seller by a “responsible person” (s 1013A). A PDS must contain sufficient information so that a retail client may make an informed decision about whether to purchase a financial product as well as allow for comparison of financial products (s 1013C to 1013E). A separate, more targeted and simplified PDS regime applies for superannuation products (¶4130). What is a “financial product”? As a general rule, all Parts of Ch 7 apply to the full range of financial products as defined in Pt 7.1 Div 3. For the purposes of Ch 7, the general definition of “financial product” is a facility through which, or through the acquisition of which, a person makes a financial investment, manages financial risk or makes noncash payments (s 763A). That is, a person performing a particular function in relation to a financial product, such as operating a financial market or providing financial advice, will have to comply with the relevant Parts of Ch 7. Some specific elements of the regulatory regime will apply to a limited range of financial products. In addition, the regulations may vary the elements applying to certain products or ASIC may exercise an exemption and modification power in relation to the elements for particular financial products. Section 764A sets out the kinds of facilities or things that are specifically included as a financial product (whether they come within the general definition in s 763A or not), and s 765A specifically excludes certain facilities or things as financial products (eg a superannuation interest prescribed by the regulations may be excluded: see s 765A(q)). A financial product includes a superannuation interest (within the meaning of SISA: ¶3-520) or an RSA (within the meaning of the RSA Act: ¶10-030) or an FHSA (first home saver account, within the meaning in the First Home Saver Accounts Act 2008) (s 764A(1)(g), (h), (ha)). A superannuation product means a superannuation interest within the meaning of SISA, ie a beneficial interest in a regulated superannuation fund, an ADF or a PST. An RSA product means an RSA, ie an account or policy provided by an RSA provider under the RSA Act, and an FHSA product means an FHSA, ie an account or life policy provided by an FHSA provider under the FHSA Act (s 761A). The regulation-making powers in Ch 7 enable modifications to be made to the classes of superannuation interests to which particular provisions are to apply (eg s 1020G in relation to product disclosure). As defined, a financial product will include an interest in an SMSF (as defined in SISA s 17A: ¶5-200). However, SMSFs are excluded from the licensing and conduct and disclosure obligations in Pt 7.6 to 7.8 by regulation, but are subject to the product disclosure provisions in Pt 7.9 with specific modifications and exemptions (¶4-090). Incidental products The definition of “financial product” does not include a range of consumer transactions that have an element, but not the primary purpose, of managing a financial risk (s 763E).

In particular, where the financial product purpose (ie making a financial investment, managing financial risk, or making non-cash payments) is incidental to the main purpose of a facility, there will not be a financial product. However, to the extent that a product comes within the list of specific inclusions in s 764A, it will be covered by Ch 7 whether or not it is incidental to the main purpose of a facility. For example, superannuation associated with a contract of employment would be covered (as would, for example, insurance associated with taking out a home loan or consumer credit insurance). FSR regulator and SIS regulator ASIC has responsibility for general administration of CA and CR and the ASIC Act (¶4-000). Under SISA, APRA, ASIC and the ATO have regulatory responsibility for disclosure by, and the conduct of, superannuation entities in other areas not covered by the FSR regime (see Chapters 3, 5 and 9). For a summary of the SISA provisions for which ASIC has general administration, see ¶3-860.

¶4-090 SMSFs — modifications and exemptions The Corporations Act 2001 and Corporations Regulations 2001 apply to SMSFs, subject to the main exceptions or modifications listed below and to the modified PDS regime for superannuation products (see ¶4-130). • Licensing — trustees of SMSFs are exempted from the requirement to hold an Australian financial services licence (AFSL) (s 911A(2)(j): ¶4-650). • Licensing — certain service providers are not required to hold an AFSL in respect of provision of certain types of advice relating to SMSFs (s 766A(2)(b); reg 7.1.29(1) to (5): ¶4-655). • Providing a Product Disclosure Statement (PDS) — in a recommendation or issue situation, a PDS is not required to be given to a client if the financial product is an interest in an SMSF and there are reasonable grounds for believing the client has access to all of the information that the PDS would be required to contain (see below) (s 1012D(2A)). • Information on request — the requirement in s 1017C(5) to provide certain documents/information to a concerned person on request does not apply to SMSFs (s 1017C(6)) (¶4-175). • Periodic statements — the specific information requirements in s 1017D(5)(g) do not apply to SMSFs (reg 7.9.19 to 7.9.21) (¶4-180). • Specific information — for SMSFs, the specific information requirements in s 1017DA(1)(a) are limited to information specified in reg 7.9.37(1)(p) (reg 7.9.38) (¶4-180). • Material changes, significant events — the modifications to the information requirements in s 1017B(5) (as provided in CR Sch 10A Pt 10) do not apply to SMSFs (reg 7.9.43). • Prescribed documents — the prescribed documents for the purposes of s 1017C(5)(a) (as provided in Sch 10A Pt 10) do not apply to SMSFs (reg 7.9.45). • Exit report — the specific information requirements in s 1017D(5)(g) do not apply to SMSFs (reg 7.9.54; 7.9.55) (¶4-175). • Confirmation of transactions — the requirements in s 1017F(4) do not apply to SMSFs (reg 7.9.62). • Dispute resolution — the requirements in s 1017G do not apply to SMSFs (reg 7.9.63H). Subject to the exemptions/modifications, the product disclosure requirements for superannuation funds generally are discussed at ¶4-100 and following. SMSF issuing a PDS before a person becomes a member A “regulated person” (which includes a trustee of an SMSF: ¶4-060) must give a PDS to a person to whom the product is or is to be issued as a retail client under s 1012B.

Section 1012D(2A) provides that in a recommendation situation or issue situation, a regulated person does not have to give the client a PDS for a financial product if: • the financial product is an interest in an SMSF, and • the regulated person believes on reasonable grounds that the client has received, or has and knows that they have, access to all of the information that the PDS would be required to contain. In determining whether a PDS should be prepared, ASIC’s views are that the trustee of an SMSF would need to have regard to the information that would be contained in a PDS and the persons to whom they would be providing information and, depending on the circumstances, s 1012D(2A) may relieve many SMSF trustees from having to give a PDS (see “Practical aspects to consider” below). SISA s 17A requires each member of an SMSF to be a trustee of the fund or, if the trustee is a body corporate, to be a director of the corporate trustee (¶5-300). In order to properly fulfil their duties as trustees or directors, it is more likely that prospective members will already know all of the information that is required to be contained in the PDS. In this situation, there may be reasonable grounds to believe that these members either have received or have (and know they have) access to the relevant information and a PDS would not need to be given to them. However, where the prospective member’s role suggests that he/she does not already know or have access to the relevant information, a PDS must be provided. In summary, whether the trustees of an SMSF must prepare and give a PDS will depend on the circumstances, in particular whether there are reasonable grounds to believe that the members have received or have (and know they have) access to information about the benefits, risks, features and costs that are significant to the fund, as well as the other information required to be included in a PDS under s 1013C, 1013D and 1013F (¶4-150). If a PDS is required to be given, an in-use notice does not need to be lodged with ASIC by the trustees of the SMSF (s 1015D(2): ¶4-150) (ASIC QFS 145). Practical aspects to consider The members of an SMSF must also be the trustees (or directors of the trustee company) of the fund and, generally, in these cases, the trustees are effectively providing a PDS to themselves. However, the general industry view is a PDS would seem likely to be required in the majority of SMSF cases. This is because the s 1012D(2A) exemption is based on the trustee/member having considerable knowledge of superannuation laws and obligations and this is not the case for many SMSF trustees who usually have to rely on external advice from their accountants and/or financial advisers. The SMSF trustees must ensure that a potential member (client) has “received, or has, and knows that they have, access to, all of the information that the PDS would be required to contain” for the s 1012D(2A) exemption to apply. Many service providers to the SMSF industry have advised that providing a PDS is beneficial and can be a very effective method of eliminating misunderstanding, as it provides a basis for informing the retail client (prospective member) of what they should know regarding the particular financial product. As noted above, whether the PDS exemption will apply in a particular case will depend on all the circumstances in the case. Issuing a PDS — SMSF converting from growth to pension stage The commencement of a pension from an SMSF constitutes the issue of a new superannuation interest (¶4-150). As a result, the trustee of the SMSF is required to issue a PDS to the member who is converting from the accumulation to pension phase unless an exemption from the PDS requirement is available. An SMSF is taken to have issued a new financial product to the member even where its trust deed does not allow the member’s benefits to be paid other than as a pension. Where a PDS is required, this has to be given to the member within three months of commencement of the pension, rather than at the commencement (s 1012B(3); 1012D(2A); 1012F; reg 7.9.04(1)(b)). Where an existing member of an SMSF is able to elect to take a benefit as a pension, an SMSF is taken to have issued a new financial product on the earlier of:

• when it acknowledges receipt of the member’s election to receive a pension, or • when it makes the first payment of the pension. On the issue of a new financial product, the general requirement in s 1012B(3) is that a PDS, if required, must be given to the member “at or before the time when the regulated person makes the offer, or issues the financial product” (¶4-150). As the acknowledgment of the member’s election to take a pension is the relevant issue date in most cases, the three-month timeframe for giving a PDS will start from that date (reg 7.9.04(1)(a)(ii)). Superannuation splitting on marriage/relationship breakdown If a non-member spouse becomes entitled to a payment split under a marriage/relationship breakdown agreement and becomes a member of a superannuation fund, a PDS must be given to the non-member spouse when the fund trustee gives a payment split notice to the non-member spouse (reg 7.9.87(2)).

Financial Product Disclosure ¶4-100 Overview of financial product disclosure Part 7.9 sets out the financial product disclosure and related provisions covering the issue of financial products. The disclosure requirements apply to all financial products (including superannuation and RSA products), with significant differentiation between products (see also the “Shorter PDS regime for superannuation products” in ¶4-130). The Pt 7.9 provisions replaced the disclosure regimes for financial products previously contained in SISA, the RSA Act and their regulations which applied before 11 March 2002. Part 7.9 applies to financial products that are issued, or will be issued, in the course of a business of issuing financial products (s 1010B(1)). To ensure that not-for-profit superannuation funds which might not otherwise be regarded as being in the business of issuing financial products are covered by Pt 7.9, the issue of any superannuation product is taken to occur in the course of a business of issuing financial products (s 1010B(2)(b)). Relevantly, Pt 7.9 (subject to the PDS modifications for superannuation products: ¶4-130) covers the following: • point-of-sale/offer general requirement to give a Product Disclosure Statement (PDS), PDS preparation and content, and supplementary PDS (Div 1; 2) • issuer’s obligations in relation to financial products (Div 3), which encompass: – giving additional information on request (s 1017A) – ongoing disclosures for material changes and significant events (s 1017B) – information for existing holders of superannuation products and RDS products (s 1017C) – periodic reporting requirements (s 1017D) – giving additional information as prescribed by regulations (s 1017DA) – handling money from applicants for financial products (s 1017E) – confirming transactions (s 1017F) – meeting appropriate dispute resolution mechanisms for product issuers (s 1017G) – giving a Short-Form PDS (s 1017H to 1017I: see CR Sch 10BA) • advertising for financial products (Div 4)

• cooling-off periods (Div 5) • stop orders, exemptions and modifications (Div 6) and offences and enforcement (Div 7). The Pt 7.9 disclosure obligations are expressed in terms of general principles capable of application across the full range of financial products. For many products the general principles are sufficient, but for some products there are specific requirements as to how the general principles apply. For superannuation and RSA products, Pt 7.9 provides for the use of regulations to specify in detail how the general obligations are to be complied with. ASIC legislative instruments (class orders) and regulations (as set out in CR Sch 10 to 10D) are also used to modify or amend the application of certain provisions of Pt 7.9 (see ¶4-050, ¶4-150, ¶4-320). For example, the PDS regime for certain superannuation products is modified to make it shorter and simpler for issuers, and more focussed and easier to understand for superannuation investors or clients (see ¶4-130). Coverage of the Corporations Regulations 2001 The principal disclosure obligations and requirements in CR (subject to PDS modifications for certain superannuation products: ¶4-130) cover: • arrangements for PDSs in relation to superannuation and RSA products, including alternative ways of giving a PDS, PDS in electronic form, late provision of PDS for certain funds, when a PDS is not required, additional rules for eligible rollover funds, dealing with money before issue of product, and PDSs for FHSAs — reg 7.9.01 to 7.9.11 (note that the special rules for superannuation entities in former reg 7.9.10 and 7.9.11, and Sch 10B and 10C were disallowed by parliament) • the form and content of PDS for certain superannuation products (for the modified or shorter PDS regime: see ¶4-130) — reg 7.9.11K to 7.9.11R • application forms for standard employer-sponsors and successor funds, offers of superannuation interest without eligible application, remedies under defective PDSs — reg 7.9.12 to 7.9.14A • general, disclosure of dollar amounts, statement not included, records, and fees — reg 7.9.15A to 7.9.15C; 7.9.15DA to 7.9.15DC • periodic statements for retail clients for superannuation products with an investment component (superannuation entities and RSAs) — reg 7.9.18 to 7.9.30 • fund information for retail clients for superannuation products with an investment component (superannuation entities and RSAs) — reg 7.9.29 to 7.9.42 • ongoing disclosure of material changes and significant events — reg 7.9.43 to 7.9.44 • information on request (members and payments) — reg 7.9.45 to 7.9.47 • information about complaints — reg 7.9.48 • periodic information when product holders cease to hold products, including exiting and deceased members — reg 7.9.49 to 7.9.60B • Short-Form PDSs — reg 7.9.61AA; Sch 10B • dealing with application money, confirming transactions and cooling-off periods — reg 7.9.61A to 7.9.70 • miscellaneous matters, including reporting periods, ways of giving information, electronic forms, additional requirements for lost members and RSA holders — reg 7.9.71 to 7.9.82 • special rules relating to splitting superannuation under the Family Law Act 1975 arrangements — reg

7.9.84 to 7.9.94. ASIC class order relief and guidelines ASIC legislative instruments (class orders) provide relief or modifications on a range of obligations under CA and CR. The main instruments and class orders affecting superannuation are noted in ¶4-800. ASIC also issues other regulatory documents (such as ASIC regulatory guides) which provide guidelines on the application of law. For those relevant to superannuation products, see ¶4-850.

¶4-130 Shorter PDS regime for certain superannuation products CR Pt 7.9 Div 4 prescribes the PDS content requirements for superannuation products, RSA products, annuity products and FHSA products. From 22 June 2012, a modified PDS regime (also commonly referred to as the “shorter PDS regime”) applies to certain superannuation products under CR Pt 7.9 Div 4 Subdiv 4.2B (see “Legislative framework for modified PDS of a superannuation product to which Subdiv 4.2B applies” below). A “superannuation product” means a financial product that is a “superannuation interest” within the meaning of SISA, ie a beneficial interest in a regulated superannuation fund, an ADF or a PST (s 761A; 764A(g): ¶4-060). The modified PDS regime is specifically targeted for investors in superannuation products to which Subdiv 4.2B applies (see below). The key features of the modified regime are as follows: • content of PDS — the PDS must contain section headings and the minimum content prescribed in CR Sch 10D cl 2 to 10. This is to ensure that consumers are provided with the key information (such as product features and benefits, risks, taxation and investment options and fees and costs) that they need to make an investment decision • form of PDS — the PDS must have a maximum length of eight (A4) pages and a minimum font size (Sch 10D cl 1) • other material may be located outside the PDS — this information may either be: – incorporated by reference (IBR) — IBR material is deemed to be part of the superannuation product PDS and the full range of PDS liability and enforcement provisions of CA apply to it, or – otherwise referred to — such referred material does not form part of the PDS but is still subject to other provisions of CA and the Australian Securities and Investments Commission Act 2001, such as the general prohibitions on misleading and deceptive conduct. The following topics are discussed in this paragraph: • Legislative framework for modified PDS of a superannuation product to which Subdiv 4.2B applies: – Entities and superannuation products covered by Subdiv 4.2B – Part 7.9 provisions that do not apply — carved-out provisions – Modification of Pt 7.9 provisions for superannuation products covered by Subdiv 4.2B – Incorporated materials rules • Schedule 10A Pt 5B — modifications for superannuation products covered by Subdiv 4.2B • Schedule 10D — form and content of a superannuation product PDS • Shorter PDS — ASIC guidelines for superannuation products PDS compliance, and • ASIC class orders — Deferral of Stronger Super amendments in relation to PDS and periodic statement disclosure.

Legislative framework for modified PDS of a superannuation product to which Subdiv 4.2B applies CR Pt 7.9 Div 4 Subdiv 4.2B (reg 7.9.11K to 7.9.11R) provides the legislative framework which: • prescribes the persons and superannuation products to which Subdiv 4.2B applies • modifies or carves out certain provisions of the general PDS regime in CA Pt 7.7 and 7.9 so that those provisions do not apply or only apply in its modified form, and • prescribes that the PDS form and content requirements for the superannuation product are set out in CR Sch 10D (see “Schedule 10D — form and content of a superannuation product PDS” below). Entities and superannuation products covered by Subdiv 4.2B The modified PDS regime in Subdiv 4.2B applies to all superannuation product PDS except a superannuation product: • that is solely a defined benefit interest • that is solely a pension product • that has no investment component (also known as a “risk-only superannuation product”), or • that is subject to relief (reg 7.9.11K(2)). This means that combined accumulation/pension products and combined accumulation/defined benefits products, but not pure risk products, are covered by the Subdiv 4.2B regime. Relief — superannuation platforms, multi-funds and hedge funds “Superannuation platforms” refer to superannuation products in which: • two or more investment strategies are available from which a member or a class of members may choose in accordance with SISA 52(4), and • each of the investment strategies enables a “regulated acquisition” (within the meaning of CA s 1012IA) of a financial product to be made. The shorter PDS regime under CR Pt 7.9 Div 4 Subdiv 4.2B (for superannuation products) and Subdiv 4.2C (for simple managed investment schemes) had commenced on 22 June 2012. Since 2012 ASIC has deferred the operation of the shorter PDS regime to superannuation platforms, multi-funds and hedge funds (relevant products) by providing temporary relief in successive ASIC Class Orders. This relief is extended to 30 June 2022 to permit further consideration of the final policy position in relation to permanent relief from the application of the shorter PDS regime to the relevant products (ASIC Corporations (Amendment) Instrument 2018/473: www.legislation.gov.au/Details/F2018L00708, amending Class Order CO 12/749). ASIC has amended the characteristics that trigger a scheme’s classification as a hedge fund so as to reduce the number of funds specifically excluded from the shorter PDS regime. The funds that remain are more complex products, which are required to address the benchmarks and disclosure principles in Regulatory Guide RG 240 “Hedge funds: Improving disclosure”. This will ensure that ASIC’s disclosure requirements for hedge funds are appropriately targeted at more complex schemes that expose investors to greater risks. A superannuation product that has a default option or which provides pre-mixed investment strategies remains subject to the shorter PDS regime, even if it also allows a member to choose from a range of accessible investments. For the purpose of determining whether a superannuation product is a superannuation platform, a facility (for example a cash account) where members’ contributions are temporarily placed when they fail to make a choice of investment or makes an error in their choice of investment is to be disregarded (CO 12/749). Part 7.9 provisions that do not apply — carved-out provisions

The following provisions of the general PDS regime in CA Pt 7.7 and 7.9, which would normally apply to a financial product PDS, do not apply to PDS for a superannuation product to which Subdiv 4.2B applies: • s 942DA (combining a Financial Services Guide with a PDS) — s 942DA does not apply to a superannuation product (reg 7.9.11L). Combining a superannuation PDS with other documents is not consistent with the objective of providing consumers with a short and simple PDS • Pt 7.9 Div 2 Subdiv D — the supplementary PDS provisions in Subdiv D do not apply to a PDS for superannuation products (reg 7.9.11M). Given that the simplified superannuation product PDS is a short document, a new PDS should be issued when there are major changes to a superannuation product, instead of a supplementary PDS (reg 7.9.11M). The carve-out is achieved by way of s 951C(1)(b) and 1020G(1)(b), which allow the regulations to exempt a financial product from all or specified provisions of CA Pt 7.7 and 7.9, respectively. Modification of Pt 7.9 provisions for superannuation products covered by Subdiv 4.2B A PDS for a superannuation product covered by Subdiv 4.2B: • must include the information and statements mentioned in Sch 10D • must be in the form mentioned in Sch 10D (reg 7.9.11O): see “Schedule 10D — form and content of a superannuation product PDS” below. Schedule 10A of CR provides for modifications of CA Pt 7.9 (which sets out disclosure and other provisions relating to the issue, sale and purchase of financial products) with respect to a superannuation product, and Sch 10A Pt 5B (containing cl 5B.1 to 5B.6) sets out the specific modifications for superannuation products to which Subdiv 4.2B applies (reg 7.9.11N) (see below). Other modifications are: • reg 7.9.11Q (rules about retention of copies of PDS for superannuation product) — each PDS version must be retained by the responsible person for a period of seven years. This is consistent with existing PDS record-keeping requirements. The regulation also applies this requirement to incorporated information located outside the PDS document and provides guidance on determining the start of the seven-year period in different situations • reg 7.9.11R (providing copy of superannuation product PDS free of charge) — if a person requests a copy of the PDS covered by Subdiv 4.2B, the responsible person for the PDS must give the person, free of charge, a copy of the Statement and a copy of a matter in writing that is applied, adopted or incorporated by the Statement within eight business days • reg 7.9.11P (references to incorporated information for superannuation product) — see “Incorporated materials rules” below. Incorporated materials rules Regulation 7.9.11P(1) sets out the requirements for information in a superannuation product PDS that is incorporated by reference (referred to in the provision as “applying, adopting or incorporating” a matter contained in writing), as permitted under s 1013C(1B) (see CR Sch 10A Pt 5B cl 5B.2). The requirements are: • incorporation by reference may only be used when expressly allowed under the Regulations (reg 7.9.11P(2)) • if a matter is incorporated by reference, it must be in writing, be clearly distinguishable from other matters that are not, and be publicly available in a document other than the PDS, unless the product is issued by a corporate superannuation fund to a standard employer-sponsored member within the meaning of SISA (this exclusion applies because of special arrangements these funds may have with their members which means the information is not made public) (reg 7.9.11P(3)(a)). The ability to request and receive a hard copy of the PDS and incorporated material will satisfy the requirement for

the incorporated matter to be publicly available (the requirement to make the incorporated material publicly available reflects the existing requirement in reg 7.9.15DA(1)(a)) • the responsible person for the PDS must: – identify the matter by including in the PDS a concise description of the matter and ensuring that the reference to the matter is clearly distinguishable from the other contents of the PDS (reg 7.9.11P(3)(b)) – identify each version of the matter (by including the date on which the version was prepared) and state the date in a prominent position at or near the front of the version (reg 7.9.11P(3)(c)) (note that the PDS document itself also has to be dated: see s 1013G) – ensure that a person who is relying on the PDS is able to have access to the document containing the matter (or, if there is more than one version of the document containing the matter, each version) reasonably easily and reasonably quickly (reg 7.9.11P(3)(d)). The ability for a consumer to obtain a hard copy of the document upon request satisfies this requirement (see below if a website link is provided) • the person responsible for the PDS must ensure that the PDS includes the statements below, and the statements are set out in each place at which the matter has been applied, adopted or incorporated (reg 7.9.11P(4)): “1. You should read the important information about [the subject] before making a decision. Go to [location of the matter that has been applied, adopted or incorporated] 2. The material relating to [matter] may change between the time when you read this Statement and the day when you sign the application form.” • the responsible person for the PDS must ensure that each document mentioned in reg 7.9.11P(3) (see above) includes the statement below (reg 7.9.11P(5)): “1. The information in this document forms part of the Product Disclosure Statement [identification by name, date and version (if applicable) of each Statement].” If a website link is provided for the purposes of reg 7.9.11P(3)(d) (ie quick and easy accessibility: see above), this needs to link to the material with as few steps as possible (eg linking directly to the material or via a prominent link on a splash page). A website link only to the home page of a provider’s website where a person needs to navigate a number of links on the website to locate the material is not considered to be reasonably quickly and easily accessible. Note also that the PDS content requirements prescribed in Sch 10D also specify that a contact telephone number for requesting hard copies of information must be provided in the PDS to assist accessibility to a matter incorporated by reference (see “Schedule 10D — form and content of a superannuation product PDS” below). To avoid doubt, reg 7.9.11P(6) confirms that whenever a physical PDS is given to a client, all the incorporated information is deemed to have been given at the same time in accordance with reg 7.9.11P(1) to (5). This addresses concerns that parties may otherwise be liable to claims that important information had not been provided. Also, where information is incorporated, that information is deemed to have been given to the person on the day the product is acquired (reg 7.9.11P(7)). Schedule 10A Pt 5B — modifications for superannuation products covered by Subdiv 4.2B Section 1013C modified Section 1013C(1) in Pt 7.9 sets out the standard PDS requirements for a financial product (see “What must be included with a PDS” in ¶4-150). Schedule 10A cl 5B.2 modifies s 1013C(1) by replacing s 1013C(1) with s 1013C(1) to (1F), which provide as follows:

• the contents and form of a superannuation PDS are prescribed in the regulations. The detailed provisions are provided in Sch 10D (see below), as prescribed by reg 7.9.11O (see above) (s 1013C(1)) • a superannuation PDS may incorporate information by reference (in the regulations this is referred to as “applying, adopting or incorporating of a matter in writing”), including a matter that is required to be included by another law (s 1013C(1A)) • a PDS may make provision for a matter contained in writing by applying, adopting or incorporating the matter as in force at a particular time or as in force from time to time (s 1013C(1B)) • all information incorporated by reference is considered to be part of the PDS, and the incorporated material does not need to be given at the same time as the PDS unless requested (s 1013C(1C)) • the regulations may prescribe further requirements applying to incorporating information by reference into a superannuation product PDS (s 1013C(1D)). The above means that information incorporated by reference into a superannuation product PDS is subject to the legal regime that generally applies to a PDS in CA. This is important as it determines the extent and nature of the legal liability attaching to the incorporated information. For instance, the PDS enforcement provisions apply to that information, which will allow, among other things, consumers to claim redress for losses or damages if the information proves to be defective. Also, a superannuation product PDS may refer to other information (other than information to which s 1013C(1A) applies) that is available in another document (known as “referencing”) (s 1013C(1E)). This allows other information to be referred to without being formally incorporated. Any referenced information is not part of the superannuation product PDS (s 1013C(1F)). The PDS liability regime does not attach to referenced information which is not formally part of the PDS, but such information is still subject to requirements such as those against misleading and deceptive conduct in the Act and the ASIC Act. Sections 1013D and 1013E omitted Schedule 10A cl 5B.3 and 5B.4 omit s 1013D and 1013E, which prescribe the general content requirements for a PDS in Pt 7.9 (see ¶4-150). Their omission means that they do not apply to a superannuation product PDS as Sch 10D (see below) prescribes the specific form and contents of a superannuation product PDS. Section 1013L substituted Section 1013L allows a PDS to consist of two or more documents. Section 1013L (as amended by Schedule 10A cl 5B.5) provides that a superannuation product PDS may consist of more than one document only if the documents consist of the prescribed PDS document and any incorporated information that forms part of the PDS. Section 1015D(3) omitted Schedule 10A cl 5B.6 omits s 1015D(3), which provides that a PDS must be kept for seven years. A similar record-retention requirement applies in reg 7.9.11Q (see “Modification of Pt 7.9 provisions for superannuation products covered by Subdiv 4.2B” above). Schedule 10D — form and content of a superannuation product PDS Schedule 10D of CR is made for the purposes of reg 7.9.11O to prescribe the form and content of a PDS for a superannuation product to which Subdiv 4.2B applies (as discussed above). For ASIC guidelines on the fees and cost disclosure requirements in the PDS and other matters, see “ASIC guidance — Enhanced fee and cost disclosure requirements for superannuation trustees” below. Form — superannuation product PDS (Sch 10D cl 1) The length of a PDS for a superannuation product (not including any matter in writing that is applied, adopted or incorporated by the Statement) must not exceed: (a) if it is printed on A4 pages — 8 pages

(b) if it is printed on A5 pages — 16 pages (c) if it is printed on DL pages — 24 pages, or (d) otherwise — if it is formatted to be printed on A4 pages, 8 A4 pages. The minimum font size for text in the Statement is: (a) for the name, address, ABN (if applicable), ACN (if applicable) and AFSL (if applicable) of the person giving the Statement — 8 points, and (b) for all other text — 9 points. Notes to Sch 10D cl 1 state that: • the PDS must be worded and presented in a clear, concise and effective manner, as required by s 1013C(3) • a person required to give a PDS to a vision-impaired person must comply with its obligations under the Disability Discrimination Act 1992. Content — superannuation product PDS (Sch 10D cl 2–11) The Corporations Act 2001, as modified in accordance with Subdiv 4.2B, requires information to be included in the PDS for a superannuation product only to the extent to which the requirement is applicable to the product. Table of contents, sections and warning The PDS for a superannuation product to which Subdiv 4.2B applies must include numbered “Sections” as follows (Sch 10D cl 2(1)):   Section 1: About [name of superannuation product]   Section 2: How superannuation works   Section 3: Benefits of investing with [name of superannuation product]   Section 4: Risks of superannuation   Section 5: How we invest your money   Section 6: Fees and costs   Section 7: How superannuation is taxed   Section 8: Insurance in your superannuation   Section 9: How to open an account. For the content of the Sections, see below. Section 8 is not required if the superannuation product does not provide insurance cover (Sch 10D cl 10(1)). In such a case, Section 9 is renumbered as 8. The PDS may include additional Sections and other information, provided this does not cause the PDS to exceed the 8-page limit (see above) (Sch 10D cl 2(5)). The PDS must include: (a) a table of contents that sets out the titles mentioned above, and (b) the telephone number of the superannuation trustee to enable a person who acquires the superannuation product to request a copy of the following (under reg 7.9.11R; see above):

(i) a copy of the Statement, and (ii) a copy of a matter in writing that is applied, adopted or incorporated by the Statement (Sch 10D cl 10(3)). A person may request a hard copy of the PDS and any incorporated information by phone. The telephone contact requirement is because not all potential customers may have access to the internet, and merely providing a website link means that any incorporated material is not considered to be reasonably accessible (see “Incorporated materials rules” above). The PDS must advise the reader (client) that it contains references to important information, and that clients should consider that information before making a final decision to invest in the product. The advice (warning) must state that the information provided is general information only and does not take account of the client’s personal financial situation or needs, and that they should obtain financial advice tailored to their own personal circumstances. This advice must be displayed in a prominent style and position at or near the beginning of the PDS (Sch 10D cl 10(4)). The PDS does not need to indicate that a particular requirement is not applicable to the superannuation product (Sch 10D cl 10(6)). Content of Sections Section 1 (About [name of superannuation product]) — Sch 10D cl 3 Section 1 of the PDS must: (a) describe, in the form of a summary, the superannuation entity and the MySuper products and other investment options offered by the entity (b) include a statement of where, on the entity’s website, the member can find: (i) the product dashboard for each MySuper product and choice product in the entity, and (ii) each trustee and executive remuneration disclosure for the entity, and any other document that must be disclosed for the entity under SIS Regulations, and (c) a statement describing the entity’s process for transitioning each member whose interest includes an accrued default amount from an existing default option to a MySuper product by 1 July 2017 (Sch 10D cl 3). Item (c) applies until the earlier of 1 July 2017 and the day on which the entity has attributed each accrued default amount in the entity to a MySuper product. Section 2 (How superannuation works) — Sch 10D cl 4 Section 2 of the PDS must include statements to the effect that: (a) superannuation is a means of saving for retirement which is, in part, compulsory (b) there are different types of contributions available to a person (eg employer contributions, voluntary contributions, government co-contributions) (c) there are limitations on contributions to, and withdrawals from, superannuation (d) tax savings are provided by the government, and (e) most people have the right to choose into which superannuation entity the employer should direct their superannuation guarantee contributions. More detailed information on the above matters may be provided by: • applying, adopting or incorporating (ie incorporation by reference: see above) a matter in writing, or • providing a reference to a website, operated by or on behalf of the Commonwealth, that contains the

information. Section 3 (Benefits of investing with [name of superannuation product]) — Sch 10D cl 5 The PDS must describe the superannuation product covered by the Statement, including a summary of its significant features and the benefits it provides. Additional information may be given about significant benefits of superannuation or other significant features of the superannuation product by applying, adopting or incorporating a matter in writing. Section 4 (Risks of superannuation) — Sch 10D cl 6 The PDS must include statements to the following effect: (a) all investments carry risk (b) different strategies may carry different levels of risk, depending on the assets that make up the strategy, and (c) assets with the highest long-term returns may also carry the highest level of short-term risk. Section 4 must describe, in the form of a summary, the significant risks of the particular superannuation product. The significant risks (to the extent not already previously described or covered above) must be described by including statements to the following effect: (a) the value of investments will vary (b) the level of returns will vary, and future returns may differ from past returns (c) returns are not guaranteed, and persons may lose some of their money (d) superannuation laws may change in the future (e) the amount of a person’s future superannuation savings (including contributions and returns) may not be enough to provide adequately for the person’s retirement (f) the level of risk for each person will vary depending on a range of factors, including: (i) age (ii) investment timeframes (iii) where other parts of the person’s wealth are invested, and (iv) the person’s risk tolerance. Additional information about significant risks of superannuation may be given by applying, adopting or incorporating a matter in writing. Section 5 (How we invest your money) — Sch 10D cl 7 The PDS must describe, in the form of a summary: (a) the MySuper products and investment options being offered, and (b) what happens if the person does not make a choice of where to invest. Section 5 must state, in the form of a warning, that when choosing a MySuper product or an investment option in which to invest, the person must consider: • the likely investment return • the risk, and

• the person’s investment timeframe. For at least one MySuper product or investment option, Section 5 must: (a) state the name of the MySuper product or investment option and give a short description of it, including the type of investors for whom it is intended to be suitable (b) list the asset classes in which the MySuper product or investment option invests, and set out, in the form of a range or otherwise, the strategic asset allocation of the asset classes (c) describe the investment return objective of the MySuper product or investment option (d) state the minimum suggested timeframe for holding the MySuper product or investment option, and (e) describe, in the form of a summary, the risk level of the MySuper product or investment option (Sch 10D cl 7(3)). If the superannuation product includes a generic MySuper product, Section 5 must give the information mentioned in Sch 10D cl 7(3) for the generic MySuper product, whether or not Section 5 gives that information for another MySuper product or investment option (Sch 10D cl 7(4)). If the superannuation product does not include a generic MySuper product, and has a balanced investment option (within the meaning given by Sch 10D cl 101), Section 5 must give the information mentioned in cl 7(3) for the balanced investment option under which most assets of the superannuation entity are invested, whether or not Section 5 gives that information for any MySuper product or other investment option (Sch 10D cl 7(5)). If the superannuation product does not include a generic MySuper product or a balanced investment option (within the meaning given by Sch 10D cl 101), Section 5 must give the information mentioned in cl 7(3) for the investment option under which most assets of the superannuation entity are invested, whether or not Section 5 gives that information for any MySuper product or other investment option (Sch 10D cl 7(6)). The information prescribed in Section 5 must make provision for each MySuper product and investment option which is not presented in Section 5 in accordance with cl 7(3), (4), (5) or (6), and may be included by using the incorporation by reference mechanism (Sch 10D cl 7(8)). The superannuation trustee: (a) must provide information about how a person may switch the person’s investments (b) must provide information about: (i) whether the superannuation product’s MySuper products and investment options may be changed and, if so, how, and (ii) if so, how the options may be changed (c) must describe, in the form of a summary, the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of investments relating to the superannuation product, and (d) may provide the information in items (a) to (c), and any additional information about MySuper products or investment options, by applying, adopting or incorporating a matter in writing (Sch 10D cl 7(9)). The explanatory statement to SLI 2010 No 135 states that where labour standards or environmental, social or ethical considerations are not taken into account, this must be stated. Section 6 (Fees and costs) — Sch 10D cl 8 For each MySuper product or investment option within a superannuation product that is presented in

Section 5 in detail in accordance with Sch 10D cl 7(3), Section 6 of the PDS must state: (a) the cost of acquiring the MySuper product or investment option, and (b) the fees and costs that are charged in relation to the MySuper product or investment option (Sch 10D cl 8(1)). The statement will be made using the template in Sch 10D cl 8(3) (see below): Consumer Advisory Warning Before setting out any other substantive material, Section 6 must: • set out the Consumer Advisory Warning in Sch 10 cl 221 • give a concise example in the form set out in the Consumer Advisory Warning in Sch 10 cl 221. Fees and costs Section 6 must set out the fees and costs for each MySuper product or other investment option that is presented in Section 5 in detail in accordance with Sch 10D cl 7(3), using the following templates.

Template in Sch 10D cl 8(3) Type of fee

Amount

How and when paid

Investment fee Administration fee Buy-sell spread Switching fee Advice fee relating to all members investing in a particular MySuper product or investment option Other fees and costs* Indirect cost ratio * If there are other fees and costs, such as activity fees, advice fees for personal advice or insurance fees, include a cross-reference to the “Additional Explanation of Fees and Costs”. The template is to be completed in accordance with Sch 10 Div 3 (including definitions applicable to that Division), as amended and modified by Class Order CO 14/1252 (see F2018C00025). Section 6 must set out the information about fee changes set out in Sch 10 cl 209(k) (as amended and modified by Class Order CO 14/1252 (see F2018C00025) where applicable). Section 6 must state: • that the information in the template can be used to compare costs between different superannuation products, and • concisely, and in general terms, that fees and costs can be paid directly from the person’s account or deducted from investment returns (Sch 10D cl 8(6)). Section 6 must: (a) apply, adopt or incorporate the definitions in relation to fees mentioned in s 29V of SISA, and (b) include the address of a link to the definitions maintained on a website (Sch 10 cl 8(6A)).

Worked example Section 6 must give a worked example for each MySuper product or investment option described in Section 5. The example given must be in accordance with Div 5 and 6 of Sch 10 (including the definitions applicable to those Divisions) (Sch 10D cl 8(7), (7A)). Calculators Section 6: • must refer to the calculator provided by ASIC on its website or a similar website operated by or on behalf of ASIC • may also refer to the calculator (if any) provided by the superannuation trustee on its website, and • must state that each calculator referred to can be used to calculate the effect of fees and costs on account balances (Sch 10D cl 8(8)). Additional fees payable to a financial advisor If additional fees may be payable to a financial advisor, Section 6 must: • state, in the form of a warning, that additional fees may be paid to a financial advisor if a financial advisor is consulted • refer to the Statement of Advice in which details of the fees are set out, and • if applicable, state that fees may be paid to the employer entity’s financial adviser and explain how the fees are determined (Sch 10D cl 8(9)). Additional information by incorporation by reference The superannuation trustee must provide the fees and costs of each of the MySuper products and investment options in accordance with Sch 10, and may do so by applying, adopting or incorporating a matter in writing (Sch 10D cl 8(10)(a)). In addition, the trustee may provide more detailed information about fees and costs by applying, adopting or incorporating a matter in writing (Sch 10D cl 8(10)(a)). Section 7 (How superannuation is taxed) — Sch 10D cl 9 The PDS must describe, in the form of a summary, the significant tax information relating to superannuation products, including: • how tax amounts due are paid, and • the main taxes that are payable in relation to contributions (if contributions are permitted), fund earnings and withdrawals. Section 7 must: • state, in the form of a warning, that the person should provide the person’s tax file number (TFN) as part of acquiring the superannuation product • explain, in the form of a summary, the consequences if the person does not provide the person’s TFN, and • if contributions are permitted — set out a warning that there will be taxation consequences if the contribution caps applicable to superannuation are exceeded. The superannuation trustee may provide additional information about taxation matters relating to superannuation products by applying, adopting or incorporating a matter in writing. Section 8 (Insurance in your superannuation) — Sch 10D cl 10

The PDS for a superannuation product is not required to include any of the information in Sch 10D cl 10 if the product does not offer insurance cover. If the superannuation product offers insurance cover, Section 8 must: • describe, in the form of a summary, the main types of insurance cover that a person can acquire • describe, in the form of a summary, how to apply for insurance cover • include a statement to the effect that there are costs associated with insurance cover, and • describe, in the form of a summary, who is responsible for paying the insurance costs and how they are calculated. If the superannuation product offers insurance cover by default, Section 8 must: (a) describe, in the form of a summary, the level and type of cover (b) state the actual cost of the cover in dollars, or the range of costs that would be payable depending on a person’s circumstances, and who is responsible for paying the costs (c) state whether a person can decline to acquire the cover or cancel the cover (d) state how a person can decline to acquire the cover or cancel the cover (e) state whether a person can change the person’s insurance cover (f) state how a person can change the person’s insurance cover (g) state, in the form of a warning that, unless a person declines to acquire the default insurance cover or cancels it, the cost of the cover will be deducted from the person’s account or from the person’s contributions (as applicable) (h) include information about eligibility for, and the cancellation of, the insurance cover, and (i) include information about any conditions and exclusions that are applicable to the insurance cover (Sch 10D cl 10(3)). If the superannuation product does not offer insurance cover by default but offers insurance cover as an option, Section 8 must include the following information: • the level and type of insurance cover available • the actual cost of the cover in dollars, or the range of costs that would be payable depending on a person’s circumstances • eligibility for, and the cancellation of, the insurance cover • any conditions and exclusions that are applicable to the insurance cover, and • any other significant matter in relation to insurance cover (eg about how a person can apply for, and subsequently change or cancel, the insurance cover) (Sch 10D cl 10(4)). Incorporation by reference The superannuation trustee may provide the information in Sch 10D cl 10(3)(h) and (i) and cl 10(4), and may provide additional information about insurance cover by applying, adopting or incorporating a matter in writing (Sch 10D cl 10(5)). If information about eligibility for, or the cancellation of, the insurance cover, or any conditions and exclusions that are applicable to the insurance cover, is provided for in accordance with Sch 10D cl 10(5), Section 8 must include a warning to the effect that the matter may affect a person’s entitlement to

insurance cover and that the information should be read before deciding whether the insurance is appropriate (Sch 10D cl 10(6)). If information is provided for, in accordance with Sch 10D cl 10(5), about: • the level and type of optional insurance cover available • the actual cost of the optional insurance cover in dollars, or the range of costs that would be payable depending on a person’s circumstances, or • any other significant matter in relation to insurance cover, Section 8 must include a warning to the effect that the information should be read before deciding whether the insurance is appropriate (Sch 10D cl 10(7)). Section 9 (How to open an account) — Sch 10D cl 11 Section 9 of the PDS must, if applicable: (a) describe, in the form of a summary, how to open an account with the superannuation provider (b) explain the cooling-off period that applies to the superannuation product, and (c) explain how to make a complaint (by means that include the provision of relevant contact details) (Sch 10D cl 11(1)). The superannuation trustee may provide more detailed information about cooling-off periods, complaints and dispute resolution by applying, adopting or incorporating a matter in writing. Note that where Section 8 is not applicable (ie insurance is not offered in the superannuation product), Section 9 is presented as Section 8 (see Sch 10D cl 2(2)). ASIC class orders — deferral of Stronger Super amendments in relation to PDS and periodic statement disclosure Among other things, a superannuation product PDS and the periodic statement given to superannuation fund members must provide information on fees and costs associated with the product to help members understand their investment and the fees and costs incurred during the relevant period (see above “Section 6 (Fees and costs) — Sch 10D cl 8”). Fees and costs disclosure is heavily prescribed for both PDS and periodic statements in relation to superannuation products. Following the recent reforms in superannuation, the disclosure requirement under the Corporations Regulations disclosure requirements in relation to fees and costs were changed to reflect basic changes to fees and costs in the Superannuation Industry (Supervision) Act 1993 (SISA) as a result of the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 and the MySuper changes. These changes restrict the types of fees that can be charged in some cases, or require other fees to only be charged on a cost recovery basis (¶3-245, ¶9-200). The changes to fee and cost terminology in the SISA have also required changes to the fee tables and templates in the Corporations Regulations see above (“Section 6 (Fees and costs) — Sch 10D cl 8”). The changes to disclosure with respect to fees and costs information in PDSs and periodic statements for a superannuation product were made by items 7 to 68 and 70 to 86 of Sch 1 of the Superannuation Legislation Amendment (MySuper Measures) Regulation 2013, which come into effect from 31 December 2013 (see First exemption below). Also, for the purposes of CA s 1017D(5)(g) in relation to a superannuation trustee’s disclosure obligations for periodic statements, CR reg 7.9.20(1)(o) (as introduced by the Superannuation Legislation Amendment (MySuper Measures) Regulation 2013) provides that if the trustee of a regulated superannuation fund is required to make publicly available a product dashboard for the investment option under CA s 1017BA, the latest product dashboard for the investment option must be included (¶9-610). This requirement means that the product dashboard must also be included as part of a periodic statement, including periodic statements when a member exits the fund (see Second exemption below).

Class Order CO 13/1534 provides the exemptions below: • First exemption — A trustee of a registrable superannuation entity does not have to comply with regulations made for the purposes of: (a) CA Div 2 of Pt 7.9 (Product Disclosure Statements); or (b) CA s 1017D (periodic statements); to the extent those regulations were amended or made by items 7 to 68 and 70 to 86 of Sch 1 to the Superannuation Legislation Amendment (MySuper Measures) Regulation 2013. This exemption applies to PDS given before 1 July 2014 and periodic statements given under s 1017D in relation to reporting periods ending before 1 July 2014. (Note that the First exemption provided interim relief from new fees and costs disclosure requirements for PDSs and periodic statements for reporting periods ending before 1 July 2014. As the new fee regime is now in operation, further relief is not required for the First exemption.) The scope of this exemption has been extended to a trustee of an ADF and a PST by Class Order CO 14/55. • Second exemption — A trustee of a regulated superannuation fund (other than an SMSF) that is required to make publicly available a product dashboard for the investment option, under CA s 1017BA, does not have to comply with CA s 1017D to the extent that provision requires the trustee to comply with para 7.9.20(1)(o) of the CR. A condition of the interim relief is that the trustee must include a website address for the latest product dashboard either in, or in a document accompanying, the periodic statement. This also applies to periodic statements for members who are exiting the fund. This exemption applies to periodic statements given under s 1017D in relation to reporting periods ending before 1 July 2023 (date extended by ASIC Corporations (Amendment) Instrument 2016/364 (F2016L00631), ASIC Corporations (Amendment No 2) Instrument 2015 (F2015L00586): ASIC Legislative Instrument No 338, 2015, ASIC Corporations Amendment Instrument 2017/569 (F2017L00742) and ASIC Corporations (Amendment) Instrument 2019/240 (F2019L00541)). A trustee relying on the second exemption must include in, or in a document accompanying, the periodic statement: (a) a website address for the latest product dashboard for the investment option; and (b) a statement to the effect that the latest product dashboard for the investment option can be found at the website address. Shorter PDS — ASIC guidelines for superannuation products PDS compliance ASIC Information Sheet INFO 155 provides guidance on technical issues related to implementation of the modified PDS requirements (shorter PDS) for superannuation products to which CR Pt 4 Subdiv 4.2B applies and for simple managed investment schemes to which Subdiv 4.2C applies (www.asic.gov.au/regulatory-resources/financial-services/financial-product-disclosure/shorter-pdsscomplying-with-requirements-for-superannuation-products-and-simple-managed-investment-schemes). ASIC guidance — Enhanced fee and cost disclosure requirements for superannuation trustees ASIC Information Sheet INFO 197 provides guidance to superannuation trustees and other persons in relation to the fee and cost disclosure requirements in Sch 10 and 10D to the Corporations Regulations 2001 (asic.gov.au/regulatory-resources/superannuation-funds/stronger-super-reforms/fee-and-costdisclosure-requirements-for-superannuation-trustees), covering: • what are the fee and cost disclosure requirements • what definitions have been introduced or amended under Sch 10 • when the new disclosure requirements start • the approach ASIC will take to the new requirements • the PDS disclosure required for each MySuper product and Choice product • the disclosure required for indirect costs • how fee disclosure should be treated from a tax perspective

• how performance fees should be disclosed, and • how advice fees should be disclosed. The enhanced fee and cost disclosure requirements are discussed further in ¶4-320.

¶4-150 Product Disclosure Statements The Product Disclosure Statement (PDS) provisions in Pt 7.9 apply to a regulated person. All superannuation entities and RSA providers are covered by the definition of “regulated person” (¶4-060). Two different perspectives were considered by parliament for the point of sale disclosure requirements under Pt 7.9. At one end of the spectrum is the “due diligence” approach (adopted in former Corporations Law s 710 in relation to securities). This requires the disclosure of all information that investors and their professional advisers would reasonably require to make an informed assessment of the rights and liabilities attaching to the products and of the assets and liabilities, financial position and performance, profits and losses and prospects of the body offering the products. At the other end of the spectrum is the “Key Features Statement” approach (adopted by the former SIS Regulations provisions in relation to superannuation products), which requires disclosure of various matters and detailed information under specific headings. A midway approach is adopted in Pt 7.9, which requires disclosure in a PDS against a specific list of items in so far as those items are relevant to the particular product being offered to aid comparability of products. Disclosure in the PDS is then also required of any other material information known to the product issuer and not required to be disclosed under a specific head which might reasonably influence a client’s decision to acquire the product. This approach ensures, as far as possible, that consumers effectively have access to all relevant information to assist their decision-making. Therefore, unlike s 710 (dealing with disclosure in a prospectus), product issuers are not required to undertake a due diligence exercise to discover all material information. In terms of geographical coverage, Pt 7.9 adopts the approach of the fundraising provisions of the former Corporations Law s 700(4) of applying the PDS requirements to offers or recommendations that are received within the jurisdiction (s 1011A). The provisions can, therefore, potentially apply to offers or recommendations included on the internet in any jurisdiction if they are accessible by persons in Australia and can be regarded as being received in Australia. Topics discussed The PDS requirements are discussed under the following headings. • When is a PDS required to be given? • Giving a PDS when issuing a superannuation interest • When is a PDS not required to be given? • Supplementary PDS • Exemption from requirement for information in a PDS to be up-to-date at time when PDS is given • Time for giving a PDS • What must be included with a PDS? • PDS content — main requirements under s 1013D • Providing a Short-Form PDS • PDS — enhanced disclosure of fees and costs

• PDS — investment choice • PDS — incorporation by reference • PDS — miscellaneous matters. Notes to Pt 7.9 provisions • Some provisions may be modified by CR (eg by Sch 10A, 10BA and by other regulations in respect of specific Corporations Act 2001 provisions), or may be supplemented by provisions of CR which clarify, amend or set out additional requirements (¶4-100). • Superannuation products that are covered by the shorter PDS regime in CR Pt 7.9 Div 4 Subdiv 4.2B and Sch 10D (form and content of PDS) are not subject to certain general PDS rules in CA Pt 7.9 (see ¶4-130). • The topics below must be read in light of the modifications that may apply in a particular provision or case. In addition, ASIC may also grant exemptions and other modifications by way of class orders (see ¶4-800). When is a PDS required to be given? A PDS is required to be given at the earliest possible time when a retail client is considering the acquisition of a financial product (s 1012A to 1012K). Broadly, this requires a PDS to be given: • when an offer of a financial product for issue is made, when a person offers to acquire a financial product by way of issue or when the product is issued • in certain limited circumstances, when a financial product is offered for sale or when a person offers to acquire a product by way of transfer. Giving a PDS when issuing a superannuation interest Generally, the requirement to give a PDS will only apply on the initial issue of a financial product. In the superannuation context, issue is defined inclusively in s 761E to mean: • a person becoming a member of a superannuation fund, or • the opening of an RSA in a person’s name. There is no issue of a financial product to a person if the person, or an employer of the person, is making additional contributions to a superannuation fund or RSA of which the person is already a member or RSA holder (s 761E(3A)). If a superannuation fund member elects to receive a pension from his/her superannuation interest in the fund (see below), the fund is taken to issue a new financial product when it makes the first pension payment (s 761E(7)(a); reg 7.1.04E). An obligation to issue a PDS at that time therefore arises (¶4-090) (see also “When is a PDS not required to be given?” and “Interest in an SMSF” below). Part 7.9 basically requires superannuation funds to provide to potential members (see below) and to employers (eg a standard employer-sponsor of a superannuation fund) information about superannuation and RSA products to which they are intending to make superannuation contributions for the benefit of their employees (s 1012B; 1012I). A key point under Pt 7.9 is that a minimum standard of disclosure is imposed on all issuers of financial products, followed by exceptions and exclusions as applicable for different types of products, as compared with the former SIS Regulations and RSAR approach of setting minimum requirements (or standards) for all funds and additional standards for particular types of funds. The requirement to give a PDS arises in the circumstances below in relation to an issue of a superannuation interest (a financial product): (1) when a person makes an offer to issue, or arranges for the issue, to a retail client of a particular financial product. This is intended to cover the circumstance where a product issuer or financial

services licensee offers a particular financial product to a person (eg a prospective member), including, eg direct marketing campaigns (s 1012B(3)) (2) when a product is issued to a person in circumstances where it is reasonable to believe that the person has not received a PDS. This is intended to cover the situation where there is no offer to issue or acquire at all, or where the offer is made to or by a person other than the person to whom the product is issued. For example, in relation to some superannuation products, the offer to issue may be made to the employer while the product is issued to the employee. In this circumstance, the intention is for the employee to receive a PDS before the issue of the product (subject to special timing rules for certain superannuation products in s 1012F: see below “Time for giving a PDS”) (s 1012B(3)(a)(iii)) (3) when a retail client makes an offer to acquire a financial product. This is intended to cover situations where a person approaches a product issuer or a financial services licensee seeking a particular financial product, eg when a person approaches a bank seeking to open an RSA (s 1012B(4)) (4) when a member moves to a new superannuation plan (reg 7.9.02 provides that an “interest” in a superannuation fund is to be defined in relation to each “sub-plan” of the fund. The effect being that a PDS (and a new application form) must be given when a member moves from one sub-plan to another). There may also be a limited range of secondary sale situations where there will be an obligation to give a PDS. These provisions (modelled on the anti-avoidance provisions in the former Corporations Law s 707) will generally only apply to the secondary sale of interests in registered managed investment schemes, but can potentially apply across the full range of financial products in relevant circumstances. Deemed issue of superannuation interest when pension is paid If a member of a superannuation fund whose interest in the fund is in the growth (accumulation) phase elects to receive a pension in relation to the interest or a part of the interest, the fund is taken to issue a new financial product when: • the fund acknowledges receipt of the member’s election to take a pension, or • the fund makes the first payment of the pension (s 761E(7)(a); reg 7.1.04E). The terms “growth phase” and “pension” have the meanings as defined in SISR reg 1.03AB and 1.06(1), respectively. This means that the conversion of a member’s benefit from growth to pension phase did not amount to the issue of a financial product before 12 March 2004, but after that date a PDS would be required in respect of the new issue. What constitutes a member’s “election” to take a pension is not defined for the purposes of reg 7.1.04E and, presumably, this must be determined in accordance with the governing rules of the fund. For example, the rules may provide certain formalities such as an election in writing or an election in a particular form. It is important to note that such an election can only be made if the governing rules enable members to take their entitlements in the form of a pension and/or lump sum. Therefore, if the rules do not give members such an option but only provide for pensions to be paid, then a PDS does not have to be given to the member until pension payment is actually made (SMSFs: ¶4-090). When is a PDS not required to be given? The main exceptions to the general requirement to provide a PDS arise in certain circumstances under s 1012D as below (the circumstances in s 1012DA dealing with secondary sale of interests in registered managed investment schemes generally do not apply to superannuation products). Client has already received a PDS A PDS need not be given if a client has already received an up-to-date PDS or the regulated person

reasonably believes that this is the case (s 1012D(1)). However, if there has been a material change in the information that was contained in the PDS which would require the giving of a new or supplementary PDS, the fact that the person has already received an outdated PDS does not negate the need to give the person a new or supplementary PDS (see below). Client already holds product and has access to up-to-date information A person who already holds a financial product and is seeking to acquire (or is being advised to acquire) a product of the same kind does not need to be given a further PDS. This will be the case if the person has received or has access to all the information that a PDS would be required to include through an earlier PDS and any ongoing disclosures or periodic reports (s 1012D(2)). The circumstances in which a financial product is of the “same kind” for the above purposes is set out in s 1012D(10). Additional contributions to an existing product A PDS is not required where a person makes an additional contribution to an existing financial product, such as a further contribution to a superannuation fund on the same terms as they have done previously. Additional contributions by a person to a superannuation fund or RSA do not constitute an issue situation and, therefore, do not give rise to obligations under Pt 7.9 (s 761E(3A)). No consideration to be provided A PDS is not required to be given in cases where no consideration is given for the issue or sale of a managed investment product or a financial product of a kind prescribed by regulations (s 1012D(5)). Generally, for all other financial products, a PDS will be required notwithstanding that no consideration is paid for the product. This is because there may be an opportunity cost to the person in taking up the product, ie if the person had not received the product for no consideration, he/she might have chosen to pay for a similar product. This will also allow the person to know the terms and conditions of the product to enable them to make an informed decision in these circumstances and, even if there is no opportunity cost, to be aware of the ongoing obligations under the terms of the particular product. Interest in an SMSF In a recommendation or issue situation, a regulated person need not give a client a PDS if the financial product is an interest in an SMSF and the regulated person reasonably believes that the client has, or has access to, the information that the PDS would be required to contain (s 1012D(2A)). For example, a PDS may not have to be given in circumstances where all the prospective members/trustees of a fund have, or have available to them, the relevant information, or where the fund has only one member (for ASIC’s views, see ¶4-090). If an SMSF member elects to take a pension (ie conversion from the growth to a pension phase), an obligation to issue a PDS arises (see “Giving a PDS when issuing a superannuation interest” above). No obligation to provide information In a recommendation, issue or sale situation, a regulated person need not give a client a PDS in circumstances where s 1013F results in there being no obligation to provide any information (s 1012D(2B)). Essentially, s 1013F enables information (eg common knowledge matters) not to be included in a PDS if it would not be reasonable for a person to expect to find that information in the PDS. However, s 1013F operates subject to a “reasonableness” test, which applies in relation to information required by a person as a retail client to determine whether to acquire a product, and this would not generally remove the obligation to provide a PDS in relation to financial products offered to the public. Supplementary PDS A supplementary PDS (or a supplementary Short-Form PDS) is a document by which a person who has prepared a PDS (or a Short-Form PDS) can: • correct a misleading or deceptive statement in the PDS • correct an omission from the PDS of information it is required to contain • update, or add to, the information contained in the PDS, or

• change a statement of a kind referred to in s 1016E(1)(a) or (b), as applied by s 1017K (s 1014A to 1014F; 1017L to 1017Q: see CR Sch 10BA).

Note: Sections 1014A to 1014F do not apply to a superannuation product PDS to which CR Pt 7.9 Div 4 Subdiv 4.2B applies (see ¶4-130).

Exemption from requirement for information in a PDS to be up-to-date at time when PDS is given Section 1012J requires the information in a PDS or Short-Form PDS (Statement) to be up-to-date at the time when it is given, subject to an exemption which provides relief for the issuer from updating the Statement for information that is not materially adverse under certain conditions (ASIC Corporations (Updated Product Disclosure Statements) Instrument 2016/1055). The information contained in a Statement at the time when it is given includes any information contained in a Supplementary PDS or Short-Form PDS given at the same time as the Statement (CA s 1014D, s 1017O as notionally inserted CR Sch 10BA Pt 3). Materially adverse information means information of a kind the inclusion of which in, or the omission of which from, a Statement would render it defective within the meaning of CA s 1021B. The exemption applies where all of the following are satisfied: (a) the Statement was up to date at the time when it was prepared (b) any updated information in relation to the Statement does not include any materially adverse information (c) the responsible person has taken reasonable steps to: (i) ensure that the Statement clearly and prominently: – explains that information that is not materially adverse information is subject to change from time to time and may be updated by means described in the Statement – explains how that updated information can be found out at any time, and – states that a paper copy of any updated information will be given, or an electronic copy made available, to a person without charge on request (ii) establish and maintain means by which a person may find out any updated information, being means that are simple and involve no charge and little inconvenience to the person, having regard to the kinds of persons likely to consider acquiring the financial product to which the Statement relates (iii) make available any updated information as soon as practicable to each regulated person to whom the Statement has been provided for further distribution, and (iv) cause a copy of any updated information to be kept for seven years after it is prepared. Time for giving a PDS The rules are: • in the recommendation situation — the PDS must be given at or before the time the advice is given (s 1012A(3)) • in the issue situation — the PDS must be given either: – at or before the time a person makes an offer to issue, or arrange to issue, or issues, the

financial product (s 1012B(3)), or – where there is a client offer, before the client becomes bound by a legal obligation to acquire the financial product (s 1012B(4)) (for application forms modifications, see s 1012B(4A) and (4B) in CR Sch 10A Pt 17) • in the sale situation — the PDS must be given either: – at or before the time the seller makes an offer to a retail client to sell the product, or – where there is a client offer, before the client becomes bound by a legal obligation to acquire the financial product (s 1012C). Special rules for superannuation products In relation to prescribed superannuation products, the PDS need not be given prior to the issue of the product, but may be given as soon as practicable up to three months after the issue of the product, ie the person becoming a member of the fund or a pension commencing (s 1012F). This is the same as under the former SIS Regulations requirements. The prescribed products cover superannuation interest in a non-public offer fund (subject to exceptions), issues of pension by a pension-only superannuation fund and interests in successor funds (reg 7.9.04). Issuing PDS timeframe — ATO commutation authority Where an individual exceeds his/her transfer balance cap under the transfer balance cap regime in ITAA97 (¶6-450), the ATO will issue one or more of the individual’s superannuation income stream providers with a commutation authority which will require the superannuation provider to commute or partially commute a superannuation income stream that is paid to the individual (¶6-455). Any such commutation provides a “debit” against the individual’s transfer balance account and is used to reduce their excess transfer balance. An amount that is commuted can be retained in the superannuation system. In certain circumstances, this may require the creation of a new accumulation phase interest for the individual. To facilitate creating new accumulation phase interests, reg 7.9.04(1)(d) of the Corporations Regulations 2001 has been introduced to cover superannuation interests issued by the trustee of a regulated superannuation fund as a result of complying with a commutation authority, applicable in relation to superannuation interests issued on or after 1 July 2017. Regulation 7.9.04(1)(d) expands the circumstances in which the general obligation to provide a PDS within a particular period is deferred. Generally, reg 7.9.04(1) applies in respect of s 1012F(b) of the Corporations Act 2001 which states that in particular issue situations, a PDS must be given to a client within three months of the issue. The obligation to give a PDS is extinguished if the client ceases to be a member of the fund before the end of the three-month period. In addition to changing the period in which a PDS must be provided, issues specified under s 1012F are not “restricted issues” for the purposes of s 1016A of the Corporations Act. The consequence of a superannuation interest not being a restricted issue is that the application form requirements in s 1016A(2) of the Corporations Act are not applicable and the timeframe for providing the PDS are governed by the more flexible conditions in s 1012F of the Corporations Act. What must be included with a PDS? The information that must be included in all PDSs, to the extent that they are relevant to the particular product, is set out in s 1013D (see below). The list distinguishes between statements and information. In relation to statements, all relevant information must be included (eg the name and contact details of the product issuer). In relation to information, the PDS will have to contain only such information under the particular item as a retail person would reasonably require for the purpose of making a decision whether to acquire the financial product. This will vary from product to product and allow for flexibility in the detail that is to be included under each topic. In addition, the information need only be included to the extent that it is within the actual knowledge of the relevant issuer, ie a full due diligence inquiry is not required.

PDS content requirements — general rules under s 1013C A PDS must include the following statements and information: • the statements and information required by s 1013D and the information required by s 1013E (see “PDS content — main requirements under s 1013D” below) • any information required by the other provisions of Pt 7.9 Div 2 Subdiv C (dealing with PDS preparation and content). The information included in the PDS must be worded and presented in a “clear, concise and effective” manner (s 1013C(3)).

Note: The PDS content requirements under s 1013C are modified for a superannuation product PDS to which Subdiv 4.2B applies (see ¶4-130).

The PDS must also comply with ASIC guidelines where a PDS makes any claim that labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment (see RG 65 for ASIC guidelines on the disclosure requirements) (s 1013DA). The PDS may also include other information or refer to other information that is set out in another document (s 1013C(1)). If a supplementary PDS containing additional information is given with a PDS that does not contain all the required information, the additional information is taken to be included in the PDS (s 1014D). The information required by s 1013D and 1013E need only be included in the PDS to the extent to which it is actually known to the responsible person, the issuer of the financial product, any person named in the PDS as a financial services licensee providing services in relation to the issue or sale of the financial product, any person who has given consent in relation to a statement included in the PDS, any person named in the PDS with their consent as having performed a particular professional or advisory function and, if any of the above persons is a body corporate, any director of that body corporate. The responsible person must not include a statement about the association between the financial product and another person in certain circumstances (eg that may be misleading as to the role of the other person). If the PDS states that a person provides, or is to provide, services in relation to the financial product, the PDS must clearly distinguish between the respective roles of that person and the issuer or seller of the financial product. PDS content — main requirements under s 1013D The topics under which statements or information must be included in the PDS are noted below. Section 1013D(1)(m) requires amounts to be disclosed in accordance with s 1013D(1)(b), (d) and (e) (see the items “Benefits”, “Costs” and “Commissions” in the list below) to be stated in dollars (¶4-300).

Note: The PDS content requirements under s 1013D do not apply to a superannuation product PDS to which Subdiv 4.2B applies (see ¶4-130).

The PDS must include information only to the extent to which the information requirement is applicable to the financial product, ie the PDS does not need to indicate that a particular requirement is not applicable to the product (s 1013D(3)). • Name and contact details of the product issuer (and, in sale situations, the name and contact details

of the seller). • Benefits — this requires disclosure of any significant benefits to which the holder of the product will or may become entitled and the circumstances in which or the time at which those benefits will or might be provided. For example, for a superannuation product, this would require the disclosure of the circumstances in which a benefit from a superannuation fund will be payable. • Risks — the PDS must include information about any significant risks associated with the holding of the product. If there are no significant risks, nothing needs to be disclosed. In other cases, the level of detail of disclosure of risks will depend on what a retail person would reasonably require to make a decision to invest in the product. However, information does not need to be included if it would not be reasonable for a person to expect to find that information in the PDS, eg because it is common knowledge (s 1013F: see “When is a PDS not required to be given?” and “No obligation to provide information” above). • Costs — this deals with disclosure of information about the cost of the product and the amounts that “will or may be payable” (see below) by the purchaser in respect of the product after its acquisition, and the times at which those amounts will or may be payable. If the amounts paid in respect of the financial product and other financial products are paid into a “common fund” (¶4-180), the information must disclose any amounts that will or may be deducted from the fund by way of fees, expenses or charges. • Commissions — if the product will or may generate a return to the holder of the product, information about any commission, or other similar payments, that will or may impact on the amount of such a return. • Significant characteristics — this requires disclosure of any other significant characteristics or features of the product, or of the rights, terms, conditions and obligations attached to the product. For superannuation products, this would include information about preservation requirements. • Dispute resolution — the PDS must include information about the internal and external dispute resolution procedures that are available to deal with complaints by holders of the product and about how those procedures may be accessed. • Taxation implications — the PDS must include information about any significant taxation implications of the product that are specific to that kind of financial product, ie taxation considerations relevant to particular kinds of products and not those that relate to the particular client’s circumstances. For example, the fact that tax will be paid at the person’s normal marginal personal income tax rate on a return from a product is not required to be disclosed; but the particular taxation treatment of superannuation products must be disclosed, including the identification of the features of the product that have particular taxation implications. • Cooling-off — the PDS must disclose the cooling-off arrangements applying to financial products (¶4400). • Product with investment component (including superannuation products) — information about the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment. • Other information — to the extent that the product issuer or seller makes other information available in relation to the product, the PDS must indicate how that information may be accessed, and any other information prescribed by the regulations. In relation to “costs” (see above), an amount will or may be payable in respect of a financial product by the holder if an amount will or may be deducted from a payment to be made to or by the holder, or from an amount held on the holder’s behalf under the financial product, or an account representing the holder’s interest in the financial product will or may be debited with an amount. It also includes an amount that the

holder will or may have to pay, or that will or may be deducted or debited, as a fee, expense or charge in relation to a particular transaction in relation to the financial product (s 1013D(2)). Information reasonably expected to influence a decision — s 1013E A PDS must disclose any other information that is actually known to the product issuer or seller and that might reasonably be expected to have a material influence on the decision of a reasonable retail person to acquire the product (s 1013E).

Note: Section 1013E does not apply to the PDS for superannuation products covered by Subdiv 4.2B (see ¶4-130).

Providing a Short-Form PDS A regulated person who is required or obliged by CA to give a PDS (or supplementary PDS) for a financial product to another person may instead provide a Short-Form PDS (supplementary Short-Form PDS) for the product, except where a PDS is specifically requested or the product is a general insurance product (s 1017H(1)). This gives product providers the option of creating a Short-Form PDS that contains a “summary” (ie a condensed and straightforward account of certain key content items that are required to be included in the PDS) of defined core information relating to the product. Providers of financial products will still be required to prepare a PDS (either in hard-copy or electronic form as allowed under s 1015C). The information contained in the Short-Form PDS is expected to be sufficient to give retail clients a reasonable understanding of the key features of the product, including what costs they will incur in acquiring the product. The regulations also permit other information to be included in the Short-Form PDS if it was of particular relevance to the product. A further method to abbreviate the contents of a ShortForm PDS is incorporation by reference, whereby reference can be made to information contained in the PDS or FSG (¶4-670). Sufficient detail, however, has to be provided to allow any retail client who wished to do so to look up the full information in the PDS or the FSG. The main difference between a Short-Form PDS and a PDS lies in their content. Generally, all provisions that apply to a PDS are mirrored in their application to the Short-Form PDS, and the exceptions to this general approach occur where the extension of a particular provision to a Short-Form PDS provides an inappropriate outcome or where it is not necessary. The modification provisions dealing with providing a Short-Form PDS are set out in CA Pt 7.9 Div 3A and CR Sch 10BA. PDS — enhanced disclosure of fees and costs The enhanced fees and costs disclosure regime in Pt 7.9 Div 4C (¶4-320) provides rules for standard disclosure of fees and costs and their calculation methods in relation to: • PDSs for superannuation products to retail clients (and other financial products) • periodic statements (other than exit statements) and exit statements (¶4-180). The regime applies to superannuation products other than: • SMSFs • superannuation products that have no investment component (ie risk-only superannuation products) • annuities (except market linked annuities) • non-investment or accumulation life insurance policies offered through a superannuation fund • defined benefit superannuation pensions (see below) (these are pensions paid under SISR reg 1.06(2), 1.06(6) and 1.06(7) (reg 7.9.16J(a)(i) to (v))).

The main reason for the exemption for defined benefit superannuation pensions (see above) is that, apart from SMSFs, the products are not accumulation type products and the investment return is generally known at the time of purchasing the product (and determined actuarially) and do not vary with investment return and costs over the life of the product. As such, the enhanced fee disclosure requirements would not benefit the product holders (Class Order CO 14/1252: ¶4-320). The dollar disclosure regime also requires fees and charges to be stated in dollars, where applicable (¶4300). PDS requirements A PDS for a superannuation product must include the following components: • a “Fees and Costs template” — this is a standardised fee table that simplifies the disclosure of fees and costs and allows for more effective comparisons across financial products • an “Additional Explanation of Fees and Costs” section — this sets out additional important information about fees and costs • an “Example of Annual Fees and Costs table” — this provides an illustrative worked example of fees and costs in a balanced investment option for a specified account balance and level of contributions • a “Consumer Advisory Warning Box” — this alerts consumers to the importance of value for money and compounding value of fees and costs and their impact over time on end benefits. Periodic statement requirements Periodic statements for superannuation products (¶4-180) have to disclose: • “other management costs” — this shows the approximate amount of management costs that were not paid directly out of a member’s or product holder’s account stated in dollars and calculated using the “indirect cost ratio” (ICR) methodology (see below) • “total fees you paid” — this shows a dollar amount that includes the total fees a member or product holder paid during the period. This amount does not include transactional or operational costs that may have been incurred • a brief description of each transaction which is described consistently in accordance with reg 7.9.60. Regulatory Guide RG 97 which provides guidance on the enhanced disclosure of fees and cost regime for PDSs and periodic statements is discussed in ¶4-320. PDS — investment choice Section 1012IA applies to custodial arrangements that allow a retail client to instruct the provider to acquire particular financial products (accessible financial products) that either are held on trust for the client (or its nominated beneficiary) or otherwise provide a reference for the calculation of benefits for the client (or its nominated beneficiary) such as investor-directed portfolio service. In addition, s 1012IA applies to superannuation trustees who offer a choice of investment strategies to members where, if the member instructs the trustee to follow a particular strategy, the trustee will acquire accessible financial products on behalf of the member. Accordingly, the trustee of a superannuation fund is required to provide a PDS to members and prospective members about some types of underlying investments, including information about particular financial products which may be acquired through an investment strategy of the superannuation fund. The requirements under s 1012IA relate to investment strategy choice (see ¶3-400), not to the choice of superannuation fund rules under the SGA Act as discussed at ¶12-040. Section 1012IA and reg 7.9.14A apply to ensure that a member must receive sufficient information about an accessible financial product before the member chooses an investment strategy that includes that product. The required information must be equivalent to what the members would have received had they invested directly in that product.

The s 1012IA requirement is in addition to the PDS that the trustee must provide members and prospective members about the superannuation fund itself. An example of a superannuation fund that may be subject to s 1012IA for some of its strategies would be a superannuation master trust. Relief from s 1012IA ASIC granted an extension of the interim relief for superannuation trustees, which postponed the commencement of the product disclosure requirements in s 1012IA from 30 June 2005 to 30 June 2007 (ASIC media releases IR 06-22, 23 June 2006, IR 05-31, 9 June 2005; former Class Orders CO 06/330 and CO 05/346 — Deferral of s 1012IA Amendment). The difficulties with complying with s 1012IA for superannuation trustees without modification are: • the duplication of disclosure obligations. A superannuation trustee would be required to provide information about the accessible financial product to members twice — in the superannuation entity’s PDS, which is prepared by the trustee, and in an accessible product PDS, which is prepared by the issuer of the financial product • the law does not allow the trustee to prepare the accessible product PDS (it must be prepared by the product issuer), and • the trustee must give a member a PDS each time an accessible financial product is acquired by the trustee on behalf of the member. Each additional investment of money by the member will be an additional acquisition, with the result that the member will generally be repeatedly given the same accessible product PDS. ASIC Regulatory Guide RG 184 “Superannuation: Delivery of product disclosure for investment strategies” explains that trustees of superannuation entities can comply with the product disclosure requirements in s 1012IA (about investment strategies with specific accessible financial products — see above) in two ways, either by: • preparing the information themselves in a PDS for a particular accessible financial product (under the law, without relief, the trustee is not permitted to prepare this PDS as it is not the product issuer), or • giving a member a PDS prepared by the issuer of the particular accessible financial product (as required by law, without relief). The relief relates to both the s 1012IA disclosure obligation and the general PDS disclosure obligations in s 1013D and 1013E (ASIC media release IR 06-29, 3 August 2006). The superannuation arrangements to which s 1012IA and RG 184 may apply include products commonly known as superannuation master trusts, employer-sponsored superannuation funds, and industry superannuation funds. Revised relief — investment strategies ASIC Corporations (Superannuation: Investment Strategies) Instrument 2016/65 (www.legislation.gov.au/Details/F2016L00204) provides relief (previously given under Superseded Class Order SCO 06/636) to superannuation trustees who offer a choice of investment strategies to members where, if the member instructs the trustee to follow a particular strategy, the trustee will acquire accessible financial products on behalf of the member. The revised relief is discussed in ¶4-160. PDS — incorporation by reference Regulation 7.9.15DA of the Corporations Regulations 2001 allows incorporation by reference in a PDS in certain circumstances. A responsible person can decide not to include a statement or information mentioned in Pt 7.9 of the Act in a PDS if: • the statement or information is in writing and is publicly available in a document other than the PDS (including electronic sources such as the internet)

• the PDS refers to the statement or information • the PDS provides sufficient details about the statement or information to enable a person: – to identify by a unique identifier the document, or part of the document, that contains the statement or information – to locate the statement or information, and – to decide whether or not to read the statement or information or obtain a copy of the statement or information • the PDS states that a copy of the statement or information may be obtained from the responsible person on request at no charge, and • the statement or information is not a statement or information that is in a Short-Form PDS (since this is already an abbreviated document) (reg 7.9.15DA(1)). For example, a financial planner may incorporate information about other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product if the information is already publicly available on a website. While all other information in Pt 7.9 may be incorporated by reference, reg 7.9.15DA(4) prescribes the core information that is required to be included in the PDS. The core information includes: • a summary description of the purpose and key features of the product, if certain prescribed information was incorporated by reference • a summary description of the key risks of the product, if certain prescribed information was incorporated by reference • a statement setting out the name and contact details of the issuer of the financial product and, if the statement is a sale statement, the seller • most of the fees and costs template as prescribed in CR Sch 10 Pt 2 (known as the enhanced disclosure requirements) • the Consumer Advisory Warning prescribed in CR Sch 10 Pt 2 • information about the dispute resolution system that covers complaints by holders of the product and about how that system can be accessed, and • information about any cooling-off regime that applies in respect of acquisitions of the product. PDS — miscellaneous matters Online delivery of financial services disclosures Parts 7.6 to 7.9 of the Corporations Act 2001 permit a wide range of financial services disclosures to be delivered online. Sections 940C(1)(a)(ii) and 1015C(1)(a)(ii) of the Act state that a PDS, FSG, supplementary FSG and SOA can be sent to a client, or the client’s agent, at an electronic address nominated by the client or the client’s agent. Also, it is possible for such disclosures to be made available in ways as agreed with the client or their agent (s 940C(1)(a)(iii), (2)(b)(iii); reg 7.9.02A(1)). The Corporations Regulations 2001 additionally requires that a PDS, FSG and SOA must be delivered in a way that allows the providing entity to be satisfied, on reasonable grounds, that the client or the client’s agent has received the disclosure (reg 7.7.01(2); 7.9.02A(1)). ASIC Corporations (Facilitating Electronic Delivery of Financial Services Disclosure) Instrument 2015/647 provides relief, if a client or the client’s agent agrees, by allowing financial service providers to deliver:

• a PDS, FSG, supplementary FSG and SOA by sending to clients a written notice (paper or electronic) with a reference to a website address where the disclosure can be found (modified s 940C; 1015C(1); reg 7.7.01(2)), and • a PDS, FSG and supplementary FSG by sending to clients an email with a hyperlink to the disclosure (modified reg 7.9.02A). The relief did not apply to enable SOAs to be delivered via a hypertext link to a website to reduce the risk that clients will be exposed to security risks such as phishing. ASIC Corporations (Facilitating Electronic Delivery of Financial Services Disclosure) Instrument 2015/647 continued and expanded the relief provided by former CO 10/1219: repealed by ASIC Corporations (Repeal) Instrument 2015/681 (www.legislation.gov.au/Details/F2015L01186). Broadly, the Instrument removes certain barriers to the electronic provision of information required under CA Ch 7 (eg by facilitating the use of electronic addresses supplied by employers to trustees of standard employersponsored superannuation funds). ASIC regulatory guide ASIC has updated Regulatory Guide RG 221 “Facilitating digital financial services disclosures” which sets out ASIC’s interpretation of the online disclosure provisions for financial services providers that use (or plan to use) technology, including email and the internet, to deliver financial product and financial services disclosures to clients. The guide: • explains how under Pt 7.6 to 7.9 of the Corporations Act most disclosures can be delivered digitally • outlines ASIC’s view that in most cases it will be clear from the context that a client has provided or nominated their electronic address for the purpose of receiving disclosure under the Corporations Act, and no higher standard of consent is required to send to an electronic address compared to nonelectronic methods • describes the relief available under ASIC Corporations (Facilitating Electronic Delivery of Financial Services Disclosure) Instrument 2015/647 (¶4-800) to facilitate the delivery of disclosures by making the disclosure available digitally and notifying the client • describes the relief available under ASIC Corporations (Removing Barriers to Electronic Disclosure) Instrument 2015/649 (¶4-800) to remove potential barriers to more innovative disclosure, and • sets out ASIC’s “good practice guidance” on digital disclosure (www.asic.gov.au/regulatoryresources/find-a-document/regulatory-guides/rg-221-facilitating-digital-financial-servicesdisclosures/). Advising ASIC PDS is in-use A PDS or a supplementary PDS for a superannuation product need not be lodged with ASIC before its issue to a person, but a notice must be given to ASIC advising that they are “in-use” using Form FS53 (“PDS in-use notice”) as soon as practicable and, in any event, within five business days after it is first given to a client (s 1015B; 1015D). The in-use process enables ASIC to conduct surveillance of PDSs. Part 2 of the in-use notice covers superannuation fee data. This part is required to be completed by trustees of regulated superannuation funds where the in-use notice relates all or in part to a PDS or supplementary PDS in respect of a product that is an interest in a regulated superannuation fund. The trustee of an SMSF is not required to lodge an in-use notice as the information which the fund would provide via an in-use notice is already available to ASIC from the Register of Complying Superannuation Funds database maintained by the ATO. Class order relief ASIC Class Orders CO 12/415 (the prospective class order) and CO 12/416 (the retrospective class order) provide relief by allowing in-use information to be provided to ASIC in a manner that reduces the administrative burden for the trustees of superannuation funds with large numbers of essentially identical

products that would otherwise require the lodgment of a separate in-use notice for each product, as follows: • a single in-use notice (primary notice) may be lodged with ASIC in relation to the common part used by each PDS for standard employer-sponsored superannuation products • issuers using this procedure will also be required to provide ASIC with a list (to be updated monthly) of those superannuation products that have used that common part • a primary notice in relation to the common part must be lodged with ASIC as soon as practicable, and in any event within five business days, after a copy of that common part is first given to someone as part of a PDS • if the responsible person for a PDS chooses to rely on the class order, the person must lodge, for the life of the common part (ie the period over which the common part does not change), a secondary notice within five business days of the end of each month that the common part is used (s 1015D(2A) and 1015DA, as inserted by CO 12/415). A person who does not wish to access the class order relief can continue to notify ASIC as required by the in-use provisions. Using an application form to apply for product Certain financial products cannot be issued or sold unless an application for the product was made using the application form included in or accompanying a PDS or copied or derived from such a form (s 1016A). This requirement applies to superannuation products (and other managed investment products, investment life insurance products and other products prescribed by regulations). ASIC Corporations (Superannuation: Accrued Default Amount and Intra-Fund Transfers) Instrument 2016/64 (www.legislation.gov.au/Details/F2016L00205) remakes Superseded Class Order SCO 04/1574 to provide relief from the application form requirements (and modifies the cooling-off rights provision in s 1019A: ¶4-400) for certain intra-fund transfers of members between financial products and interests within a regulated superannuation fund. An “intra-fund transfer” occurs when fund members and their benefits are transferred between superannuation products within a regulated superannuation fund. The relief allows members to be transferred between products within a fund without the member’s consent, as part of the rationalisation of fund products. The following conditions must be met for the relief to apply. • The trustee of the fund must have a specific condition imposed by APRA in either its public offer “instrument of approval” or registrable superannuation entity (RSE) licence, as well as its trust deed, that requires the trustee to apply the “equivalent rights” test to intra-fund transfers. • The members to be transferred must be given a significant event notice under s 1017B (¶4-170) and a PDS for the new product they will acquire at least 30 days before the intra-fund transfer occurs. • The intra-fund transfer is carried out in relation to all members who hold the affected products or interests at substantially the same time, and no person subsequently becomes a member of the original product or no further interests are issued. The equivalent rights test already applies under SIS Regulations in relation to a transfer of a member’s benefits, without his/her consent, to a successor fund. The test requires that the transfer confers on the member rights equivalent to those that the member had under the original fund in respect of his/her superannuation benefits (¶3-370). Applications received under outdated PDS An issuer or seller of a financial product must deal with applications that have been received pursuant to an outdated PDS in a particular way. A PDS may be outdated for a number of reasons, eg (a) the issuer or seller becomes aware that the document contains a misleading or deceptive statement, (b) there is an

omission and that statement or omission is materially adverse from the point of view of a retail client, or (c) a new circumstance has arisen which would have been required to be included in the PDS that is materially adverse from the point of view of a retail client. The options available to the issuer or seller in those circumstances are either to: • repay the money received from applicants • give applicants a supplementary PDS and the opportunity to withdraw their applications, or • issue or sell the products to the applicants, but give them a supplementary PDS and an opportunity to return the financial products and be repaid. If the issuer or seller fails to exercise any of the above options, the applicant has the right to return the product and to repayment of the money paid to acquire the product (s 1016F). Regulation 7.9.14(2) deals with the situation of returning products in the context of the preservation requirements for superannuation products.

¶4-160 PDS relief — funds offering choice of investment strategies ASIC Corporations (Superannuation: Investment Strategies) Instrument 2016/65 (www.legislation.gov.au/Details/F2016L00204) provides relief to superannuation fund trustees by modifying some requirements for a Product Disclosure Statement (PDS) in Pt 7.9 of the Corporations Act 2001. This relief applies to fund trustees who offer a choice of investment strategies to members where, if the member instructs the trustee to follow a particular strategy, the trustee will acquire accessible financial products on behalf of the member. Relief Different options for giving PDSs The Instrument inserts s 1013FB into the Act to allow the trustee of a superannuation fund to choose between different methods of giving PDSs where a financial product may be acquired through the fund. A trustee may elect to not rely on the relief under the Instrument. If this occurs, s 1012IA will apply unaffected by the Instrument. This will mean that the trustee will be required to give a member a PDS in relation to the superannuation fund and, on each occasion an interest is acquired in a financial product through the superannuation fund, a PDS for the relevant financial product. This position is reflected in s 1013FB(2)(c). If a trustee chooses to rely on the relief under the Instrument, there are two methods available for giving PDSs to a member: (a) separate PDSs for the superannuation fund PDS and each accessible financial product PDS (s 1013FB(2)(a), 1013FB(3) and 1013FB(4)), or (b) an integrated PDS for the superannuation fund and each accessible financial product (s 1013FB(2) (b), 1013FB(5) and 1013FB(6)). This preserves the position that existed under former CO 06/636, subject to non-substantive changes to the terms of the relief. Separate PDSs method Section 1013FB(3)(a) (as inserted by the Instrument) clarifies that, where a trustee chooses to rely on this method, the PDS requirements that apply to the superannuation fund under Div 2 of Pt 7.9 of the Act will continue to apply in full. In many cases, the PDS requirements that apply will be the shorter PDS requirements under Sch 10D of the Regulations (see reg 7.9.11O). In addition to information regarding the superannuation fund, particular information must be given under this method about each accessible financial product (see s 1013FB(3)(b)). The PDS for the superannuation fund must also contain the information that a person would reasonably

require as a retail client to: • identify the accessible financial product • understand the investment strategy under which the product may be acquired, and • work out whether to ask for further information about the product. In addition, the PDS for the superannuation fund includes either (s 1013FB(3)(c)): • a statement that informs people of their right to obtain from the trustee a PDS for the accessible financial product that the trustee has prepared, or • a statement that informs people of their right to obtain from the trustee a PDS for the accessible financial product that the issuer of the product has prepared. As the PDS for an accessible financial product must satisfy the requirements of Div 2 of Pt 7.9 of the Act, the shorter PDS requirements will apply for some types of accessible financial products. For example, an accessible financial product may be a simple managed investment scheme, to which the shorter PDS requirements would apply (see Sch 10E and reg 7.9.11W). Where this method is relied on, the Instrument relieves the trustee from the obligation to include in the PDS for the superannuation fund any other information about the accessible financial product that would be required by s 1013C, 1013D, 1013DA, 1013E or 1013F of the Act (see s 1013FB(4)(a)). The exemption in relation to the general PDS content requirements under s 1013C includes absolving the trustee from any requirement that would otherwise arise to comply with the shorter PDS requirements for an accessible financial product. Further, the trustee must give on request the trustee’s PDS for the accessible financial product or the product issuer’s PDS for the accessible financial product, as the case may be (s 1013FB(4)(b)). Integrated PDS method The other alternative method available to a trustee to give PDSs is to prepare an integrated PDS (see s 1013FB(5)). An integrated PDS is a PDS that combines the superannuation fund PDS and the PDS for each accessible financial product in a single document, or where these PDSs are combined in two or more separate documents that are given at the same time. Under this method, the integrated PDS must contain the information about the superannuation fund and the information about each accessible financial product that is required by the PDS requirements under Div 2 of Pt 7.9 of the Act (see s 1013FB(6)(a)). This will include the shorter PDS requirements to the extent that the requirements apply to the superannuation fund and any accessible financial product, such as a simple managed investment scheme. In addition, the integrated PDS must contain the information that a person would reasonably require as a retail client to understand the investment strategy under which the accessible financial product may be acquired (see s 1013FB(6)(b)). The Instrument clarifies the position that the PDS requirements under Div 2 of Pt 7.9 of the Act apply to the superannuation fund PDS and the PDS for each accessible financial product. This requirement was not expressed in the corresponding provisions of former CO 06/636, which were limited to the test of the information reasonably required by a member as a retail client Integrated PDS method. Definitional changes and additional acquisitions relief The Instrument inserts various definitions in s 1011BA and 1012IA (see cl 5(a) and 5(b)(i) of the Instrument). These definitions do not depart substantively from the corresponding definitions in former CO 06/636. Under the Instrument, the trustee of a superannuation fund will continue to be relieved from the obligation to give a PDS under s 1012IA(2) on each occasion an additional acquisition is made in an accessible financial product. The Instrument makes technical changes to various provisions in Div 2 of Pt 7.9 of the Act to enable the

PDS provisions to operate where PDSs are given to a person under a method that is allowed by the Instrument (see cl 5(b)(iii), 5(b)(iv), 5(c) and 5(d) of the Instrument). There are no substantive differences between these changes made by the Instrument and the corresponding changes made under former CO 06/636.

¶4-165 Providing information on request A product issuer or seller who has prepared a Product Disclosure Statement (PDS) must provide certain additional information about the product on request (s 1017A). Information needs only be given on request if: • it has previously been made generally available to the public • it might reasonably influence the decision of a retail client whether to acquire the product • it is reasonably practicable to give the information. The following persons may request information from an issuer or seller: • any person who has been given or has obtained a PDS in relation to the product who is not a holder of the product • professional advisers, such as financial services licensees and their representatives. Any information requested must be given as soon as practicable and reasonable efforts must be made to comply within one month of the request. A product issuer or seller may only charge the reasonable cost associated with the giving of the information.

¶4-170 Ongoing disclosure of material changes and significant events Disclosure is required where there is a material change to or a significant event affecting any of the information that was required to be included in the PDS and the information is reasonably necessary for the holder to understand the nature and effect of the change or event (s 1017B). The disclosure must be made to a person who was a retail client when they acquired the product and who was given or obtained, or should have been given, a PDS for the product. Therefore, a person who was a wholesale client at the time of acquiring the product would not be entitled to ongoing disclosure. Ongoing disclosure may be provided in writing, electronically or in a way specified in the regulations. Alternative methods of notice may include advertisements in national newspapers. When is the ongoing disclosure given? Any change that is (or might result in) an increase in fees or charges must be notified 30 days before the change takes place. Any change or event that is not an increase in fees or charges must be given by the time below: • if the change or event is adverse to the holder’s interest — before the change or event occurs, or as soon as reasonably practicable, but within three months after the change or event, or • if the issuer reasonably believes that the change or event is not adverse to the holder’s interest and the holder would not be expected to be concerned about the delay in receiving the information — no later than 12 months after the change or event occurs. A person is exempt from s 1017B in relation to the attribution or transfer of an accrued default amount if the person is an RSE licensee (within the meaning of SISA) and must comply with a requirement under SISR reg 9.46 in relation to the attribution or transfer (CR reg 7.9.11LA). However, where a member of a MySuper product has his/her balance in the MySuper product moved to any other product, including to another MySuper product, upon the recommendation of a trustee, the

trustee must provide a significant event notice to that member under s 1017B. The notice must specify the consequences to the member that might result from moving to another product regardless of whether the information was contained in the PDS (CR reg 7.9.11LB). For financial products with an investment component, the non-adverse information could be notified in a periodic statement required to be given under s 1017D (¶4-180). Exemption: departed former temporary residents Part 3A of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLMA) provides a specific regime dealing with the superannuation benefits held for departed former temporary residents. Part 3A generally requires the trustee of a regulated superannuation fund, upon receiving an ATO notice, to pay the benefits of such departed former temporary resident fund members to the ATO where the departed former temporary resident has not claimed the benefits within six months of departure from Australia. Payment of the amount to the ATO discharges the trustee from any further liability to the departed former temporary resident and the departed former temporary resident may seek payment of the amount of the benefit from the ATO (¶8-400). For the purposes of the periodic statement provisions in CA Pt 7.9, the payment of benefits to the ATO causes the departed former temporary resident, as the holder of a superannuation product, to cease to hold the product under s 1017D(2)(d). As a result, the fund is required to give to the departed former temporary resident a periodic statement (known as an exit statement) in accordance with the detailed requirements in CR Pt 7.9 Div 5 Subdiv 5.12. The operation of SUMLM Act to compulsorily end the former temporary resident’s fund membership and shift liability for the amount paid to the ATO will also trigger the requirement for the trustee to notify the former temporary resident of a significant event or material change under s 1017B. Class Order CO 09/437 provides an ongoing conditional exemption for superannuation fund trustees from the requirement to give notices and exit statements under s 1017B and 1017D where a fund member ceases to hold a superannuation product in the circumstances of Pt 3A of SUMLMA. The exemption is conditional on a fund trustee disclosing in the PDS for the relevant superannuation product, in fund reports to members and on their website (where applicable): • the circumstances in which the benefits of temporary residents will be paid to the ATO, and • that the trustee will not provide departed former temporary resident members whose benefits are paid to the ATO with notices or exit statements at the time of or after the benefits are paid to the ATO. However, if contacted by a departed former temporary resident after the person’s benefits have been paid to the ATO, the trustee must provide the person with information about the payment to allow the person to apply to the ATO to reclaim the benefit.

¶4-175 Information for existing holders of superannuation/RSA products For existing holders of superannuation and RSA products, s 1017C sets out the rules for providing information to a “concerned person” (as defined in s 1017C(9): eg an existing or former superannuation fund member or RSA holder) on request. The required information includes the governing rules, the audited accounts, fund information, actuarial reports, and the terms and conditions of an RSA (reg 7.9.45; 7.9.46). Regulations prescribed under s 1017DA may require the trustee of a superannuation entity or an RSA provider to provide the holder (or former holder) of a superannuation product, or any other person to whom benefits under the product are payable, with: • information relating to the management, financial condition and investment performance of the entity and/or of any relevant sub-plan (within the meaning of s 1017C) • information relating to the person’s benefit entitlements (see below) • information about arrangements for dealing with inquiries and/or complaints relating to the product

(reg 7.9.33 to 7.9.44) (¶4-180). The regulations also prescribe the type of fund information and when and how information is to be provided (see ¶4-180). Benefit entitlements and inactive accounts A person’s “benefit entitlements” include the provision of insurance cover for the person (the fund member) by the provider of the superannuation product held by the person. From 1 July 2019, a trustee is required to notify a member once their account has been inactive, when after a further prescribed period of continued inactivity, insurance cover will cease to be provided for the member (reg 7.9.44B). The trustee must acknowledge a member’s direction to maintain insurance cover even though the member’s account may be considered inactive, and provide annual reminders to the member (reg 7.9.44C). Notices do not need to be given to defined benefit members and Australian Defence Force Super members as the SISA does not apply to those members. An “inactive” account is an account that has not received an amount such as a contribution or a rollover in the previous 16 months (reg 7.9.44A). The definition of “inactive” is the same as in the SISA (¶3-240). ASIC guidelines The insurance opt-out measures in the SISA in relation to inactive members are discussed in ¶3-240. These measures were introduced by the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (PYSP) and PYSP Regulations 2019 (F2019L00539). ASIC has issued a letter (2 April 2019) which sets out its expectations relating to member communications associated with the PYSP, particularly in relation to initial insurance cancellation notices (download.asic.gov.au/media/5072385/asic-letter-pysp.pdf). The Appendix to the letter provides tips for developing consumer-centric messages and processes for member communications about the PYSP changes. The letter states that trustees may decide to communicate with affected members in other ways in relation to insurance cancellation for inactive members or before low balance accounts are transferred to the ATO in accordance with the SISA. More guidelines are available in Protect Your Super (www.letstalk.ato.gov.au/SuperCommunity/news_feed/protect-your-super) which contains the ATO’s advice and implementation documents on the PYSP changes, and APRA’s letter of 8 May 2019 and FAQs to all RSE trustees about the PYSP reforms (www.apra.gov.au/sites/default/files/letter_protecting_your_super_legislative_amendments_implementation.pdf; www.apra.gov.au/protecting-your-super-package-frequently-asked-questions).

¶4-180 Periodic reporting The content of periodic statements is governed by s 1017D and 1017DA which broadly require information about a range of issues to be included in periodic statements, including information about the member’s current balance and any transactions that have taken place during the relevant reporting period (see s 1017D(5) below which sets out the specific content). A failure to comply with s 1017D or 1017DA is an offence (s 1311(1)). Section 1017D Section 1017D provides for periodic reporting in relation to financial products that have an investment component, such as superannuation and RSA products, managed investment products, investment life insurance products, deposit products and products prescribed by regulations. Each reporting period lasts for a maximum period of 12 months, but a product issuer may provide more frequent reporting if they so wish. The first reporting period starts when the product is issued to the holder and each subsequent reporting period starts at the end of the preceding reporting period. If a person ceases to be a member (holder), the period starting at the end of the preceding reporting period and

ending when the person ceases to be a member is a reporting period (s 1017D(2)). Product issuers may choose to end the reporting period at the same time for all holders, so that they report on the same date for all holders. This may mean that new holders will have a shorter reporting period at the first reporting date than for subsequent reporting periods. A periodic statement must be given as soon as practicable after, and in any event within six months after, the end of the reporting period to which it relates (s 1017D(3)). The periodic statement must be given in writing, electronically or in a way specified by regulations (s 1017D(6)). For exemptions and other relief granted by ASIC in relation to certain periodic statements, see below. Content of periodic statement A periodic statement must give the holder the information that the issuer reasonably believes the holder needs to understand his/her investment in the financial product (s 1017D(4)). The periodic statement must also contain the specific contents specified in s 1017D(5). The specific content requirements which are prescribed for the purposes of s 1017D(5)(g) are set out in reg 7.9.19, 7.9.20, 7.9.26 and 7.9.30 (RSAs). The specific content requirements do not apply to SMSFs. Statement of long-term returns and performance Superannuation trustees (other than SMSFs) are required to provide a statement of long-term returns in periodic member statements. The statement is provided at the investment option level, sub-plan or whole of fund level, and where it is provided at the investment option level, the requirement applies to all investment options that the member has invested in at the end of the reporting period or financial year (reg 7.9.20(1)(n); 7.9.20AA(2) to (14)). The long-term return statement is not required where the disclosure is provided in an exit statement provided on the death of the member. Long-term superannuation returns — proposed refinements and ASIC relief In 2010, the government announced that refinements would be made to the long-term performance disclosure regulations to: • exclude exit statements (¶4-180) from the regime • allow the industry to use inserts to provide five-year performance information for one more year up until 30 June 2011 • exempt “traditional” funds (of an insurance nature) (these are older style insurance products that are not usually relevant for long-term performance reporting), and • allow ADFs and PSTs to provide annual reports online (¶4-170 – ¶4-220) (Minister for Financial Services, Superannuation and Corporate Law media release No 015, 19 February 2010). Pending legislative changes to implement the above, ASIC has provided relief to certain superannuation products (see below) which continues beyond 31 December 2015 indefinitely (see CO 10/630 “LongTerm Superannuation Returns” (the principal class order, as amended by ASIC Corporations (Amendment) Instrument 2015/1073) (www.legislation.gov.au/Details/F2015L01953), superseding ASIC Corporations (Amendment No 3) Instrument 2015 (www.legislation.gov.au/Details/F2015L00600) and former Class Orders CO 11/554, CO 12/622 and CO 13/752: ¶4-800). Relevantly, reg 7.9.20AA does not apply in the circumstances below: (a) the superannuation product is a non-investment or accumulation life insurance policy that is offered through the regulated superannuation fund (b) the superannuation product has no investment component (also known as a risk-only superannuation product) (c) the statement is a periodic statement to be given to a member of the regulated superannuation fund

for a reporting period mentioned in CA s 1017D(2)(d) (reg 7.9.20AA(1A)). Also, reg 7.9.75BA(1) (as substituted by CO 10/630) provides that the trustee of a superannuation entity may provide information about a regulated superannuation fund, an ADF or a PST to a holder by making it available on a website that is maintained by or on behalf of the trustee. Exemption — general The periodic statement need not be given if the issuer has already given the holder all the information that would be included in the periodic statement if it were to be given (s 1017D(7)). Exemption — CO 09/437 Class Order CO 09/437 provides an ongoing conditional exemption for superannuation fund trustees from the requirement to give notices and exit statements under s 1017B and 1017D where a fund member ceases to hold a superannuation product in the circumstances covered by Pt 3A of SUMLMA (¶4-170). Exemption — CO 13/1420 (as amended) Under CR reg 7.9.20(2A), superannuation fund trustees must state separately in the periodic statements given to a member the amount of government co-contributions and amount of low income superannuation tax offset (LISTO) received for the member. Trustees have the option under reg 7.9.20(2A) of either separately reporting the amount of superannuation co-contributions and LISTO received during a reporting period or reporting these two amounts as an aggregate amount on periodic statement to members. Where a fund reports an aggregate amount on a periodic statement, this must be accompanied by additional information to assist the member in understanding the nature of the contribution amount included on the periodic statement. Section 1017DA Regulations prescribed for the purposes of s 1017DA may: • require the trustee of a superannuation entity to do all or any of the following: – provide a member with information relating to the management, financial condition and investment performance of the entity and/or of any relevant sub-plan (within the meaning of s 1017C) – provide information to the member or former member, or to any other person to whom benefits under the superannuation interest of the member are payable, with information relating to his/her benefit entitlements (see ¶4-175 regarding notifications required in relation to insurance cover in inactive accounts) – provide information to the member with information about arrangements for dealing with inquiries and/or complaints relating to the product, or • require an RSA provider to do either or both of the following: – provide information to the RSA holder or former holder, or to any other person to whom benefits under the product are payable, with information relating to his/her benefit entitlements – provide information to the RSA holder with information about arrangements for dealing with inquiries and/or complaints relating to the product • deal with what, when and how information is to be provided for the above purpose (s 1017DA(1), (2)). With regard to fund information for superannuation retail clients with a product that has an investment component, CR Pt 7.9 Div 5 Subdiv 5.5 (applicable to regulated superannuation funds, ADFs and PSTs) provides that the information mentioned in CR Pt 7.9 Div 5 Subdiv 5.6 and 5.7 must be provided to the product holder in a periodic statement for each fund reporting period during which the holder holds the product. A reporting period lasts for a period not exceeding one year, fixed by the issuer, or a longer period fixed

by ASIC on the application of the issuer to which the period relates. The first reporting period starts when the holder acquires the product (ie becomes a member), and each subsequent reporting period starts at the end of the preceding reporting period (reg 7.9.32(2)). The periodic fund statement must be given as soon as practicable after, and in any event within six months after the end of the reporting period to which it relates (reg 7.9.32(3)). A periodic fund report, or fund information, can be contained in more than one document (reg 7.9.33). Fund information — content The fund information requirements where the financial product has an investment component are prescribed in Subdiv 5.6 for regulated superannuation funds and ADFs, and in Subdiv 5.7 for PSTs. For the purposes of s 1017DA(1)(a), fund information provided by a regulated superannuation or ADF must include all information (both mandatory information and information as may be relevant in a particular case) that the responsible person reasonably believes a product holder would reasonably need for the purpose of: (a) understanding the management and financial condition of the fund and of the relevant sub-plan (if any), and (b) understanding the investment performance of the relevant sub-plan or, if none, of the fund (reg 7.9.35; 7.9.36; 7.9.37). Exceptions — SMSFs and certain funds Fund information for an SMSF includes only the information mentioned in reg 7.9.37(1)(p) (reg 7.9.38). Regulations 7.9.37(1)(e), (f) and (g) do not apply to superannuation funds and ADFs from which the benefits paid to each member are wholly determined by reference to life insurance products. In such a case, the fund information must include the reason why the information has not been given (reg 7.9.38). Fund information may be made available on website For s 1017DA(1)(a), the trustee of a regulated superannuation fund (other than an SMSF) may provide fund information prescribed by CR Subdiv 5.6 (see above) by making it available on a website that is maintained by or on behalf of the trustee, provided the fund information is readily accessible from the website (reg 7.9.75BA). For the first financial year or reporting period in which fund information is available on the website under reg 7.9.75BA, the trustee must (in one document): (a) notify each member that the fund information is available on the website (b) explain how to access the website, and (c) notify the member that he/she may elect to have a hard copy, or electronic copy if it is available, of the fund information sent to him/her free of charge. If a member elects to have a hard copy or electronic copy of the fund information sent to him/her, the trustee must, for each subsequent financial year or reporting period, send the fund information for the financial year or reporting period to the member, in that form, until notified that a hard copy is no longer required. Periodic statement — disclosure of costs, fees, benefits, etc For the purposes of s 1017D(5)(c), the periodic statement must include a brief description of each transaction (as below) in relation to the product during the reporting period (reg 7.9.60B). • The amount of a transaction must include, if applicable, GST, stamp duty and income tax (after deductions have been taken into account). • A description of contributions paid into a superannuation account that must be sufficient to identify the source of the contribution, if that information has been recorded by the fund.

• A transaction (other than a contribution) of the same kind as another transaction may be described with the other transaction in a single item in the periodic statement if: (a) it is practicable to do so; and (b) the items are described together on a consistent basis in the periodic statement (eg if a member incurs a weekly management cost, the transactions may be grouped consistently on a monthly basis in the member’s periodic statement). Under the enhanced disclosure of fees and costs regime for a superannuation product or a managed investment product, the only fees and costs that need to be itemised in a periodic statement are those set out in the fees and costs template for a PDS in CR Sch 10 Pt 2 (see ¶4-320). For exemptions provided by CO 13/1534 and CO 14/55 on the disclosure of fees and costs in periodic statements in certain circumstances, see “ASIC class orders — Deferral of Stronger Super amendments in relation to PDS and periodic statement disclosure” in ¶4-130.

¶4-220 PDS guidelines for specific superannuation topics ASIC has issued Regulatory Guide RG 168 “Disclosure: Product Disclosure Statements (and other disclosure obligations)” which consolidates the guidelines for all entities required to comply with the Product Disclosure Statement (PDS) requirements in Pt 7.9, including the Good Disclosure Principles (RG 168 which replaced former Policy Statement PS 168 is available at www.asic.gov.au/regulatoryresources/find-a-document/regulatory-guides/rg-168-disclosure-product-disclosure-statements-and-otherdisclosure-obligations). A listing of ASIC class orders and other regulatory guides relevant to superannuation products and their PDS issuers is set out in ¶4-800 and ¶4-850. Formats and processes ASIC does not generally publish pro-forma PDS (or Financial Services Guide or Statement of Advice), but has provided broad policy guidance on the preparation of a PDS in compliance with the Pt 7.9 requirements. A PDS preparer should have regard to ASIC Regulatory Guide RG 168 (see above) as well as other ASIC guidelines for compliance with the PDS rules in particular circumstances. Note that a modified PDS regime applies to superannuation products covered by Pt 7.9 Div 4 Subdiv 4.2B (see ¶4-130). Among other things, the modified regime imposes a limit on the length of a superannuation product PDS and is prescriptive on the PDS content (see ¶4-130).

¶4-250 MySuper products — additional disclosure obligations A MySuper product is essentially a low cost superannuation product which must have prescribed characteristics (¶9-150). Registrable superannuation entity (RSE) licensees are trustees of superannuation funds which are licensed by APRA under SISA and are required to comply with a number of conditions under their licence (¶3-480). As part of the MySuper regime, RSE licensees may apply to APRA under the SISA to be authorised to offer MySuper products. These RSE licensees are required to comply with many additional disclosure requirements under both SISA and CA for prudential regulation and greater transparency purposes to the extent that they relate to MySuper products (s 1017BA(4AA)). Some of the additional disclosure obligations under CA Pt 7.9 are outlined below. These requirements are discussed further together with the SISA requirements in ¶9-600 and following. Product dashboard and other information RSE licensees will be required to publish a product dashboard for each of the fund’s MySuper and choice products on a part of their website that is accessible to the public at all times (CA s 1017BA). The product dashboard will contain information on the investment return target and the number of times the target has been achieved, level of investment risk, a statement about the liquidity of the product and a measure of the average amount of fees and other costs in relation to the product (see ¶9-610). Portfolio holdings

RSE licensees will be required to publish information regarding their portfolio holdings on their website (CA s 1017BB). The RSE licensee must publish portfolio holdings as at the reporting day, which will occur once every six months on 30 June and 31 December, within 90 days after each reporting day. A person who acquires a financial product or enters into a custodial arrangement using the assets, or assets derived from the assets, of an RSE under a contract or arrangement will be required to notify any person with whom they are investing those assets that they will be required to provide the relevant information to the RSE licensee so that it can satisfy its obligation to publish portfolio holdings (CA s 1017BC) (see ¶9-620). Other parties must provide information to RSE licensees To enable an RSE licensee to obtain the required information for their portfolio holdings disclosure, obligations will be imposed on parties to contracts and arrangements that acquire a financial product using the assets, or assets derived from the assets, of an RSE. Specifically, where a person (the first party) enters into a contract or other arrangement with another person (the second party), to acquire a financial product using the assets, or assets derived from assets of an RSE, or to provide a custodial arrangement, then the first party must notify the second party to that contract or arrangement which relates to assets, or assets derived from assets, of an RSE (CA s 1017BC). A “custodial arrangement” is defined by reference to its definition in CA. This has been generally understood to applying to platform arrangements that allow members to direct a superannuation entity to invest in a particular financial product. For the above purposes, it will capture traditional custody arrangements that are provided to RSE licensees by professional custodians as these arrangements only permit the custodian to invest assets as directed by the RSE licensee (CA s 1017BD; 1017BE) (see ¶9620).

¶4-300 Dollar disclosure — costs, fees, charges and benefits Australian financial services licensees and their representatives and product issuers are required to disclose various costs, fees, charges, expenses, benefits and interests as amounts in dollars (the dollar disclosure regime) in the following documents: • Product Disclosure Statements (PDSs) (¶4-150) • periodic statements (¶4-180) • Statements of Advice (SOAs) (¶4-675). ASIC may, by determination, grant relief that a particular disclosure item need not be disclosed as an amount in dollars but is instead disclosed as: • a percentage of a specified matter, or • if the item cannot be disclosed as an amount in dollars or as a percentage, a description of the method of calculation of that item. ASIC can only make a determination where, for compelling reasons, disclosure in dollars is not possible, unreasonably burdensome (including within a specified period), or not in the interests of a client or class of clients. ASIC may exercise its general exemption and modification powers in granting relief from the dollar disclosure requirements (see RG 182 below). The prescribed rules for PDSs and periodic statements are contained in CR Pt 7.9 Div 4C (¶4-150). In summary, subject to ASIC relief, the following rules apply: • SOAs must contain information about remuneration, benefits, interests and relationships (s 947B to 947D)

• PDSs must contain information about fees, costs and benefits (s 1013D) • periodic statements must contain information about the client’s balance, transactions, returns, fees and costs (s 1017D). In all cases, this information must be stated as amounts in Australian dollars unless the regulations provide otherwise. Regulatory Guide RG 182 ASIC has issued Regulatory Guide RG 182 “Dollar Disclosure” (15 December 2017) which sets out how it will administer the “dollar disclosure provisions” under the Corporations Act 2001 and the Corporations Regulations 2001, the relief it has granted from these provisions and its approach to granting relief (see www.asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-182-dollar-disclosure). As noted above, the dollar disclosure provisions require various costs, fees, charges, expenses, benefits and interests to be disclosed as Australian dollar amounts in SOAs, PDSs and periodic statements, including exit statements, except where ASIC relief has been granted.

Note: A modified PDS regime applies to superannuation products covered by Pt 7.9 Div 4 Subdiv 4.2B (see ¶4-130).

¶4-320 Enhanced disclosure of fees and costs in PDS and periodic statements Schedule 10 to the Corporations Regulations 2001 sets out requirements for the disclosure of fees and costs of superannuation products (and managed investment products) in PDSs and in periodic statements that must be given to product holders. Schedule 10D to the Regulations sets out those requirements for superannuation products which are required to use a shorter PDS. Issuers of financial products (including superannuation products) must comply with the requirements for disclosing fees and costs in PDSs and periodic statements under: • the PDS regime in Pt 7.9 of the Corporations Act and the enhanced fee disclosure regulations in Sch 10 to the Corporations Regulations (as modified by Class Order CO 14/1252: see “Amendments and modifications by CO 14/1252” below) • the shorter PDS regime in Pt 7.9 of the Corporations Act (as modified by CR Pt 7.9 Subdiv 4.2 – 4.2C) and CR Sch 10D and 10E to the Corporations Regulations. These Schedules impose a modified version of the enhanced fee disclosure regulations, applicable to issuers of most superannuation products (Sch 10D), and to some simple managed investment schemes (Sch 10E). Amendments and modifications by CO 14/1252 Consolidated Class Order CO 14/1252 (F2018C00025) amends and modifies certain definitions and the fees and costs disclosure requirements for PDSs and periodic statement in Sch 10 as it applies in relation to managed investment and superannuation products — see www.legislation.gov.au/Details/F2017L01174/Download and www.legislation.gov.au/Details/F2017L01714/Download. See also “Summary of amendments and deferral of disclosure of property operating costs in investment fee or indirect costs” below. Amendments to CO 14/1252 to resolve interaction issues The Treasury Laws Amendment (Protecting Your Superannuation Package) Regulations 2019 (PYSP Regulations) (F2019L00539) made a number of amendments to CR Sch 10 and 10D as part of the PYSP reforms effective from 1 July 2019.

However, the PYSP Regulations amended Sch 10 and 10D as made and amended, and not as those Schedules appear as modified by Class order CO 14/1252. To resolve any unintended consequences in that regard, ASIC Corporations (Amendment) Instrument 2019/599 (www.legislation.gov.au/Details/F2019L00854) has amended CO 14/1252 (from 1 July 2019) as below: (a) Items 1 to 3 and 7 amend the class order to ensure that the result of the modifications made by the class order align with the amendments made by the PYSP Regulations to support the prohibition on funds charging exit fees (eg omitting “fee” in CO 14/1252 subpara 6(f)(ia) (definition of administration fee), subpara 6(f)(ib) (definition of investment fee)), and (b) Items 4 to 6 amend the class order by “renumbering” notional paragraphs inserted into Sch 10 by the class order to reflect the insertion of a new paragraph into Sch 10 by the PYSP Regulations. This will ensure that the visibility and continued intention of the notional paragraphs that had been inserted into Sch 10 by the class order remain clear. Enhanced fee and cost disclosure regulations The enhanced fee and cost disclosure regulations were introduced in 2005 (by the Corporations Amendment Regulations (2005) No 1) and were amended as part of the Stronger Super reforms for superannuation products. The Strong Super reforms required the SISA and Corporations Act to take into account, among other things, the introduction of the MySuper products regime (¶9-000), tighter regulation for prescribing the types of fees charged (¶9-200), and improving reporting to members and encouraging member engagement. In support of the above, the reforms introduced specific fee definitions for MySuper products and a new “indirect cost” concept, which replaced the previous “management costs” and “transactional and operational costs” concepts for superannuation products in the Corporations Regulations. Superannuation products covered by the enhanced fee disclosure regulations The enhanced fee disclosure regulations apply to PDSs for superannuation products (with some exceptions) issued to retail investors. The regulations cover all issuers of superannuation products other than the following products: (i) SMSFs (ii) superannuation products that have no investment component (also known as “risk-only” superannuation products) (iii) annuities (except market-linked annuities, including both investment-linked annuities and investment account annuities) (iv) pensions provided under superannuation fund rules that meet the standards of reg 1.06(2), 1.06(6) or 1.06(7) of the SIS Regulations 1994 (Class Order CO 14/1252 modifies the enhanced fee disclosure provisions so they do not apply to pensions), and (v) non-investment or accumulation life insurance policies offered through a superannuation fund. Regulatory Guide RG 97 — Disclosing fees and costs in PDSs and periodic statements Regulatory Guide RG 97 (issued in March 2017) provides guidance for issuers of most superannuation products and managed investment products issued to retail clients on how to disclose fees and costs in PDSs and periodic statements under the enhanced fee disclosure regulations (available at asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-97-disclosing-fees-and-costs-inpdss-and-periodic-statements/). The guidance provided is grouped as below: • general guidance on disclosing fees and costs in PDSs (see Section B) • specific guidance on disclosing fees and costs in PDSs for issuers of superannuation products (see Section C) and managed investment products (see Section D), and • guidance on disclosing fees and costs in periodic statements (see Section E).

Some key points and dates from RG 97 are summarised below. Note that modifications and amendments have been made since the issue date of RG 97 in March 2017 (see “Amendments and modifications by CO 14/1252” above). What is required to be disclosed? Subject to the amendments and modifications made by CO 14/1252 (see above), CR Sch 10 — Disclosure of Fees and Other Costs provides the definitions of various fees and costs, and the templates, and an example and consumer advisory warning that are used for disclosure in a PDS and a periodic statement (CR reg 7.9.16K; 7.9.16M; 7.9.16N). An issuer must meet the requirements as prescribed in the following clauses in Sch 10 for disclosing fees and costs in a PDS. The PDS must include: (a) a standardised fees and costs template (cl 201–202A) (b) certain additional explanations of fees and costs (cl 209) (c) an example of annual fees and costs (cl 210–212), and (d) a boxed consumer advisory warning (cl 221–222). Subject to the amendments and modifications made by CO 14/1252 (see above), an issuer must also: (a) describe certain transactions in periodic statements (s 1017D and reg 7.9.60B(2)) (b) disclose indirect costs and, in the case of a superannuation product, other fees (cl 301) (c) disclose total fees and costs (cl 302), and (d) provide certain additional information (cl 303). Modified disclosure if subject to shorter PDS regime Issuers of most superannuation products and some simple managed investment schemes must comply with shorter, simpler PDS disclosure under Pt 5B and 5C of Sch 10A to the Corporations Regulations (the shorter PDS regime: ¶4-130). The regime also applies a modified version of Sch 10 (see cl 8 of Sch 10D, cl 8 of Sch 10E and CR Subdiv 4.2B and 4.2C) for when the enhanced fee disclosure regulations and the shorter PDS regime apply. As the shorter PDS regime prescribes the content and length of the PDS (eg an eight-page limit applies to an A4 PDS), a modified version of the enhanced fee disclosure regulations applies to facilitate the use of the shorter PDS format. The PDS must contain abbreviated fees and costs information in accordance with the shorter PDS regime requirements. An issuer must comply with the requirements in RG 97 and the fees and costs disclosure requirements, as modified by CO 14/1252, including the requirements for disclosure of borrowing costs for superannuation products. When the requirements apply — periodic statement

Adapted from RG 97 Last day permitted for giving periodic statement

Compliance requirements

Before 1 January 2018

An issuer must comply with: • the requirements in RG 97 and [CO 14/1252] if the periodic statement applies the periodic statement provisions of [CO 14/1252] and the

periodic statement states that [CO 14/1252] applies to it, or • ASIC previous guidance in RG 97, issued in November 2011 (unaffected by [CO 14/1252]) for periodic statements required to be given before 1 January 2018, in any other case. On or after 1 January 2018*

An issuer must comply with the requirements in RG 97 and the fees and costs disclosure requirements, as modified by [CO 14/1252].

Note: *See further “Summary of amendments and deferral of disclosure of property operating costs in investment fee or indirect costs” below. INFO 197 — fee and cost disclosure requirements for superannuation trustees ASIC Information sheet INFO 197 provides the information on the enhanced disclosure of fees and cost regime and ASIC’s approach to the disclosure requirement, as summarised below. New and amended definitions in Sch 10 As noted above, Class Order CO 14/1252 has introduced or modified a number of key definitions under Sch 10 to the Corporations Regulations to reflect changes to fees and costs arrangements for superannuation trustees in the SISA. They include definitions of “investment fee” and “advice fee” and updating of existing definitions (eg “switching fee” and “exit fee”), as well as changes to the “indirect cost” concept (see below), so as to improve disclosure practice and more closely align the disclosure requirements with those in the SISA. Fees and costs template For shorter PDSs and long-form PDSs, the fees and costs tables for each MySuper product and Choice product must consist of the elements set out below. Each element, except for “other fees and costs”, is defined in s 29V of the SISA (¶9-200) (see Sch 10 cl 101 and 209A; Sch 10D cl 8(6A)): • investment fee • administration fee • buy-sell spread • switching fee • exit fee • advice fees relating to all members investing in a particular MySuper product or investment option • other fees and costs • indirect cost ratio. The amounts of these fee categories will need to be apportioned to each MySuper product or Choice product to enable the relevant amounts for each fee or cost category to be set out in the fees and costs tables. If a superannuation trustee prepares a long-form PDS, the fees and costs tables for each MySuper product and Choice product have to be set out in the PDS (see Sch 10 cl 201 and 205 for the template fees and costs table for superannuation products). Disclosure for indirect costs Indirect costs are any amount that the trustee knows, or reasonably ought to know, will directly or indirectly reduce the return on investment of a member, where this amount is not charged to the member as a fee (Sch 10 cl 101).

Returns on investment may be income, capital gain or a combination of both. Costs that reduce these returns will be: • costs that are deducted from the return before it is received in the common fund which includes the member’s investment (eg brokerage on a share sale or a property management fee based on the gross rent collected) • costs that are deducted from the common fund which includes the member’s investment itself (eg a trustee’s operating costs or a management fee paid to an external fund manager). ASIC expects that fees charged to members will include: • fees that are deducted directly from the member’s account (eg an administration fee in the form of a flat weekly fee) • fees, such as an investment fee, that are charged by the trustee through a reduction in a unit price (eg a percentage-based fee). Fee disclosure be treated from a tax perspective A trustee must disclose fee and cost information in its PDS in accordance with CR Sch 10 and 10D. Clause 204(7) of Sch 10 requires that a cost or amount paid or payable must include, if applicable, GST (less any reduced inputs tax credits) and stamp duty. A trustee must also disclose fees gross of income tax. The fee the trustee discloses must not be reduced by any income tax deduction the trustee may be able to claim against costs. For example, if the gross fee is $100 (ignoring GST for illustrative purposes only), the amount the trustee must disclose is $100, rather than $85 (assuming the fund’s income tax of 15%). Any benefit of an income tax deduction relating to a fee should be received by the member through the deduction of a lower fee than is disclosed, or as lower tax on contributions or income. Disclosure of performance fee The Superannuation Legislation Amendment (MySuper Measures) Regulation 2013 introduced a number of changes to key definitions affecting performance fee disclosure. As a consequence, the definitions of “performance” and “performance fee” in Sch 10 have changed to take into account the different types of products on offer (eg a managed investment product, a superannuation product, a MySuper product or an investment option). Trustees should also be aware that the new definition of “investment fee” for superannuation products now incorporates performance fees. The changes to Sch 10 cl 209 for performance fees under the heading “Additional explanation of fees and costs” now require trustees to provide a statement about how performance fees affect administration fees and investment fees for a superannuation product. Previously, trustees were required to make a statement that performance fees were included in the template as “management costs”. The method of calculating the fee and the amount of the fee (or an estimated amount if the amount is unknown) has not changed. ASIC recognises that there is inconsistency and a lack of clarity in the industry about how future performance fees should be determined and disclosed. One common practice is for funds to show the previous year’s performance fees as a reflection of what will occur in the current year. ASIC view is that this practice may be misleading because it implies that past performance fees may be repeated. ASIC states that the guidance currently provided in RG 97.79, which requires that the assessment of future performance fees is based on reasonable assumptions consistent with Regulatory Guide RG 170 Prospective financial information. ASIC’s expectation is that trustees will not simply reflect past performance fees for future years, but will make assumption-based estimates of future performance fees, which allow for meaningful comparison between superannuation funds.

Disclosure of advice fee and intra-fund advice fee The fees and costs template for superannuation products in Sch 10 cl 201 requires the inclusion of “advice fees” relating to all members investing in a particular MySuper product or investment option. Intra-fund advice is often incorporated into the administration fee. The definition of “advice fee” in SISA s 29V(8) contemplates the possibility that a fee for intra-fund advice can be charged as another form of fee, such as an administration or investment fee. A fee for intra-fund advice that has the characteristics described is s 29V(8)(a), and is charged as an administration fee (see s 29V8(b)), will not be an advice fee and will need to be disclosed as an administration fee in the template. If the intra-fund advice fee has the characteristics in s 29V(8)(a), and is not otherwise charged as a fee under s 29V(8)(b), the intra-fund advice will be an advice fee and will need to be disclosed as such in the template.

Summary of amendments and deferral of disclosure of property operating costs in investment fee or indirect costs ASIC Corporations (Amendment) Instrument 2017/664 (F2017L01174) (the Amendment Instrument) The Amendment Instrument amends CO 14/1252 (which modifies or varies Pt 7.9 of the Act as it applies in relation to managed investment and superannuation products) for a temporary period the disclosure of property operating costs for superannuation products. It also clarifies the definition of interposed vehicles inserted by CO 14/1252 and modifies the reporting of some fees and costs on periodic statements for a temporary period. ASIC Corporations (Amendment) Instrument 2017/1138 (F2017L01714) (the Amendment Instrument) Currently, Sch 10 to the Regulations (as modified by CO 14/1252) provides for certain disclosure obligations arising in relation to periodic statements for reporting periods prior to 30 June 2018 to operate differently to the disclosure obligations applying for reporting periods on or after 30 June 2018. Similarly, currently Schedule 10 (as modified by CO 14/1252) provides for superannuation trustees to deal with property costs in PDSs given before 30 September 2018 by disclosing these in the Additional Explanation of Fees and Costs rather than including these as part of investment fees (as would occur for a PDS given on or after 30 September 2018). These disclosure obligations were intended to be interim arrangements, in recognition of the need to change internal systems in relation to the production of periodic statements and to allow additional time for discussions with the industry about how to calculate property costs. External expert report on implementation and issues — extension of time In response to industry feedback around challenges with the implementation of CO 14/1252 and RG 97, ASIC appointed an external expert to conduct a review of the fees and costs disclosure regime to ensure that legislative modifications and regulatory guidance issued by ASIC will best meet in practice the objective of improving fees and costs transparency for consumers. The review will involve consideration of both: • the value of fee and cost information for consumer decision-making and the extent to which it assists consumers (including by contributing to market analysis) in comparing products, and • the practicalities and costs of producing fee and cost information (ASIC media release 17-369MR, 1 November 2017: asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-369mrasic-updates-work-on-fee-transparency-for-super-and-managed-investment-schemes). In view of the Review, the Amendment Instrument has extended the time period for these interim arrangements for an additional year, as summarised below. For the review report, see “REP 581 — External review report on fees and costs disclosure” below. Summary of extension of time Items 1, 2, 3 and 9 of Schedule 1 to the Amendment Instrument extend the time period for compliance with Sch 10 of the Regulations as modified by CO 14/1252, and modifies CO 14/1252 itself in relation to requiring property operating costs to be disclosed as part of the investment fee or indirect costs in a Product Disclosure Statement for superannuation products (ie from 29 June 2018 to 29 June 2019 and from 30 September 2018 to 30 September 2019). Items 4, 5 and 7 of Schedule 1 to the Amendment Instrument extend the time period for compliance with Sch 10 of the Regulations as modified by CO 14/1252 which set out ongoing requirements in relation to the disclosure of certain costs in periodic statements for superannuation products (ie from 29 June 2018 to 29 June 2019 and from 29 September 2018 to 29 September 2019). Item 6 of Schedule 1 to the Amendment Instrument extends the time period for compliance with Sch 10 of the Regulations as modified by CO 14/1252 which set out ongoing requirements in relation to the disclosure of certain costs in periodic statements for both superannuation products and managed investment products (ie from 29 June 2018 to 29 June 2019).

Item 8 of Schedule 1 to the Amendment Instrument extends the time period for compliance with Sch 10 of the Regulations as modified by CO 14/1252 which sets out ongoing requirements in relation to the disclosure of certain costs in periodic statements for managed investment products (ie from 29 June 2018 to 29 June 2019) (Explanatory statement to the Amendment Instrument: see www.legislation.gov.au/Details/F2017L01714/Download). REP 581 — external review report on fees and costs disclosure ASIC has released REP 581 Review of ASIC Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements (download.asic.gov.au/media/4824186/rep581-published-24-july-2018.pdf). REP 581, prepared by expert Darren McShane, concludes that changes to the disclosure regime would be advantageous. It discusses the way fee and cost information is presented to consumers and the information to be included in this disclosure and includes 34 recommendations. Pending further developments and ASIC’s response to the issues raised in REP 581, ASIC’s facilitative compliance approach to fees and costs disclosure will continue (ASIC media release 18-217MR, www.asic.gov.au/about-asic/media-centre/find-a-media-release/2018-releases/18-217mr-external-reporton-fees-and-costs-disclosure-welcomed-by-asic/).

¶4-400 Cooling-off period A 14-day cooling-off period applies to certain superannuation and RSA products. When a retail client acquires a prescribed superannuation or RSA product, the client will have the right to return the product to the issuer or seller of the product and to a refund of any money paid to acquire the product (s 1019A; 1019B). A cooling-off period does not apply to a superannuation product that is issued in relation to a non-public offer superannuation entity or a public offer entity mentioned in reg 7.6.01(1)(b) to (d), ie certain PSTs (reg 7.9.64(1)(f)). A standard employer-sponsor in a public offer superannuation entity is entitled to a 14-day cooling-off period, but only in respect of the employee’s interest in the superannuation entity. If a standard employer-sponsor exercises its right to cancel an interest within the 14-day cooling-off period the product issuer must return any: • mandated employer contributions • money paid to acquire the product to which the right of return relates. Preserved benefits and variation of amounts Where superannuation interests are subject to the cooling-off regime, reg 7.9.66 provides for the restricted non-preserved benefits and/or preserved benefits to be rolled over to a superannuation fund, ADF or RSA product. The holder of the superannuation product or RSA holder is required to nominate the fund or RSA into which the restricted non-preserved benefits or preserved benefits are to be paid. If the nominated fund or RSA refuses to accept the money, the trustee may send the money to an eligible rollover fund (reg 7.9.67(9)). Specific rules deal with the underlying investments decreasing or increasing in value during the 14-day cooling-off period, therefore allowing variations of the amount to be repaid (reg 7.9.67(7)). Deducting tax and costs If the amount contributed for a superannuation product is a taxable contribution, the trustee may deduct contributions tax before rolling over the appropriate amount to another fund (reg 7.9.67(6)). Reasonable administrative and transaction costs (other than the payment of commissions or similar benefits) incurred by the issuer may also be deducted from any amount paid, but these deductions cannot exceed the true costs of an arm’s length transaction (reg 7.9.67(7)).

¶4-420 ASIC stop orders ASIC may issue stop orders where there is a misleading or deceptive statement in, or an omission from, a disclosure document, a supplement or other disclosure material that is required to be prepared, or any advertising or promotional material (s 1020E). A stop order can also be issued if the information included in a Product Disclosure Statement (PDS) or supplementary PDS is not worded or presented in a “clear, concise and effective” manner (s 1013C(3); 1014F). Stop orders may be issued after a hearing in order to give any interested person a reasonable opportunity to make oral or written submissions to ASIC on whether the order should be made.

Market Conduct and Prohibited Conduct ¶4-500 Rules of conduct — superannuation providers Part 7.10 contains provisions dealing with market misconduct or prohibited conduct relating to the provision of financial products and financial services. The provisions have effect independently of each other (s 1041J). The main provisions that superannuation providers must have regard to include the following: • dissemination of information about illegal transactions (s 1041D, replacing former s 1001 and 1263). This is a civil penalty provision • false or misleading statements (s 1041E) • fraudulently inducing persons to deal (s 1041F). This covers situations where a person knows or is reckless as to whether a statement is misleading, false or deceptive, and will apply to the following conduct: – applying to become or permitting a person to become a “standard employer-sponsor” (within the meaning in SISA) of a superannuation entity – applying, on behalf of an “employee” (within the meaning in the RSA Act), for the employee to become the holder of an RSA product • dishonest conduct (s 1041G). This provision prohibits a person, in the course of carrying on a financial services business, from engaging in dishonest conduct in relation to a financial product or service. This is a civil penalty provision • misleading and deceptive conduct (s 1041H). This provision replaced former s 995. A contravention will only attract civil liability (s 1041I) • civil action for loss or damage for contravention of s 1041E to 1041H (s 1041I) • proportionate liability for misleading and deceptive conduct (s 1041L to 1041S) • limit on the amount that a person may recover for a contravention of s 1041H(1) from the other person or from another person involved in the contravention (s 1044B). ASIC’s Regulatory Guide RG 234 provides good practice guidance to help promoters comply with their legal obligations to not make false or misleading statements or engage in misleading or deceptive conduct, applicable to any communication intended to advertise financial products or financial advice services. ASIC’s letter to superannuation trustees reminds them about disclosure requirements associated with advertising for superannuation products. In particular, ASIC encourages superannuation trustees to review their advertising and promotional material (including direct mailouts to members), and consider the guidance given in ASIC’s Regulatory Guide RG 234 (ASIC media release 12-311MR, 11 December

2012). Insider trading Part 7.10 also contains provisions dealing with insider trading and the prohibited conduct which also apply to superannuation products (other than those exempted by regulation) and any other financial products traded on a financial market (s 1042A to 1044A). These are civil penalty provisions.

¶4-530 Best interests obligation and conflicted remuneration Part 7.7A in Ch 7 of CA (“Best interests obligations and remuneration”) (comprising s 960 to 968) and regulations (reg 7.7A.10 to 7.7A.40) containing the Future of Financial Advice (FOFA) provisions. The FOFA provisions focus on the obligations of providers of financial advice with the underlying objective to improve the quality of financial advice while building trust and confidence in the financial advice industry, through enhanced standards which align the interests of the adviser with the client and reduce conflicts of interest. The reforms also focus on facilitating access to financial advice, through the provision of simple or limited advice. The guide provides only an outline of the FOFA obligations and some key points. Readers are advised to refer to other Wolters Kluwer services which provide specialist information for detailed commentary, such as the Wolters Kluwer Australian Company Law Commentary and Australian Financial Services Law Essentials Commentary. The Divisions in Pt 7.7A contain provisions covering the following: • a best interests obligation for financial advisers, requiring them to act in the best interests of their clients and to place the interests of their clients ahead of their own when providing personal advice to retail clients (Div 2) • a requirement for providers of financial advice to obtain client agreement to ongoing advice fees and enhanced disclosure of fees and services associated with ongoing fees (Div 3). This is commonly referred to as the “opt-in” rules under which advice providers are required to renew their clients ongoing fee arrangements at least every two years and give clients a fee disclosure statement where there is an on-going fee arrangement • a ban on conflicted remuneration (including product commissions), where licensees or their representatives provide financial product advice to retail consumers (Div 4) • a ban on volume-based shelf-space fees from asset managers or product issuers to platform operators (Div 5) • a ban on asset-based fees on borrowed amounts (Div 5) • anti-avoidance (Div 6) and transition period (Div 7). The meaning of retail client, wholesale client and professional investor is discussed in ¶4-050. Advice “Personal advice” is defined in s 766B(3) and financial product advice is defined in s 766B(1) (see ¶4630). It is important to note that: • the client obligations under Div 2 apply to “personal advice” to retail clients, ie financial product advice (see s 766B(1) and (3)) that is provided to retail clients (s 961(1)) • the ongoing fees arrangement rules in Div 3, apply to the provision of “personal advice” to retail clients • the rules in Div 4 about conflicted remuneration apply in relation to the provision of “financial product advice” to retail clients.

As financial product advice includes both “personal advice” and “general advice” (¶4-630), the rules about conflicted remuneration may have a wider scope than the clients’ best interests rules and the ongoing fees arrangement rules as they can potentially apply also to general advice provided to retail clients (see “ASIC guidelines” below). Financial services licensees and their clients cannot contract out of Pt 7.7A. That is, if a contract or other arrangement contains a condition that purports to require or bind a party to the contract to waive any right under Pt 7.7A, or to waive compliance with any requirement of this Part, that condition is void (CA s 960A). Related rules Section 960B makes it clear that the obligations imposed on a person by any provision of Pt 7.7A are in addition to any other obligations imposed on the person by CA or by any other law. In a particular case, the other obligations in the CA which may apply in conjunction with the best interests rule in s 961B include the following: • s 961G, which requires advice to be appropriate • s 961H, which requires an adviser to provide a warning if there is any incomplete or inaccurate information • s 961J, which requires an adviser to prioritise the client’s interests ahead of his/her own, and • s 961L, which requires AFS licensees to ensure that their representatives are complying with these sections. Some key points on the operation of Div 2, 3 and 4 which are most relevant to superannuation advisers and their clients are noted below. For the record-keeping requirements for AFS licensees when they or their representative (including an advice provider) give personal advice to retail clients, see “Record-keeping requirements when providing personal advice to retail clients” in ¶4-630. Best interests obligation (Div 2) Division 2 of Pt 7.7A, comprising s 961 to 961Q, imposes an obligation on persons (such as a financial adviser) who provide “personal advice” (¶4-630) to “retail clients” (¶4-060) to act in the best interests of his/her client and to give priority to the client’s interests. The primary rule is set out in s 961B(1). The underlying principle guiding the application of the best interests obligation is that meeting the objectives, financial situation and needs of the client must be the paramount consideration when going through the process of providing advice. Section 961B(2) sets out a list of steps which will satisfy that primary obligation, if the provider can prove, on the balance of probabilities, that those steps have been taken. The steps are (s 961B(2)(a)–(g)): 1. Identify: • the subject matter of the advice sought (whether explicitly or implicitly) • the objectives, financial situation and needs of the client that would reasonably be considered as relevant to the advice sought on that subject matter 2. Identify the objectives, financial situation and needs of the client that are disclosed to the adviser by the client 3. Where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate, make reasonable inquiries to obtain complete and accurate information 4. Assess whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, decline to provide the advice 5. If in considering the subject matter of the advice sought, it would be reasonable to consider

recommending a financial product: • conduct a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter • assess the information gathered in the investigation 6. Base all judgements in advising the client on the client’s relevant circumstances 7. Assess if the adviser has taken any other reasonable step that would be regarded as being in the best interest of the client given the client’s relevant circumstances, at the time the advice is provided (Step 7 is also commonly called the “catch-all” provision). Charging ongoing fees — intra-fund advice fees (Div 3) Division 3 of Pt 7.7A, comprising s 962 to 962S, imposes an obligation on financial services licensees and their representatives to obtain their retail clients’ agreement in order to charge them ongoing fees for financial advice. Section 961B defines an “ongoing fee” as a fee that is payable under an “ongoing fee arrangement” (within the meaning in s 962A). CR reg 7.7A.10(1) and (2) prescribe arrangements which are not ongoing fee arrangements for the purposes of CA s 962A(5). An arrangement described in s 962A(1) and (2) will not be an ongoing fee arrangement to the extent that a fee payable under the arrangement is a product fee. For example, where an arrangement includes more than one fee to be paid including a product fee, the arrangement only extends to fees which are not product fees. A “product fee” means: • a fee charged by a product issuer to a retail client for the administration, management and operation of a financial product. For example, a monthly administration or investment fee, charged by the trustee of a superannuation fund or the responsible entity of a managed investment scheme, or a monthly account-keeping fee, charged by the provider of a basic deposit product, and • a fee that is a cost of providing financial product advice that is not prohibited from being passed on to a member of a regulated superannuation fund under s 99F of SISA (reg 7.7A.10(3)). Regulation 7.7A.10(3) is not intended to exempt fees charged for the administration, management or operation of a financial product in circumstances where these fees are used to subsidise the provision of personal financial advice, other than the type not prohibited under s 99F (commonly referred to as intrafund advice). As product fees are not ongoing fee arrangements, they are exempt from the requirements in Div 3 which relates to charging ongoing fees to retail clients. Conflicted remuneration (Div 4) “Conflicted remuneration” has the meaning given in s 963A, as affected by s 963B to 963D. Subdivision C of Div 4 of Pt 7.7A, comprising s 963E to 963K, imposes a ban on the receipt of conflicted remuneration, and in some circumstances the payment of conflicted remuneration. The ban is imposed on the receipt by licensees and their representatives, and on the payment by product issuers or sellers, of remuneration that could reasonably be expected to influence the financial product advice given to retail clients. The ban on conflicted remuneration includes a ban on both monetary and non-monetary (sometimes known as soft dollar) benefits. CR reg 10.18.01 provides that Div 4 does not apply to a benefit given to a financial services licensee, or a representative of a financial services licensee, and which relates to a group life policy for members of a superannuation entity or a life policy for a member of a default superannuation fund. A benefit given in relation to a life risk insurance product, other than a group life policy for members of a superannuation entity, or a life policy for a member of a default superannuation fund, is not conflicted remuneration (reg 7.7A.12A). Client-pays provision

Benefits given by a retail client to a licensee or representative in relation to the issue or sale of a financial product or financial product advice are permitted (s 963B(1)(d)). CA s 52 provides that “a reference to doing an act or thing includes a reference to causing or authorising the act or thing to be done”. As para 963B(1)(d) exempts a benefit from conflicted remuneration if it is “given” to a licensee or representative, applying s 52 would mean that in giving a benefit to a licensee or representative, a retail client is also causing or authorising the benefit to be given. Note 2 to reg 7.7A.12 clarifies that for the purpose of the conflicted remuneration provisions of Div 4 of Pt 7.7A, giving a benefit includes a reference to causing or authorising a benefit to be given as provided in s 52. Note 3 clarifies that the client-pays provision can be used to permit payments made from a superannuation fund member’s balance. It specifically indicates that the client-pays exemption operates with respect to advice paid from a superannuation fund member’s fund balance. This principle also applies to other investments of the client, such as a managed investment scheme. The trustee of the superannuation fund must still consider whether payments out of the client’s superannuation fund is appropriate given the trustee’s other obligations, such as the sole purpose test under SISA s 62 (¶3-200). Where the benefit is given by another party it must be given with the client’s clear consent. A client would not be considered to have given clear consent if the consent was not clearly and expressly sought. For example, where consent has been sought as part of a broad range of terms and conditions agreed by the client in aggregate, clear consent would not have been provided. Rather, a client’s consent could be expressly sought in a separate and distinct section of the terms and conditions agreed by the client. Similarly, if a client has given consent for a specified period of time, this consent does not cause or authorise the benefit to be given beyond that specified period of time. Benefits given by another party at a client’s direction are not given by the client if the benefits are borne out of the other party’s funds. In deciding whether a benefit is conflicted remuneration, ASIC focuses on the substance of a benefit over its form and considers the overall circumstances in which the benefit is given. For example, asset-based fees paid by clients to an AFS licensee for financial product advice provided by a representative on behalf of the AFS licensee are excluded from being conflicted remuneration (s 963B(1)(d)(ii)). However, this does not necessarily mean that a performance benefit or other benefit paid by the AFS licensee to the representative based on the increase in asset-based fees paid by the representative’s clients is excluded from the conflicted remuneration provisions (RG 246.44). ASIC guidelines RG 244 “Giving information, general advice and scaled advice” provides guidance to AFS licensees, authorised representatives and providers who give information and advice to retail clients, and explains: (1) the differences between giving factual information, general advice and personal advice; and (2) how to meet the advice obligations in Ch 7 of the CA, including the best interests duty and related obligations, when giving “scaled” advice (ie personal advice that is limited in scope). RG 245 “Fee disclosure statements” is a guide for persons who provide personal advice to retail clients, and their professional advisers (such as lawyers). This guide explains the fee disclosure statement (FDS) obligations in Div 3 of Pt 7.7A of the CA and the obligations they create for persons who provide personal advice to retail clients under an ongoing fee arrangement. RG 246 “Conflicted remuneration” provides guidance to AFS licensees and their representatives and other entities that need to comply with the provisions on conflicted remuneration and other banned remuneration in Div 4 and 5 of Pt 7.7A of the CA.

¶4-550 Auditors’ reporting obligations An auditor has an obligation under s 311 and 601HG to report to ASIC matters that the auditor has reasonable grounds to suspect amount to a significant contravention of CA or, in the case of matters that are not a significant contravention, the auditor believes that the matter will not be adequately dealt with.

The auditor’s duty described in s 311 applies to an audit of a financial report for a financial year and to the audit or review of a half-year financial report conducted for the purposes of CA. The auditor’s duty under s 601G applies in relation to compliance plans (if any) and is similar to that applying under s 311 for an auditor who conducts an audit or review of a financial report. If an obligation arises under s 311 or 601HG, the notification to ASIC must be given as soon as practicable, and in any case within 28 days. An auditor should not wait until the conclusion of an audit to report a matter. Regulatory Guide RG 34 “Auditor’s obligations: reporting to ASIC” provides guidelines on the auditor’s reporting obligations, including the matters that ASIC considers: • “reasonable grounds to suspect” a contravention (RG 34.24–RG 34.28) • is a “significant contravention” (RG 34.29–RG 34.34), and • a suspected contravention not “adequately dealt with” (RG 34.35–RG 34.37). AFS licensees In relation to AFS licensees, an auditor is also required under s 990K to report certain matters to ASIC, including certain contraventions and suspected contraventions of CA, within seven days of becoming aware of a matter, contravention or suspected contravention covered by s 990K(2). An auditor needs only to report a matter that “has adversely affected, is adversely affecting or may adversely affect the ability of the licensee to meet the licensee’s obligations as a licensee” or it is a matter covered by s 990K(2)(b). For example, under s 990K(2)(b)(iv), an auditor must report contraventions and suspected contraventions of conditions of a licensee’s licence. These licence conditions have two sources — those imposed by ASIC under s 914A(1) (see ASIC Pro Forma 209 “Australian financial services licence conditions”) and those included by regulations made under s 914A(8) (¶4-660). Unlike s 311, 601HG and 912D(1)(b), s 990K(2)(b) does not include a “significance” test, and all matters must be reported to ASIC regardless of materiality or significance. The reporting obligation covered by s 990K(2)(b) is, however, more restricted than that in s 311 or 601HG as the auditor is only obliged to report contraventions or suspected contraventions of specified provisions (see s 990K(2)(b)(i) to (iii)) or of a condition of the licensee’s licence (s 990K(2)(b)(iv)). In addition, the matters that must be reported under s 990K(2)(a) are limited to those that have an “adverse effect” on the licensee’s ability to meet its obligations. Scope of inquiry and qualified privilege ASIC states that while auditors are expected to be vigilant, and make appropriate inquiries where the circumstances warrant inquiry, ASIC does not expect auditors to engage in a systemic search for all possible contraventions of CA. However, auditors should be alert to matters that come to their attention that may indicate such contraventions. The auditor reporting obligations are not limited to matters that have arisen from audit or review. Information may come to the auditor’s attention during the audit or review, or otherwise, which gives rise to reasonable grounds to suspect that a contravention of CA has occurred (RG 34.11–RG 34.12). An auditor making a report to ASIC has qualified privilege (s 601HG(8); 990L(1)(a); 1289). Qualified privilege covers protection from proceedings for defamation and is available if an auditor has acted in good faith and solely for the purpose of discharging the statutory reporting obligation, ie the auditor must not have acted maliciously or for any other improper purpose (s 89). Statutory privilege does not displace any privilege that the auditor may be entitled to rely on under the common law. Consequences of non-compliance An auditor who fails to comply with s 311, 601HG or 990K is guilty of an offence punishable on conviction by a penalty (fine and/or term of imprisonment) as set out in CA and, in particular, Sch 3. If ASIC considers that an auditor has failed to adequately and properly carry out or perform the duty to report circumstances to ASIC under s 311, 601HG(4) or 990K(2), ASIC may apply to the Companies Auditors and Liquidators Disciplinary Board for the cancellation or suspension of the auditor’s registration

under s 1292(1).

Licensing ¶4-600 Overview of ASIC licensing regime A single licensing regime applies to all persons providing a financial service under the Corporations Act 2001. The licensing provisions, together with their related rules, are in: • Pt 7.6 — which sets out the licensing requirements for providers of financial services, how to apply for a licence, and variations, suspensions or cancellations of licences • Pt 7.7 — which sets out the financial services disclosure requirements (Financial Services Guide, Statement of Advice) for Australian financial services licensees (¶4-665) • Pt 7.8 — which sets out the rules relating to conduct connected with financial product advice and financial services, other than financial product disclosure (¶4-680). The licensing regime provides for separate kinds of licences for different classes of activities. This chapter deals only with the Australian financial services licence (AFSL). The other types of licences, the Australian financial market licence and the Australian clearing and settlement facility licence, are not relevant for superannuation. Requirement to have an AFSL and exemptions A person who carries on a financial services business must hold an AFSL covering the provision of the financial services (s 911A) (¶4-610). There are various exemptions from the requirement to hold an AFSL (¶4-650). A person provides a financial service if the person provides financial product advice or deals in or makes a market for a financial product (¶4-630), or operates a managed investment scheme or provides a custodial or depository service (s 766A(1)). A superannuation interest or an RSA is a financial product, but the operation of a regulated superannuation fund, an ADF or a PST does not amount to providing a custodial or depository service (¶4-060). Under s 766C, dealing in a financial product includes applying for or acquiring or issuing a financial product, and under s 761E a superannuation interest is issued when a person becomes a member of the superannuation fund or an RSA is opened for the person. However, certain activities of non-public offer superannuation funds are exempted by regulations from the licensing requirements, ie the dealing by the trustee of the superannuation fund is not a regulated financial service (reg 7.6.01(1)(a)–(d): ¶4-650, ¶4655). A person who is exempted from the licensing requirements may still be subject to the other requirements in Ch 7. For example, superannuation entities are generally subject to the product disclosure and other requirements in Pt 7.9 as they are a “regulated person” under s 1011B (¶4-060). Coverage of licensing requirements The single licensing regime applies to product issuers (such as superannuation entities, life and general insurance companies, friendly societies and banks) who carry on a financial services business and who: • engage agents to provide advice on and/or sell products to clients • sell products directly to clients through direct response campaigns (irrespective of the medium through which these transactions occur, eg direct mail campaigns, telephone sales or internet sales), or • sell products directly to clients “over the counter”. Other key points of the licensing regime are:

• a licence will be required where services are provided to either wholesale or retail clients • consistent conduct and disclosure standards will apply to all licensees, with some flexibility in the requirements for different services • licensees who provide services to retail clients will have additional obligations. Obligations of AFS licensees The general obligations of financial services licensees are set out in s 912A. Examples of the conduct standards which may be imposed on licensees include providing financial services in a competent and honest way, complying with any licence conditions imposed by ASIC, complying with obligations in respect of the handling of clients’ funds, maintaining competence, skills and experience to provide financial services and having internal and external dispute resolution procedures that are approved by ASIC (¶4-660). ASIC class order relief and guidelines For a list of ASIC class orders and legislative instruments which provide relief on a range of obligations under Pt 7.6 to 7.8 of CA and CR affecting superannuation, see ¶4-800. For example, ASIC Corporations (Advertising by Product Issuers) Instrument 2015/539 (www.legislation.gov.au/Details/F2015L01306): • exempts issuers of financial products from the requirement to hold an AFS licence for providing financial advice, where they provide general financial product advice in advertisements, and • exempts AFS licensees from the requirement to give an FSG and the requirement to give a general advice warning, where they provide general financial product advice on an offer or intended offer of their securities in advertisements. This effectively reissues the relief underlying former CO 05/835 General advice in advertising. A summary of ASIC regulatory guides on the application of CA and CR affecting superannuation is found at ¶4-850. ASIC Regulatory Guides RG 1 to RG 3 provide guidance for applicants applying for an AFSL or vary a licence. RG 1 forms Part 1 of the AFS Licensing Kit and explains the process of applying for and varying an AFSL. Applicants should also read Part 2 (RG 2), which outlines how to complete the AFSL application form (FS01) or variation application form (FS03) and prepare “core” supporting proof documents. Applicants will need to read Part 3 (RG 3) if they are required by ASIC to provide additional proofs. Education, training, and ethical standards for financial advisers Part 7.6 Div 8A of the Corporations Acts 2001 sets out education, training, and ethical standards of financial advisers providing personal advice to retail clients on “relevant financial products” (these are similar to the concept of Tier 1 financial products in Regulatory Guide RG 146 (¶4-850)). From 1 January 2019, only relevant providers who meet these standards can call themselves a “financial adviser” or “financial planner” or similar terms. An independent standards body, the Financial Adviser Standards and Ethics Authority (FASEA) provides administration oversight and compliance of the standards. The Guide does not cover these standards, and readers may refer to other Wolters Kluwer products, such as the Australian Corporations & Securities Legislation Services, for commentary in this area.

¶4-610 Licensing prerequisites Subject to certain exceptions, a person who carries on a financial services business (¶4-620) in this jurisdiction must hold an Australian financial services licence (AFSL) covering the provision of the financial services (s 911A). The exceptions are discussed at ¶4-650 and ¶4-655. The concept of “carrying on a business” in the superannuation context and the business of providing financial service is discussed in ¶4-620. A “person” includes a company, a natural person, a partnership and multiple trustees (s 761F; 761FA).

The inclusion of multiple trustees as a person ensures that the licensing provisions of Ch 7 apply to superannuation funds and other trusts which are operated by trustees. For this purpose, Ch 7 applies to those trusts as if all trustees constituted at all times a single legal entity (referred to as the “notional entity”). If a fund or trust is operated by one trustee, the notional entity obligations under Ch 7 are imposed on that single trustee, and if there is more than one trustee, the notional entity obligations are imposed on each of the trustees. A financial services business is taken to be carried on “in this jurisdiction” by a person for the purposes of Ch 7 if, in the course of carrying on the business, the person engages in conduct that intends to induce people in this jurisdiction to use the financial services the person provides, or the conduct is likely to have that effect (s 911D). This makes it clear that financial services businesses which target Australians from overseas by whatever means (including internet and telephone) will be taken to carry on a financial services business in this jurisdiction. These businesses will therefore require an AFSL and be subject to the obligations attached to that licence. Applying for an AFSL A person may apply for an Australian financial services licence (AFSL) by lodging an application with ASIC. The application must include the information and documents required by the regulations and be accompanied by the appropriate fee (s 913A; reg 7.6.03). ASIC must grant an AFSL to an applicant if all of the conditions in s 913B are satisfied, namely: • the application is made in accordance with s 913A • ASIC has no reason to believe that the applicant will not comply with the general obligations under s 912A (¶4-660) • ASIC has no reason to doubt the good fame and character of: – the applicant (if a natural person) – the responsible officers (if a body corporate), or – any of the partners or trustees of a trust who would perform duties in connection with the holding of the licence (if a partnership or a trust) • the applicant has given ASIC any additional information requested by ASIC in order to decide whether to grant the AFSL. If ASIC is not satisfied in regard to the good fame and character of an applicant, it must be satisfied that the applicant’s ability to provide the financial services would nevertheless not be significantly impaired (s 913B(3)(b)). In determining good fame and character, ASIC will have regard to: • convictions for serious fraud within the past 10 years • whether the person has held an AFSL that was suspended or cancelled • whether a banning order or disqualification order has been made against the person under Pt 7.6 Div 8 • any other matter that ASIC considers relevant (s 913B(4)). An applicant must be given the opportunity to make submissions and have a hearing if ASIC intends to refuse to grant an AFSL to an applicant (s 913B(5)).

¶4-620 Is superannuation carrying on a business? There are two key parts in the test as to whether a person needs an Australian financial services licence — whether the person is “carrying on a business” and whether the business is one of providing financial services.

The meaning of “carrying on a business” is not specifically defined for the purposes of Ch 7 and, therefore, the common law principles are relevant for determining whether a person is carrying on a business. These principles include: • the person’s intention to conduct a business • whether the operations are in the nature of a business • the frequency of transactions • the subject matter of the transactions • the period during which they are carried out. A superannuation fund may be considered to be carrying on a business on the basis of the system, repetition and continuity of its activities, such as: • accepting contributions for new and existing members in the fund • paying out benefits to members • providing advice to persons • amending its trust deed • performing other acts to ensure that the fund’s activities continue. Carrying on a financial services business A financial services business is simply a business of providing financial services. As noted in ¶4-610, a person provides a financial service if, among other things, the person provides financial product advice, or deals in or makes a market for a financial product (¶4-630) (s 766A). A financial product includes the issue of a superannuation interest or the opening of an RSA. In working out whether a person carries on a financial services business, the provisions in Pt 1.2 Div 3 (with the exception of s 21(3)(e)) must be taken into account (s 761C). These provisions set out the following general rules to determine whether a person carries on a business. • A person carrying on a business includes a person who carries on a business otherwise than for the profit of either that person or the members or corporators of a body corporate (s 18). • A reference to someone carrying on a financial services business includes a reference to them carrying on a business of a kind that is part of, or is carried on in conjunction with, any other business (s 19). • A person can be carrying on that business alone, or with any other person or persons (s 20). • A body corporate that has a place of business in Australia carries on a business in Australia (s 21(1)), subject to certain circumstances when it is taken not to be carrying on a business (s 21(3)). An important point from the above rules is that there is no requirement for a profit motive in order for the business test to be satisfied. In the context of superannuation funds, the licensing obligations therefore cannot be avoided merely on the basis that a superannuation fund is a non-profit entity. Superannuation trustees — types of financial services to be authorised by the AFSL The services covered by an AFSL are to: (1) provide financial product advice (2) deal in a financial product

(3) make a market for a financial product (4) operate a registered scheme (5) provide a custodial or depository service. Superannuation fund trustees may apply for AFS licensing in respect of items (1) and (2), being the two most common financial services that they would need to operate a public offer superannuation fund. Trustees of non-public offer funds would require licensing under item (1), but not (2) as, under reg 7.6.01(a), trustees of these superannuation entities are exempted from the requirement to hold an AFSL to deal in a financial product. For superannuation trustees, item (3) is not relevant as, under s 766E(3)(c), the operation of a superannuation entity does not include the provision of custodial or depository services. Types of advice to be covered by the AFSL The financial product advice covered by an AFSL is: (1) financial product advice (2) general financial product advice (3) general financial product advice only to wholesale clients. ASIC expects most superannuation trustees to select item (2); but if they provide personal advice they will need to select item (1). The terms “personal advice” and “general advice” are defined in s 766B and are discussed at ¶4-630. Generally, trustees are giving personal advice if they have considered, or a reasonable person might expect the trustees to have considered, one or more of the client’s (the member’s) objectives, financial situation and needs. Products to be covered by AFSL authorisation Generally, superannuation trustees do not need to be authorised to provide advice on the underlying investments of the superannuation fund unless they are providing advice on specific types or classes of financial products to the members (ie member-directed investments). Superannuation trustees are required to choose all the types of financial products they intend to provide advice on as these will be specifically listed on the AFSL. Superannuation products cover public sector superannuation fund and “RSA-like” products. Superannuation trustees are to select this product in their application. They are not expected to select RSA products. Life products cover: (1) investment life insurance products (2) life risk insurance products. Where superannuation trustees offer additional life products (over and above the group life benefits of the fund) they should select items (1) and (2). For example, funds which offer life products, such as annuities, will need to select this financial product authorisation. Dealing activity to be covered by AFSL authorisation The types of dealing activity required to be authorised in an AFSL cover: (1) dealing in a financial product (2) arranging for a person to deal in a financial product. Dealing in a financial product is defined in s 766C (¶4-630). It includes conduct such as applying for,

acquiring, issuing, varying or disposing of a product, or arranging for a person to engage in those activities. Approved trustees should select item (1), as it includes both dealing and arranging. ASIC Corporations (Superannuation and Schemes: Underlying Investments) Instrument 2016/378 (www.legislation.gov.au/Details/F2016L00802) exempts trustees of public offer entities (ie approved trustees) who deal in underlying assets in the course of the management and administration of the superannuation fund so that they do not need to be authorised for dealing in the underlying investments of the superannuation fund for the purposes of an AFSL. The particular types of products to be covered by dealing authorisation in the AFSL will be the same as products for the advice authorisation, ie superannuation products, RSA-like products and life products. Client group for current or intended business Superannuation clients are deemed retail clients under s 761G(6) (¶4-060).

¶4-630 Financial product advice and dealing A person (such as the trustee of a superannuation fund or an accountant) provides a financial service if the person provides financial product advice or deals in superannuation interests (other than an exempted public sector superannuation scheme) and in an RSA, or engages in conduct of a kind prescribed by the regulations (s 766A). A range of other obligations also specifically applies to providers of financial advice (eg financial advisers) under Pt 7.7A in Ch 7 of CA (commonly called the FOFA provisions), including the best interest obligation for financial advisers and rules on conflicted remuneration (see ¶4-530). Financial product advice “Financial product advice” is defined in s 766B. Essentially, advice is considered to be financial product advice where there is a recommendation or statement of opinion (or a report of recommendations or opinions) that: • is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial product or an interest therein • could reasonably be regarded as being intended to have such an influence • is not exempted from being a financial service (eg where reg 7.1.29 applies: ¶4-655). The above encompasses decisions made by a consumer (eg a member of a fund) to make additional payments or contributions in relation to financial products held by them (whether or not the making of such additional payments or contributions involves the issue of a financial product: s 761E), as well as decisions made by consumers about investment strategies or options which they may select within a fund (see also “Dealings” below). The person who provides the financial product advice will generally include the author(s) of the advice as well as the principal for whom they act and any other person who endorses the advice. The following advice is not financial product advice: • a lawyer’s professional advice about matters of law, legal interpretation or application of the law to any facts • any other advice given by a lawyer in the ordinary course of activities as a lawyer, except as provided by the regulations • advice given by a tax agent in the ordinary course of activities as a tax agent, except as provided by the regulations (s 766B(5)). Specific examples of whether superannuation trustees require an Australian financial services licence

(AFSL) to provide financial products advice, exemptions for superannuation funds and dealing authorisations are discussed at ¶4-650. Provision of financial product advice about default funds For the purposes of CA s 766A(1)(f), a person that provides advice to an employer about default funds (ie a fund to which the employer will make contributions for the benefit of employees who have not chosen a fund under the choice of fund rules in the SGA Act) is providing a financial service (CR reg 7.1.28AA). The effect of this that the person providing the employer with financial advice in these circumstances must treat the employer as a retail client and as a result is subject to the FOFA provisions (see ¶4-530) in relation to that advice. Factual information is not financial product advice If a communication does not involve a recommendation or a statement of opinion, or a report of either of those things, it is not financial product advice. Communications that consist only of factual information (ie objectively ascertainable information whose truth or accuracy cannot be reasonably questioned) will generally not involve the expression of opinion or recommendation and will not be financial product advice. In some circumstances, a communication which consists only of factual information may amount to financial product advice, eg if the factual information is presented in a manner that may reasonably be regarded as suggesting or implying a recommendation to buy, sell or hold a particular financial product or class of financial products. For more information on providing factual information, and the difference between factual information and financial product advice, see Regulatory Guide RG 36 “Licensing: Financial product advice and dealing” and Regulatory Guide RG 200 “Advice to superannuation fund members”. Providing exempt documents Providing financial product advice does not include providing or giving an exempt document or statement (s 766B(1)). An “exempt document or statement” means any document that is prepared or given under Ch 7 (such as a Financial Services Guide, Product Disclosure Statement (PDS), confirmation of transactions, reporting documents or other documents prescribed by the regulations, but not a Statement of Advice) and documents or statements as prescribed by the regulations (s 766B(9)). ASIC Corporations (Financial Product Advice — Exempt Documents) Instrument 2016/356 (www.legislation.gov.au/Details/F2016L00998) specifies the documents, information or statements for the purposes of CR reg 7.1.08(3) that are included in the definition of “exempt document or statement” in s 766B(9)(b). Paragraph 5 of the Instrument exempts a person that provides financial product advice that is general advice in the documents specified in the Instrument, from the requirement to hold an AFS licence for the provision of financial product advice, or where the person is a financial services licensee or an authorised representative of such a licensee, from the conduct and disclosure requirements in Div 2 and 4 of Pt 7.7 of the Act in relation to that advice. Paragraph 6 of the Instrument specifies the documents to which the relief applies. The relief was previously contained in former Class Order CO 03/606 (now repealed, see ASIC Corporations (Repeal) Instrument 2016/452). Providing superannuation product advice — carrying on financial services business ASIC considers that providing financial product advice in relation to a superannuation product will constitute carrying on a financial services business if it is done with system, repetition and continuity. A person who provides financial product advice of this type must operate under an AFSL or an express exemption (eg the limited exemption available to accountants in the context of the establishment, operation, structuring or valuation of an SMSF: ¶4-655). When assessing whether a communication will represent financial product advice the overall context should be taken into account, including its presentation and the circumstances of the parties. A person may, therefore, provide financial product advice in relation to superannuation products if he/she can reasonably be regarded as suggesting, encouraging or discouraging a decision in relation to a superannuation product or class or products. Superannuation information that may not be financial product advice includes situations where the context

of the communication supports the provision of factual information (see above) only. Factual information is objectively ascertainable and its truth or accuracy cannot reasonably be questioned (eg general tax treatment of superannuation). However, a communication of factual information may amount to financial product advice where it is presented in a manner that may reasonably be regarded as suggesting or implying a recommendation. A person does not require an AFSL to refer another person to an AFS licensee or a representative of an AFS licensee (reg 7.6.01(1)(e), (ea): ¶4-650). Such a referral must be limited to informing the person of the licensee’s or representative’s ability to provide a financial service, and their contact details. A referral will only be exempt where the person discloses at the time of the referral any benefits (including commissions) the person or their associates may receive in providing the referral (QFS 147; see also QFS 134 at ¶4-650). Personal advice and general advice Financial product advice can be personal advice or general advice. “Personal advice” is financial product advice that is given or directed to a person (including by electronic means) where the provider of the advice has either considered one or more of the objectives, financial situation and needs of the person, or a reasonable person might expect the provider to have considered one or more of those matters. “General advice” is financial product advice that is not personal advice. In relation to providing personal advice to a retail client (eg superannuation fund members), the AFS licensee (providing entity) has additional obligations as below: • act in the best interests of the client (s 961B) • provide the client with appropriate advice (s 961G) • warn the client if their advice is based on incomplete or inaccurate information (s 961H), and • where there is a conflict with their own interests, or those of one of their related parties, prioritise the interests of the client (s 961J). The commonly referred to “best interests duty and related obligations” in CA Pt 7.7A Div 2 (¶4-530) are designed to ensure that retail clients receive advice that meets their objectives, financial situation and needs, and that advice providers act in the best interests of their clients in providing them with advice. These obligations replaced the previous requirements for licensees and authorised representatives to ensure that advice is appropriate for the client (former s 945A) and to warn clients if the advice is based on incomplete or inaccurate information (former s 945B). Summary of key Pt 7.7 disclosure obligations The table below summarises the key obligations of a providing entity under Pt 7.7 for the provision of personal advice and general advice to retail clients. Applicable to personal advice?

Applicable to general advice?

Prepare and provide a Financial Services Guide (¶4-670)

Yes

Yes

Provide a general advice warning to the client (s 949A: see below)

No

Yes

Prepare and provide suitable personal advice (¶4665)

Yes

No

Where applicable, warn the client that the personal advice is based on incomplete or inaccurate information (s 961G; former s 945B: see below)

Yes

No

Key obligation

Prepare and provide a Statement of Advice (¶4675)

Yes

No

Warnings and additional obligations When general advice is provided to a retail client, the providing entity must warn the client that: • the advice has been prepared without taking into account the client’s objectives, financial situation or needs • the client should therefore consider the appropriateness of the advice, in the light of their own objectives, financial situation or needs, before acting on the advice • if the advice relates to the acquisition or possible acquisition of a particular financial product, the client should obtain a copy of and consider the PDS for that product before making any decision (s 949A). A providing entity must only provide personal advice to a client if the entity: • acts in the best interests of the client (s 961B) (¶4-530) • provides the client with appropriate advice (s 961G) • warns the client if their advice is based on incomplete or inaccurate information (s 961H), and • where there is a conflict with their own interests, or those of one of their related parties, prioritises the interests of the client (s 961J). The above obligations replaced similar but more limited obligations on AFS licensees who provide personal advice under former s 945A and 945B (repealed when Pt 7.7A commenced). An exemption applies for providing intra-fund advice to superannuation fund members about their existing superannuation fund (see below). Certain general advice is not provision of financial service In certain cases, advice may be provided (eg about a class or range of financial products, educational or other financial market information) without constituting the provision of a financial service. Specifically, a person is not taken to provide a financial service if: • the person gives advice that is not personal advice and is not about a particular financial product or an interest in a particular financial product: – the advice is not intended to influence another person to make a decision in relation to a particular financial product or an interest in a particular financial product, or – the advice could not reasonably be regarded as being intended to have such an influence in respect of a particular financial product or an interest in a particular financial product, and • by giving the advice, neither the adviser, nor an associate of the adviser, receives any remuneration or other benefit related to the advice, except remuneration or other benefits that the adviser or associate would have received, even if the advice had not been given (reg 7.1.33G). Advice about own products In certain cases, financial product issuers are allowed to provide advice to consumers and existing clients about their own products, without that advice constituting the provision of a financial service. This is because product issuers have the relevant expertise about their own products to provide general advice and information. However, where an issuer chose to provide unlicensed advice, certain safeguards under reg 7.1.33H must be complied with. All of the safeguards apply where an issuer is providing advice intended to influence a consumer or existing client to purchase one of their products. The safeguards require the issuer to:

• make the consumer or existing client aware that the advice is not being provided by a licensed adviser • advise the consumer or existing client that they ought to read the relevant PDS before making a decision to acquire the product that is the subject of the advice, and • where the advice is about the offer, issue or sale of a financial product, notify the consumer or existing client about the availability or otherwise of a cooling-off regime that applies in respect of the acquisition of the product. If the advice is provided to an existing client and is about a product that the client already holds, then not all of the safeguards are necessary. In such circumstances, it is sufficient for the issuer to inform the client that they are not a licensed adviser. Other obligations relating to providing financial product advice Apart from Pt 7.7, a providing entity must also be aware of other obligations that may be applicable, such as: • the prohibited conduct provisions relating to financial products and financial services in Pt 7.10 Div 2 (¶4-500) • the best interest obligation, the charging fee and conflicted remuneration rule in Pt 7.7A in Ch 7 (CA) should be noted when providing personal advice to retail clients (¶4-530) • the misleading or deceptive conduct provision in the Australian Securities and Investments Commission Act 2001 (ASIC Act), s 12DA • the PDS provisions in Pt 7.9 (¶4-150 and following) • the common law obligations, including a duty to: (a) disclose any conflicts of interest that may affect the advice they provide; and (b) adopt due care, diligence and competence in preparing advice. Where financial services (including financial product advice) are provided to retail clients, there is an implied warranty under the ASIC Act that the financial services will be rendered with due care and skill and, where the purpose for which the financial services are being obtained is made known, the financial services will be reasonably fit for that purpose (ASIC Act s 12ED). Record-keeping requirements when providing personal advice to retail clients Class Order CO 14/923 modifies CA Pt 7.6 Div 3 by inserting s 912G which imposes record-keeping requirements for AFS licensees when they or their representative (including an advice provider) give personal advice to retail clients. Under s 912G, licensees must ensure that, in relation to the provision of personal advice, certain records are kept to demonstrate compliance with the best interests duty and related obligations under Div 2 of Pt 7.7A (which replaced the obligation in former s 945A). Section 912G(2) specifies the records that AFS licensees must keep in relation to the provision of personal advice given to retail clients. The licensee or its representatives must ensure that records of the following matters are kept: (a) the information relied on and the action taken by the provider that indicates the provider has, in accordance with s 961B(1), acted in the best interests (the best interests duty) of the client in relation to the advice (¶4-530) (b) if the safe harbour is relied on to demonstrate that the best interests duty has been satisfied, the information relied on and the action taken by the provider that satisfies the steps in s 961B(2) (c) the advice given, including the reasons why, under s 961G, it would be reasonable to conclude that the advice is appropriate to the client, had the provider satisfied the best interests duty under s 961B, and

(d) where the provider knows, or reasonably ought to know, that there is a conflict between the interests of the client and the interests of any person mentioned in s 961J(1), the information relied on and the action taken by the provider to indicate that the provider has given priority to the client’s interests when giving the advice. Dealings Providing a financial service includes dealing in a financial product. The meaning of “dealing” is defined in s 766C. The regulations can also determine conduct that constitutes dealing. In relation to superannuation, issuing, applying for, varying or disposing of a superannuation interest or RSA amounts to dealing, as well as arranging for a person to do any of the above conduct. “Arranging” refers to the process by which a person negotiates for, or brings into effect, a dealing in a financial product. The person who is arranging may be acting for a product issuer, seller or consumer. The following factors are general indicators of conduct that may constitute a person arranging: • where the person’s involvement in the chain of events leading to the relevant dealing is of sufficient importance that without that involvement the transaction would probably not take place (eg the person was the main or only person consumers dealt with directly in a particular transaction) • where the person’s involvement significantly adds value for the second person • where the person receives benefits depending on the decisions made by the second person. Thus, where an individual applies to be, and becomes, a member of a superannuation fund, the fund will be “dealing” in a financial product, ie providing a financial service. Varying a superannuation interest or RSA product may occur when a fund’s trust deed is amended, or when a member switches investments in a fund which provides investment choice, or when the trustee changes the fund’s overall investment strategy. Disposals of a beneficial interest in a superannuation fund or RSA (or other superannuation entities such as an ADF or PST) will occur when the benefit is paid out or a benefit is rolled over. A “disposal” of a superannuation interest includes the termination or closing of the legal relationship that constitutes the interest (s 761A). Exemptions from dealings Certain kinds of conduct in relation to superannuation are specifically exempted from the definition of “dealing” by the regulations. These are discussed at ¶4-650 and ¶4-655. The question of what dealing authorisation is required does not arise for non-public offer superannuation entities by virtue of the dealing exemption in reg 7.6.01(1)(a). Superannuation funds providing intra-fund personal advice to members — class order relief Class Order CO 09/210 provides relief from s 945A (see “Warnings and additional obligations”) to superannuation fund trustees (other than SMSFs) and their authorised representatives who provide personal advice to fund members about their existing superannuation fund. ASIC explains that these fund trustees are already in a special relationship with their members and subject to existing obligations to them under statute and at common law, and that the relief is also to improve members’ access to advice about their interest in an existing super fund and encourage member engagement. Superannuation funds providing retirement estimates to members A retirement estimate is a simple, broad estimate of how much superannuation fund members may receive when they retire and is intended to help members think about how much money they will need when they retire, so they can start planning how to achieve this. A superannuation forecast may be generated by the provider of the superannuation product and provided to a member in the form of a statement (as a “retirement estimate”). It may also be provided in the form of a calculator involving, to some extent, the input of certain information by members themselves. It is not mandatory for funds to provide retirement estimates to their members.

As superannuation forecasts may involve personal advice (see “Personal advice and general advice” above), whether delivered as a calculator or as a retirement estimate in a statement, fund trustees that provide members with superannuation forecasts may need to hold an AFS licence with an authorisation to give personal advice (¶4-600), and comply with the personal advice requirements of the financial services licensing regime, including the obligation to prepare Statements of Advice (¶4-675). Class order relief and ASIC guidelines Superannuation fund trustees providing retirement estimates (which may be personal advice) have been granted class order relief in CO 11/1227 “Relief for providers of retirement estimates” from the licensing, conduct and disclosure requirements for general and personal advice in the Corporations Act 2001. ASIC’s guidance in Regulatory Guide RG 229 “Superannuation forecasts” and the class order relief in CO 11/1227, as amended by CO 14/870, aim to help members engage more with their superannuation and retirement planning. These initiatives, together with tools like ASIC’s retirement planner on the MoneySmart website (¶4-658) and receiving professional advice from licensed financial advisers, are designed to help people better understand their options and get the most out of their retirement income. ASIC relief for generic financial calculators relating to superannuation and retirement A generic financial calculator involves financial product advice if it produces recommendations or statements of opinion that are (or could reasonably be regarded as being) intended to influence the user in making a decision about a financial product or class of financial product (CA s 766B). Whether a particular generic financial calculator involves financial product advice and whether the financial product advice is likely to be personal advice will depend on the facts of the particular case. ASIC Corporations (Generic Calculators) Instrument 2016/207 provides relief to generic financial calculators providers relief from the requirement to hold an AFS licence with an advice authorisation or (where they currently hold a licence) relief from the conduct and disclosure requirements in CA Pt 7.7 Div 2, 3 and 4 in relation to that advice if the generic financial calculator provider takes reasonable steps to meet certain requirements (see ¶4-658). Regulatory Guide RG 229 provides guidance for superannuation fund trustees and their advisers. and explains the relief ASIC has given to trustees when providing fund members with superannuation forecasts, both in the form of a statement (ie a “retirement estimate”) or as a calculator. The Guide also explains how the general relief for providers of financial calculators applies to superannuation calculators. Providing financial product advice is not a tax agent service The provision of financial product advice is exempted as a tax agent service in certain circumstances (¶16-060). ASIC guidelines — providing advice about superannuation products Regulatory Guide RG 200 “Access to advice for super fund members” (asic.gov.au/regulatoryresources/find-a-document/regulatory-guides/rg-200-advice-to-super-fund-members) provides guidance to those who provide financial product advice to superannuation fund members about their existing interest in a fund (including insurance), including financial advisers and fund trustees and their outsourced advice providers. The guide: • sets out how this advice can be provided under either s 945A of the Corporations Act 2001 or, alternatively, the relief given to superannuation fund trustees if they choose to rely on it (eg CO 09/210 in “Superannuation funds providing personal advice to members — class order relief” above), and • gives guidance on the boundaries between factual information, general advice and personal advice provided to fund members about their existing interest in a fund. RG 200 includes examples of giving factual information, general advice and personal advice about common superannuation topics, including changing investment options, making extra contributions, insurance and financial hardship, but not more complex personal advice about super, including

superannuation switching, consolidation or retirement planning advice. The examples apply to all AFS licensees, including superannuation trustees and financial planners, and as well as accountants who currently hold an AFS licence. RG 244 “Giving information, general advice and scaled advice” provides guidance to AFS licensees, authorised representatives and advice providers who give information and advice to retail clients, and explains: (1) the differences between giving factual information, general advice and personal advice; and (2) how to meet the advice obligations in Ch 7 of the CA, including the best interests duty and related obligations (¶4-530), when giving “scaled” advice (ie personal advice that is limited in scope). RG 245 “Fee disclosure statements” is a guide for persons who provide personal advice to retail clients, and their professional advisers (such as lawyers). This guide explains the fee disclosure statement (FDS) obligations in Div 3 of Pt 7.7A of the CA and the obligations they create for persons who provide personal advice to retail clients under an ongoing fee arrangement (¶4-530). RG 246 “Conflicted remuneration” provides guidance to AFS licensees and their representatives and other entities that need to comply with the provisions on conflicted remuneration and other banned remuneration in Div 4 and 5 of Pt 7.7A of the CA (¶4-530).

¶4-650 Exemptions from licence requirements The exemptions from the requirement to hold an Australian financial services licence (AFSL) are set out in s 911A(2) and regulations made for the purposes of that provision. In the context of superannuation, a person does not need to hold an AFSL in the following circumstances or in relation to the following conduct. • The person provides financial services as a representative of a licensee (or as a representative of a person exempted from the requirement to hold an AFSL) (s 911A(2)(a)). • The person is a product provider who issues, varies or disposes of a financial product pursuant to an arrangement with a licensee (see “Product issuer exemption” below) (s 911A(2)(b)). • The person provides the service only to wholesale clients and is a body regulated by APRA, where the service is one in relation to which APRA has regulatory or supervisory responsibilities (s 911A(2) (g)). • The person provides the service in the capacity of trustee of an SMSF (s 911A(2)(j)). • The person deals in a financial product in the capacity of trustee of a superannuation entity (other than the trustee of a public offer superannuation entity) (reg 7.6.01(1)(a)). • The person deals in a financial product in the capacity of trustee of a PST where the regulated superannuation fund investing its assets in the PST has net assets of at least $10m (reg 7.6.01(1) (b)). • The person deals in a financial product in the capacity of trustee of a PST where the regulated superannuation fund investing its assets in the PST has net assets of at least $5m and the person reasonably expects that the superannuation fund will have net assets of at least $10m within three months (reg 7.6.01(1)(c)). • The person deals in a financial product in the capacity of trustee of a PST where the PST is not used for the investment of assets of a regulated superannuation fund (reg 7.6.01(1)(d)). • The person provides a financial service that consists only of referring another person to a licensee (where the referral is an incidental part of the person’s ordinary activities and the person discloses any benefits, including commission, receivable that are attributable to the referral) (reg 7.6.01(1)(e)). • The person provides a financial service that consists only of arranging for contributions to be paid into a superannuation fund, successor fund or RSA (reg 7.6.01(1)(h)).

• The person provides a financial service that consists only of the provision of factual information to members or prospective members of a superannuation fund or holders or prospective holders of an RSA (reg 7.6.01(1)(i)). • The person provides a financial service to an insurer where that service consists only of the handling of claims and/or the settling of claims in relation to an insurance product (reg 7.6.01(1)(j)). ASIC relief is provided in ASIC Corporations (Superannuation and Schemes: Underlying Investments) Instrument 2016/378 (www.legislation.gov.au/Details/F2016L00802). Topics covered The licensing requirements are discussed under the following headings. • SMSFs • Corporate superannuation funds • Product issuer exemption • Do superannuation trustees require an AFSL to give financial product advice? • Do superannuation trustees require dealing authorisations? • Representatives • General advice in advertisement relief. SMSFs The trustees of an SMSF do not need to hold an AFSL as they are exempted (s 911A(2)(j): see above). SMSFs are also exempted from the disclosure and conduct obligations related to the licensing rules in Pt 7.7 (financial services disclosure requirements) and Pt 7.8 (rules relating to conduct connected with financial products and financial services). SMSFs are, however, subject to the financial product disclosure requirements relating to issue and sale of financial products in Pt 7.9 (¶4-090, ¶4-150). Corporate superannuation funds Part 7.7 requires persons who provide financial services to obtain an AFSL or to become the representative of a licensee (depending on whether they are acting as a principal or a representative, see below). A person provides financial services if the person carries out certain activities (eg advising or dealing: ¶4630) in relation to “financial products” (including superannuation: ¶4-060). Dealing in a financial product includes issuing the product (s 766C). A superannuation interest is issued when a person becomes a member of the relevant fund (s 761E). Specific activities of non-public offer superannuation funds are exempt from the licensing requirements, eg dealing by a person in the capacity of the trustee of a superannuation entity is not a regulated financial service (reg 7.6.01(1)(a) to (d): see above). Product issuer exemption A mere product issuer is exempted from the requirement to hold an AFSL (s 911A(2)(b): see above). The trustee of a superannuation fund will come with the exemption if the financial service it provides is the issue, variation or disposal of a superannuation interest (ie a member’s beneficial interest in the fund) pursuant to an arrangement (an intermediary authorisation) between the trustee and an AFSL holder where: • the AFSL holder or their authorised representatives can make offers to people to arrange for the issue, variation or disposal of the superannuation product by the trustee

• the trustee issues, varies or disposes of the superannuation product if the offers are accepted. In practice, this is a very limited exemption as any offer pursuant to which the issue, variation or disposal is made must already be covered by the licence held by the AFSL holder. Do superannuation trustees require an AFSL to give financial product advice? Unless a specific exemption applies, the trustee of a superannuation fund generally requires an AFSL authorisation to provide financial product advice as many communications by the trustee to its members will fall within the broad definition of “financial product advice” in s 766B(1) (¶4-630). In most cases, the trustee is providing financial product advice in relation to the members’ superannuation interests held in the fund, which means that the trustee is generally providing that advice as a principal and will require its own AFSL authorisation to do so. The situations where an AFSL authorisation may not be required are where the trustee confines its communications with its members to: • providing “factual information” (¶4-630) • providing or giving an “exempt document” (¶4-630) • providing “general advice” (¶4-630) which the trustee prepares and provides via a financial services licensee who is authorised to provide that advice (reg 7.1.33B) Another situation is where the trustee has an arrangement with an appropriately authorised financial services licensee to provide financial product advice about the fund to its members, but not as a representative of the trustee and not attributing that advice to the trustee. In such cases, it must be made clear to the fund members that the financial services licensee is providing financial product advice about the fund as a principal in its own right. This is important so that the members are aware that they are receiving advice from a financial services licensee and, thus, have the protections afforded to consumers under the Corporations Act 2001, such as the availability of dispute resolution mechanisms (and ultimately compensation) in relation to the provision of the advice, regardless of whether the members may have other rights of redress outside of CA. Note that the trustee of a superannuation fund who is a financial services licensee can have an arrangement with another financial services licensee to provide financial product advice about the fund to its members on its behalf (s 911B(1)(d), (3)). In such cases, the trustee must make it clear to the members who is providing the financial product advice so that they are not misled about who is providing the relevant financial service and they know the party against whom they can exercise their rights. Such disclosure may be made in a Financial Services Guide (FSG), a PDS, or through ongoing disclosure to members (ASIC QFS 134). Do superannuation trustees require dealing authorisations? Public offer superannuation entities The trustee of a “public offer entity” (¶3-500) is generally only required to apply for authorisation in relation to issue, variation or disposal of an interest in the entity. In a superannuation context, dealing may involve applying for, or acquiring, a financial product, issuing a financial product, varying a financial product, disposing of a financial product or arranging for any of the aforementioned. A trustee of a public offer entity fund clearly deals in a financial product when it issues an interest in the entity and requires an authorisation to do so. A trustee may also deal when it invests the fund assets in a way that involves the acquisition, variation or disposal of other financial products and/or when it enters into group life insurance arrangements involving the acquisition, variation or disposal of insurance products. However, ASIC takes the view that these dealings are undertaken by the trustee for the purpose of managing and administering the fund on behalf of members in order to enable the trustee to meet its obligations under its governing rules. Compliance with these obligations is regulated by APRA. Accordingly, an authorisation to deal in other financial products will not be required (ASIC Corporations (Superannuation and Schemes: Underlying Investments) Instrument 2016/378: www.legislation.gov.au/Details/F2016L00802).

Further, the trustee of a public offer entity will not need a dealing authorisation of the kinds discussed above if it can rely on a relevant exemption in s 911A(2) and reg 7.6.01(1). Note that the above do not deal with the authorisation requirements of a trustee of a public offer entity for providing financial services other than dealing (eg financial product advice). Non-public offer superannuation entities The question of what dealing authorisation is required does not arise in the case of non-public offer superannuation entities because of the dealing exemption in reg 7.6.01(1)(a) (ASIC QFS 116). Representatives Generally, the following people will not need to have an AFSL to carry on a financial services business: • an authorised representative of a licensee who is appointed under s 916A or 916B • employees or directors of the licensee or of the licensee’s related bodies corporate • employees or directors of an exempt provider of financial services or of their related bodies corporate, or • other persons acting on the licensee’s or the exempt provider’s behalf. The trustee of a superannuation fund that holds an AFSL may appoint an authorised representative to provide specified financial services of the fund covered by the licence held by the trustee. The trustee must lodge a written notice with ASIC within 10 business days if the representative is authorised to provide a financial service. It should be noted that an AFSL holder cannot be the authorised representative of another licensee. For example, a company holding an AFSL and providing administration services to a superannuation fund whose trustee holds its own AFSL covering these activities cannot be appointed as an authorised representative of the trustee. General advice in advertisement relief ASIC Class Order CO 05/835 provides relief for issuers of financial products who provide general advice in advertisements from 2 September 2005. Briefly, product issuers are exempted from the requirement to hold an AFSL where they provide general financial product advice in advertisements in the media, or on billboards or posters. The exemption applies only when the product issuer includes a statement in their advertisement that a person should consider whether the financial product is appropriate for them. The advertisement may also need to comply with the disclosure requirements in s 734 or 1018A, as may be applicable to the kind of offer document (ASIC media release IR 05-47, 31 August 2005).

¶4-655 Exemption for service providers in certain circumstances A person who provides a “financial service” (¶4-600) is required to be licensed under the Corporations Act 2001. The Corporations Act 2001 enables the regulations to set out the circumstances in which a person is taken to provide, or taken not to provide, a financial service (s 766A(2)(b)). These circumstances have been specified by reg 7.1.29 and they cover a wide range of administrative tasks and the provision of advice services (eg by accountants and other service providers). The general exemptions and circumstances relevant to superannuation advice, audit advice, business advice, risk management advice and taxation advice are discussed under the following headings. • General approach to exemptions • Regulation 7.1.29 — how an exemption arises • Exempt service — reg 7.1.29(3) (audit and miscellaneous administration advice) • Exempt service — reg 7.1.29(4) (taxation advice)

• Exempt service — reg 7.1.29(5) (fund start-up and operation advice) • Exemption for recommendation to SMSFs by recognised accountants — reg 7.1.29A. General approach to exemptions The approach of the exempting regulations is that if a person meets the requirements of reg 7.1.29(1) and the person performs an activity (exempt service) listed in reg 7.1.29(3), (4) and (5) (see below), that person will not be providing a financial service (or eligible service). The regulations are not intended to be an exhaustive list of every task that a person can perform without being licensed. Therefore, certain activities are described in broad terms using words such as “administration”, “establishment” and “structuring” so that reasonable tasks would be covered by the exemption. For example, providing advice on compliance with legislation is part of “administration” tasks. Regulation 7.1.29 — how an exemption arises Under reg 7.1.29(1), a person who provides an eligible service is taken not to provide a financial service if: • the person provides the eligible service in the course of conducting an exempt service (see above) • it is reasonably necessary to provide the eligible service in order to conduct the exempt service • the eligible service is provided as an integral part of the exempt service. The key test is that the service provided must be an integral and not merely incidental part of the specified activity. For example, if relying on the tax advice limb in reg 7.1.29(4), any financial service must be part of providing that taxation advice. Financial advice that is merely incidental to that tax advice would not satisfy the test. For purposes of the regulation, a person provides an eligible service if the person engages in conduct mentioned in s 766A(1)(a) to (f). This is the same as the definition of “financial service”. Exempt service — reg 7.1.29(3) (audit and miscellaneous administration advice) A person who does any of the following provides an exempt service (reg 7.1.29(3)): • provides advice in relation to the preparation or auditing of financial reports or audit reports • provides advice on the risk associated with carrying on a business and identifies generic financial products or generic classes of financial products that will mitigate that risk, other than advice for inclusion in an “exempt document” (as defined in s 766B(9)) or statement (see ¶4-630). Under this limb, a person could, for example, recommend that a particular business requires certain types of insurance in their circumstances, but the exemption would not be available if the person also recommends products of a particular insurance company to meet those requirements • provides advice on the acquisition or disposal, administration, due diligence, establishment, structuring or valuation of an incorporated or unincorporated entity, if the advice: – is given to a person who is, or is likely to become, an interested party in the entity – to the extent that it is financial product advice is confined to advice on a decision about: (a) securities of a body corporate, or related body corporate, that carries on or may carry on the business of the entity; or (b) interests in a trust (other than a superannuation fund or a managed investment scheme), the trustee of which carries on or may carry on the business of the entity in the capacity of trustee – does not relate to other financial products that the body corporate or the trustee of the trust may acquire or dispose of – is not advice for inclusion in an exempt document or statement

• provides advice on financial products that are: – securities in a company (other than securities that are to be offered under a disclosure document under Ch 6D), or – interests in a trust (other than a superannuation fund or a managed investment scheme), if the company or trust is not carrying on a business and has not, at any time, carried on a business • provides advice in relation to the transfer of financial products between related bodies corporate • arranges for another person to engage in conduct referred to in s 766C(1) in relation to interests in an SMSF in the circumstances in reg 7.1.29(5)(b) and (c). This activity applies to arranging activities to assist trustees in operating an SMSF, eg allowing a person to undertake tasks such as rolling over funds into an SMSF, where the decision to roll over the funds has already been made. However, this arranging exemption will only apply to an SMSF given the need to assist member-trustees operate their own funds. Arranging can only be provided to persons mentioned in reg 7.1.29(5)(b) and must not be inconsistent with the limitation in reg 7.1.27(5)(c) • arranges for another person to engage in conduct referred to in s 766C(1) by preparing a document of registration or transfer in order to complete administrative tasks on instructions from the person. This activity covers the preparation of documents to complete administrative tasks (eg share transfers, transferring superannuation funds and establishing structures without licensing, and completing relevant documentation for signature of the client) and the exemption is available only if the administrative tasks are due to a direct instruction from the client. “Arranging” activities needs to be distinguished from the “financial product advice” that recommends the registration or transfer of a financial product. Providing financial product advice must be expressly exempted (either under this regulation or another provision of the Act), but once the client has made a decision, the exemption under this limb is available to give effect to the client’s instructions • provides advice about the provision of financial products as security, other than where the security is provided for the acquisition of other financial products. Exempt service — reg 7.1.29(4) (taxation advice) A person also provides an exempt service if (reg 7.1.29(4)): • the person provides advice to another person on taxation issues including advice in relation to the taxation implications of financial products • the person will not receive a benefit (other than from the person advised or an associate of the person advised) as a result of the person advised acquiring a financial product mentioned in the advice, or a financial product that falls within a class of financial products mentioned in the advice • either: (a) the advice does not constitute financial product advice to a retail client; or (b) the advice constitutes financial product advice to a retail client and it includes, or is accompanied by, a written statement that: – the person providing the advice is not licensed to provide financial product advice under CA – taxation is only one of the matters that must be considered when making a decision on a financial product – the client should consider taking advice from an Australian financial services licence (AFSL) holder before making a decision on a financial product. This regulation provides an exemption for licensing purposes when providing taxation advice. It does not exempt the provider of advice from compliance with tax legislation that may be relevant. For example, under the Tax Agent Services Act 2009 (TASA), which is administered by a national board called the Tax Practitioners Board to provide a registration regime for tax agents providing tax agent service, an unregistered entity that provides a tax agent service for a fee or other reward, or advertises that they

provide tax agent services or represents that they are registered will be subject to penalties. The TASA contains provisions to bring entities which give tax advice in the course of giving advice that is usually provided by financial services licensees, within the regulatory regime administered by the Tax Practitioners Board (see “Tax agents” in ¶16-060). Generally, a person who receives a benefit from the client or its associate (such as a fee for taxation advice) will thus be able to use the exemption in reg 7.1.29(4). However, the exemption cannot be used as a means to market or sell financial products without a licence on the basis that a person is promoting taxation advantages and providing taxation advice. Therefore, a person cannot use this exemption if they receive a benefit from a third party, such as a commission, following a client acquiring a financial product as a result of the advice. Taxation advice should not be the only consideration in making an investment decision. Therefore, if taxation advice includes financial product advice provided to a retail client, a written statement disclosure must be provided to the client. Exempt service — reg 7.1.29(5) (fund start-up and operation advice) A person also provides an exempt service if (reg 7.1.29(5)): (a) the person provides advice in relation to the establishment, operation, structuring or valuation of a superannuation fund, other than advice for inclusion in an exempt document or statement (see ¶4630) (b) the person advised is, or is likely to become, a trustee, a director of a trustee, an employer sponsor, or a person who controls the management of the superannuation fund, and (c) except for advice that is given for the sole purpose, and only to the extent reasonably necessary for the purpose, of ensuring that the person advised complies with SISA or SIS Regulations (other than SISA s 52(2)(f) or SISR reg 4.09) or SGAA — the advice: (i) does not relate to the acquisition or disposal by the superannuation fund of specific financial products or classes of financial products (ii) does not include a recommendation that a person acquire or dispose of a superannuation product (this is not applicable to a recommendation by a “recognised accountant” in relation to an SMSF: see “Exemption for recommendation to SMSFs by recognised accountants — reg 7.1.29A” below) (iii) does not include a recommendation in relation to a person’s existing holding in a superannuation product to modify an investment strategy or a contribution level, and (d) if the advice constitutes financial product advice provided to a retail client — the advice includes, or is accompanied by, a written statement that: (a) the person providing the advice is not licensed to provide financial product advice under CA; and (b) the client should consider taking advice from an AFSL holder before making a decision on a financial product. A person may advise the trustee of a superannuation fund on compliance with legal requirements, eg advice on what are the legal requirements and whether there has been a breach of these requirements. In limited circumstances, a person may also give advice that would normally contravene reg 7.1.29(5)(c) if the advice were for the sole purpose and only to the extent reasonably necessary to ensure compliance with SISA, SIS Regulations or SGA Act as noted above. While a person can advise on the need for an investment strategy that meets the requirements in s 52(2) (f) or reg 4.09, no advice can be given that contravenes the requirements of reg 7.1.29(5)(c). Advice that may breach reg 7.1.29(5)(c) cannot go beyond what is required by the specified legislation. For example, recommending a trustee purchase a financial product to comply with the need to act in the best interests of the beneficiaries under s 52(2)(c) would not satisfy the requirement that it is “for the sole purpose and only to the extent reasonably necessary”. Only advice relating to certain legislation may breach reg 7.1.29(5)(c). This is due to certain provisions of the specified legislation virtually requiring advice being provided on how to remedy breaches of the legislation, including advice on:

• the sale of financial products to correct a breach under SISA s 129 (dealing with the whistle-blower obligations of actuaries and auditors) • meeting in-house asset rules • modifying the contribution level due to changes in the SG contribution level. The government stated (in the explanatory statement to SR No 85 of 2003, which amended the licensing exemptions under reg 7.1.29) that it is not envisaged that a normal retail client holding employersponsored superannuation would require advice on issues such as establishment and/or structuring. However, superannuation is a financial product (under s 764A(1)(g)) and a financial service in relation to superannuation ordinarily requires licensing. Financial product advice (or a recommendation) that influences a client’s investment or retirement planning decisions will have a significant impact upon that person’s economic future, eg a recommendation on which superannuation structure, vehicle or fund type the person advised should enter. Accordingly, the government considers that advice that a consumer receives in these circumstances should be subject to consumer protection. Therefore, financial product advice on investment decisions cannot be given without licensing in circumstances such as: • a person becoming a member of a superannuation fund • an existing member of the superannuation fund joining another sub-plan in that same fund • a superannuation product changing from the growth phase to the pension phase • transferring benefits between investment options • making additional and voluntary contributions to a superannuation fund • deciding what financial products should be held by a superannuation fund. Regulation 7.1.29(5) does not provide an exemption for advice recommending an SMSF structure in isolation or as a preferred structure to other alternative investment vehicles. Under CA, recommending a person to establish an SMSF structure is a superannuation investment decision as it is equivalent to recommending a person to become a member of an SMSF. Further, when a person accepts a recommendation to establish an SMSF, that client will probably not consider seeking further advice from a licensed person on what other investment alternatives may be suitable in their circumstances. Therefore, if unlicensed advice is provided under the exemption in reg 7.1.29(5) (including financial product advice to retail clients), the person advised must also receive additional written disclosure. The exemption cannot be relied upon if the information is included in an exempt document.

¶4-657 ASIC guidelines on limited AFS licensee obligations The term “limited AFS licensee” describes individuals, companies, and any other firms that hold an AFS licence that authorises them to provide only one or more of the following limited financial services: • financial product advice about: – self-managed superannuation funds (SMSFs) – a client’s existing superannuation holdings, to the extent required for making a recommendation to establish an SMSF or providing advice to a client on contributions or pensions under a superannuation product • “class of product advice” about: – superannuation products – securities

– simple managed investment schemes – general insurance products – life risk insurance products – basic deposit products – arranging and dealing in an interest in an SMSF. An AFS licensee who is authorised to provide financial services other than these limited financial services is not a limited AFS licensee. For example, an AFS licensee who can provide financial product advice about securities (rather than “class of product advice” about securities) is not a limited AFS licensee because financial product advice about securities is not covered in the list above. ASIC guidelines for accountants providing SMSF services Information Sheet (INFO 216) (discussed in ¶5-570) provides guidance for accountants who provide services relating to SMSFs (referred to as “SMSF services” in INFO 216) (www.asic.gov.au/for-financeprofessionals/afs-licensees/applying-for-and-managing-an-afs-licence/limited-financial-services/afslicensing-requirements-for-accountants-who-provide-smsf-services). It covers: • how the AFS licensing regime applies to SMSF services provided by accountants, and how the law applying to accountants has changed from 1 July 2016 • the various SMSF services accountants may provide, and whether a licensing exemption applies to them or whether accountants must be covered by an AFS licence for that service. ASIC guidelines for limited AFS licensees Information Sheet INFO 179 “Applying for a limited AFS licence” provides guidelines to applicants for a limited AFS licence (www.asic.gov.au/asic/asic.nsf/byheadline/Applying-for-a-limited-AFS-licence? openDocument). INFO 179 covers: • what a “limited” AFS licence is, including how the law and ASIC guidance apply to an applicant (you) if you hold a limited AFS licence (namely, meet the CA and CR requirements, including the conduct and disclosure obligations that apply, when you give financial product advice) • determining the scope of your limited AFS licence • the information required in your application for a limited AFS licence • how to apply for a limited AFS licence • how ASIC assesses organisational competence, including the transitional arrangements that apply to recognised accountants who apply between 1 July 2013 and 30 June 2016 • the requirement to lodge an annual compliance certificate if you are a limited AFS licensee • training requirements for limited AFS licensees, and • converting your limited AFS licence to an AFS licence with broader authorisations. Other ASIC INFO sheets Other ASIC guidelines for limited AFS licensees and their representatives cover: • the activities that limited AFS licensees can undertake — Information Sheet INFO 227 What can limited AFS licensees do? (www.asic.gov.au/for-finance-professionals/afs-licensees/limited-afslicensees/what-can-limited-afs-licensees-do) • the conduct and disclosure obligations that apply to limited AFS licensees when they give advice —

Information Sheet INFO 228 Limited AFS licensees: Advice conduct and disclosure obligations when providing advice under a limited AFS licence (www.asic.gov.au/for-finance-professionals/afslicensees/limited-afs-licensees/limited-afs-licensees-advice-conduct-and-disclosure-obligations). INFO 228 provides guidance in the following areas when a limited AFS licensee provides advice to retail clients: – preparing and providing a Financial Services Guide (FSG) – best interests duty and related obligations – complying with the best interests duty when providing advice about self-managed superannuation funds (SMSFs) – preparing and providing a Statement of Advice (SOA) – record-keeping obligations that apply to personal advice – general advice warning – conflicted remuneration – ongoing fee arrangements • what limited AFS licensees need to do on an ongoing basis — Information Sheet INFO 229 Limited AFS licensees: Complying with your licensing obligations (www.asic.gov.au/for-financeprofessionals/afs-licensees/limited-afs-licensees/limited-afs-licensees-complying-with-your-licensingobligations). ASIC has also issued Limited AFS licensees: Quick guide which provides a summary of the key obligations that apply when giving advice to retail client under a limited AFS licence (www.asic.gov.au/forfinance-professionals/afs-licensees/limited-afs-licensees/limited-afs-licensees-quick-guide). More related ASIC information on disclosure These are available at: • Limited AFS licensees — check whether you are a limited AFS licensee or a representative of a limited AFS licensee — www.asic.gov.au/for-finance-professionals/afs-licensees/limited-afslicensees/. • RG 90 Example Statement of Advice: Scaled advice for a new client — www.asic.gov.au/regulatoryresources/find-a-document/regulatory-guides/rg-90-example-statement-of-advice-scaled-advice-fora-new-client/. • RG 175 Licensing: Financial product advisers — Conduct and disclosure — www.asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-175-licensing-financialproduct-advisers-conduct-and-disclosure/. • RG 246 Conflicted remuneration — www.asic.gov.au/regulatory-resources/find-adocument/regulatory-guides/rg-246-conflicted-and-other-banned-remuneration/. • INFO 182 Super switching advice: Complying with your obligations — www.asic.gov.au/regulatoryresources/superannuation-funds/superannuation-guidance-and-relief/superannuation-advice/superswitching-advice-complying-with-your-obligations-info-182/. • INFO 205 Advice on self-managed superannuation funds: Disclosure of risks — www.asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/advice-onself-managed-superannuation-funds-disclosure-of-risks/. • INFO 206 Advice on self-managed superannuation funds: Disclosure of costs —

www.asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/advice-onself-managed-superannuation-funds-disclosure-of-costs/.

¶4-658 Exemption for superannuation and generic calculators A generic financial calculator is a facility, device, table or other thing that: • is used to make a numerical calculation or find out the result of a numerical calculation relating to a financial product, and • does not advertise or promote one or more specific financial products. Typically, generic financial calculators help the user calculate the estimated value of total superannuation, savings or investments at a future point in time, and/or the estimated level of superannuation contributions, saving, investment or life insurance cover required to achieve a particular financial goal. Some generic financial calculators will produce financial product advice. This means that, unless an exemption or relief applies, the providers of such calculators are required to be licensed and comply with the conduct and disclosure provisions of the financial services licensing regime. ASIC relief for providers of generic calculators ASIC Corporations (Generic Calculators) Instrument 2016/207 (www.legislation.gov.au/Details/F2016L00438) (Principal Instrument); remaking former Class Order CO 05/1122 which has been repealed by ASIC Corporations (Repeal) Instrument 2016/230) provides generic financial calculators providers relief from the requirement to hold an AFS licence with an advice authorisation or, where they currently hold a licence, relief from the conduct and disclosure requirements in Div 2, 3 and 4 of Pt 7.7 of the Corporations Act in relation to that advice. The relief only applies where the generic financial calculator provider takes reasonable steps to meet the requirements set out in the Principal Instrument. One of these requirements is noted below. Superannuation and retirement calculators, a subset of generic financial calculators, are exempt from this requirement until 5 December 2019 (extended from 1 July 2019 previously, see below). Superannuation and Retirement Calculator Under s 7 of the Principal Instrument, a generic financial calculator that provides an estimate of an amount payable or receivable at a future time of two years or more must include a clear and prominent statement setting out the present value of the estimate calculated using a discount rate of 2.5% (being the mid-point of the Reserve Bank of Australia’s target range for inflation over the cycle). The commencement of the requirement for a generic financial calculator relating to superannuation and retirement (superannuation and retirement calculator) to include the present value of future receipts and payments using an assumed rate of inflation of 2.5% is deferred until 1 July 2019 (ASIC Corporations (Amendment) Instrument 2018/40: (www.legislation.gov.au/Details/F2018L00241; Principal Instrument new section 7)). ASIC states that the deferral for superannuation and retirement calculators is because there are current superannuation reforms that may impact on how superannuation calculators should present and calculate estimates in the future. Until 1 July 2019, a superannuation and retirement calculator must display to the user in the ordinary course of its use or have printed on it a clear and prominent statement specifying whether or not the estimate takes into account an assumed change in the cost of living between the time of the preparation of the estimate and the future time (www.asic.gov.au/about-asic/media-centre/find-amedia-release/2018-releases/18-071mr-asic-extends-the-transition-period-for-superannuation-andretirement-calculators). Further deferral for superannuation and retirement calculator ASIC Corporations (Amendment) Instrument 2019/514 (www.legislation.gov.au/Details/F2019L00724) has amended the Principal Instrument to: • provide superannuation and retirement calculator providers with the option of using an assumed inflation rate of 3.2% or an alternative assumed inflation rate, as long as certain disclosure

requirements are satisfied, and • defer commencement of the above requirements to 5 December 2019. Superannuation calculators on MoneySmart ASIC’s MoneySmart page provides guidance to help individuals make more informed choices about their personal finances (see www.moneysmart.gov.au). Among other things, MoneySmart contains superannuation and retirement-related calculators that individuals can use in making further decisions about their superannuation and retirement. The calculators are not product specific and are designed to illustrate the effect that certain factors, such as contribution levels and account-keeping fees, can have on a person’s superannuation and retirement savings. The calculators available on MoneySmart are described in more detail in Appendix 2 to ASIC Regulatory Guide RG 229.

¶4-660 Obligations imposed on AFS licensees The general obligations imposed on holders of an Australian financial services licence (AFSL) are set out in s 912A to 912F. An AFSL holder is ultimately responsible for all the financial services provided under its AFSL, regardless of how the services are provided. In addition, ASIC may, at any time, by giving written notice to a financial services licensee: • impose conditions, or additional conditions, on the licence, and • vary or revoke conditions imposed on the licence (s 914A(1)). An AFS licence is subject to such other conditions as prescribed by reg 7.6.04 made for the purposes of s 914A, which ASIC cannot vary or revoke (s 914A(8)). The general obligations in s 912A require an AFSL holder to: • do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly • comply with any licence conditions • take reasonable steps to ensure that their representatives comply with the financial services laws • have available adequate resources (not applicable to APRA-regulated entities) • maintain the competence to provide the financial services • adequately train their representatives and ensure that they are competent to provide the financial services • have dispute resolution systems (see below) where financial services are provided to retail clients • have adequate risk management systems (see below) • have compensation arrangements where financial services are provided to retail clients (not applicable to APRA-regulated entities) • comply with any other obligations prescribed by regulations. For ASIC guidelines on meeting the general obligations, see Regulatory Guide RG 104. Record-keeping AFS licensees must ensure that, in relation to the provision of personal advice, certain records are kept to

demonstrate compliance with the best interests duty and related obligations under CA Div 2 of Pt 7.7A (see ¶4-530), rather than the previous obligation in former s 945A (see “Record-keeping requirements when providing personal advice to retail clients” in ¶4-630). The record-keeping obligation is intended to assist licensees to supervise their representatives, including advice providers, when they provide advice to clients (ie the ongoing supervision by a licensee of their representatives to ensure compliance with the law: see the second dot point above). In addition, this will also assist clients to hold the licensee or advice provider accountable for the quality of advice that they receive. For instance, it would also be difficult for external dispute resolution bodies, such as the Financial Ombudsman Service to consider and resolve any disputes between clients and the licensee or their representatives without reviewing records kept by the licensee. Miscellaneous obligations and breach notification An AFSL holder that provides a financial service to persons as retail clients must have arrangements for compensating those persons for loss or damage suffered because of breaches of the relevant obligations under Ch 7 by the licensee or its representatives. The arrangements must meet the requirements specified by the regulations or be approved by ASIC (s 912B). An AFSL holder must comply with requests from ASIC to provide information and must notify ASIC if the AFSL holder breaches, or is likely to breach, certain obligations in certain circumstances (s 912C; 912D; Regulatory Guide RG 79). Dispute resolution systems An AFSL holder must have in place a dispute resolution system that consists of: • an internal dispute resolution (IDR) procedure that: (a) complies with standards and requirements made or approved by ASIC in accordance with regulations made for this purpose; and (b) covers complaints against the licensee made by retail clients in connection with the provision of financial services covered by the licence • membership of one or more external dispute resolution (EDR) schemes that: (a) is, or are, approved by ASIC in accordance with the regulations made for this purpose (s 912A(2)(a); 1017G(2)(a)). Regulatory Guide RG 139 ASIC Regulatory Guide RG 139 provides detailed information about its role in relation to external complaints resolution schemes, explains which schemes need ASIC approval, identifies the guidelines by which ASIC assesses a scheme for approval, and explains how a scheme should apply for approval. In the transition to the commencement of the new, single EDR scheme — the Australian Financial Complaints Authority (AFCA) — on 1 November 2018, complaints made to the EDR schemes will continue to be dealt with under the relevant scheme’s terms of reference and rules that applied when the complaint was made. RG 139 provides the framework for those versions of the terms of reference and rules and will remain in force until all those complaints are closed. At that time, ASIC will withdraw RG 139. Regulatory Guide RG 267 Oversight of the Australian Financial Complaints Authority sets out how ASIC performs its oversight role in relation to the AFCA scheme. Dispute resolution obligation for superannuation products In QFS 73, ASIC states that the SCT covers the dispute resolution obligations of a licensed superannuation trustee, subject to certain exceptions as outlined below. Under s 912A(1), a licensee that provides financial products or financial services to retail clients must have a dispute resolution system in place. Superannuation trustees provide financial services as they deal in financial products as issuers of superannuation interests. They may also provide financial product advice. A dispute resolution system is made up of both internal dispute resolution procedures and membership of one or more external dispute resolution (EDR) schemes that are approved by ASIC (see above). A licensee does not need to join an EDR scheme to cover complaints that can be dealt with by the SCT.

Because the SCT is a statutory tribunal, it is not subject to ASIC’s approval. However, to make sure that consumers have similar access to independent dispute resolution procedures to resolve complaints about their superannuation (as they do for other financial products), ASIC has reviewed the extent of the SCT’s coverage and considers that the SCT’s jurisdiction is adequate to deal with complaints that may be made by retail clients about their superannuation fund. This means that a licensee who is a trustee of a regulated fund will satisfy its dispute resolution obligations by being subject to the SCT. The SCT does not, however, have jurisdiction to deal with complaints about other (non-superannuation) products or services that do not relate to a decision of the trustee in relation to the fund, eg if a trustee gives advice about products that are available outside its superannuation fund (eg on banking products or post-retirement products). Therefore, some licensed trustees may need to join another approved EDR scheme to consider complaints that the SCT cannot deal with. Superannuation trustees that provide broader financial product advice beyond the SCT’s jurisdiction will need membership of the Financial Industry Complaints Scheme for the relevant EDR for those elements of their business. The trustees must also ensure that their activities are consistent with all other relevant regulatory requirements, eg the prudential requirement for trustees to ensure that a fund is maintained solely in accordance with the sole purpose test. As is the case with approved EDR schemes, the Corporations Act 2001 does not require that the SCT should be able to deal with any or all complaints that a retail client may make. For example, finance sector EDR schemes typically exclude complaints that relate only to a member firm’s commercial judgment or policy. ASIC’s review of the SCT has, therefore, not covered standard limitations built into its legislation, including prescribed time limits and the exclusion of complaints about the management of the fund as a whole. However, ASIC will monitor the handling of complaints by the SCT, focusing on how the SCT deals, under its current jurisdiction, with complaints about advisory activities of licensees and with complaints that may give rise to a claim for compensation. Adequate risk management systems — superannuation dual regulated entities (SDREs) ASIC and APRA have written to entities that are both a responsible entity of a registered managed investment scheme (MIS) and a registrable superannuation entity licensee (RSE licensee) regarding changes to the regulatory requirements that apply for these entities. SDREs were previously exempted from obligations under the Corporations Act 2001 to have in place adequate resources (s 912A(1)(d)) and adequate risk management systems (s 912A(1)(h)) for nonsuperannuation related business activities. Amended s 912A(1) (by the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Act) resulted in the cessation of the former exemptions so that SDREs are required to ensure that their business as responsible entity of an MIS complies with the adequate resources and adequate risk management system requirements. AFS licensees must have adequate resources to provide the financial services covered by their licence and to carry out supervisory arrangements, including financial, technological and human resources (see s 912A(1)(d); Financial resource requirements for responsible entities: CO 13/760 and Regulatory Guide RG 166 “Licensing: Financial requirements”). Previously, where a responsible entity of an MIS was also regulated by APRA as an RSE licensee, the requirements of s 912A(1)(d) and (h) did not apply so that SDREs only had to satisfy requirements for adequate resources and risk management systems under the SISA and regulations and APRA’s prudential standards. The RSE licensee requirements, however, are not designed to ensure that either adequate resources are maintained in respect of non-superannuation business or risks relating to the non-superannuation business are fully captured in risk management frameworks. The responsible entity of SDREs is now required to meet the requirements of both regulators on adequacy of resourcing and in relation to risk management, ie under s 912A(1)(d) to have adequate resources and under s 912A(1)(h) to have adequate risk management systems, regardless of whether that entity as an RSE licensee is required to comply with similar obligations under the SISA. ASIC guidelines on risk management systems of responsible entities

ASIC has released Regulatory Guide RG 259 Risk Management systems of responsible entities “to provide additional guidance to responsible entities on our expectations for compliance with their obligation under the Corporations Act 2001 to maintain adequate risk management systems”. The guidance in RG 259 is in addition to Regulatory Guide 104 Licensing: Meeting the general obligations which provides general guidance for all AFS licensees (including REs) about what ASIC expects in relation to their risk management obligations. REs that are registrable superannuation entity licensees are also subject to the APRA requirements on risk management. ASIC had been contemplating providing such guidance for some time. In March 2013, it issued CP 204 Risk management systems of responsible entities, but did not proceed with the proposals in the paper. In the media release accompanying the Guide, ASIC states that “there have been a number of collapses of responsible entities which resulted in significant losses to investors and where we consider inadequate risk management systems to have played a role”. As holders of an AFS licence, REs have an ongoing obligation under s 912A(1)(h) of the Corporations Act to have adequate risk management systems. RG 259 provides that REs should have: • An overarching risk management system (which includes a policy or statement of the RE’s risk appetite). • Processes for identifying and assessing risks. As part of the risk identification process, material risks to the business and schemes should be recorded in a risk register. • Processes for managing or mitigating risks. Regulatory Guide RG 259 sets out what ASIC considers are the minimum requirements to be met by REs if they are to meet their obligation under s 912A(1)(h). It also includes some additional good practice guidance. ASIC expects REs to develop and maintain a strong risk management culture. As REs are subject to the ongoing obligation to maintain adequate risk management systems, there is no formal transition period for compliance with the guidance. Nevertheless, ASIC has said it will take a “constructive and facilitative approach” to any breaches of the guidance for the next 12 months, provided an RE can show that it is taking steps to bring its risk management system into compliance with the guidance. RG 259 is available at asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-259-riskmanagement-systems-of-responsible-entities. REs whose risk management process complies with the risk management standard, AS/NZS ISO 31000:2009 Risk management, should already be complaint with requirements of RG 259. Notification requirements change Under CR reg 7.6.04(1)(a), an AFS licence has a condition that the licensee must lodge a notification within three business days of being aware of certain material adverse changes to its financial position, subject to exceptions to this notification arrangement for SDREs. Consequent to the Superannuation Legislation Amendment (MySuper Measures) Regulation 2013, reg 7.6.04(1)(a) has been modified so that notification under this regulation will be required in the case of SDREs. Conflict management policy Australian financial services licensees must have adequate arrangements to manage conflicts of interest (as part of the government’s Corporate Law and Economic Reform Program (CLERP 9)). Regulatory Guide RG 181 “Licensing: Managing conflicts of interest” sets out how ASIC expects licensees to manage all conflicts of interest affecting their business — namely, controlling and avoiding conflicts of interest and disclosing conflicts of interest. Controlling and avoiding conflicts Licensees are expected to have arrangements in place to allow them to:

• identify the conflicts of interest relating to their business • assess and evaluate those conflicts • decide upon, and implement, an appropriate response to those conflicts. Licensees must have written conflict management arrangements and must keep written records of how they manage conflicts of interest. In cases of conflicts of interest that have a serious potential impact on a licensee or its clients, ASIC considers avoidance may be the only way to manage those conflicts, and it will not be appropriate to merely disclose them and impose internal controls. Disclosing conflicts ASIC expects licensees to ensure that clients are adequately informed about any conflicts of interest that may affect the provision of financial services to them. Disclosure should focus on material conflicts and must be clear, concise and effective in order to allow a client to make an informed decision about how the conflict may affect the relevant service. ASIC recognises that the required disclosure to comply with the law for a wholesale client will sometimes be less detailed than for a retail client. Accordingly, the appropriate level of disclosure to any given client will depend on all of the facts and circumstances, including: • the level of sophistication of the client • the extent to which other clients (especially retail clients) are also likely to rely, directly or indirectly, on the service • how much the client already actually knows about the specific conflict • the complexity of the service.

Financial Services Disclosure ¶4-665 Financial services disclosure regime Part 7.7 sets out the financial services disclosure requirements in connection with the provision of financial services or advice (s 940A to 953C). An Australian financial services (AFS) licensee (“providing entity”) providing financial services or advice to a retail client must provide the client with the following: • a Financial Services Guide (FSG) (¶4-670), and/or a Supplementary Financial Services Guide (SFSG) • a Statement of Advice (SOA) (¶4-675) • a general warning under s 949A if providing general advice (¶4-630) • for personal advice, a warning if advice is based on incomplete or inaccurate information. The entity must also have a reasonable basis for the advice (¶4-630). Warnings and personal advice and general advice are discussed in ¶4-630. The disclosure under Pt 7.7 (collectively the “financial services disclosure” requirements) are different from the financial Product Disclosure Statement (PDS) requirements in Pt 7.9 dealing with sale and purchase of financial products (see ¶4-100). An FSG and a PDS may be combined into a single document in the circumstances specified by the regulations, but an SOA cannot be combined with an FSG or PDS (s 942DA; 947E). (Note that s 942DA does not apply to a superannuation product under the modified PDS regime for superannuation products from 22 June 2011: see ¶4-130 for the transitional arrangements.) ASIC may exempt a person or class of persons from all or specified provisions of Pt 7.7 (s 951B(1)(a)).

The general rules that apply to FSGs, SFSGs and SOAs are discussed at ¶4-670 and ¶4-675. The conduct rules relevant to AFS licensees and their representatives are discussed at ¶4-680. A Statement of Additional Advice (SOAA) can be given instead of an SOA in certain circumstances (see “SOAA” in ¶4-675). An SOAA is basically a document that incorporates by reference information from another document that has previously been provided to the client. An FSG and SOA (or SOAA) are to be provided by a licensee or an authorised representative (s 941A; 941B; 944A; 946A). These obligations do not apply when providing financial services to wholesale clients, although the providing entity may treat wholesale clients as retail clients. Flowchart of disclosure documents requirements

Source: RG 168: Disclosure: Product Disclosure Statements (and other disclosure obligations), p 33.

¶4-670 Financial Services Guide The FSG provisions are intended to ensure that retail clients are given sufficient information to enable them to decide whether to obtain financial services from the providing entity. The obligation to provide an FSG is imposed on the providing entity (the AFS licensee or the authorised representative) if either: • the entity provides financial services to that client (s 941A), or • an authorised representative provides financial services to that client on behalf of one or more authorising licensees (s 941B). A providing entity must give an FSG to a client as soon as practicable after it becomes apparent to the providing entity that a financial service will be, or is likely to be, provided to that client and, in any event, must give an FSG to the client before a financial service is provided (s 941D(1)). In some cases, an FSG may be given after a financial service has been provided, eg in time critical cases (such as during the provision of a financial service over the telephone) and where the client expressly instructs that the financial service be provided immediately, or by a specified time, and it is not reasonably practicable to provide the client with an FSG before that financial service is provided. In that case, a statement of certain key information must be given at that time, and the FSG must be provided as soon as practicable (but within five days) after that financial service has been provided (s 941D). The Corporations Act 2001 generally allows an FSG to provide information that is limited to the reasonable information needs of the retail client to whom the FSG is actually provided. However, CR reg 7.7.04(2) and 7.7.07(2) require FSGs to include specific additional information about remuneration,

commissions and other benefits. This additional information must be included in all FSGs, even where: • the information is not relevant to the financial services that will be or are likely to be provided to the client receiving the FSG, or • the remuneration, commission or other benefits relate solely to services for which an FSG would not be required (ASIC has granted limited relief, see “FSG disclosure relief” below). Remuneration Information about remuneration must be disclosed in an FSG provided by a licensee or authorised representative as set out in reg 7.7.04(3) to (5) and reg 7.7.07(3) to (5). For all FSGs, if the remuneration is able to be ascertained at the time the FSG is given, the amount of that remuneration should be specified, eg if the licensee or authorised representative charges a set fee, regardless of the financial service provided (reg 7.7.04(3); 7.7.07(3)). Where the amount of remuneration cannot be ascertained at the time the FSG is given to the client, and the providing entity (ie the licensee or authorised representative) reasonably believes that personal advice will be given to the client, the FSG must contain general information about the remuneration, or more detailed particulars of the remuneration. In addition, where the remuneration cannot be ascertained at the time the FSG is given to the client, and the providing entity reasonably believes that personal advice will be provided to the client, the FSG has to contain a statement to the effect that the amount of remuneration in relation to specific financial products which are recommended in the personal advice, or the manner in which such remuneration is calculated will be disclosed when, or as soon as practicable after, the personal advice is given (reg 7.7.04(4)(c), (d); 7.7.07(4)(c), (d)). Where the remuneration cannot be ascertained at the time the FSG is given to the client and the providing entity reasonably believes that personal advice will not be provided to the client, the FSG has to either contain particulars of the remuneration, or general information about the remuneration, together with a statement that the client may request particulars of the remuneration, provided the request is made within a reasonable time after the client is given the FSG and before any financial service identified in the FSG is provided to the client (reg 7.7.04(5)(c), (d); 7.7.07(5)(c), (d)). Therefore, the providing entity can either include particulars of the remuneration, or include a general description of the nature of the remuneration, along with a statement that the client may request particulars. Where the providing entity chooses not to include particulars of the remuneration in the FSG, but rather includes a statement that the client may request particulars, the providing entity may respond to the request only for a reasonable time (eg seven or 14 days, based on the circumstances) after the FSG is given to the client and, in any event, before any service identified in the FSG is provided. General information about remuneration must be more than a mere statement that remuneration has been, or will be, received. This should include a description of the nature of the remuneration, such as whether the remuneration is in the nature of commission, the commission type (eg trailing commission) or some other type of remuneration or benefit (eg volume bonuses), and whether those benefits are in monetary or other forms (eg prizes or gifts). The general information must also indicate how the remuneration is calculated. Exemptions — where an FSG is not required An FSG is not required to be given to a client in the situations specified in s 941C. A providing entity who is a product issuer dealing in its own products is not required to provide an FSG to a client if: • the providing entity is an issuer of financial products • the only financial service that they are providing is dealing in their own financial products (except for derivatives able to be traded on a licensed market). The trustee of a superannuation fund that is involved only in issuing superannuation interests (ie accepting new members) would be covered by the exemption and will not be required to give an FSG to the member. The rationale for the relief is that the providing entity will be giving these clients a PDS which

will contain similar information. Product issuers should, however, note that if they provide any other financial service (such as advice), or they deal in the products of other issuers, the exemption does not apply in respect of those activities. An entity that is providing general advice need not give the client an FSG where the general advice is provided to the public, or a section of the public, in the manner prescribed in the regulations (s 941C(4)). Before 1 September 2007, the exemption only applied where the advice was provided in a “public forum” as defined in reg 7.7.07(2). From that date, the prescribed limited circumstances for the purposes of the s 941C(4) exemption are: • providing general advice to the public, or a section of the public, at any event organised by or for financial services licensees to which retail clients are invited, eg giving a public lecture or seminar for retail clients, including employees of a workplace • a broadcast (such as television or radio broadcasts) of general advice to the public, or a section of the public, that may be viewed or heard by any person, and • distributing or displaying promotional material that both provides general advice to the public, or a section of the public, and is available in a place that is accessible to the public, eg distributing promotional material contained in newspapers and magazines (reg 7.7.07(2)). FSG disclosure relief ASIC has provided limited disclosure relief relating to specific additional information about remuneration, commissions and other benefits in an FSG under reg 7.7.04(2) and 7.7.07(2) (see above). Class Order CO 05/27 (applicable from 29 April 2005) exempts financial service providers from including any additional remuneration information required by the above regulations in an FSG where: • the information does not relate to a financial service that will be or is likely to be provided to the client, or • the information relates exclusively to services which do not require the provision of an FSG (eg if the service is provided only to wholesale clients). However, if the providing entity later provides another financial service to a retail client and the additional remuneration disclosures have not previously been made to the client in an FSG because of the relief in CO 05/27, the providing entity must give the client a new FSG or SFSG including the relevant additional remuneration disclosures for that financial service.

¶4-675 Statement of Advice An entity who gives personal advice (¶4-630) to a retail client (eg a superannuation member) must give the client a Statement of Advice (SOA) (s 946A). The SOA may be the means by which the advice is given or a separate record of the advice. An SOA need not be given if the advice provided is only general advice. However, a warning should be given about the limitations of the advice in these circumstances (s 949A). From 28 June 2007, an SOA is required only if the advice is given in relation to an investment amount that is above the monetary threshold prescribed by regulations (see “SOA exemption — small investment advice” below). An SOA must contain information about the advice provided, so that the retail client can make an informed decision about whether to act upon that advice. The required information in the SOA includes (s 947B): • a statement setting out the advice and an explanation of the basis upon which it was given, including a warning if the advice is based on incomplete or inaccurate information • the name and contact details of the providing entity

• information on any remuneration (including commissions) or other benefit that the providing entity or a related body corporate of the entity, or a director or employee of the entity or body corporate, or an associate may receive that could influence the providing entity in providing that advice • information on any other interests of the providing entity or an associate that could influence the providing entity in providing that advice • a statement setting out or recording a warning (as required by former s 945B) if the advice was based on incomplete or inaccurate information. Generally, the SOA must be given as soon as practicable after the advice is provided (s 946C) (see below). Regulations 7.7.09 to 7.7.12 specify the additional information that must be contained in the SOA. SOA exemption — providing urgent superannuation advice Under s 946C, a providing entity (eg a financial adviser: CA s 944A) must give to a client an SOA when, or as soon as practicable after, personal advice is given to the client and in any event before the providing entity provides the client with any further financial service that arises out of or is connected with that advice (eg implementing the advice by applying for or acquiring a particular financial product). In time critical cases (where the client expressly instructs the adviser that they want the service immediately or by a specified time), the providing entity is permitted to give the SOA later. However, it must be given within five business days or, if the relevant financial product is subject to a cooling-off period under s 1019B of the Act, before the cooling-off period commences. ASIC Corporations (Urgent Superannuation Advice) Instrument 2017/530 (F2017L00735) exempts a providing entity from the obligation to give an SOA within the normal statutory timeframe and allows an SOA to be given within 30 days after providing advice to the client. A providing entity does not have to comply with s 946C of the Act in relation to urgent superannuation advice to the extent it requires the providing entity to give a client an SOA any earlier than 30 days after providing the advice to the client. “Urgent superannuation advice” means personal advice in relation to a superannuation product in connection with the changes in laws regulating superannuation as a result of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act. This exemption applies if the conditions below are met: (a) the advice is about a superannuation product in connection with the changes in laws regulating superannuation as a result of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act b) the client expressly requests the advice be provided before 1 July 2017 and the advice is given before 1 July 2017, and (c) where the advice relates to a financial product that is subject to a cooling-off period — the providing entity gives the client a written statement explaining the nature of the cooling-off rights and that the client may not receive the SOA until after the cooling rights have expired. The written statement in (c) should be given at the time the advice is provided. The providing entity must take all reasonable steps to give the client an SOA in relation to the urgent superannuation advice as soon as practicable after the advice is provided. SOA not required in certain circumstances An SOA is not required in the situations prescribed in s 946B (see below). The effect of s 946B is that the exemptions from the need to provide an SOA apply not in respect of further market-related advice, but in respect of further advice. That is, the exemption potentially applies to any provider of personal advice, and in respect of advice in relation to any financial product, and is not limited, as was previously the case

before December 2005, to providers of personal advice who are participants on a licensed market and to products able to be traded on licensed markets. There are no limitations on the means by which the further advice is provided (previously, this was limited to telephone advice and the pre-condition that the advice provider reasonably believes that the client requires the further advice promptly). It is no longer a requirement that the adviser has, either immediately before the further advice is given or within the preceding 12 months, checked whether the client’s objectives, financial situation or needs have changed, but the advisers are still subject to the general obligation imposed by former s 945A requiring them to have a reasonable basis for any personal advice given, which carries with it an obligation to determine the relevant personal circumstances of the client before giving advice (¶4-630). Where the requirements of s 946B are met, the adviser does not have to give the client an SOA for the further advice, but is instead required to make more limited disclosure at the time, or as soon as practicable after, the further advice is given and is required to keep a Record of Advice (ROA) which must be made available to the client on request. It is envisaged that the provisions contained in s 946B(1) to (3A) can be relied upon only where the further advice relates to a class of financial product that was discussed in a previous SOA or an earlier advice, as the case may be. For example, the provisions will apply where the previous SOA (or the earlier advice) contained advice in relation to listed securities and the further advice also relates to listed securities, or where the further advice recommends a client make additional contributions to an existing investment product (including a superannuation fund) where the previous SOA or earlier advice related to that product. However, if a client seeks advice on switching to a new superannuation fund and the client has not been provided specific advice in a previous SOA (or an earlier advice) on choosing an appropriate superannuation product (in contrast to broad advice on the benefits of investing in superannuation), then a new SOA addressing the switching of the client’s superannuation fund must be given. The exemptions in s 946B are also not applicable where the further advice relates, for example, to a superannuation product, where the previous SOA or earlier advice relates to some non-superannuation investment product. SOA exemption — provision of general advice Where general advice is given to a retail client, an SOA need not be given but the adviser will need to warn the client that: • the product they are buying may not be appropriate to their financial circumstances, objectives or needs • the client must consider whether the advice is appropriate • the client should obtain a PDS if the advice concerns the acquisition, or possible acquisition, of a product (s 949A). SOA exemption — no recommendation and no remuneration Financial services licensees do not have to provide an SOA where they provide personal advice which does not recommend a product and they do not receive any remuneration for providing that advice. Personal advice in these cases will need to be documented in a Record of Advice (ROA) and given to the client upon request. The client’s right to a record of the advice are set out in s 942B(8) and 942C(8). In particular, an SOA for particular advice is not required to be given if: • the advice does not recommend or state an opinion in respect of the acquisition or disposal of any specific financial product or products of a specific issuer, or a modification to an investment strategy or a contribution level of a financial product held by the client, and • the persons specified in s 946B(7)(b) (eg the providing entity or employer of the entity, etc) do not directly receive any remuneration (other than remuneration currently being received for an earlier acquisition of a product) or other benefit for the advice (s 946B(7)). The providing entity must keep a record of the advice given and comply with any applicable requirements that may be specified by regulations (s 946B(9)). A failure to comply with this requirement is an offence (s

1311(1)). The content requirements for an ROA for the purposes of s 946B(7) are set out in reg 7.7.10AAA. SOA exemption — small investment advice A providing entity does not have to give a client an SOA for small investment advice if: • the total value of all financial investments (worked out in the manner specified by regulations) in relation to which the advice is given does not exceed $15,000 (the current threshold amount: see reg 7.7.09A(1)) • the advice does not relate to a derivative, a general insurance product, or a life risk insurance product (except to the extent that advice about a superannuation product relates to a life risk insurance product), and • the advice does not relate to any superannuation product or RSA product, unless the client already has an interest in the product (s 946AA(1)). Instead of a full SOA, the entity is permitted to provide a Record of Advice (ROA) to the client. Advice below the monetary threshold is known as “small investment advice”. The entity is required to keep a record of the small investment advice in an ROA in accordance with the regulations. The total value of the investments to which the small investment advice is provided is worked out under s 946AA(2). Regulations may prescribe how the threshold amount is to be worked out in relation to particular kinds of financial products. The providing entity must, instead, keep a record of the personal advice given and comply with all requirements that currently apply in regard to the content of records of advice, including information about remuneration or other benefits and other interests and associations (as required in s 947B(2)(d) and (e) or 947C(2)(e) and (f)) and with any applicable requirements that may be specified by regulations (s 946AA(4)). A failure to comply with this requirement is an offence (s 1311(1)). The explanatory memorandum to the amending Act which inserted s 946AA states that where the advice provided is to consolidate into, or supplement, a superannuation fund or retirement savings account (RSA) of which the person is an existing member or RSA holder, the SOA exemption may be relied on. Where this occurs, the ROA must disclose the matters listed in s 947D (these disclosures relate primarily to charges and pecuniary interests relevant to the client). Where the advice relates to the consolidation or supplementation of superannuation in relation to an investment amount of $15,000 or less, the exemption will extend to the consideration of life risk insurance associated with the superannuation interest only. Application of $15,000 threshold The small investment advice threshold amount, the financial products to which the threshold relates and the method for calculating the threshold in relation to those products are set out in reg 7.7.09A. Different methods are required for calculating the threshold in relation to financial products with different characteristics, for example, the requirement to make future payments or ongoing commitments. For small investment advice to a client that is related to the acquisition of a superannuation product, the threshold amount is calculated to include both the value of the total investment and other amounts that would be committed to by the client if the advice is taken. If the investment is not finite, the value of the investment is calculated for the 12 months from the time the advice is required to have been given. Similarly, for small investment advice that is related to the disposal of a superannuation product, the threshold amount must be calculated to include the value to the client of the total divestment and other amounts reasonably related to the divestment that would be expended if the advice is taken. If the total value of the investment to which the advice relates is not reasonably ascertainable, the value is deemed to exceed the threshold amount and therefore the exemption does not apply (reg 7.7.09A(8)). Advice — switching superannuation funds A person earning $50,000 per annum is given advice to switch an existing superannuation fund balance of $12,000 to another superannuation fund and to direct all future superannuation guarantee contributions to that new fund.

In this case, the total of the superannuation guarantee contributions in the first 12-month period of $4,500 (ie $50,000 × 9% SG requirement = $4,500) when added to the initial $12,000 transfer would exceed the $15,000 threshold. In the above example, the exemption in s 946AA from the requirement to provide an SOA would not apply.

ROA — content requirements Regulation 7.7.08C prescribes that an ROA must include the following: • brief particulars of the recommendations made to the client, and the basis on which the recommendations are made • brief particulars of the information required by s 947D(2) and (3) if the advice recommends replacement of one financial product with another (these provisions primarily require disclosure in relation to charges, pecuniary interests and significant costs), and • information required by s 947B(2)(d) and (e) or 947C(2)(e) and (f) as if an SOA were given to the client. These provisions deal with information about any remuneration or other benefits that a person (eg the providing entity or employee of the entity) will receive that might reasonably be expected to be or have been capable of influencing the providing entity in giving the advice, and information about any other interests, associations or relationships of the providing entity or associate in that regard. ASIC guidelines on SOAs and temporary relief When preparing SOAs, licensees and their representatives and advisers (“advisers”) should note the following. • Advisers are expected to take a flexible approach to their SOAs, but generally should provide short and simple SOAs in relation to short and simple advice. • Extraneous information (information not required to be disclosed in the SOA by law) should not be disclosed, if it results in the SOA not being clear, concise and effective. Any extraneous information included should be clearly distinguishable from mandatory information. • Information in the SOA should be disclosed in as brief a manner as reasonably possible, without compromising its accuracy. The SOA must disclose all information required by the SOA content provisions. • Important information in an SOA should be highlighted, and navigational aids (eg a table of contents) should be included for long SOAs. • Legal, industry or technical jargon should be avoided. There is no “correct” or “ideal” format for an SOA, as the law provides flexibility in tailoring the format and presentation to the particular information needs of consumers. Advisers should also refer to guidance ASIC has already issued about disclosure documents (see RG 168 “Disclosure: Product Disclosure Statements (and other disclosure obligations)” which includes the Good Disclosure Principles, and RG 175 Licensing: Financial product advisers — conduct and disclosure). Generally, a financial adviser is not required to give a client an SOA during a fact-finding process, although this will depend on the actual circumstances. ASIC recognises that when a financial planner provides personal advice to a client, this occurs as part of a process that may include one or more factfinding consultations culminating in the provision of personal advice in an SOA. Part of the fact-finding process may involve responding to client queries or expressing preliminary views on various matters during consultations. SOA — incorporation by reference Regulation 7.7.09B provides for incorporation by reference in an SOA to be permitted under certain circumstances.

A providing entity (eg a financial adviser) may incorporate information (that is ordinarily contained within the SOA) by reference to a statement or information that has been previously provided to a client. This means that the providing entity will not be required to include a statement or information mentioned in CA Pt 7.7 in an SOA to a client if the SOA: • refers to the statement or information • provides sufficient details about the statement or information to enable the client: – to identify by a unique identifier the document, or part of the document, that contains the statement or information, and – to decide whether or not to read the statement or information or obtain a copy of the statement or information, and • states that a copy of the statement or information may be obtained on request at no charge (reg 7.7.09B). However, information required under former s 945B and 947D cannot be incorporated by reference: • former s 945B required the financial adviser to provide a warning to the client if the advice is based on incomplete or inaccurate information (¶4-630), and • s 947D requires information regarding the charges and benefits that a client may incur or lose to be provided where a financial adviser provides advice that recommends the replacement of one product with another. Providing entities can only incorporate information by reference if they have given the document or part of the document to the client previously. If not, they must do so at the time the SOA is given to the client. SOAA A Statement of Additional Advice (SOAA) is a document which incorporates, by reference, information from another document which has previously been provided to the client. Generally, an SOAA that an adviser gives an existing client can incorporate by reference information previously given to the client provided: • the SOA is dated and it identifies, at or near the beginning of the document, the original SOA from which it incorporates statements or information • the SOA states, at or near the beginning of the document, that it must be read in conjunction with the original SOA, and disclose to the client that the original SOA can be obtained from the providing entity free of charge and how it can be obtained • the SOA contains the new advice and supporting information provided since the original SOA • the SOA highlights any changes since the original SOA • the SOA repeats any required warnings and the additional information required if recommending a replacement of one product with another. Before 25 August 2007, former Class Order CO 04/1556 (issued on 21 December 2004, and revoked on 1 September 2009 by CO 03/09) permitted providing entities to streamline the process of providing additional advice to retail clients by modifying Pt 7.7 so that the providing entity giving additional advice to a retail client may use an SOAA to avoid repeating some information required under Pt 7.7 where the client had already previously received a document from the providing entity setting out all the information required in an SOA. The repetition of information was avoided by allowing providing entities to incorporate by reference the relevant information required under Pt 7.7 from an SOA previously provided.

Conduct Rules

¶4-680 Conduct — financial products and services The general obligations imposed on a financial services licensee and their representatives have been discussed at ¶4-660. Part 7.8 sets out the rules relating to conduct connected with financial products and financial services, other than financial product disclosure. The principal rules cover: • dealings with clients’ money, obligation to pay money into an account and protection of money from attachment, etc, and the powers of the court • requirements for money relating to insurance • obligations to keep financial records and statements and to have audits • unconscionable conduct of licensees • hawking restrictions • miscellaneous issues such as ASIC modification powers, enforcement and transition. Dealing with clients’ money Money paid by a client to a licensee must generally be held in a separate account in trust for the client (s 981H). This includes money that is paid in connection with either: • a financial service that has been provided, or that will or may be provided, to a client, or • a financial product held by a client. The above obligation arises where the money is paid either by the client or someone acting on the client’s behalf, or to the licensee in the licensee’s capacity as a person acting on behalf of the client (s 981A). Any money paid by a client to a licensee is taken to be held in trust by the licensee for the benefit of the client (s 981H; reg 7.8.01(5)). A licensee can operate one or more trust accounts, but must comply with the rules regarding withdrawals, permissible investments, minimum balance requirements and interest and other earnings on the accounts (s 981B(2); reg 7.8.02). Any money in the account, or investments of money withdrawn from it, cannot be attached or otherwise taken in execution, or be the subject of a set-off, charge or charging order (or to any similar process), except at the suit of a person who is otherwise entitled to the money or the investment (s 981E). Keeping financial records Licensees are required to keep financial records that correctly record and explain the transactions and financial position of the financial services business that they carry on. Some of the general rules in this regard include the following. • Records must be kept so that profit and loss statements and balance sheets can be prepared and audited (s 988B). • Records must be kept in English or in a manner that enables them to be readily accessible and converted into English (s 988C). • The records must contain various categories of information as specified (s 988E), including: – all money received or paid by the licensee – all acquisitions and disposals of financial products made by the licensee, the charges and credits arising from them and the names of the person acquiring or disposing of each of those products

– all income that the licensee has received from commissions, interest and other sources, and all expenses, commissions and interest paid by the licensee – the licensee’s assets and liabilities (including contingent liabilities) – all securities or managed investment products owned by the licensee, showing by whom the products or documents of title to them are held. If they are held by some other person, the information needs to be clear about whether they are held as security against loans or advances – for all securities and managed investment products that are not the property of the licensee and for which the licensee or their nominee is accountable, records must show by whom and for whom they are held, and the extent to which they are held for safe custody or deposited with a third party as security for loans or advances made to the licensee – such other matters (if any) as are specified in the regulations (s 988F; reg 7.8.12). Unconscionable conduct Financial services licensees must not engage in conduct that is unconscionable. Where a licensee is guilty of unconscionable conduct, and a client suffers loss or damage, the client may commence an action against the licensee within six years after the cause of action arises (s 991A). In addition, the licensee (and its representatives) may have other liability in relation to such conduct under other provisions, such as the Australian Securities and Investments Commission Act 2001, Pt 2 Div 2 Subdiv C. Restrictions on hawking Chapter 7 contains restrictions on hawking of financial products, ie offers to issue or sell financial products that are connected with unsolicited contact (s 992A to 992B). Section 992A sets out the hawking restriction in respect of financial products (other than securities and managed investments) and applies to both retail and wholesale clients so as to restrict the type of conduct that leads to pressure selling. The broad prohibition against offering financial products for issue or sale in the course of, or because of, an unsolicited meeting with another person is contained in s 992A(1). Approaches to potential clients are permitted, but are subject to the restrictions set out in s 992A(3). Broadly, where an offer to issue or sell a financial product is made in the course of, or because of, any “unsolicited personal contact”, that contact must meet the following requirements. • The person can only be contacted within the hours prescribed in the regulations (reg 7.8.22). • The person must be given an opportunity to register as a person who does not want to receive such contacts and to select the time and frequency of any future contacts. • The person must be given a Product Disclosure Statement (PDS) before they become bound to acquire a financial product. • The person must be clearly informed of the importance of using the information in the PDS when deciding whether to acquire a financial product. • The person must be given the option of having the information in the PDS read to them. ASIC has released Regulatory Guide RG 38 “The Hawking Prohibitions”, which provides guidance on the hawking prohibitions contained in the Corporations Act 2001.

Design and Distribution Obligations • Product Intervention ¶4-700 Consumer protection measures in disclosures

The Financial System Inquiry (FSI) (Murray) final report which was released on 7 December 2014 made 44 recommendations relating to the Australian financial system, including: • Recommendation 21 — Introduce a targeted and principles-based product design and distribution obligation • Recommendation 22 — Introduce a proactive product intervention power that would enhance the regulatory toolkit available where there is risk of significant consumer detriment (fsi.gov.au/publications/final-report/, p 198, 206). These recommendations have been implemented by the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Act No 50 0f 2019) (assent: 5.4.19), which amends: • the Corporations Act 2001 to introduce design and distribution obligations (DDO) in relation to financial products, • the Corporations Act 2001 and National Consumer Credit Protection Act 2009 to introduce a product intervention power (PIP) for the ASIC to prevent or respond to significant consumer detriment, and • the Australian Securities and Investments Commission Act 2001 (ASIC Act) to make consequential amendments. The Act (passed with amendments) by parliament also: • extended the DDO and PIP regimes to financial products regulated under the ASIC Act • provided a further private cause of action where an entity fails to make a target market determination under the DDO regime, and • enabled the court, on application from ASIC, to make orders to benefit non-party consumers who have suffered loss or damage because of contraventions of the DDO regime. The extension of the DDO and PIP regimes followed from the recommendation of the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which suggested that the regimes should also cover financial products not regulated by the Corporations Act 2001, but are regulated by the ASIC Act. The other additional measures (further private cause of action, and ASIC’s standing to seek compensation on behalf of affected consumers that are non-parties to legal proceedings) followed from the Senate Economics Legislation Committee’s inquiry into the legislation. The DDO regime will commence from 6 April 2021 (two years after the assent date), and the PIP regime commenced on 6 April 2019 (the day after the assent date). The DDO and PIP regimes, and the extent that superannuation providers and products may be affected, are briefly discussed in ¶4-710 and ¶4-720. Readers may wish to refer to specialist Wolters Kluwer services such as the Australian Company Law Commentary and the Australian Corporations & Securities Legislation services for detailed commentary and the legislation.

¶4-710 Product design and distribution obligations Part 7.8A of the Corporations Act 2001 (Design and distribution requirements relating to financial products for retail clients) imposes design and distribution obligations (DDO) in relation to financial products (CA s 994A to 994Q). The obligations generally apply to: • offers of financial products about which the offeror is required to make certain disclosures under the Corporations Act. These are products that require a disclosure document (such as a PDS or prospectus), subject to exceptions for products and distribution methods where there are existing

similar regimes or other competing policy priorities, and • financial products that are not regulated under the Corporations Act, but are regulated under the ASIC Act (such as credit products). The DDO regime will apply from 6 April 2021. The explanatory memorandum to Act No 50 of 2019 (¶4-700) summarised the context of the DDO measures as below: “1.2 The Corporations Act 2001 relies heavily on disclosure to assist consumers understand and select appropriate financial products. However, disclosure can be ineffective for a number of reasons, including consumer disengagement, complexity of documents and products, behavioural biases, misaligned interests and low financial literacy. The availability of financial advice may not be sufficient to overcome these issues. A consumer may not seek financial advice or may receive poor-quality advice. 1.3 The Financial System Inquiry recognised these shortcomings of the existing disclosure regime ….. recommended the introduction of a targeted and principles-based product design and distribution obligation … 1.5 These obligations are designed to assist consumers to obtain appropriate financial products by requiring issuers and distributors to have a customer-centric approach to designing, marketing and distributing financial products”. The DDO in summary Offerors must: • make a target market determination for most financial products that require disclosure (ie a PDS under CA Pt 7.9 (Financial product disclosure) or a prospectus to investors under CA Ch 6D (Fundraising)), and for financial products that are not regulated under the Corporations Act, but are regulated under the ASIC Act. • make target market determinations available to the public free of charge. • develop a plan for reviewing target market determinations and abide by that plan. • specify distribution information that distributors must collect, keep and provide back to the offeror. Distributors: • are prohibited from distributing a product unless a current target market determination is in place. • must notify a product’s offeror, and an offeror must notify ASIC, of a significant dealing in a product that is not consistent with the product’s target market determination. Offerors and distributors must: • take reasonable steps so that distribution is consistent with the most recent target market determination. • maintain records and information relating to their obligations under the DDO regime. • the offeror (issuer) of a financial product may also be a distributor of the product. Financial products covered by DDO regime and exemptions The DDO regime applies to offers of financial products that require disclosure under the financial product disclosure and fund raising disclosure regimes in the Corporations Act (see the first dot point above). What is a financial product is determined according to the provisions of CA Pt 7.1 Div 3 and applicable definitions in Ch 7.5 (CA s 994AA(a)).

A financial product includes a superannuation interest (¶4-060). MySuper products exempted from DDO The products requiring disclosure that are exempt from the DDO regime include MySuper products and margin lending facilities (CA s 994A, 994B(1)(c), 994B(3)). These products are currently subject to product-specific regulations that are also aimed at ensuring that firms provide appropriate products to consumers. For example, MySuper products are subject to special rules under the Superannuation Industry (Supervision) Act 1993. Products prescribed by the regulations The regulations may apply prescribed additional financial products that are subject to the DDO regime, or are exempted from its operation. This regulation-making power means the DDO regime can apply to any prescribed financial product in any prescribed circumstance, regardless of whether or not the product requires disclosure. By doing so, the power provides the flexibility necessary to future-proof the DDO regime to ensure its ongoing relevance and effectiveness. Similarly, the regulation-making power to exclude products from the DDO regime is aimed at future proofing the DDO regime by providing flexibility to exempt products where appropriate (s 994B(3)(f)). Defined benefit interests and eligible rollover fund interests will be exempted The government proposes to make regulations that would exclude a number of products from the regime, including: • interests in defined benefit superannuation funds, and • interests in eligible rollover funds (EM 1.38). What are the design and distribution obligations? Four design obligations and five distribution obligations are prescribed in Pt 7.8A for issuers and distributors of financial products (note that an issuer of a financial product may also be the distributor). The design obligations are: 1. to make a publicly available target market determination (s 994A, 994B(5)). The target market determination must be made available to the public free of charge (s 994B(9)) 2. to review the target market determination as required to ensure it remains appropriate (using a “review triggers” (see s 994A and 994B) and “review period” (s 994A, 994B(5)(d)(e) and (f), 994B(6) approach) 3. to keep records of the person’s decisions in relation to the DDO (eg decisions about a product’s target market determination, review triggers, review periods and other decisions relating to requirements for making target market determinations and the reasons for those decisions (s 994F(1)) (see “Related rules and obligations” below), and 4. to notify ASIC of any significant dealings in a product that are not consistent with the product’s target market determination. The distribution obligations are: 1. not to engage in “retail product distribution conduct” in relation to a product unless a target market determination has been made (s 994D) (note that this obligation does not apply where the distribution conduct consists of personal advice or associated conduct. “Associated conduct” consists of any dealings engaged in by the personal advisor, or an associate of the advisor, for the purposes of implementing the personal advice (s 994E(1), (3)). “Retail product distribution conduct” is, in relation to a product, dealing in relation to a retail client, providing financial product advice to a retail client, or giving a disclosure document or PDS to a retail client (s 994A) (see further below).

2. not to engage in retail product distribution conduct where a target market determination may no longer be appropriate (s 994C(3), 994C(4) and 994C(5)) (note that this obligation does not apply where the distribution conduct consists of personal advice or associated conduct). 3. to take reasonable steps so that retail product distribution conduct is consistent with the target market determination (s 994E) (note that this obligation does not apply where the distribution conduct consists of personal advice or associated conduct). Whether these requirements are met is determined objectively. This means that an issuer or distributor (as the case may be) must meet the standard of behaviour expected of a reasonable person in their position that is offering the same product and is subject to the same legal obligations. A risk management approach applies to determine what satisfies the requirement of “reasonable steps” (s 994E(5)). 4. to collect information specified by the issuer and complaints related to a product and provide both to the issuer. This requires a distributor to collect and keep complete and accurate records of “distribution information” and provide certain distribution information to the issuer (s 994A and 994F(2), (4), (5)). 5. to notify the issuer of a product of any significant dealings in the product that are not consistent with the products target market determination (s 994F(6)). A regulated person who becomes aware of such a dealing must notify the issuer in writing as soon as practicable, and in any case within 10 business days. The term “significant” is not defined and the meaning of significant is intended to take its ordinary meaning in the context of the provision. Ultimately, whether or not a dealing is significant would be a matter to be determined in the circumstances of each case. Related rules and obligations Other related rules and obligations are as follows: • The design obligations are imposed on the person who is responsible for developing the financial product. This is the person who is responsible for preparing the disclosure document required (by Pt 7.9 or Ch 6D, as applicable) for the product. All references to “issuer” are references to the person who is subject to the design obligations unless a contrary intention is indicated (s 994B(1)). • Advertising or other promotional material for a financial product must refer to the product’s target market (s 1018A(1)(ca) and 1018A(2)(ca)). • The DDO only apply to primary or initial offerings of financial products to retail clients. It should also be noted that while “retail product distribution conduct” includes providing financial product advice, the DDO regime excludes personal advice and associated conduct from most of the distribution obligations. This reflects that such conduct already involves consideration of the client’s individual circumstances and is subject to the best interest obligations under Pt 7.7A of the Corporations Act. However, conduct related to personal advice is subject to the record keeping and notification obligations to ensure the effective operation of those obligations (s 994A, definitions of “retail product distribution conduct”, “dealing”, “excluded conduct” and “excluded dealing”). Relevantly, personal advice and closely related conduct is defined as “excluded conduct”. Excluded conduct, in turn, includes “excluded dealings” which is defined as arranging for the issue of a product for the purpose of implementing the personal advice, whether by the advisor or their associate (see s 994A). The DDO record keeping provisions for issuers (under point 3, see above) and distributors (under point 4, see above) are supported by the existing provisions of the Corporations Act relating to record keeping. For example, it is an offence to destroy, conceal or falsify records required to be kept under a provision of CA Ch 7, and records required to be kept by a provision of Ch 7 must be preserved for five years (s 101C, 1101E and 1101F).

ASIC enforcement powers The DDO regime gives ASIC enforcement powers, including: • the ability to request necessary information (s 994H(1), (2)) • issue stop orders where there is a suspected contravention of the law (s 994J(1)), and • to make exemptions and modifications to the new arrangements (s 994K and 994L). These powers are similar to those that ASIC has under the general disclosure regime in the Corporations Act (eg stop orders (s 739 and 1020E), exemption and modification power (s 741 and 1020F)). Contraventions and penalties A contravention of an obligation in the DDO regime is both a civil penalty provision and an offence. The penalties are set out in s 1317E of the Corporations Act (in relation to civil penalties) and Sch 3 of the Corporations Act (in relation to criminal penalties). A combination of civil and criminal penalties may apply to contraventions of the DDO provisions. This combination of civil and criminal allows ASIC or the prosecutor (as the case may be) to take a proportional approach to enforcement of the obligations. Civil liability A person who suffers loss or damage because of a relevant contravention of the DDO regime may recover that loss or damage by civil action. The relevant contraventions relate to: • failing to review the target market as required and associated obligations • failing to make a target market determination or distributing a product without a determination, and • failing to take reasonable steps to comply with a target market determination (s 994M(1)(a), (b)). With respect to a contravention of the first kind, civil liability does not arise where defences to the contraventions are available. In particular, a defence arises: • in relation to the issuer — where the review has already been conducted and the target market determination has been re-made (if necessary), and • in relation to the regulated person — where all reasonable inquiries have been made and the regulated person believed on reasonable grounds that the determination had been reviewed and remade (if necessary). Similarly, with respect to a contravention of the second kind, a person does not have a cause of action where a defence to the contravention is available. In particular, the cause of action would not arise if a regulated person (except the issuer) made all inquiries that were reasonable in the circumstances, and after doing so, believed on reasonable grounds that the target market determination had been validly made by the issuer. This ensures that a distributor is not liable to civil action in circumstances where any wrongdoing is ultimately attributable to the issuer. A contravention of the third kind arises where a person suffers loss or damage because of a failure to take reasonable steps so that distribution is consistent with the target market determination. A cause of action does not affect any liability that a person has under any other law. In addition, the causes of actions arise regardless as to whether any person has been convicted of an offence or ordered to pay a civil penalty with respect to the relevant contravention. The court, in dealing with a cause of action, may, in addition to awarding loss or damage: • make an order declaring that a contract entered into by the person who suffered loss or damage is void, and • if it makes such an order — make such other orders as it thinks are necessary or desirable because of

that order (s 994N(1)).

¶4-720 Product intervention power of ASIC Part 7.9A of the Corporations Act 2001 (Product intervention orders) provides ASIC with powers that it can use proactively to reduce the risk of significant detriment to retail clients resulting from financial products (CA s 1023A to 1023R). A “product intervention order” means an order made under s 1023D(1) or (3). These powers are referred to as product intervention powers (PIP) in the commentary. Note that Pt 6-7A of the National Consumer Credit Protection Act 2009 (Credit Act) which prescribes the product intervention orders for the purposes of that Act is not discussed as that Act is outside the scope of the Guide. The PIP regime commenced on 6 April 2019. It applies only in relation to products that may be acquired by consumers on or after the commencement date. The need for ASIC’s proactive intervention orders The explanatory memorandum to Act No 50 of 2019 (¶4-700) summarised the context of the PIP measures as below: “2.2 The Corporations Act relies heavily on disclosure to assist consumers understand and select appropriate financial products. However, disclosure can be ineffective for a number of reasons, including consumer disengagement, complexity of documents and products, behavioural biases, misaligned interests and low financial literacy. The availability of financial advice may not be sufficient to overcome these issues. A consumer may not seek financial advice or may receive poor-quality advice. 2.3 ASIC has powers under certain parts of the Corporations Act to impose conditions and take actions to rectify consumer detriment after a breach or suspected breach of the law. However, these powers provide ASIC with limited scope to regulate proactively. 2.4 ASIC can only intervene in certain situations where there is a suspected contravention of the law. For example, ASIC can stop the issuance of products where the disclosure documents are defective. This limits ASIC’s ability to intervene in the distribution of products where there is no defective disclosure. 2.5 The FSI considered the scope of ASIC’s powers in the context of past situations where consumers had suffered significant consumer detriment and ASIC had exhausted its regulatory toolkit. The FSI found that early intervention by ASIC could be more effective in reducing harm to consumers compared with waiting for a breach to occur. It recommended providing ASIC with a proactive intervention power that would enhance the regulatory toolkit available where there is risk of significant consumer detriment…. 2.7 The intervention power will allow ASIC to regulate, or if necessary, ban potentially harmful financial and credit products where there is a risk of significant consumer detriment. The power is intended to enable ASIC to take action before harm, or further harm, is done to consumers”. The PIP regime in summary Part 7.9A allows ASIC to make a range of orders prohibiting specified conduct in relation to products regulated under the Corporations Act and the ASIC Act. This intervention power allows ASIC to proactively reduce the risk of consumers suffering significant detriment from financial and credit products. ASIC must satisfy consultation and notification obligations before an intervention order is made. Affected parties have the opportunity to make submissions to ASIC before an intervention is made, and all interventions are made public. Civil and criminal penalties apply to contraventions of the PIP regime. The combination of civil and criminal penalties allows the prosecutor or ASIC (as may be the case) to take a proportional approach when enforcing the obligations.

In addition, a person who suffers loss or damage because of a contravention of the PIP obligations may recover that loss by civil action. ASIC may only intervene in relation to products that are made available for acquisition after the commencement of Pt 7.9A (6 April 2019). In addition, an order cannot apply to a product that has already been acquired or where a contract for the acquisition of the product has already been entered into. This ensures that the PIP cannot interfere with existing arrangements between consumers and providers. What products are subject to the intervention power? The intervention power applies to products regulated under the ASIC Act and Corporations Act (and Credit Act). In the case of ASIC Act and Corporations Act financial products, the intervention power generally only applies to financial products that are, or are likely to be, available for acquisition by retail clients by way of issue. However, the power also applies to such products in certain anti-avoidance sale situations (s 1023B, 1023D(1)(a) and (3)(a)). There are two main limitations on the types of financial products that can be subject to the intervention power under the Corporations Act. Firstly, the power generally only applies in an “issue situation”, and secondly, the power only applies where a product may be made available to “retail clients”. “Financial product” is a broad term that covers a range of products that meet the investment and risk management needs of investors. It includes superannuation products (s 1023B, 1023D(1)(a) and 1023D(3)(a)). The intervention power only applies where the relevant product may be offered to retail clients. The meaning of “retail client” is defined in CA s 761G and 761GA. The precise definition depends on a range of circumstances, but roughly captures those persons that may be considered ordinary consumers of financial products, as opposed to wholesale clients. The intervention power can be used regardless as to whether or not the financial product requires disclosure under Ch 6D or Pt 7.9 of the Corporations Act. This ensures that the power is not unduly limited in its operation. The regulations may exclude financial products from the operation of the PIP regime. This may be appropriate, for example, in the event of unintended consequences in the context of a particular product. This flexibility also serves to future-proof the PIP (s 1023B and 1023C(3)). Importantly, to enhance the application of the PIP regime, regulations may declare anything to be, or to not be, a financial product for specified provisions of Ch 7. Currently, the regulations may only declare something to be, or not to be, a financial product for all Ch 7 purposes. Section 765A further clarifies that regulations made under that section have precedent (to the extent of any inconsistency) over an inconsistent ASIC declarations (s 764A(3), 765A(3), (4)). When can the intervention power be used? The intervention power can be used where ASIC is satisfied that a product or class of products has resulted, or is likely to result, in “significant detriment” to relevant persons. Relevant persons are retail clients under the Corporation Act (and consumers proposing to acquire credit products). These persons are collectively referred to as consumers unless a contrary intention is indicated. Consistent with existing provisions of the Corporations Act, the term “significant” is not defined and the meaning of significant is intended to take its ordinary meaning in the context of the PIP provision. Generally, this would require the detriment to be sufficiently great to justify an intervention, having regard to the circumstances of the case and the object of the intervention power. The term “detriment” is also not defined and the meaning of detriment is intended to take its ordinary meaning in the context of the PIP provision. However, it is intended to cover a broad range of harm or damage that may flow from a product. The harm or damage may arise from any number of sources associated with the product, including the product’s features, defective disclosure, poor design or inappropriate distribution. A product’s compliance with existing provisions of the law may be relevant to whether it is likely to cause

significant consumer detriment. However, a product may cause such detriment even if it complies with all applicable laws. In particular, a product may result in significant detriment to consumers even if a person has complied with all applicable disclosure requirements, and with the person’s design and distribution obligations, in relation to the product (s 1023E(3)). Content and exercise of an intervention power ASIC can order, in relation to a product or class of product, that conduct must not be engaged in in relation to a retail client, either entirely or except in accordance with any conditions specified in the order (s 1023D(1), (3)). An intervention order may generally operate in relation to any person or class of persons, but it cannot operate in relation to a person in their capacity as a retail client. In addition, the regulations may provide classes of persons in relation to which an intervention order cannot be made (s 1023C(2), (3)). The range of orders that ASIC can make under an intervention order is extensive. They include: • banning a person from issuing a product or class of product to consumers • directing that a particular product or class of product only be offered by way of issue to particular classes of consumers or in particular circumstances, and • directing that a product or class of product not be distributed unless accompanied by an appropriate warning or label.

Limitation on intervention orders An intervention order cannot: • require a person satisfy a standard of training, or meet a professional standard, other than a standard prescribed for the person by or under the Corporations Act • require a person who is not required to hold an Australian financial services licence to join an external dispute resolution scheme, or • impose requirements in relation to a person’s remuneration, other than so much of the remuneration as is conditional on the achievement of objectives directly related to the financial product (s 1023D(4)). Furthermore, the conduct covered by an intervention order must be limited to conduct in relation to a consumer. For example, an intervention order cannot limit the offering or distribution of products to wholesale clients. Duration of intervention order An intervention order made by ASIC may continue for up to 18 months (the prescribed period) unless the period is extended by ASIC with the approval of the Minister. In addition, if a court makes an order staying or otherwise affecting the operation or enforcement of an intervention order, the period of the court’s order is not included towards the prescribed period (s 1023G(2)). The regulations may vary the prescribed period, but only to shorten the period. The regulations cannot lengthen the prescribed period beyond 18 months (s 1023). Strict rules apply to remaking an intervention order. In particular, if an order ceases to be in force or is revoked, ASIC may not remake the order, or make an order in substantially the same terms unless: the circumstances have materially changed from those when the order was made; or, the Minister approves the remaking of the order (s 1023M). An intervention order can only be extended by a declaration made in the above-mentioned circumstances. Procedural requirements ASIC must comply with two key procedural requirements before making an intervention order — consultation and issuing a public notice with respect to the intervention. Consultation requirements Three consultation requirements may be applicable to the making of an intervention order: 1. ASIC must consult with people or entities that are likely to be affected by the order. (ASIC is taken to have complied with this requirement if it undertakes a public consultation process, eg publication of proposed order on its website and inviting public comment.) 2. ASIC must consult with APRA before making an intervention order in which APRA may have an interest (in particular, on a proposed product intervention order that would apply to a body regulated by APRA). 3. ASIC must comply with any further consultation requirements prescribed by the regulations (s 1023F). A failure by ASIC to comply with the consultation process requirements does not invalidate an intervention order. This ensures that an otherwise valid intervention order is effective despite any defect in the relevant consultation process (s 1023F(3)). In addition, s 1023F(4) clarifies that s 17 of the Legislation Act 2003 does not apply to the making of an intervention order. Section 17 sets out the general consultation requirements for legislative instruments. That provision applies to all legislation instruments made under the PIP regime except the making of an intervention order. The exception of s 17 in the case of making an order reflects specific needs for

consultation when making an intervention order. Public notice of intervention orders An intervention order must be published and a public notice issued in relation to the intervention. The order and notice must be published on ASIC’s website, and the notice must contain certain specified information (s 1023L(2), (3)). ASIC must make a similar public notice if an intervention order is amended. Such a notice must detail the amendment, when the amendment takes effect, the consultation undertaken with respect to the amendment and why the amendment is appropriate (s 1023L(5), (6)). When an intervention order is revoked, ASIC is only required to publish the notice of the revocation on its website (s 1023L(7)). For intervention orders and amendments to orders that are not legislative instruments (see below), ASIC must also serve a copy of the order or amendment on any person to whom ASIC considers the order applies. This ensures that individuals who are directly affected by orders in relation to individual products know that they must comply with such orders (s 1023L(1), (4)). Commencement of intervention orders The commencement date of an intervention order depends on whether it is a legislative instrument. An intervention order is a legislative instrument where it relates to a class of product or class of persons. An intervention order is not a legislative instrument if it relates to a particular person or a particular product. The commencement date is as below: • Intervention order is a legislative instrument — the order commences the day after the legislative instrument is registered. • Intervention order is not a legislative instrument — the order applies from the date it is published or from the date specified in the public notice related to the intervention (s 1023G(1)). Amendment and revocation ASIC can revoke or amend an intervention order that has not been extended at any time. Where an intervention order has been extended, ASIC can only revoke or amend the order with the Minister’s approval. However, an intervention order can never be amended so as to extend the duration of its operation. The duration of an intervention order can only be extended by the declaration process as noted above (s 1023J and 1023K). All amendments to, and revocations of, interventions orders must be published on ASIC’s website. In the case of an amendment, ASIC must also publish on its website a notice that sets out why the amendment is appropriate and the consultation ASIC undertook in relation to the amendment. In the case of a revocation, ASIC need to only publish a notice of the revocation on its website. Three obligations associated with intervention orders The first (and principal) obligation is that a person must not engage in conduct that is contrary to the order. This obligation applies in relation to all intervention orders (s 1023P(1)). The second obligation only arises if a person is served with an intervention order. In this case, the person must take reasonable steps to ensure that other persons who engage in conduct to which the order applies are aware of the order (s 2023P(4)). Note that a similar obligation applies in relation to stop orders made under Corporations Act (see s 1020E). Note that service is not necessary where an intervention order is made by “legislative instrument” (see above). In the case of an instrument of a legislative character, a person does not need to be notified of the instrument in order to be obligated to comply with the instrument (s 1023P(1)).

The third obligation enables ASIC to require a person to notify their customers of an intervention order in certain circumstances. These circumstances are where: • an intervention order has been made in relation to a product, and • the person has dealt in, or provided financial advice in relation to, the product with respect to consumers. In these circumstances, ASIC may require the person to notify those customers of the terms of the intervention order and any other matters that may be prescribed in the regulations (s 1023N(1) and 1023P(2)). The notice ASIC provides to the person may specify the way in which the person is to notify their customers. If the intervention order is a legislative instrument, the notice must also be a legislative instrument. If the notice is not a legislative instrument, a person does not need comply with the notice if they are not aware, and could not reasonably be aware, of the notice (s 1023N1(b)). Review of intervention orders Section 1317 of the Corporations Act provides a general right to apply to the Administrative Appeals Tribunal for merit review of a decision made under the Act by ASIC and certain other bodies. These rights of review apply to all decisions made by ASIC under the PIP intervention order regime, except those made by legislative instrument. Decisions made by legislative instrument are subject to the processes applicable to such instruments, including parliamentary oversight via the disallowance process, rather than merits review. Contraventions of PIP obligations and penalties The consequences of breaching the PIP provisions are: • liability to the state through civil penalty proceedings or criminal prosecution, and • liability to persons who have suffered loss or damage through civil action. Civil and criminal penalties A contravention of an obligation under the PIP regime is both a civil penalty provision and an offence. This allows the regulator or prosecutor (as the case may be) to take a proportional approach to the enforcement of the PIP regime. As noted earlier, the contraventions cover engaging in conduct contrary to an intervention order, failure to take steps to ensure other persons are aware of the intervention order and failure to notify consumers of the intervention order (see “Three obligations associated with intervention orders” above). The maximum penalties in relation to each obligation are set out in s 1317E(1) (table items 40P to 40R). Civil liability A person who suffers loss or damage because of a contravention of an intervention order may recover that loss or damage by civil action. A cause of action arises if: • a person is required to comply with an intervention order and contravenes the order, and • the consumer suffers loss or damage because of the other person’s contravention of the order (s 1023Q(1)). The cause of action does not affect any liability that the person who contravenes the intervention order has under any other law. In addition, the cause of action arises regardless of whether the person who contravenes the order has been convicted of an offence or ordered to pay a civil penalty with respect to the relevant contravention (s 1023Q(3)). The limitation period applicable to the cause of action is six years, commencing on the day on which the

cause of action arose. In a particular case, the court may, in addition to awarding loss or damage: • make an order declaring that a contract entered into by the person who suffered loss or damage is void (including an order for the return of money and payment of interest), and • if it makes such an order, make such other orders as it thinks are necessary or desirable because of that order. ASIC consultation on PIP ASIC has initiated consultation on the proposed administration of its new PIP. ASIC’s principles-based approach to the regulatory guidance, outlined in Consultation Paper 313 Product intervention power (CP 313) reflects the product intervention power being a broad and flexible tool for ASIC. CP 313 and Attachment 1 (draft regulatory guide) are available at asic.gov.au/regulatory-resources/find-adocument/consultation-papers/cp-313-product-intervention-power/. Submissions on the consultation documents will close by 7 August 2019 and ASIC aims to release its final regulatory guide in September 2019.

ASIC Regulatory Documents and Guidelines ¶4-800 Legislative instruments — interim or transitional relief From time to time, ASIC issues legislative instruments pursuant to CA to: • exempt a person(s) from certain provisions of CA or other Acts administered by ASIC • modify or clarify the operation of certain provisions • make declarations about a person(s) who is subject to a particular provision. Legislative instruments can have a wide application or can specifically apply to a class of persons who carry out a particular activity in certain circumstances. Before 2015, legislative instruments were referred to as class orders. In this chapter, references to legislative instruments issued before 2015 are cited by their title, for example, Class Order CO 14/1217. From 2015, legislative instruments are cited using their full title, for example, ASIC Corporations (Amendment No 2) Instrument 2015. Legislative instruments and class orders are available from asic.gov.au/regulatory-resources/find-adocument/class-orders. Superseded class orders (denoted by ASIC with the prefix “SCO” (eg SCO 05/27)) may be found at asic.gov.au/regulatory-resources/find-a-document/legislative-instruments/superseded-legislativeinstruments. ASIC’s action on sunsetting class orders Under the Legislative Instruments Act 2003 (LIA), legislative instruments cease automatically, or “sunset”, after 10 years, unless action is taken to exempt or preserve them. Section 50(1) of the LIA repeals a legislative instrument on either 1 April or 1 October — whichever date occurs first on or after the 10th anniversary of its registration on the Federal Register of Legislative Instruments (FRLI). A repeal, however, does not undo or affect the past effect of the instrument. The purpose of sunsetting is to ensure that instruments are kept up to date and only remain in force while they are fit for purpose, necessary and relevant. To preserve the prospective effect of a legislative instrument (eg a class order), the instrument must be remade before the sunset date.

Summary of instruments The main ASIC instruments granting interim or transitional relief dealing with superannuation products and issuers are set out below for easy reference to where they are discussed in the chapter. For ASIC regulatory guides and other guidelines on the administration of the law, see ¶4-850. Class Orders • CO 03/237 — no supplementary PDS required in certain circumstances (¶4-150) • CO 04/1430 — disclosure items contingent on unknown facts and circumstances (¶4-300) • CO 04/1431 — costs of derivatives, foreign exchange contracts, general insurance products and life risk insurance products (¶4-300) • CO 04/1432 — non-monetary benefits and interests (¶4-300) • CO 04/1435 — amounts denominated in a foreign currency (¶4-300) • CO 09/210 — regulated superannuation funds exemption from complying with s 945A for provision of personal advice to members (ie intra-fund personal advice about the member’s existing superannuation fund) (¶4-630) • CO 09/339 — ASIC standards and requirements for an internal dispute resolution procedure (¶4-660) • CO 09/437 — departed former temporary residents’ superannuation: ongoing conditional exemption for superannuation funds from having to give notices and exit statements under s 1017B and 1017D where a fund member ceases to hold a superannuation product in the circumstances of Pt 3A of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶4-170) • CO 12/749 — exempts multi-funds, superannuation platforms and hedge funds from the shorter PDS regime under Pt 7.9 Div 4 Subdiv 4.2B (for superannuation products) and 4.2C (for simple managed investment schemes) until 30 June 2022 (¶4-130) • CO 12/418 — Information in a Financial Services Guide given in a time-critical situation (¶4-670) • CO 12/1687 — sets out the competency standards determined by ASIC to be complied with by all approved SMSF auditors under SISA s 128F(c)(i) (¶5-508) • CO 13/797 — modifies CA s 1015C to allow platform operators and trustees of superannuation entities to deliver a PDS using an agent who is an AFS licensee or an authorised representative of a licensee • CO 13/830 — exempts RSE licensees from disclosure obligations in SISA s 29QB until 31 October 2013 (¶9-650) • CO 13/1420 (as amended by former CO 13/1473 and CO 14/1249) — Interim relief from separately reporting low income superannuation contributions in members’ periodic statements up to 30 June 2015 (¶4-180) • CO 13/1534 (as amended by CO 14/1217) — exempts a trustee of a regulated superannuation fund (other than an SMSF) from having to comply with regulations made for the purposes of CA Pt 7.9 Div 2 (PDSs) or s 1017D (periodic statements) to the extent those regulations were amended or made by items 7 to 68 and 70 to 86 of Sch 1 to the Superannuation Legislation Amendment (MySuper Measures) Regulation 2013, applicable in relation to PDSs and periodic statements (¶4-130) (CO 13/1534 as amended by ASIC Corporations (Amendment No 2) Instrument 2015, ASIC Corporations (Amendment) Instrument 2016 (F2015L00586), ASIC Corporations (Amendment) Instrument 2017 (F2017L00742) and ASIC Corporations (Amendment) Instrument 2019/240 (F2019L00541) (see ¶9620))

• CO 14/443 — provides relief to defer the operation of the product dashboard requirements for choice products and the portfolio holdings disclosure requirements under CA s 1017BA to 1017BD. It extends the Second Exemption in CO 13/1534 (F2014L00594) so that it now applies to periodic statements for reporting periods ending before 1 July 2023 (CO 14/443 as amended by ASIC Corporations (Amendment No 2) Instrument 2015, ASIC Corporations (Amendment) Instrument 2016/351, ASIC Corporations Amendment Instrument 2017/569 and ASIC Corporations (Amendment) Instrument 2019/240 (F2019L00541)) (see below and ¶9-610) • CO 14/509 — clarifies the requirement under SISA s 29QB that superannuation websites must be kept up to date at all times (as amended by ASIC Corporations (Amendment No 1) Instrument 2015 (see below): (¶9-650)) • CO 14/541 — exempts RSE licensees from disclosure obligations in SISA s 29QC (as amended by later ASIC Corporations (Amendment) Instruments (see below): ¶9-660) • CO 14/541 (amendment of CO 11/1227) — superannuation forecasts (¶4-630) • CO 14/923 — modifies Pt 7.6 of the Corporations Act to impose specific record-keeping obligations on AFS licensees in relation to the best interests duty and related obligations under Div 2 in Pt 7.7A when providing personal advice to retail clients (¶4-630) • CO 14/1252 (as amended by ASIC Corporations (Amendment and Repeal) Instrument 2015/876, and ASIC Corporations (Amendment) Instrument 2019/698, see below) — modifies or varies Pt 7.9 as it applies in relation to managed investment and superannuation products. Specifically, it modifies CA s 1013C so that issuers must include information in their PDS that is known to them unless otherwise provided in the regulations, and modifies and varies some of the definitions in CR Sch 10 dealing with fees and costs for those products (¶4-050, ¶4-320). Legislative Instruments All legislative instruments made pursuant to the Corporations Act 2001 and SISA and their Regulations are available from www.legislation.gov.au. For easy reference, most of the instruments affecting superannuation products and related matters from 2017 onwards are listed below. Note that the instruments may be superseded, replaced, affected or further amended by a later instrument. Instruments made in pre-2017 years may be found in earlier editions of the Guide. ASIC determinations made pursuant to the SISA and Corporations Act 2001 • ASIC Corporations (Urgent Superannuation Advice) Instrument 2017/530 (www.legislation.gov.au/Details/F2017L00735) — exempts a providing entity from the obligation to give an SOA within the normal statutory timeframe and allows an SOA to be given within 30 days after providing advice to a client in respect of urgent superannuation advice (¶4-665). • ASIC Corporations Amendment Instrument 2017/569 (www.legislation.gov.au/Details/F2017L00742) — extends the Second Exemption in CO 13/1534 so that it now applies to periodic statements for reporting periods ending before 1 July 2019. The exemption will apply to periodic statements given in relation to reporting periods ending before 1 July 2019, to allow for further consideration and consultation on the requirement in reg 7.9.20(1)(o). The Instrument also amends CO 14/443 to defer the commencement of the product dashboard provisions for choice products to 1 July 2023 (¶9-610, ¶9-620). • ASIC Superannuation (RSE Websites) Instrument 2017/570 (www.legislation.gov.au/Details/F2017L00738) — continues the relief formerly provided by ASIC Class Order CO 14/509 which exempt persons from complying with s 29QB of the SISA if certain conditions are met, and extend transitional sub-plan relief 30 June 2018 (further extended to 30 June 2024 — see ASIC Superannuation (Amendment) Instrument 2018/474 below) • ASIC Superannuation (Repeal) Instrument 2017/573 (www.legislation.gov.au/Details/F2017L00739)

— repeals ASIC Class Order CO 14/509 which is superseded by ASIC Superannuation (RSE Websites) Instrument 2017/570 (www.legislation.gov.au/Details/F2017L00738) (see above). • ASIC Corporations (Amendment) Instrument 2017/0386 (www.legislation.gov.au/Details/F2017L00757) — extends the relief given by Class Order CO 12/749 until 30 June 2018, to enable ASIC to consult on permanent relief for the application of the shorter PDS regime to superannuation platforms, multi-funds and hedge funds (further extended to 30 June 2022 — see ASIC Corporations (Amendment) Instrument 2018/473 below) • ASIC Corporations (Amendment) Instrument 2017/664 (www.legislation.gov.au/Details/F2017L01174) — amends Class Order CO 14/1252 (which modifies or varies Pt 7.9 of the Corporations Act 2001 and Sch 10 to the Corporations Regulations as they apply in relation to managed investment products (MIP) and superannuation products (SP) to: – amend for a temporary period the disclosure of property operating costs for superannuation products – clarify the definition of interposed vehicles inserted by CO 14/1252 (MIP and SP) – modify the reporting of some fees and costs on periodic statements for a temporary period (MIP), and – make minor amendments correcting typographical errors in CO 14/1252 (¶4-320). • ASIC Corporations (Amendment) Instrument 2017/1138 (www.legislation.gov.au/Details/F2017L01714) — amends Class Order CO 14/1252 to extend by one year the time for compliance with certain provisions of Sch 10 of the Corporations Regulations 2001 as modified by Class Order CO 14/1252 (¶4-320). 2018 • ASIC Corporations (Amendment) Instrument 2018/40 (www.legislation.gov.au/Details/F2018L00241) — amends ASIC Corporations (Generic Calculators) Instrument 2016/207 to defer the commencement of the requirement for a generic financial calculator relating to superannuation and retirement to include the present value of future receipts and payments using an assumed rate of inflation of 2.5% until 1 July 2019 (further deferred, see ASIC Corporations (Amendment) Instrument 2019/514 below). • ASIC Corporations (Amendment) Instrument 2018/473 (www.legislation.gov.au/Details/F2018L00708) — amends Class Order Co 12/749 (see above) to defer the application of the shorter PDS regime to superannuation platforms, multi-funds and hedge funds until 30 June 2022 (¶4-130). • ASIC Corporations (Amendment) Instrument 2018/474 (www.legislation.gov.au/Details/F2018L00709) — amends ASIC Superannuation (RSE Websites) Instrument 2017/570 (see above) to defer the application of s 29QB of the SISA in relation to information about employer sub-plans until 30 June 2024 (¶9-650). • ASIC Superannuation (Amendment) Instrument 2018/1080 (www.legislation.gov.au/Details/F2018L01779). This Instrument further extends the exemption provided by ASIC Class Order CO 14/541 for RSE licensees from the disclosure requirement in s 29QC(1) of the SISA until 1 January 2024 (see ¶9-660). 2019 • ASIC Corporations (Amendment) Instrument 2019/240 (www.legislation.gov.au/Details/F2019L00541) — amends the exemption: • in para 4 of Class Order CO 14/443 (F2014/L00594) so that a trustee of a regulated superannuation fund is not required to make a product dashboard for a choice product publicly available until 1 July 2023.

• in para 7 of Class Order CO 13/1534 (F2013L02077) (ie the second exemption in the class order) so that a trustee of a regulated superannuation fund is not required to comply with the requirement to include a product dashboard for an investment option in a periodic statement given for a reporting period ending before 1 July 2023 (¶9-610, ¶9-620). • ASIC Corporations (Amendment) Instrument 2019/514 (www.legislation.gov.au/Details/F2019L00724) — amends ASIC Corporations (Generic Calculators) Instrument 2016/207 (Principal Instrument) to set out the assumed inflation rate superannuation and retirement calculators must use to calculate the present value of estimates in order to be eligible for relief under the Principal Instrument, and to defer commencement of the above requirements to 5 December 2019 (¶4-658). • ASIC Corporations (Amendment) Instrument 2019/599 (www.legislation.gov.au/Details/F2019L00854) — amends Class Order CO 14/1252 (which modifies certain aspects of CR Sch 10 and 10D relating to disclosure of fees and costs of superannuation products in PDSs and in periodic statements that must be given to product holders). The Treasury Laws Amendment (Protecting Your Superannuation Package) Regulations 2019 (the PYSP Regulations) made amendments to Sch 10 and 10D as part of the PYSP reforms effective from 1 July 2019. The PYSP Regulations amended those Schedules, as made and amended, and not as those Schedules appear as modified by the class order. The purpose of the amending instrument is to amend CO 15/1252 to ensure that the amendments made by the PYSP Regulations are given effect, and the modifications to Sch 10 and 10D made by the class order (not inconsistent with the PYSP Regulations) continue to operate as intended (see ¶4-320).

¶4-850 Regulatory documents ASIC regulatory documents are rationalised and redesigned under four groups — regulatory guides, consultation papers, reports and information sheets. These four categories of documents replace ASIC documents previously issued such as policy statements, practice notes, guides, guidelines or kits, and frequently asked questions (FAQs). The scope of the documents is as below. • Regulatory guides (RG) — RGs do not constitute legal advice. These documents give guidance to regulated entities. They explain when and how ASIC will exercise specific powers under CA and provide interpretation of the law, explain the principles underlying ASIC’s approach as well as give practical guidance (eg describing the steps of a process such as applying for a licence or examples of how regulated entities may decide to meet their obligations). Examples in RGs are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Some RGs may have previously been issued as: – policy statements (including interim, draft, proof and summary policy statements) – practice notes (including interim, draft, proof and summary practice notes) – guides or guidelines (including kits and model/sample documents) – information releases with policy frequently asked questions. • Consultation papers (CP) — these documents seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance (see ¶4-860). CP were formerly called policy proposal papers (PPPs), discussion papers, and consultative documents. • Reports (REP) — these documents describe ASIC compliance or relief activity or the results of a research project. • Information sheets (INFO) — these documents provide concise guidance on a specific process or

compliance issue or an overview of detailed guidance. Roadmap and superannuation page The gateway to the regulatory documents is www.asic.gov.au/asic/ASIC.NSF/byHeadline/New%20regulatory%20documents. ASIC provides an online roadmap (a subject matter index that links to regulatory documents and class orders) on both general and specific topics (see www.asic.gov.au/roadmap). ASIC has a dedicated superannuation webpage to assist the professionals and the general public understand ASIC’s role in superannuation and to provide information about the reforms and new requirements. This is in addition to the information available on ASIC’s MoneySmart website. RGs RGs do constitute legal advice. Entities who may be affected by CA should seek their own professional advice to find out how the Act and other applicable laws apply to them, as it is the entity’s responsibility to determine its obligations. The examples provided in RGs are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. RGs supersede former ASIC Policy Statements. Certain financial services and superannuation-related RGs are noted below, with cross-references to paragraphs where they are discussed in the Guide. • RG 1 to 3 — AFS Licensing Kit — this provides guidance on applying for and varying an AFS licence, preparing an application and preparing additional proofs (¶4-600). • RG 34 — Auditor’s reporting obligations to ASIC — this provides detailed guidelines on the auditor’s reporting obligations (¶4-550). • RG 36 — Licensing: financial product advice and dealing — this provides guidance for persons who provide financial product advice or deal in a financial product and the obligations applying to providers of financial services. • RG 38 — Hawking prohibitions — this contains guidance on the hawking restrictions (¶4-680). • RG 51 — Applications for relief — this provides guidance for applicants and their advisers who are applying to ASIC for relief from the Corporations Act 2001 or Superannuation Industry (Supervision) Act 1993, including applications for exemptions from and modifications to provisions of these Acts. • RG 65 — s 1013DA disclosure guidelines — this provides guidance on the disclosure of how labour standards or environmental, social or ethical considerations are taken into account in selecting, retaining or realising an investment (¶4-150). • RG 78 — Breach reporting by AFS licensees — this provides general guidance on an AFS licensee’s obligation under s 912D to report to ASIC certain breaches or likely breaches of the obligations (¶4660). • RG 84 — Super switching advice: Questions and answers — this answers some common questions from advisers about “super switching advice” focusing on “knowing your client” in a superannuation switching context, how the “reasonable basis for advice” obligation applies, and what advisers should tell their clients. • RG 90 — Example statement of advice (SOA) — scaled advice for a new client — this explains how and why ASIC has developed an example SOA, and explains why certain information has been included, or not included, in the example SOA. • RG 97 — Disclosing fees and costs in PDSs and periodic statements — This guide provides: – general guidance on disclosing fees and costs in PDSs

– specific guidance on disclosing fees and costs in PDSs for issuers of superannuation products and managed investment products – guidance on disclosing fees and costs in periodic statements (¶4-320). • RG 98 — ASIC’s powers to suspend, cancel and vary AFS licences and make banning orders — this guide is for AFS licensees, their representatives and advisers. It describes the administrative powers available to ASIC to enforce compliance with the Corporations Act 2001 (Corporations Act), including the financial services licensing provisions, by suspending, cancelling and varying AFS licences and making banning orders. It also indicates the matters ASIC generally takes into account when exercising these powers. • RG 104 — Licensing: Meeting the general obligations — this guide for AFS licensees and licence applicants describes what ASIC looks for when it assesses compliance with most of the general obligations under s 912A(1) (¶4-660). The general obligations not covered in this guide are covered in separate guides. • RG 105 — Licensing: organisational competence — this sets out guidance on the organisational competence obligation in s 912A(1)(e) which licence applicants must be able to demonstrate in their application that they can comply with. • RG 139 — Approval and oversight of external dispute resolution schemes — this guide explains ASIC's oversight of the two ASIC-approved external dispute resolution (EDR) schemes — the Financial Ombudsman Service (FOS) and the Credit and Investments Ombudsman (CIO). In the transition to the commencement of the new, single EDR scheme — the Australian Financial Complaints Authority (AFCA) — from 1 November 2018, complaints made to the FOS and CIO schemes will continue to be dealt with under the relevant scheme's terms of reference and rules that applied when the complaint was made. See below RG 267 Oversight of the Australian Financial Complaints Authority. • RG 146 — Licensing: Training of financial product advisers — this guide for advisers (AFS licensees and representatives who provide financial product advice to retail clients) and providers of training and education for advisers. Superannuation products (a Tier 1 product) are covered by RG 146 (para 146.38). If the representative of a trustee of a pooled superannuation trust provides a financial service to a trustee of a superannuation entity that has net assets of at least $10m or is an RSA provider (a wholesale client), the representative does not have to meet the training requirements. RG 146 sets out minimum training standards that apply to advisers and how advisers can meet these training standards. For example, any person advising on SMSFs must complete, as a minimum, the Tier 1 training requirements for superannuation, ie the adviser must have knowledge of all superannuation products, even when the adviser is advising only on one superannuation product (eg SMSFs) (RG 146.43). RG 146 applies to existing providers until the education, training, and ethical standards administered by the Financial Adviser Standards and Ethics Authority (FASEA: (www.fasea.gov.au/) in Pt 7.6 Div 8A apply. Existing providers must pass the exam by 1 January 2021 and attain the required educational qualifications by 1 January 2024; otherwise, they will no longer be able to provide personal advice to retail clients on relevant financial products. For new entrants to the industry seeking to become a relevant provider from 1 January 2019 onwards, RG 146 will not apply. ASIC will be updating its guidance on training for financial advisers who are not relevant providers (eg advisers who provide general advice or who provide advice about products other than relevant financial products). RG 146 will be reviewed and updated as part of this process (www.asic.gov.au/regulatory-resources/financial-services/professional-standards-for-financialadvisers-reforms) (see also RG 175 below).

• RG 148 — Platforms that are managed investment schemes — this explains ASIC’s objectives when regulating platforms, sets out the requirements for operating a platform and the disclosure obligations of operators of investor directed portfolio services (IDPS) and responsible entities of IDPS-like schemes (ie IDPS provided through a registered managed investment scheme), and provides guidance to people who provide financial product advice on platforms. • RG 165 — Licensing: Internal and external dispute resolution — this guide explains what AFS licensees, unlicensed product issuers, unlicensed secondary sellers, credit licensees, credit representatives, unlicensed carried over instrument lenders (unlicensed COI lenders), and securitisation bodies must do to have a dispute resolution system in place that meets ASIC’s requirements. The dispute resolution provisions of the Corporations Act 2001 set out the obligations to have a dispute resolution system available for retail clients by: (a) a licensee (s 912A(1)(g), (2)); (b) an unlicensed product issuer (s 1017G); and (c) an unlicensed secondary seller (s 1017G). This guide should be read in conjunction with Regulatory Guide RG 139 Approval and oversight of external dispute resolution schemes. • RG 166 — Licensing: Financial requirements — this guide sets out the financial requirements an entity has to meet as the holder of an AFS licence, which vary depending on the financial products and services offered by the entity. The guide does not apply to an entity regulated by the Australian Prudential Regulation Authority (APRA), in which case APRA, and not ASIC, imposes any requirements for financial resources that are to apply to the entity. However, the guide applies if only a part of the entity’s financial services business is an activity that is regulated by APRA. For example, the guide applies if an entity is a subsidiary or a related body corporate of a body regulated by APRA, unless the entity is itself regulated by APRA. It supersedes Policy Statement PS 166. • RG 167 — Licensing: Discretionary powers — this guide explains miscellaneous matters, including ASIC’s approach to applications for relief from compliance with Pt 7.6 to 7.8 (other than Pt 7.6 Div 4 and 8 and Pt 7.8 Div 8) of the Corporations Act 2001, ASIC’s powers to impose licence conditions to support the licensee obligations under CA, and ASIC’s policy on relief for generic financial calculators. • RG 168 — Disclosure: Product Disclosure Statements (and other disclosure obligations) — this guide contains broad policy guidance on preparing a PDS in compliance with the PDS requirements, good disclosure principles, and ASIC’s approach to monitoring the use of PDSs and enforcing the PDS requirements. • RG 169 — Disclosure: Discretionary powers — this guide explains ASIC’s approach to applications for relief from compliance with the hawking prohibition provisions of Pt 7.8 Div 8 and financial product disclosure provisions of Pt 7.9. • RG 175 — Licensing: Financial product advisers: conduct and disclosure — this guide considers how certain conduct and disclosure obligations in Pt 7.7 of the Corporations Act 2001 apply to the provision of financial product advice to retail clients, and sets out ASIC’s policy for administering the law on providing financial product advice, preparing and providing a Financial Services Guide (FSG), preparing and providing suitable personal advice, preparing and providing a Statement of Advice (SOA) and Statement of Additional Advice (SOAA) (¶4-675). • RG 181 — Licensing: Managing conflicts of interest — this guide sets out ASIC’s general approach to compliance with the statutory obligation to manage conflicts of interest in s 912A(1)(aa) (conflicts management obligation), guidance for licensees generally on controlling, avoiding and disclosing conflicts of interest (¶4-660). • RG 182 — Dollar disclosure — this guide sets out how ASIC will administer the dollar disclosure provisions. It covers the class order relief granted by ASIC, eg CO 03/237, CO 04/1430, CO 04/1431, CO 04/1432, CO 04/1433, CO 04/1434 and CO 04/1435 (¶4-300). • RG 183 — Approval of financial services sector codes of conduct — this guide provides guidance

about how and when ASIC will approve financial services sector codes of conduct under s 1101A, an overview of the role of codes and ASIC approval, and a code approval checklist (¶4-600). • RG 184 — Superannuation: Delivery of product disclosure for investment strategies — this guide helps trustees of superannuation entities to comply with the product disclosure requirements in s 1012IA (¶4-150). The superannuation arrangements to which s 1012IA and this policy may apply include products commonly known as superannuation master trusts, employer-sponsored superannuation funds and industry superannuation funds. • RG 200 — Advice to superannuation fund members — this guide gives guidance on the distinction between factual information, general advice and personal advice in the superannuation context, and provides examples of how advice may be given in a variety of circumstances (¶4-630) (withdrawn: see RG 244 below) (see also CP 164 and CP 183 in “Consultation papers” below). • RG 221 — Facilitating online financial services disclosures — this guide sets out ASIC’s interpretation of the online disclosure provisions under CA (¶4-150). • RG 229 — Superannuation forecasts — this guide gives guidance on the relief given to trustees of superannuation funds by CO 11/1227 “Relief for providers of retirement estimates” (¶4-800) from the licensing, conduct and disclosure requirements for general and personal advice when the trustees provide fund members with superannuation forecasts, both in the form of a statement or as a calculator (¶4-630). • RG 234 — Advertising financial products and advice services: Good practice guidance — this guide gives guidance for promoters of financial products and financial advice services, and publishers of advertising for these products and services. It contains good practice guidance to help promoters comply with their legal obligations not to make false or misleading statements or engage in misleading or deceptive conduct (¶4-500). • RG 243 — Registration of SMSF auditors — this guide explains how to apply for registration as an approved SMSF auditor, the types of registers of SMSF auditors maintained by ASIC and the transitional arrangements for the registration of existing approved auditors of SMSFs, and gives guidance on the continuing legal obligations of approved SMSF auditors (¶5-508). • RG 244 — Giving information, general advice and scaled advice — this guide provides guidance to Australian financial services (AFS) licensees, authorised representatives and advice providers who give information and advice to retail clients, and explains: (1) the differences between giving factual information, general advice and personal advice; and (2) how to meet the advice obligations in Ch 7 of the CA, including the best interests duty and related obligations, when giving “scaled” advice (ie personal advice that is limited in scope) (¶4-620 – ¶4-630). • RG 245 — Fee disclosure statements — this is a guide for persons who provide personal advice to retail clients, and their professional advisers (such as lawyers). This guide explains the fee disclosure statement (FDS) obligations in Div 3 of Pt 7.7A of the CA and the obligations they create for persons who provide personal advice to retail clients under an ongoing fee arrangement (¶4-620 – ¶4-630). • RG 246 — Conflicted remuneration — this guide provides guidance to Australian financial services (AFS) licensees and their representatives and other entities that need to comply with the provisions on conflicted remuneration and other banned remuneration in Div 4 and 5 of Pt 7.7A of the CA (¶4530). • RG 252 — Keeping superannuation websites up to date — this guide explains how remuneration and other information on superannuation websites may be kept up to date under s 29QB of SISA (¶9650). • RG 255 — Providing digital financial product advice to retail clients — digital advice (also known as robo-advice or automated advice) is the provision of automated financial product advice using

algorithms and technology and without the direct involvement of a human adviser. This guide brings together some of the issues that persons providing digital advice to retail clients need to consider when operating in Australia (from the licensing stage, ie obtaining an AFS licence to the actual provision of advice). • RG 256 — Client review and remediation conducted by advice licensees — this guide sets out guidance on review and remediation conducted by AFS licensees who provide personal advice to retail clients (advice licensees). The guidance should also be applied to review and remediation that is not related to personal advice to the extent relevant. • RG 259 Risk Management systems of responsible entities — Provides additional guidance to responsible entities on ASICs expectations on compliance with their obligation under the Corporations Act 2001 to maintain adequate risk management systems. This guidance is in addition to Regulatory Guide 104 Licensing: Meeting the general obligations which provides general guidance for all AFS licensees (including REs) about what ASIC expects in relation to their risk management obligations. REs that are registrable superannuation entity licensees are also subject to the APRA requirements on risk management (¶4-660). • RG 267 Oversight of the Australian Financial Complaints Authority — this guide sets out how ASIC will perform its oversight role in relation to the Australian Financial Complaints Authority (AFCA). It also includes the AFCA membership obligations of financial firms. This guide should be read in conjunction with RG 165 Licensing: Internal and external dispute resolution • RG 269 approval and oversight of compliance schemes for financial advisers — explains ASIC’s proposed process and criteria for determining whether to grant approval to a compliance scheme and ASIC’s proposed oversight of compliance schemes on an ongoing basis. Transition to AFCA The Corporations Act 2001 provides for the establishment of a single financial services external dispute resolution scheme under the operation of the Australian Financial Complaints Authority (AFCA) (Treasury Laws Amendment (Putting Consumers First — Establishment of the Australian Financial Complaints Authority) Act 2018 (AFCA Act)). AFCA has replaced the two existing ASIC-approved external dispute resolution (EDR) schemes — the Financial Ombudsman Service (FOS) and the Credit and Investments Ombudsman (CIO) — and the statutory entity Superannuation Complaints Tribunal (SCT) (AFCA is discussed in Chapter 13 of the Guide). There are a number of disclosure documents which are required to include details of a financial firm’s EDR scheme (eg PDSs, FSGs, periodic and exit statements, statements about superannuation interests under the Family Law Act). The AFCA Act has amended various legislative provisions to impose an obligation to refer to AFCA in the disclosure communications (ie affected entities must change the name and contact details of predecessor EDR schemes to those of AFCA). The transition to AFCA also triggers significant event notification requirements for issuers of financial products captured by s 1017B of the Corporations Act (see “ASIC transitional relief” below). ASIC Corporations (AFCA transition) Instrument 2018/447 (www.legislation.gov.au/Details/F2018L00677) and ASIC Credit (AFCA transition) Instrument 2018/448 (www.legislation.gov.au/Details/F2018L00678) gave financial firms transitional relief from the requirements to update disclosure documents and periodic statements with AFCA’s contact details until 1 July 2019. The relief from the significant event notification requirements is limited to events relating to the transition but is ongoing. The relief is conditional upon the consumer communications (including on websites) about how to complain and internal dispute resolution procedures being updated with AFCA’s details by 1 November 2018. Stronger Super reforms — information sheets ASIC’s Stronger Super gateway page provides the following:

• an overview of the Stronger Super and MySuper reforms • key dates and legislation • questions and answers to help superannuation funds and their administrators prepare for the implementation of various reforms • ASIC guidance — FAQs and information sheets, covering particular aspects of the Stronger Super reforms and ASIC’s expectations in relation to key aspects of the reforms (see www.asic.gov.au/regulatory-resources/superannuation-funds/stronger-super-reforms). ASIC recognises in a number of areas that Stronger Super will require trustees to undertake major work so that IT systems and compliance requirements are in place for the new regime. ASIC will adopt a facilitative compliance and measured approach where inadvertent breaches arise or systems changes are underway, provided industry participants are making reasonable efforts to comply. However, where deliberate and systemic breaches are detected, ASIC will take stronger regulatory action. ASIC information sheets (for completeness, all superannuation-related information sheets are listed below) (Note that Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.) • Information Sheet INFO 86 “How do the RSE and AFS licensing application processes work together?”, which provides guidance for public offer superannuation trustees who need an AFS licence to deal in financial products in their capacity as a trustee (such as interests in securities), and superannuation trustees who need an AFS licence to provide financial product advice (usually in relation to interests in their own funds or investment life products associated with those funds). • Information Sheet INFO 89 “What can I tell my employees about making a choice of superannuation fund?”, which addresses the issues employers face in communicating to employees about choice of superannuation fund (“super choice”) and provides general guidance about what they can say to their employees about super choice without breaking the law. • Information Sheet INFO 90 “Notifying members about superannuation transfers without consent”, which explains the requirements for disclosure to members where there is a “significant event” or “material change” regarding their superannuation fund, has also been updated. However, this does not reflect a substantive shift in policy by ASIC. • Information Sheet INFO 133 “Shorter PDS regime — Superannuation managed investment schemes and margin lending”, which explains generally how the shorter PDS requirements apply. See also Information Sheet INFO 155. • Information Sheet INFO 155 “Shorter PDS — Complying with requirements for superannuation products and simple managed investment schemes”, which provides concise and technical guidance on the following specific topics relating to the shorter PDS requirements: incorporation by reference; page length; font size; warnings; additional information; “white label” products; whether and how investment options may change; employer PDSs; employer-sponsored members; StrongerSuper; insurance information; accumulation and pension interests in the same superannuation fund; and the standard risk measure. • Information Sheet INFO 167 “Disclosure requirements for superannuation trustees: s 29QC”, which covers the requirements under s 29QC of the SISA that require a superannuation trustee to use the same calculation when providing information to a person or on a website as it does when giving the same or equivalent information to APRA under a reporting standard. Broadly, under s 29QC, if a registrable superannuation entity (RSE) licensee provided information that is calculated in a particular way to APRA under a reporting standard made under the FSCDA,

and the licensee gives the same or equivalent information to another person, the licensee must ensure that this information is calculated in the same way as the information given to APRA (¶9-660). This significant change to the disclosure requirements for superannuation trustees is designed to improve the comparability of superannuation products by requiring consistency in how information is calculated. In practice, this means the following: – information included in the product dashboard must be calculated consistent with APRA requirements in its reporting standards (eg for returns or risk information) – an RSE licensee can only use information in advertising or other disclosure material, such as information on investment returns, if it aligns with the calculation methodology that APRA prescribes for reporting this data. This also applies to information the licensee gives to third parties (eg ratings agencies) – an RSE licensee does not have to use exactly the same information in your disclosure material that you gave to APRA. For example, advertising may contain more up-to-date information on returns. However, this information must be calculated using the same methodology used when providing the information to APRA – if APRA requires information to be reported in different ways, an RSE licensee may use any of these methods in your disclosure material in the absence of further guidance. For example, if APRA requires a licensee to provide both gross and net information on investment returns, the RSE licensee can use one or both of these figures in information to third parties or in your advertising. However, any methodology used must be consistent with APRA’s methodologies for reporting this data, and – an RSE licensee need to be aware that the requirement to align its disclosure material with how it reports data to APRA may extend beyond matters such as performance information. If APRA requires the RSE licensee to report data about asset allocation (including defining “cash” or any other asset class), the RSE licensee will need to consider whether changes should be made to its disclosure to align with these definitions. If the disclosure requirements and reporting standards conflict and inconsistencies arise, APRA and ASIC may use their discretionary powers under the Corporations Act or the SISA to address issues arising from these inconsistencies. • Information Sheet INFO 167 “Disclosure requirements for superannuation trustees: s 29QC”, which gives guidance about particular disclosure requirements for superannuation trustees. • Information Sheet INFO 168 “Giving and collectively charging for intra-fund advice”, which explains: – what intra-fund advice is – the restrictions on collectively charging for advice – MySuper and conflicted remuneration – how the Future of Financial Advice (FOFA) reforms and other advice laws apply to intra-fund advice, and – what records must be kept. • Information Sheet INFO 169 “Notifying members about superannuation transfers: Accrued default amounts (MySuper transition)”, which addresses the requirements under s 29SAA(3) of the SISA and SIS Regulations where a superannuation trustee must provide a notice to a fund member with an “accrued default amount” regarding an intended transfer or attribution to a MySuper product in the same fund, or to another fund within specific timeframes.

• Information Sheet INFO 170 “MySuper product dashboard requirements for superannuation trustees”, which gives guidance to superannuation trustees and other persons in relation to the product dashboard requirements in s 1017BA of the Corporations Act 2001 for MySuper products. • Information Sheet INFO 182 “Super switching advice — complying with your obligations”, which provides general information and compliance tips for financial advisers who provide superannuation switching advice, as listed below. It also provides specific examples of inadequate conduct in some of those areas of compliance issues. – What is “super switching advice”? – How do I ensure my super switching advice satisfies the best interests duty? – What should the SOA say about the advice and the basis for the advice? – What are the practical factors I might have to consider before recommending an SMSF fund (SMSF)? Can I use disclaimers? Where do I get information about the “from” fund? Where can I get more information? • Information Sheet INFO 197 “Fees and costs disclosure requirements for superannuation trustees”, which gives guidance to superannuation trustees and other persons in relation to the fee and cost disclosure requirements in Sch 10 and 10D to the Corporations Regulations 2001. It explains: – what are the fees and costs disclosure requirements – what definitions have been introduced or amended under Sch 10 – when the new disclosure requirements start – the approach ASIC will take to the new requirements – the PDS disclosure required for each MySuper product and Choice product – the disclosure required for indirect costs – how fee disclosure should be treated from a tax perspective – how performance fees should be disclosed – how advice fees should be disclosed (see further ¶4-320). • Information Sheet INFO 197 “AFS licensing requirements for accountants who provide SMSF services”, which provides guidance for accountants who provide services relating to SMSFs (SMSF services). INFO 197 covers: – how the AFS licensing regime applies to SMSF services provided by accountants, and how the law applying to accountants has changed from 1 July 2016 – the various SMSF services accountants might provide, and whether a licensing exemption applies to them or whether accountants must be covered by an AFS licence for that service. • Information Sheet INFO 205 “Advice on self managed superannuation funds: Disclosure of risks” explains the relevant conduct and disclosure obligations, the risks that should be considered by the adviser and disclosed to the client when providing personal advice about SMSFs and the additional information that must be included in a Statement of Advice. • Information Sheet INFO 206 “Advice on self managed superannuation funds: Disclosure of costs” explains the relevant conduct and disclosure obligations, the need for advice on the costeffectiveness of an SMSF — in particular, if the starting balance is below $200,000, the need for advice on the costs of setting up, operating and winding up an SMSF, and the need for advice on the

continued suitability of an SMSF for the client. • Information sheet INFO 216 “AFS licensing requirements for accountants who provide SMSF services” is for accountants who provide services relating to SMSFs (www.asic.gov.au/for-financeprofessionals/afs-licensees/applying-for-and-managing-an-afs-licence/limited-financial-services/afslicensing-requirements-for-accountants-who-provide-smsf-services see further ¶5-570) • Information sheet INFO 227 “What can limited AFS licensees do”, which explains all the activities that limited AFS licensees can be authorised to carry out. Some limited AFS licensees may only be authorised to carry out a subset of these activities (www.asic.gov.au/for-finance-professionals/afslicensees/limited-afs-licensees/what-can-limited-afs-licensees-do). • Information Sheet INFO 229 “Limited AFS licensees: Complying with your licensing obligations”, which sets out the licensing obligations that apply to a limited AFS licensee under the headings — General licensing obligations, Stay within scope of your limited AFS licence authorisations, Training, education and ethics, Financial advisers register, Dispute resolution, Compensation and insurance arrangements, Breach reporting, Financial requirements, Ongoing financial reporting, Advertising financial services (¶4-657).

¶4-860 ASIC consultation papers and reports This paragraph sets out the main consultation papers and reports released by ASIC which directly or indirectly affect superannuation product disclosure, licensing and conduct rules of the Corporations Act 2001. Following the consultation process, ASIC may issue a report and/or make class orders (legislative instruments, see ¶4-800) or issue Regulatory Guides (see ¶4-850) as a consequence. The government has also established an ASIC Enforcement Review Taskforce to undertake reviews into a wide range of measures — see treasury.gov.au/review/asic-enforcement-review and ¶17-600. Consultation Paper (CP) ASIC CPs are available at www.asic.gov.au/regulatory-resources/find-a-document/consultation-papers. Recent CPs relevant to superannuation include the following. CP 313 Product intervention power Consultation period: 26 June to 7 August 2019 Available at asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-313-productintervention-power/. This paper sets out ASIC’s proposals for guidance on exercising the product intervention power in Pt 7.9A of the Corporations Act and Pt 6-7A of the National Credit Act (see ¶4-720). CP 308 Review of RG 97 Disclosing fees and costs in PDSs and periodic statements Consultation closed on 2 April 2019 Available at: www.asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-308-reviewof-rg-97-disclosing-fees-and-costs-in-pdss-and-periodic-statements/. CP 308 sets out ASIC’s response to the recommendations in Report 581 Review of ASIC Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements (REP 581). CP 298 Oversight of the Australian Financial Complaints Authority: Update to RG 139 Consultation closed on 6 April 2018 Available at: www.asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-298oversight-of-the-australian-financial-complaints-authority-update-to-rg-139/. CP298 sets out ASIC’s proposals for two aspects of its oversight role regarding the Australian Financial Complaints Authority (AFCA). It also seeks feedback on whether financial firms need any transitional

relief from external dispute resolution disclosure obligations in the lead up to commencement of AFCA. Attached to this paper is a draft updated version of Regulatory Guide 139 Oversight of the Australian Financial Complaints Authority (draft RG 139). ASIC reports Summarised below are recent ASIC reports that may be relevant to superannuation products and their issuers. A full list of ASIC reports is available at www.asic.gov.au/regulatory-resources/find-a-document/? filter=Report. REP 591 — Insurance in superannuation This report sets out the findings of ASIC’s review of the provision of insurance cover through superannuation. ASIC’s review of 47 superannuation trustees focused on: • insurance claims and complaints handling • disclosures about insurance (including about cover ceasing) • insurer rebates paid to trustees, and • whether members were defaulted into demographic categories that resulted in higher premiums. REP 581 — Review of ASIC Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements This external ASIC-commissioned report prepared by Darren McShane covers the external expert review of Regulatory Guide 97, Disclosing fees and costs in PDSs and periodic statements (RG 97). The report concludes that changes to the disclosure regime would be advantageous and includes discussion of: • the way fee and cost information is presented to consumers, and • some of the information to be included in this disclosure (see further ¶4-320). REP 577 — Response to submissions on CP 298 Oversight of the Australian Financial Complaints Authority This report highlights the key issues that arose out of the submissions received on Consultation Paper 298 Oversight of the Australian Financial Complaints Authority: Update to RG 139 (CP 298) and details ASIC’s responses to those issues. REP 576 — Member experiences with self-managed superannuation funds This report gives a comprehensive overview of research commissioned by ASIC into the experiences Australians have when setting up and running SMSFs. REP 575 — SMSFs: Improving the quality of advice and member experiences In conjunction with ASIC’s commissioned research project to examine member experiences in setting up and running an SMSF (member research) (see REP 576 above), ASIC reviewed 250 files on whether advice providers complied with the law when providing personal advice to retail clients to set up an SMSF (advice review). This report summarises the findings of the advice review and also provides: • a comprehensive overview of SMSF market characteristics, and • practical tips that advice providers can use to improve the quality of SMSF advice they provide to clients. REP 551 — Response to submissions on CP 281 Financial Services Panel

This report highlights the key issues that arose out of the submissions received on Consultation Paper 281 Financial Services Panel and details ASIC’s response in the following areas: • Establishment of the Financial Services Panel — Purpose of the Panel • Matters the Financial Services Panel would consider — Matters to be referred to the Panel and other administrative powers • Composition of the Financial Services Panel • Other matters – Managing conflicts of interest – Panel processes and procedures – Reviewing the Panel’s effectiveness. REP 529 — Member experience of superannuation This report gives feedback on some key disclosures and practices in the superannuation industry based on the findings from recent ASIC projects and reviews, with a view to enhancing members’ experience of, and engagement with, their superannuation. REP 515 — Review of how large institutions oversee their advisers This report sets out the findings of ASIC’s review of how Australia’s largest financial advice firms have dealt with past poor advice and non-compliant advisers, including how these firms have dealt with affected customers. The review, which forms part of ASIC’s broader Wealth Management Project, was focussed on the conduct of the financial advice arms of AMP, ANZ, CBA, NAB and Westpac. It arose out of serious concerns about past adviser misconduct, and had the broad objective of lifting standards in major financial advice providers. ASIC has identified a number of areas of concern where further improvements need to be made, including: • failure to notify ASIC about serious non-compliance concerns regarding adviser conduct • significant delays between the institution first becoming aware of the misconduct and reporting it to ASIC • inadequate background and reference-checking processes, and • inadequate audit processes to assess whether the advice complied with the “best interest” duty and other obligations. Appendices to REP 515 set out checklists for all advice licensees and compliance consultants to consider when: • conducting background and reference checks before appointing a new adviser (Appendix 2) • auditing advisers to assess their compliance with the best interests duty and related obligations when providing personal advice (Appendix 3), and • developing and implementing Key Risk Indicators to identify high-risk advisers (Appendix 4). REP 457 — Response to submissions on draft Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements This report highlights the key issues that arose out of the submissions received on the draft version of Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements and the proposed

amendments to Class Order CO 14/1252 Technical modifications to Schedule 10 of the Corporations Regulations, and details ASIC’s responses to those issues (¶4-320). Other ASIC releases ASIC media releases may be found at asic.gov.au/about-asic/media-centre/find-a-media-release.

ASIC Levy ¶4-900 ASIC’s regulatory cost recovery levy From 1 July 2017, entities that are regulated by ASIC are required under an industry funding model to pay a levy to recover ASIC’s regulatory costs in each financial year. The levy is calculated based on annual returns submitted by the entities to ASIC and is payable in the following financial year once ASIC has issued leviable entities with a notice setting out their levy liability (ASIC Supervisory Cost Recovery Levy Act 2017, ASIC Supervisory Cost Recovery Levy (Collection) Act 2017). The industry funding model replaced the previous market supervision and competition cost recovery regime under the Australian Securities and Investments Commission Act 2001, Corporations Act 2001, Corporations (Fees) Act 2001 and National Consumer Credit Protection Act 2009. The total levy paid by all leviable entities under the funding model should not exceed ASIC’s total regulatory costs for a particular financial year. Regulations provide the methods and formulas on how ASIC’s regulatory costs are to be apportioned across the various sectors and sub-sectors that ASIC regulates. More information on the industry funding model is available in the Cost Recovery Implementation Statement issued by ASIC each year (see below). Regulations prescribing supervisory cost recovery levy The ASIC Supervisory Cost Recovery Levy Regulations 2017 (the Levy Regulations) apply either a basic or a graduated levy to entities in each industry subsector regulated by ASIC. The type of levy and the formula for calculating the amount of levy payable is different for each industry subsector. The Levy Regulations also establish the criteria for determining the subsector(s) an entity forms part of, sets out the formulas and metrics to be used for calculating the amount of levy payable for entities in each industry subsector and prescribes certain amounts that should not be part of ASIC’s regulatory costs (eg SMSF auditors’ regulatory costs, see below). The ASIC Supervisory Cost Recovery Levy Amendment (Enhancements) Regulations 2018: (www.legislation.gov.au/Details/F2018L00963) amended the Levy Regulations to, among other things, clarify certain exemptions from levy, remove possible double counting of assets for the purpose of calculating the levy amount payable by entities that fall within both the responsible entities and wholesale trustees subsectors, and exclude employer-sponsored receivables from the value of assets in a registrable superannuation entity for the purposes of calculating the amount of levy payable by superannuation trustees. Cost Recovery Implementation Statement (CRIS) for 2018/19 ASIC is required to publish a Cost Recovery Implementation Statement (CRIS) each year under the Australian Government Charging Framework (Australian Government Cost Recovery Guidelines). The CRIS outlines ASIC's forecast regulatory costs and activities by sub-sector for each financial year and provides details on how ASIC allocated its costs in the previous year. The CRIS will also provide industry with indicative levies for the following year. ASIC has released CRIS: ASIC industry funding model (2018–19). This CRIS is divided into three parts: • Part 1 provides information about how the costs of ASIC’s regulatory activities in 2018/19 will be recovered from each industry sector via cost recovery levies under the industry funding model. ASIC will issue invoices for the 2018/19 financial year in January 2020, after the business activity has occurred and ASIC’s regulatory costs are known.

• Part 2 provides information about how ASIC will recover its user-initiated and transaction-based regulatory costs via cost recovery fees in 2018/19. It includes information about fees for service and the methodology for calculating the fees. • Part 3 covers the stakeholder engagement undertaken, how ASIC measures its financial and nonfinancial performance, key events and estimated dates, and the CRIS approval and change register (download.asic.gov.au/media/5169042/cris-asic-industry-funding-model-2018-19-published-27-june2019.pdf). Superannuation trustees in the CRIS The investment management, superannuation and related services sector in the CRIS consists of AFS licensees with authorisations to under certain specified businesses (other entities). Entities that are registrable superannuation entity (RSE) licensees (within the meaning of the SISA) will, among the other entities, fall within the investment management, superannuation and related services sector as “superannuation trustees”. Minimum levy and graduated levy Superannuation trustees must pay a levy calculated in accordance with the graduated levy formula. All superannuation trustees will pay a minimum levy of $18,000. Where the total value of assets in all RSEs operated by the trustee exceeds $250m, that trustee will have to pay a graduated levy amount. The graduated levy amount is equal to the value of assets in all RSEs operated by the trustee as a proportion of the total value of assets in all entities in the sub-sector above the $250m threshold. To avoid double counting of assets, the total value of assets will not include any assets that are an interest in another RSE operated by the trustee. Employer-sponsored receivables are also excluded from total assets for the purposes of calculating the levy. SMSF auditors The ASIC Supervisory Cost Recovery Levy Regulations 2017 (Cost Recovery Levy Regulations) prescribe that certain amounts are not part of ASIC’s regulatory costs (see above) and therefore will not be recovered under the industry funding regime, including the costs of regulating SMSF auditors. Note, however, that the SISA (as amended by the Superannuation Industry (Supervision) Amendment (ASIC Fees) Act 2018) allows ASIC to charge fees for applications to vary or revoke the conditions or cancel the registration of an approved SMSF auditor. Also, the Superannuation Auditor Registration Imposition Act 2012 sets a limit on the maximum amount of the fee that can be prescribed in the regulations so that ASIC can recover the costs incurred when providing regulatory services to SMSF auditors (¶5-509).

5 SELF MANAGED SUPERANNUATION FUNDS SELF MANAGED SUPERANNUATION The SMSF regime

¶5-000

Why self manage a superannuation fund?

¶5-050

REGULATION OF SMSFs Prudential supervision under the SISA

¶5-100

QUALIFYING AS AN SMSF Basic conditions for an SMSF

¶5-200

All members are trustees

¶5-220

Remuneration of trustees

¶5-230

ESTABLISHING AN SMSF Basic requirements — starting an SMSF

¶5-300

MANAGING AN SMSF Duties of SMSF trustees — covenants

¶5-400

Sole purpose test

¶5-410

Accepting contributions

¶5-420

Investment of funds

¶5-430

Investment objectives and strategy

¶5-432

Keeping SMSF money and assets separate

¶5-433

Investing on an arm’s length basis

¶5-435

Investing in collectables and personal use assets

¶5-437

Loans or financial assistance to members or relatives ¶5-440 Restrictions on SMSF borrowings

¶5-445

LRBAs — safe harbours

¶5-448

Acquiring assets from a related party ¶5-450 Investing in in-house assets Investing in derivatives and

¶5-455

charging fund assets

¶5-458

Payment of benefits

¶5-460

Funds providing pensions

¶5-470

Diverting personal services income to SMSFs

¶5-480

SMSF ADMINISTRATION AND AUDIT Administrative duties

¶5-500

Registration as approved SMSF auditor

¶5-508

Approved SMSF auditors — Fees and ASIC guidelines and tools

¶5-509

SMSF audit, fund records, returns and reports

¶5-510

Auditor’s contravention report

¶5-530

Monitoring compliance by the SMSFs

¶5-540

Administrative directions and penalties for certain contraventions

¶5-550

Accountants providing financial services to SMSFs — ASIC guidelines ¶5-570 DUTIES AND OBLIGATIONS — CHECKLISTS Checklist of trustee duties and obligations

¶5-600

Fund establishment — trust deed and trustees

¶5-610

Operating standards

¶5-620

Fund administration

¶5-630

Investment rules

¶5-640

Small APRA funds and exemptions

¶5-650

Applying to the ATO for SMSF specific advice

¶5-700

Self Managed Superannuation ¶5-000 The SMSF regime An SMSF is a superannuation fund with one to four members where the members actively participate in the fund’s management. The members must also be the individual trustees or directors of the corporate trustee of the fund and they have full responsibility for the fund’s management, investment and general

administration functions, usually with the assistance of external service providers (¶5-050). SMSFs are also sometimes referred to as DIY funds, mum and dad funds or family funds. The SMSF concept replaced the former “excluded superannuation fund” concept for small funds with fewer than five members under the SISA. Apart from the strict membership and trusteeship rules contained in the definition of SMSF (¶5-200), SMSFs are essentially regulated superannuation funds with fewer than five members which are regulated by the ATO. All other regulated funds, including non-SMSFs with fewer than five members (called “small APRA funds”) are regulated by APRA. However, SMSFs and small APRA funds are subject to less onerous prudential requirements than other regulated funds (¶5100, ¶5-650). To qualify as a complying superannuation fund for tax purposes, an SMSF has to comply with broadly similar conditions in the SISA as other regulated funds (see Chapter 2). If it satisfies the relevant SISA conditions, it is taxed concessionally as a complying superannuation fund under ITAA97. If not, it is also taxed under ITAA97 but as a non-complying superannuation fund and it does not enjoy any of the tax concession that are available to complying funds as discussed in Chapter 7. This chapter discusses the particular characteristics of SMSFs and the main prudential requirements which apply to them under the SISA and related legislation. As many prudential requirements are common to SMSFs and regulated superannuation funds that are not SMSFs, cross-references are provided throughout to Chapters 3 and 4 where the requirements are discussed in detail. The chapter does not deal with the conditions for qualifying as a complying superannuation fund (this is discussed in Chapter 2) or the taxation of SMSFs (this is discussed in Chapter 7). Further SMSF commentary The Wolters Kluwer online product Australian Practical Guide to SMSFs provides additional commentary and coverage of the SMSF regime. [SLP ¶6-100]

¶5-050 Why self manage a superannuation fund? SMSFs may be contrasted with managed funds, such as employer-sponsored funds, industry funds or personal superannuation funds offered under a master trust or master fund arrangement. A managed fund is required to have the trustee structure prescribed by the SISA (eg an RSE licensee, comprising a group of individual trustees or a corporate trustee, with equal representation of employer representatives and member-elected representatives) or an alternative agreed representation structure. The trustee of the managed fund is primarily responsible for all aspects of the fund’s management, operation and administration, with only minimal involvement of the members. On the other hand, the members in an SMSF must also be the trustees and are fully responsible for the management of the fund in all respects. Traditionally, certain categories of taxpayers have shown great interest in establishing SMSFs. They are the self-employed (professionals or people running a small business) who wish to have their own costeffective superannuation vehicles, taxpayers who are high income earners and have a large net worth, and retirees who wish to manage their own pension funds. The prospect of self managing a fund is also an option for many employees. Many employees want to have a greater say in the investment of their superannuation savings in line with their expectations and needs. Others may be dissatisfied with the investment performance of their existing employer-sponsored or public offer managed funds, or with the level of charges imposed by these funds. The employee choice of fund regime under SGA Act (¶12-040) has also encouraged many employees to have their own SMSFs. What are the attractions? An SMSF is perceived to have certain attractions in that the members have greater control, flexibility and choice in the operation of the fund, and costs can be minimised, with the result that the funds are more efficiently (and profitably) managed. In an appropriate case, there is little doubt that an SMSF can be a tax-effective option for retirement planning and savings purposes (eg to accumulate savings in a concessionally taxed vehicle and/or to provide pensions). However, managing a superannuation fund demands a certain level of expertise or

knowledge in many technical areas, and this will usually also require professional assistance from one or more superannuation service providers. It is therefore important for a person contemplating the establishment of an SMSF to give careful consideration at the outset to the costs, workload and responsibilities which are associated with self managing a superannuation fund. Some of these issues are considered below. Service providers and costs The life cycle of a superannuation fund may be divided into three stages, namely: (1) establishment of the fund (2) ongoing administration and operation of the fund, particularly receiving contributions, investment of fund assets and payment of benefits (3) termination or winding up of the fund. At each stage, professional superannuation service providers are usually involved, whether in a particular or one-off aspect (eg preparation of the trust deed, an investment plan), or in continuing operations of the fund (eg accounting, administration and fund investments, preparation of accounts or tax returns, audit and other compliance work), or in the winding-up compliance processes. Service providers may thus include lawyers, accountants, auditors, investment managers and consultants, actuaries, sharebrokers, and fund administrators or managers. The involvement of service providers inevitably means that costs are incurred in a superannuation fund’s operations, whether it be a managed fund or SMSF. A fund with a larger membership (eg a managed fund) has greater opportunities for cost distribution and economies of scale than one with a small membership. However, it is also common to find that managed funds impose other ongoing and administration costs on members, such as annual management fees, entry and exit fees, and fees for switching between various investment options, which may be minimal or absent in the case of SMSFs. Knowledge of superannuation business A superannuation fund is a special kind of trust, and the trustees of the fund must be aware of their fiduciary obligations under the trust. Some trust law duties are already codified as covenants in the SISA. These include acting honestly in all matters, keeping trust assets separate and acting in the best interests of members (¶5-400). Trustees generally derive their powers under the trust deed. Additional powers are conferred and additional duties are imposed upon them under the SISA and related legislation or state trustee laws. The trustees must ensure that the superannuation fund is always operated strictly in accordance with the trust deed and statutory requirements. Importantly, people intending to be SMSF trustees are required to provide a declaration that they understand their duties as a trustee (¶5-300). A failure to comply with the requirements may result in severe penalties being imposed or an action for breach of trust. For an SMSF to be compliant and managed efficiently, the members of an SMSF must possess certain investment skills and expertise as well as be aware of the SISA prudential requirements relating to investments so that they can be actively involved in the fund’s investment functions. Among other things, the SISA requires a fund to be maintained solely for one or more of the core purposes and ancillary purposes (the sole purpose test: ¶5-410), have a properly formulated investment strategy and comply with strict investment rules (¶5-430). These prerequisites, together with the diversity of investment products in the marketplace and the complexities of their operation (eg the use of derivatives, instalment warrants and global investments), present a formidable task for the average superannuation fund trustee or member. In practice, most funds find it necessary to engage specialised investment managers and tactical asset consultants from time to time for their investment activities. Such an expense for professional advice may not be viable or cost-efficient for SMSFs, unless the fund has substantial assets. Control, flexibility and choice It has been suggested that SMSF members (as trustees) are better placed to choose or control the type of fund investments made for the members’ own benefit, thus providing for greater flexibility and efficiency in the fund’s investment decision-making process. These arguments simply raise the question of whether

the professional institutional fund manager in a managed fund or the member of an SMSF with appropriate specialist assistance is better able to optimise the fund’s investments given the fund’s particular objectives and investment strategies. This question is totally subjective and there can be no correct answer applicable to all funds as it will depend on the abilities of the individual member trustee or fund manager concerned in each case. Control, flexibility and choice of investments have always been available to superannuation fund members, though in a limited way. This is because, under the SISA, superannuation funds may offer their members a choice of investment options (ie member-investment choice on a range of investment strategies: ¶3-400). A choice of investment strategies allows members to have their superannuation savings invested according to their own particular needs. For example, a member nearing retirement age may opt for a more conservative capital guaranteed or balanced growth investment strategy, while a younger member may prefer a different strategy which will allow investments greater potential for growth commensurate with the attendant risks. Issues to consider when considering the SMSF option Four key questions will need to be addressed when deciding whether to commence an SMSF. (1) Is the SMSF strictly for retirement purposes? (2) Does the taxpayer have the time and skills? (3) Will the benefits be worth the costs? (4) How will switching to an SMSF affect the taxpayer’s current superannuation? The first question emphasises the fact that the assets and money in a superannuation fund are strictly for retirement benefits only, and are not, for example, to run a business or to benefit the taxpayer or anyone else outside the fund. For instance, the personal use of fund money or assets, or the provision of current benefits to members, would almost certainly not be approved purposes. Taxpayers must also avoid illegal schemes to gain access to benefits before they are due to be released. The second question deals with the time and skills required to manage an SMSF. The trustees’ duties include preparing an investment strategy, selecting and managing investments, record-keeping, reporting and preparing tax and regulatory returns. Consultation with professionals and advisers adds to the cost of managing the SMSF and even if external service providers are used, the taxpayer remains legally responsible. On the third question, the general view is that an SMSF must have at least $200,000 in assets as it may otherwise not be worthwhile in view of the fund’s set-up and annual running costs (eg audit and regular reporting). The last question raises the issue that changing funds means changing benefits, services and fees, and taxpayers are advised to compare the costs and benefits involved with professional help from a licensed financial advisory business. For other aspects of comparison of the tax-effectiveness of maintaining superannuation in a managed fund or an SMSF, see ¶16-400. Regulators’ guides and information The following ATO and ASIC documents provide helpful information for those considering setting up an SMSF: • ATO’s “SMSF Checklists” (www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSFresources/SMSF-checklists/) — covering setting up, investment rules, reporting and other SMSF compliance obligation, paying income streams, and winding-up (see also www.ato.gov.au/Mediacentre/Speeches/Other/Fledgling-SMSFs---the-first-18-months-of-an-SMSF-s-life/) • ATO’s factsheet Thinking about self managed super (www.ato.gov.au/Super/Self-managed-superfunds/Thinking-about-self-managed-super) — this is designed to make it easier for professionals and their clients to find answers to SMSF issues, by offering a range of information on keys aspects of

SMSF operations from start to winding up, the appointment of SMSF service providers like auditors, accountants and administrators, including comparing SMSFs with other superannuation funds and the costs, time and skills involved in SMSF management • SMSF checklists (www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSFchecklists/) — covering topics such as setting up a fund, contribution types, investment restrictions, benefit types, pensions and income streams, and winding up • ATO’s Governance guide (www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/Taxgovernance/Retirement-planning/Self-managed-super-funds) — which examines how having effective governance practices in place can help individuals to manage their obligations as an SMSF trustee and to avoid exposure to compliance action and penalties for regulatory breaches • ATO’s SMSF quarterly statistical report — September 2018 (www.ato.gov.au/Super/Self-managedsuper-funds/In-detail/Statistics/Quarterly-reports/Self-managed-super-fund-quarterly-statistical-report--September-2018) — which provides useful information on SMSF population and asset allocation tables, and analysis tables and member demographics • ASIC’s Self-managed super fund (SMSF) — Do it yourself super (www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super-fund-smsf) — which assists in working out if managing an SMSF is the best and right options for an individual and which covers general issues, such as how SMSFs work, the questions to ask before starting an SMSF, investing in SMSFs, scams targeting people with SMSFs, and miscellaneous issues like bankruptcy and SMSF courses and further education • ASIC’s infographic Self-managed super isn’t right for everyone (www.asic.gov.au/media/4780951/rep576-infographic.pdf). ATO SMSF bulletins and alerts The ATO’s legal database contains SMSF Regulator’s Bulletins (SMSFRBs) which outline concerns about new and emerging arrangements that pose potential risks to SMSF trustees and their members from a superannuation regulatory and/or income tax perspective (eg SMSFRB 2018/1 on the use of reserves by SMSFs). Also, under the “Other ATO Documents” section in the legal database, the ATO “Super CRT Alerts” provide news for the superannuation industry on topical developments in compliance and administration issues, eg CRT Alert 006/2018 (MAAS Foundation Data Handbook), CRT Alert 002/2019 (Excess contributions and Division 293 Release Authority Statements issues).

Regulation of SMSFs ¶5-100 Prudential supervision under the SISA An SMSF is subject to prudential supervision under the SISA like any other regulated superannuation fund. Some of the areas of difference are noted below. The Commissioner of Taxation is the principal Regulator of SMSFs, rather than APRA which is the principal Regulator of superannuation entities that are not SMSFs. APRA and ASIC, however, also have a regulatory role over SMSFs to the extent that the SISA and other regulatory Acts they administer contain provisions that are common to all regulated superannuation funds (¶3-000). The ATO (from 1 July 2018) is responsible for administration of the early release of a member’s benefits on compassionate grounds by all superannuation entities (not just SMSFs) (¶3-280). This chapter covers the main aspects of prudential regulation of SMSFs under the SIS legislation in the following areas: • establishing an SMSF (¶5-300)

• managing the operations of the fund (¶5-400) • managing the investments of the fund (¶5-430) • paying benefits and providing pensions (¶5-470) • administrative duties of trustees (¶5-500). References are made throughout to Chapter 3, where a detailed discussion of the SIS prudential requirements for all regulated superannuation funds may be found, and to Chapter 4 where the product disclosure regulatory regime for financial products under the Corporations Act 2001 (which also applies to SMSFs) is discussed. An SMSF must come within the definition of “self managed superannuation fund” in the SISA which effectively imposes specific rules on SMSFs about their membership and trustee structure (see ¶5-200). Generally, SMSFs are subject to less onerous regulation than non-SMSF regulated superannuation funds under the SIS prudential regime. This is because SMSF members, who must also be trustees of the SMSF and have a relationship with one another (see ¶5-220), are considered to be able to protect their own interests. Some of the other main differences are noted below. Compliance test to determine complying SMSF status Apart from having the Commissioner (rather than APRA) as its principal regulator, SMSFs are generally required to comply with broadly similar conditions as other regulated superannuation funds so as to qualify as a complying superannuation fund for tax purposes and be eligible for concessional tax treatment under ITAA97 Div 295. One significant regulatory difference between SMSFs and non-SMSFs in this regard is that if the trustees of an SMSF breach one or more “regulatory provision” during a financial year, a “compliance test” will apply to determine whether the fund is treated as a complying superannuation fund instead of the “culpability test” which applies to other regulated funds (¶2-140). Levy payable by SMSFs The supervisory levy payable by an SMSF each year is considerably less than that for non-SMSFs. The SMSF levy is a flat amount of $259 for 2013/14 and later years (for the levy amount in earlier years and the levy payment arrangements, see ¶18-650), in contrast to the levy for other regulated superannuation funds which is calculated based on a percentage of the fund’s asset base. SMSFs are not covered by the financial assistance scheme in SISA Pt 23 which enables regulated superannuation funds that have suffered loss as a result of fraudulent conduct or theft to claim financial assistance under the SISA. This means that SMSFs are neither eligible for financial assistance under the SISA nor liable to pay financial assistance funding levy (¶3-930). Licensing and registration The trustee of an SMSF is not required to be registered or licensed by APRA under the SISA (¶3-480). Neither is the trustee of an SMSF required to hold an Australian financial services licence (AFSL) under the Corporations Act 2001 (¶4-650). A person who wishes to be an approved SMSF auditor must be registered by ASIC in accordance with SISA (¶5-508). Accountants who provide SMSFs with advice may be exempted from the AFSL requirements in certain cases (¶4-655).

Qualifying as an SMSF ¶5-200 Basic conditions for an SMSF To qualify as an SMSF, an entity must be a “superannuation fund” (¶2-120) and come within the definition of “self managed superannuation fund” in SISA s 17A as discussed below. Funds with two to four members

A superannuation fund (other than a single member fund) is an SMSF if it satisfies the following basic conditions: • the fund has two to four members • if the trustees of the fund are individuals, each individual trustee is a member • if the trustee of the fund is a body corporate, each director of the body corporate is a member • each member is a trustee of the fund or a director of the corporate trustee of the fund • no member is an employee of another member, unless the members concerned are relatives • no trustee of the fund receives any remuneration from the fund, or from any person, for any duties or services performed by the trustee in relation to the fund • if the fund trustee is a body corporate, no director of the body corporate receives any remuneration from the fund or from any person (including the body corporate) for any duties or services performed by the director in relation to the fund (subject to exceptions, see below) (s 17A(1)). Proposal to increase SMSF membership to six members A proposal to increase the maximum number of allowable members in SMSFs and small APRA funds from four (under the current law, see above) to six from 1 July 2019 was announced in the 2018/19 Federal Budget (see ¶17-600). Schedule 1 to the Treasury Laws Amendment (2019 Measures No 1) Bill 2019 (when introduced into parliament) had proposed amendments to the SISA, ITAA97 and Superannuation (Unclaimed Money and Lost Members) Act 1999 to give effect to the proposal, as well as make consequential and contingent amendments. However, Sch 1 was omitted from the Bill (now enacted as Act No 49 of 2019: ¶17-330). Therefore, no legislation is pending for the proposed measure at the time of this update. Single member funds A superannuation fund with only one member is an SMSF if it satisfies the following basic conditions: • if the trustee of the fund is a body corporate: – the member is the sole director of the body corporate – the member is one of only two directors of the body corporate, and the member and the other director are relatives, or – the member is one of only two directors of the body corporate, and the member is not an employee of the other director • if the trustee of the fund is comprised of individuals: – the member is one of only two trustees, one of whom is the member and the other is a relative of the member, or – the member is one of only two trustees, and the member is not an employee of the other trustee • no trustee of the fund receives any remuneration from the fund, or from any person, for any duties or services performed by the trustee in relation to the fund • if the fund trustee is a body corporate, no director of the body corporate receives any remuneration from the fund or from any person (including the body corporate) for any duties or services performed by the director in relation to the fund (subject to exceptions, see below) (s 17A(2)). The basic conditions, including examples of fund structures which comply or do not comply with the

SMSF definition, are discussed further at ¶5-220. Exceptions to basic conditions As exceptions to the basic conditions, a person who is not a member of the fund may be appointed as a trustee or director of the corporate trustee in place of a member in certain circumstances (¶5-220). The payment of trustee remuneration in certain circumstances is permitted as exceptions to s 17A(1)(f) and (g) and 17A(2)(c) and (d) (see ¶5-230). Individual trustees or a corporate trustee There are many arguments in favour of having a corporate trustee. These include the avoidance of difficulties in ensuring that fund assets are held separately from the individual trustees’ own assets, the general ease of changing members, including the need to transfer assets to new trustees whenever a member is added or removed, asset protection and the comfort provided by the additional layer of regulation under the Corporations Act 2001. However, whether an SMSF has individual trustees or a corporate trustee as its trustee structure is basically a matter for each individual fund. Either trustee structure does not affect the fund’s ability to provide lump and/or income stream benefits to members, provided this is not inconsistent with the fund’s trust deed. Fund ceasing to be an SMSF Trustees should be aware that any decision to change the membership or trustee structure of an SMSF may mean that the fund no longer meets the SMSF definition. For example, this may arise if the fund’s membership increases to more than four because it has admitted a new member, or a non-member spouse becomes a member because of a payment split under the family law superannuation splitting provisions (¶5-220), or the fund appoints a non-member as a trustee (otherwise than as permitted for single member funds: see above). If a fund no longer complies with the SMSF definition, it remains an SMSF until the earlier of: • the appointment of an RSE licensee (¶3-500), or • six months from the event that caused the fund to fail to comply with the definition (s 17A(4)). The six-month period is to allow the fund time to restructure if it still wishes to remain within the SMSF definition. However, the six-month extension of SMSF status does not apply if the reason for ceasing to comply was the admission of one or more new members (s 17A(5): see further ¶5-220 for the extended meaning of “member”). At the end of the six months, the SMSF will continue to be regulated by the Commissioner until an RSE licensee is appointed as trustee or the fund is wound up (see below). A fund must notify the ATO within 21 days of ceasing to be an SMSF (¶3-310).

¶5-220 All members are trustees An SMSF must have at least one member, but not more than four members (¶5-200). The requirement that all members of an SMSF must be trustees ensures that they are fully involved and responsible for the fund’s operations and have the opportunity to participate equally in the fund’s decisionmaking processes, ie the fund is truly self managed. Therefore, there will be a clear commonality of interest and equality of influence over the management of the fund. Meaning of member In the SISA, a “member” includes a person who receives a pension from the fund or a person who has deferred his/her entitlement to receive a benefit from the fund (SISA s 10(3)). Example An SMSF has four members comprising Allan, his two daughters and a son-in-law. Allan has retired from business and is being paid

a pension from the fund. If Allan’s 12-year-old grandson were to join the fund, the fund would no longer be an SMSF as it would then have five members. A minor counts as a member of the fund (but the minor may not be a trustee: see below).

The definition of “member” can also be modified by regulations for the purposes of particular SISA provisions (SISA s 15B). In particular, if a superannuation interest in a fund is subject to a payment split under the family law, or a non-member spouse interest has been created under SISR reg 7A.03B, and before the payment split the non-member spouse was not a member, the non-member spouse is treated as being a member of the fund in which the interest is held for the following purposes: • the SMSF definition in SISA s 17A, except s 17A(5) • the prohibition on lending to members in SISA s 65 (¶5-440) • the in-house asset rules in SISA Pt 8 (¶5-455). For the purposes of s 17A(5) (¶5-200), the non-member spouse is treated as being a member of the fund in which the interest is held from the end of six months after the operative time for the payment split (SISR reg 1.04AAA: see further ¶3-355). Superannuation splitting under the family law is discussed in Chapter 14. Relative of a member In s 17A, a “relative” in relation to an individual means: (a) a parent, child, grandparent, grandchild, sibling, aunt, uncle, great-aunt, great-uncle, niece, nephew, first cousin or second cousin of the individual or of his/her spouse or former spouse (b) a spouse or former spouse of the individual, or of an individual referred to in para (a) (s 17A(9)). For the purposes of para (a), if one individual is the child of another individual because of the definition of “child” in SISA s 10(1) (see ¶3-020), relationships traced to, from or through the individual are to be determined in the same way as if the individual were the natural child of the other individual (s 17A(9A)). Note that the s 17A(9) definition of “relative” is not the same as the definition of “relative” in SISA s 10(1), which applies subject to a contrary intention and does not include a former spouse or cousins of the individual member (see above). The s 10(1) definition is relevant for other SISA provisions, eg in relation to loans to members and their relatives in s 65(6) or the meaning of “related party” in SISA s 70B to 70D. Meaning of employee A member cannot be in the same fund as his/her “employer” unless they are related. The term “employee” has its common law meaning. It is also deemed to include a person employed by another fund member or a related employer-sponsor. In particular, a member who is an employee of an employer-sponsor of the fund is taken to be an employee of another person (A) if the employer-sponsor is: • a relative of A • either a body corporate of which A (or a relative of A) is a director or a related body corporate • the trustee of a trust of which A (or a relative of A) is a beneficiary, or • a partnership where: – A (or a relative of A) is a partner in the partnership – A (or a relative of A) is a director of a body corporate that is a partner in the partnership, or – A (or a relative of A) is a beneficiary of a trust, if the trustee of the trust is a partner in the partnership.

The above restrictions not only ensure that all members are trustees, but also prevent a member of a self managed employer-sponsored superannuation fund from being an employee of another member of the fund unless they are relatives. For a fund with more than one member, this means that the fund cannot be an SMSF if a member is employed by an employer-sponsor of the fund, and another member who is not a relative has a specified interest in the employer-sponsor (eg the employer-sponsor is a company of which the member is a director). Also, in the case of a single member fund, the fund cannot be an SMSF if the single member is employed by an employer-sponsor in which the other trustee of the fund, who is not a relative, has a specified interest. A director of an employer-sponsor company is not an employee of the company or of another director of the company (SISR reg 1.04AA). This means that both directors can be members of the same SMSF. Further, a person who is both an employee and a relative of a member of an SMSF is not taken to be an employee of any other member of the fund. This would allow, for example, the spouse of a director of a company who works for the company to be in the same SMSF without being related to any other director who is also a member of the same SMSF. Other persons as a trustee of the SMSF If a member of an SMSF is unable to be the trustee of the fund, another person may be the trustee in place of the member in the following circumstances, so that the fund can still retain its SMSF status. Death of member If a member dies, the legal personal representative of the member may act as a trustee of the fund or a director of the body corporate trustee of the fund during the period from the member’s death until payment of death benefits commences in respect of the deceased member (s 17A(3)(a)). For example, s 17A(3) permits but does not require the executor of the deceased member’s estate to be appointed as a trustee of the SMSF (Ioppolo & Anor v Conti & Anor [2015] WASCA 45) (¶3-288). A “legal personal representative” means the executor of the will or administrator of the estate of a deceased person, the trustee of the estate of a person under a legal disability (see ID 2010/139 below), or a person who holds an enduring power of attorney (see below) granted by a person (s 10(1)). When the death benefits begin to be paid, the legal personal representative must cease to be trustee and the fund will have to satisfy the basic conditions in order to continue as an SMSF. This is so even if the benefit payments are not final (eg pending determination of the member’s total benefit entitlements to take account of taxes or the applicable earnings rate). If the death benefits in respect of the deceased member are in the form of a pension, the person receiving the pension will come within the definition of “member” and will therefore have to become a trustee. Member under a legal disability If a member of an SMSF is under a legal disability (eg mental incapacity), the member’s legal personal representative may become a trustee of the fund or a director of the corporate trustee of the fund in the member’s place during the period of the disability (s 17A(3)(b)(i)). Person holding an enduring power of attorney A legal personal representative of a member who has an enduring power of attorney (see below) in respect of the member may also act as a trustee or director of the corporate trustee of an SMSF in place of the member during any period covered by that power of attorney (s 17A(3)(b)(ii)). Member is a minor If a member of an SMSF is under a legal disability because of age (ie the member is a minor) and does not have a legal personal representative, the member’s parent or guardian may act as a trustee of the fund or a director of the corporate trustee of the fund on the member’s behalf (s 17A(3)(c)). A parent acting as a trustee on behalf of a minor may also be a member of the same fund. In such a case, the minor is counted as a member when determining whether the fund has fewer than five members (see “Meaning of member” above).

Section 17A(3)(c) was amended retrospectively from 8 October 1999 (its first commencement date) to address the anomaly that a minor child’s parent or guardian could only be an individual trustee of the fund in place of the child, and not a director of the fund’s corporate trustee. Disqualified persons A person in the capacity of legal personal representative of a “disqualified person” (¶3-130) cannot be an individual trustee or director of the corporate trustee of an SMSF (s 17A(10)). For example, a bankrupt member cannot appoint a legal personal representative to be the trustee in the member’s place (see para 14 in SMSFR 2010/2 below). Person holding an enduring power of attorney In SISA: • a person who holds an enduring power of attorney for a member qualifies as a “legal personal representative” (s 10(1)) • a person who holds an enduring power of attorney in respect of a member can be the trustee or a director of the corporate trustee of an SMSF in place of the member (s 17A(3)(b)(ii)) (see above). A power of attorney that is not an enduring power of attorney is not sufficient for the above purposes. The concept of “enduring power of attorney” is not defined in the SISA. However, the expression has a specific legal meaning to mean an enduring power authorised by statute which survives the mental incapacity of the donor. Each state and territory in Australia has legislation dealing specifically with enduring powers of attorney: • Powers of Attorney Act 2003 (NSW), Pt 4 Div 2 • Powers of Attorney Act 2014 (Vic), Pt 3 (replaced former Pt XIA of the Instruments Act 1958 (Vic)) • Powers of Attorney Act 1998 (Qld), Ch 3 • Powers of Attorney and Agency Act 1984 (SA), s 6 • Guardianship and Administration Act 1990 (WA), Pt 9 • Powers of Attorney Act 2000 (Tas), Pt 4 • Powers of Attorney Act 2006 (ACT), Ch 5 • Powers of Attorney Act 1980 (NT), s 13. While an enduring power of attorney is intended to survive the mental incapacity of the donor, the legislation of each jurisdiction enables the donor to authorise the donee to exercise those powers while the donor is mentally capable. The donor may confer either a general grant of authority to the donee to act in relation to the donor’s property, business or financial affairs or specify particular powers for which the attorney is granted. SMSFR 2010/2 provides detailed guidelines on the scope and operation of s 17A(3)(b)(ii) with respect to appointing persons holding an enduring power of attorney as an SMSF trustee. Duties and obligations of legal personal representative Before accepting an appointment as a trustee or director of the corporate trustee of an SMSF, the legal personal representative must ensure that he/she is aware of the duties, responsibilities and obligations of being a trustee or director of a corporate trustee under the SISA (and other Acts such as the TAA and, in the case of a director of the corporate trustee, the Corporations Act 2001 (CA)) (see ¶5-400). As a trustee or director of the corporate trustee of the SMSF, the legal personal representative is similarly subject to civil and criminal penalties for any breaches of their duties under the SISA or other legislation. A legal personal representative who is a director of the corporate trustee is also subject to civil and

criminal penalties for breaches of CA. If a legal personal representative, as a trustee of an SMSF, is in breach of the trust deed, or fails to exercise his or her powers reasonably, in good faith and for the conferred purposes, civil action may be brought against the legal personal representative by SMSF members for a breach of trust. Acting trustee appointed by the ATO The ATO may suspend or remove a trustee if: • the person is a disqualified person under SISA s 126H or Pt 15, or • it appears to the ATO that conduct that has been, is being, or is proposed to be, engaged in by the trustee or any other trustees may result in the financial position of the fund or of any other superannuation fund becoming unsatisfactory (s 133). If the ATO suspends or removes a trustee, it may appoint an acting trustee to the SMSF under SISA s 134 (¶3-130). In such a case, the fund will continue as an SMSF (s 17A(3)(d)).

¶5-230 Remuneration of trustees One of the basic conditions in the SMSF definition in SISA s 17A is that no trustee of the fund (whether an individual trustee or the director of the corporate trustee) receives any remuneration from the fund or from any persons for any duties or services performed by the trustee in relation to the fund (SISA s 17A(1)(f), (g), (2)(c), (d): ¶5-200). For the exceptions to this condition, see “Trustee remuneration conditions” below. The above provisions are drafted in very broad terms, in particular the words “remuneration … from any person … for any duties or services … in relation to the fund”. The usual interpretation of the provisions is that the SMSF trustees must not be remunerated for carrying out their normal activities in their capacity as a trustee or director of the corporate trustee, such as participating in trustee decision-making, attending meetings, etc, but the provisions do not prevent trustees from being remunerated for nontrustee services that may be provided to the fund in a separate professional capacity (eg for accounting or other professional or trade services). Example Tom and Nicole who are friends decided to set up their own SMSF. They used the services of Adam, an accountant, to set up the fund. Adam also agreed to be a member of the fund. The fund qualifies as an SMSF as all members are also trustees, no member is employed by another member and no member receives any remuneration for their services as trustee (¶5-200). Adam can continue to be the fund’s accountant and be remunerated for providing accounting services to the fund as he is providing professional services as an accountant in a capacity separate from the trusteeship of the fund. However, there must be proper documentation of the service agreement covering Adam’s provision of accounting services to the fund.

Retrospective amendments effective from 8 October 1999 (the commencement date of the SMSF definition in s 17A) have confirmed the view above (see “Trustee remuneration conditions” below). Trustee remuneration conditions The trustee remuneration restriction in s 17A(1) and (2) do not apply if the individual trustees or directors of the corporate trustee are remunerated for non-trustee duties or services where: • they perform the services or duties other than in the capacity of trustee, or director of the corporate trustee in connection with the body corporate’s capacity of trustee • they are appropriately qualified and licensed to perform the duties or services • the duties or services are performed as part of a business through which the trustee or director provides the same services to the public, and • the remuneration is on an arm’s length basis (s 17B).

Funds should ensure that proper documentation is maintained that evidences that the requirements in s 17B are satisfied for any remuneration made. Reimbursements for fund expenses A trustee who personally pays an expense of the fund may be reimbursed for that expense. However, reimbursements of this nature would not normally arise, as expenses of the fund should be paid by the fund directly to preserve the SISA covenant that assets of the fund should be kept separately from other non-fund assets (¶5-400). Expenses paid by a trustee on an SMSF’s behalf which are not reimbursed are taken to be contributions to the fund (TR 2010/1). Example Jane is the single member of her SMSF. During the year, she arranged accounting and audit services to ensure the fund met its income tax and regulatory obligations. Jane paid the accounting and audit fees for the fund from her own money and did not reimburse her outlay from fund money. By satisfying a liability of the fund, Jane has indirectly increased the capital of the fund. Jane’s purpose in paying the liability of the fund without reimbursement was to increase the benefits she would ultimately receive from the fund. Therefore, Jane made a contribution to the fund when she paid the accounting and audit fees. By contrast, assume that Jane is a chartered accountant with significant experience and she prepares the fund’s accounts and income tax and regulatory return each year without remuneration. By ensuring the fund does not incur a liability in having the fund accounts prepared, Jane does not increase the capital of the fund and there is no contribution.

Establishing an SMSF ¶5-300 Basic requirements — starting an SMSF A number of trust law and legislative requirements must be complied with when setting up an SMSF. Many professional advisers and superannuation providers, such as accountants, solicitors and superannuation specialists, provide “packages” for the establishment process. A taxpayer may purchase such packages but must also ensure that the SMSF trust deed provides adequately for the purposes of the fund and the taxpayer’s needs. In broad terms, the establishment process covers the following matters: • drafting the trust deed or governing rules • obtaining applications for membership of the fund, including member details and TFNs • obtaining from members/trustees their consent to act as individual trustees or directors of the corporate trustee of the fund and declarations that they are not “disqualified persons” • obtaining from trustees a declaration that they understand their duties as SMSF trustees • holding the first meeting of trustees • electing to be a regulated superannuation fund under SISA • applying for a TFN and ABN for the fund • opening a bank account in the name of the fund. Some key procedural and tax issues to be considered in the establishment process are discussed below. Trust deed or governing rules The terms “governing rules” and “trust deed” have been used interchangeably to mean the same thing. In the SISA, the term “trust deed” is not defined, but “governing rules” is defined in relation to a fund,

scheme or trust to mean: (a) any rules contained in a trust instrument, other document or legislation, or a combination of them, or (b) any unwritten rules, governing the establishment or operation of the fund, scheme or trust (SISA s 10(1)). Essentially, the trust deed evidences the setting up of the trust and provides the rules for the operation of the fund. Among other things, the trust deed will set out: • who can be a trustee • the rules for appointing and removing trustees • the decision-making powers of trustees • who can be a fund member • who can make contributions • when and in what form benefits are payable to members • procedures for termination and winding up of the fund. An accountant, solicitor or legal service company may prepare the trust deed. The trustee must ensure that the deed is correctly drafted and contains the appropriate clauses so as to enable the fund to achieve its objectives (eg to pay an allocated pension or a transition to retirement pension to members, allow for reversions or commutation, deal with reversionary pensions and payment of death benefits). The deed must be signed by the trustees, dated and properly executed in accordance with the relevant state or territory laws. Trustee qualifications and appointment To qualify as an SMSF, all members must be individual trustees or directors of the corporate trustee of the fund (¶5-200). Anyone over the age of 18 who is not a disqualified person can be a trustee. An individual is a “disqualified person” if: • at any time, the person has been convicted of an offence under a Commonwealth, state, territory law or foreign law involving dishonesty • at any time, a civil penalty order under the SISA (¶3-800) was made in relation to the person • the person is an insolvent under administration (eg an undischarged bankrupt) • the person has been disqualified under s 126H or 126K (see ¶3-130). A company cannot act as a corporate trustee of an SMSF if: • a responsible officer of that company is a disqualified person (a responsible officer includes a director, secretary or executive officer) • a receiver, receiver and manager, official manager or administrator, or provisional liquidator has been appointed to the company, or • action to wind up the company has commenced. Protection for trustees The trustee of an SMSF is responsible for ensuring that the fund is properly managed and complies with all the SISA and other statutory and legal obligations with regard to the operation of the fund. Trustees may be subject to penalties and/or an action for breach of trust if these obligations are not complied with.

However, the SISA and the general trust law provide certain protection for trustees in the discharge of their duties (¶3-150). Trustee consent and declaration A person must give consent in writing to act as a trustee or a director of the corporate trustee of an SMSF and must provide a declaration stating that he/she is not a disqualified person (¶3-130). Declaration of understanding SMSF trustee duties A person who is appointed as an individual trustee, or a director of the corporate trustee, of an SMSF must sign a declaration in the approved form, no later than 21 days after becoming a trustee or director (s 104A). The purpose of the declaration is to ensure that new trustees, or directors of corporate trustees, understand their duties and obligations as SMSF trustees. The approved declaration form is available at www.ato.gov.au/super/self-managed-super-funds/setting-up/appoint-your-trustees/#Trusteedeclaration. The declaration is not required to be lodged with the ATO, but must be readily available to the ATO if required. Failure to produce the declaration at the time of an ATO audit or review may result in a maximum penalty of 50 penalty units. This is a strict liability offence. The SMSF must retain the declaration for a period of at least 10 years (s 104A(2)). Becoming a regulated superannuation fund To qualify as a complying superannuation fund for tax purposes, and to be eligible to receive concessional tax treatment, the trustee of a new SMSF must make an election (which is irrevocable and be in the approved form) for the fund to be regulated under the SISA (¶2-130). The election must be lodged with the ATO by completing an “Application for ABN registration for superannuation entities” form (available at www.ato.gov.au/Super/Self-managed-super-funds/Settingup/Register-your-fund) within 60 days of the establishment of the fund. This form is also used by the ATO for TFN, ABN and GST registration purposes (see below). As the decision to become a regulated superannuation fund is irrevocable, an SMSF can only cease to be regulated by winding up the fund. The ATO has changed the registration process for SMSFs from January 2010 to identify and prevent sham SMSFs from operating and being displayed on the government’s Super Fund Lookup (SFLU) webpage at superfundlookup.gov.au (¶3-287). When first registered by the ATO, new SMSFs (and existing SMSFs who have not received a notice of compliance) will be given a “registered” status on SFLU. This status will be updated by the ATO when the fund is issued with a notice of compliance or noncompliance (¶2-150), ie after the lodgment of the fund’s first annual return. Obtaining a TFN and ABN A TFN is a unique number issued by the ATO for each taxpayer. The trustees of an SMSF must obtain a TFN for the fund. The ABN enables businesses and other entities to be readily identified at all government agencies (¶5-350). Superannuation funds are allocated a TFN and ABN by the ATO after lodgment of the “Application for ABN registration for superannuation entities” form referred to above. Commencing fund operations Once an SMSF has been established, the fund can commence its operations, such as accepting contributions, investing the money of the fund and setting up the administration arrangements. The trustee’s principal duties and obligations under the SISA relating to these operations are discussed at ¶5-400 and following. For a checklist of trustee duties and obligations, see ¶5-600.

Managing an SMSF ¶5-400 Duties of SMSF trustees — covenants The trustee of an SMSF has various duties which arise under:

• the general trust law • statutory provisions — principally the SISA, the Corporations Act 2001, the Taxation Administration Act 1953 (TAA), the Trustee Act of a state or territory, and other tax and general laws (eg the Bankruptcy Act 1966), and • the fund trust deed or governing rules. Governing rules are any rules contained in a trust instrument, other document or legislation, or combination of them, or any unwritten rules, governing the establishment or operation of the fund (SISA s 10(1)). If a trustee fails to act in accordance with the duties, the consequences which may arise will depend on the particular duty that is breached. For example, if the duties breached are those under the SIS or corporations legislation, or the TAA, the Regulator may institute action against the trustee (and other persons responsible) and a fine or term of imprisonment may be imposed by the court upon conviction. In addition, if the provision breached is a regulatory provision (¶2-140), the fund may be determined by the ATO to be a non-complying fund and lose its concessional tax status. Similarly, various forms of penalties may be imposed for offences against other laws, such as the bankruptcy or income tax laws. On the other hand, if the trustee contravenes a SISA provision that is not an offence or penalty provision (eg the trustee breaches a trustee covenant, see below) or fails to act in accordance with the trust deed, civil liability action for a breach of trust may be brought against the trustee by the affected parties or members for any loss suffered as a consequence of the breach. The penalty provisions under the SISA are discussed in detail at ¶3-800. The trustees of an SMSF must, therefore, be familiar with their common law or statutory duties and, when in doubt, should not hesitate to seek professional advice. Any provision in the fund’s trust deed that prevents the trustees from seeking advice in relation to performance of their duties or powers, or from being indemnified out of the fund’s assets in respect of the costs of obtaining such advice, is void (SISA s 56(3): ¶3-150). A person who becomes a trustee of an SMSF (or a director of the corporate trustee) is required to sign a declaration that he/she understands the duties as a trustee (¶5-300). Among others, the operations of an SMSF mainly revolve around the four principal areas below: (1) acceptance of contributions (2) investment of funds (3) preservation, portability and payment (whether in a lump sum or as an income stream) of benefits (4) maintenance of records and accounts, and reporting. The SIS provisions dealing with these operations are discussed at ¶5-420–¶5-500. The fund’s trust deed, the general trust law and other statutory requirements must also be considered. It is possible, for example, for a fund’s trust deed to provide more onerous or restrictive rules than the SIS legislation. The ATO’s views on the type of operations that constitute a fund’s strategic and high level decisionmaking processes and activities are discussed in ¶2-130. These include formulating and reviewing the fund’s investment strategy, managing reserves, and determining how assets are to be used to fund member benefits. These processes and activities are crucial to determining the central management and control of a fund and whether a fund is an “Australian superannuation fund” for tax and SIS purposes. For compliance purposes, an SMSF trustee (or a person authorised by the trustee such as the fund auditor, tax agent) may seek specific advice from the ATO regarding the application of certain regulatory requirements to the fund’s particular circumstances (see ¶5-700). SIS covenants and overlap with trust law duties The SISA contains covenants that codify some of the duties imposed on a trustee under the general trust

law. If the governing rules of an SMSF do not contain the SIS covenants to the effect of the covenants, the rules are taken to contain covenants to that effect (SISA s 52B(1)). The deemed covenants referred to in s 52B(1) are covenants by each trustee: (a) to act honestly in all matters concerning the fund (b) to exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide (this is an objective test, but note that a higher test of a “prudent superannuation trustee” applies for entities that are not SMSFs: ¶3-100) (c) to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries (d) to keep the money and other assets of the fund separate from any money and assets, respectively, that are held by the trustee personally or are money or assets of a standard employer-sponsor, or an associate of a standard employer-sponsor, of the fund (e) not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee’s functions and powers (see below) (f) to formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund including, but not limited to specified matters (g) if there are any reserves of the fund — to formulate, review regularly and give effect to a strategy for their prudential management, consistent with the fund’s investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due (h) to allow a beneficiary of the fund access to any prescribed information or any prescribed documents (s 52B(2)). Covenant by director of corporate trustee of an SMSF If the governing rules of an SMSF which has a corporate trustee do not contain the SIS covenants to the effect of the covenant in s 52C(2), the rules are taken to contain a covenant to that effect (SISA s 52B(1)). The covenant in s 52C(2) is a covenant by each director of the corporate trustee to exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the covenants in s 52B as if the director were a party to the governing rules (s 52C(2), (4)). A “reasonable degree of care and diligence” means the degree of care and diligence that a reasonable person in the position of director of the corporate trustee would exercise in the corporate trustee’s circumstances. Engaging and authorising other persons to act on the trustee’s behalf The covenant in para (e) of s 52B(2) (see above) does not prevent the trustee from engaging or authorising persons to do acts or things on behalf of the trustee (s 52B(3)). For example, the trustee of an SMSF will usually engage service providers to perform certain functions (such as an accountant, fund administrator, tax agent, lawyer, etc) for the purposes of the fund’s operation. However, it is important to remember that the trustee has ultimate responsibility and accountability for ensuring that the fund is managed and operated in accordance with the trust deed and other legislative requirements. Investment strategy of the fund Under the SIS covenant in para (f) of s 52B(2) (see above), the trustee must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund including, but not limited to, the following:

(i) the risk involved in making, holding and realising, and the likely return from, the fund’s investments, having regard to its objectives and its expected cash flow requirements (ii) the composition of the fund’s investments as a whole, including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification (iii) the liquidity of the fund’s investments, having regard to its expected cash flow requirements (iv) the ability of the fund to discharge its existing and prospective liabilities. The requirements in s 52B(2)(f) are also prescribed as an operating standard for SMSFs under reg 4.09, with an additional requirement for the trustee to consider whether the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund (see ¶5-432). Keeping fund money and other assets separate The SIS covenant in para (d) of s 52B(2) (see above) requires the trustees of an SMSF to keep money and other assets of the fund separate from their own personal assets or from the assets belonging to their employer-sponsors or associates, such as a business run by two partners who are members of the fund. In addition to being a SIS covenant, the requirements in s 52B(2)(d) are also a prescribed operating standard (see ¶5-433). Also, the money and assets of the SMSF must not, under any circumstances, be used for personal or business purposes as, in most cases, this will cause the fund to breach the sole purpose test (¶5-410) and other SISA investment rules (¶5-430). Interdependency of covenants and defences for certain breaches The SIS covenants are cumulative in effect. Each covenant in s 52B and 52C that applies to a trustee (or director of the corporate trustee) applies in addition to every other covenant or obligation referred to in those sections that applies to the trustee or director (s 51A). Under s 55(5), a trustee can claim a defence against an action for loss or damage in relation to an investment if the investment was made in accordance with the investment strategy covenant in s 52B(2) (f). For the defence to be available, the trustee must satisfy all of the covenants in s 52B and 52C where they are relevant to the investment (rather than just s 52B(2)(f)). The rules above recognise the interdependency between the covenants. For example, if a trustee has acted dishonestly and in a conflicted manner, it would be unreasonable to have a defence for an investment loss on the basis that the trustee had complied with the investment covenant. However, the rules are not intended to prevent trustees from accessing the defence where a covenant or duty is not relevant to the particular loss as a result of making an investment. A similar statutory defence on the above basis is available against an action for loss or damage in relation to the reserves management covenant in s 52B(2)(g) (s 55(6)). The trustee of an SMSF may maintain a reserve for a particular purpose, unless its governing rules prohibit the maintenance of a reserve for that purpose (SISA s 115).

¶5-410 Sole purpose test The sole purpose test under the SISA reflects the fundamental reason for the existence of a superannuation fund, ie maintaining the fund to provide superannuation benefits to members on retirement or to members’ dependants on the death of the member. The sole purpose test is divided into core and ancillary purposes. The trustee of an SMSF is required to ensure that the fund is maintained for at least one of the following core purposes: • the provision of benefits to members on or after retirement from gainful employment • the provision of benefits to members when they have reached the prescribed age of 65, or

• the provision of benefits on the member’s death to the member’s dependants or legal representative, or both. Alternatively, the sole purpose test can be satisfied if the fund is maintained for at least one core purpose and one or more ancillary purposes (see SISA s 62). A fund cannot be maintained for ancillary purposes only. While the core purposes deal specifically with the provision of retirement benefits, benefits on attaining age 65 or death benefits, the ancillary purposes can cover the provision of any benefits permitted under SISA Pt 6, including resignation/retrenchment benefits, disability benefits, post-retirement death benefits, and financial hardship, welfare and compassionate benefits. These are discussed in detail at ¶3-200. The rules for the payment of benefits to members under Pt 6 are discussed in ¶5-460. The ATO has provided guidelines and examples on the application of the sole purpose test, as summarised below (see also “ATO ruling on sole purpose test” below). The sole purpose test is one of the key prudential requirements for complying superannuation funds and is closely monitored by the ATO. In SMSFR 2008/2 (see below), the ATO states that determining the purpose for which an SMSF is being maintained requires a survey of all of the events and circumstances relating to the SMSF’s maintenance, thus enabling an objective assessment of whether the SMSF is being maintained for any purpose other than those specified by s 62. The trustee must maintain the SMSF in a manner that complies with the sole purpose test at all times. This will be tested in light of all of the fund’s activities which broadly encompass: • accepting contributions • acquiring and investing fund assets • administering the fund (including maintaining the structure of the fund) • employing and using fund assets, and • paying benefits, including benefits on or after retirement. A strict standard of compliance is required under the sole purpose test requiring exclusivity of purpose, which is a higher standard than the maintenance of the SMSF for a dominant or principal purpose (SMSFR 2008/2, para 5–7). The issue of SMSFs providing incidental benefits and “current day” benefits is discussed in “ATO ruling on sole purpose test” below. The sole purpose test is a civil penalty provision in the SISA (¶3-820), and civil and criminal penalties may be imposed if the test is breached. In addition, a breach of the sole purpose test may result in the fund losing its complying fund status if the fund does not satisfy the compliance test as discussed at ¶2-140. The trustee of an SMSF may purchase trauma insurance for members and still satisfy the sole purpose test provided certain conditions are met (see former SMSFD 2010/1). The Commissioner’s views for the withdrawal of SMSFD 2010/1 and the interaction with reg 4.07D which sets out the insurance standard (see ¶3-240) are discussed in ¶3-200. Compliance issues and examples One of the main ways to determine if a fund has contravened the sole purpose test is to examine the character and purpose of the fund’s investments. For instance, in the Swiss chalet 95 ATC 374 case, the fund had purchased shares which provided the managing director of the employer-sponsor of the fund access to a golf club. The fund also invested in a Swiss chalet which provided a source of income for the managing director and his family trust. Most of the fund members were young, casual workers employed by the employer-sponsor and, because of their work arrangements, usually did not receive any benefit from the fund or were not even aware of the fund’s existence. In that case, the court held that the fund had failed the sole purpose test. ATO ruling on sole purpose test SMSFR 2008/2 states that there are some circumstances where an SMSF may be maintained solely for

the purposes specified in SISA s 62 while providing members or other entities with benefits other than those specified. The ruling also clarifies when the provision of such benefits will not contravene the sole purpose test. Although the ruling is stated to apply to SMSFs and former SMSFs, the ATO guidelines are applicable to regulated superannuation funds generally in principle. Essentially, the core purposes relate to providing retirement or death benefits for or in relation to SMSF members. An SMSF can also maintain the fund for one or more of these purposes and other specified ancillary purposes which relate to the provision of benefits on the termination of a member’s employment and other death benefits not specified under the core purposes. The ATO considers that determining the purpose for which an SMSF is being maintained requires a survey of the events and circumstances relating to the fund’s maintenance. This enables an objective assessment of whether the SMSF is or has been maintained for any purpose other than those specified by s 62(1). As noted earlier, a strict standard of compliance is required as the sole purpose test requires exclusivity of purpose, which is a higher standard than the maintenance of the SMSF for a dominant or principal purpose. However, the ATO considers that the provision of incidental, remote or insignificant benefits that fall outside the scope of those that are specified in s 62(1) may occur, particularly as an inherent or unavoidable part of the legitimate activities of SMSFs. If the provision of such benefits, when viewed objectively in the overall context of the circumstances of the SMSF’s maintenance, does not displace an assessment that the SMSF is being maintained solely for the purposes specified in s 62(1), the trustee does not contravene the sole purpose test. The ATO considers that the factors listed below are relevant in determining whether the provision of a benefit that is not specified in s 62 is of such a nature that it does not cause a contravention of the sole purpose test. This is not an exhaustive statement of the factors that may be relevant in a particular case; rather, it reflects the factors that commonly arise in considering the provision of benefits not specified in s 62(1) in the context of the sole purpose test (SMSFR 2008/2, para 12, 13). The factors that would weigh in favour of a conclusion that an SMSF is not being maintained in accordance with s 62 (because of the provision of benefits not specified in the section) are the following: • the trustee negotiated for, or sought out, the benefit (whether or not the trustee does so in the course of undertaking other activities that are consistent with s 62) • the benefit has influenced the decision-making of the trustee to favour one course of action over another • the benefit is provided by the SMSF to a member or another party at a cost or financial detriment to the SMSF • there is a pattern or preponderance of events that, when viewed in their entirety, amount to a material benefit being provided that is not specified under s 62(1). The factors that would weigh in favour of a conclusion that an SMSF is being maintained in accordance with s 62 despite the provision of benefits not specified in the section are the following: • the benefit is an inherent or unavoidable part of other activities undertaken by the trustee that are consistent with the provision of benefits specified by s 62(1) • the benefit is remote or isolated, or is insignificant (whether it is provided once only or considered cumulatively with other like benefits) when assessed in light of other activities undertaken by the trustee that are consistent with the provision of benefits specified by s 62(1) • the benefit is provided by the SMSF on normal commercial terms consistently with the financial interests of the SMSF and at no cost or financial detriment to the SMSF • all of the activities of the trustee are in accordance with the covenants set out in SISA s 52

• all of the SMSF’s investments and activities are undertaken as part of or are consistent with a properly considered and formulated investment strategy. Aussiegolfa Pty Ltd’s test case — market value rent and sole purpose test The facts of the case concerned an investment by Aussiegolfa Pty Ltd (Aussiegolfa) as trustee for the Benson Family Superannuation Fund (BFSF) in units in a MIS called the DomaCom Fund (DomaCom). The case was an appeal from the decision of the Federal Court (2017 ATC ¶20-643; 2018 ATC ¶10-471) dismissing a claim for declaratory relief regarding the application of the SISA to the investment. Aussiegolfa sought declarations that the investment was not an in-house asset under SISA s 71(1) (see ¶3-450) and did not involve a breach of the sole purpose test in SISA s 62 (Aussiegolfa Pty Ltd (Trustee) 2018 ATC ¶20-664). Briefly, Aussiegolfa (as trustee) resolved to invest in a residential property in Burwood, Victoria (Burwood Property) by acquiring, together with two related parties, 100% of the units in a sub-fund (Burwood SubFund). The sole member of the BFSF was Mr Benson. The funds committed to the Burwood Sub-Fund in subscription for the units were used to buy the Burwood Property. While the Burwood Sub-Fund held the property, it was leased twice at market rent initially to tenants unrelated to the BFSF. In April 2017, a lease over the property was entered into with Mr Benson's daughter at the same rent as those previous tenants with the lease commencing in February 2018. Relevantly, the Federal Court (on appeal) held that, on the facts and circumstances, the leasing of the Burwood property to the member's daughter did not cause Aussiegolfa to contravene the sole purpose test. The Court did not find sufficient evidence to infer that the leasing constituted a collateral purpose for maintaining the fund. Moshinsky J (with whom Besanko J agreed) observed that there did not appear to be any financial or other non-incidental benefit to be obtained by the daughter leasing the property rather than another lessee. Nor did there appear to be any financial or other non-incidental benefit to be obtained by the member due to the property being leased to his daughter rather than another tenant. The “comfort or convenience” the daughter received by residing in the property was viewed at best as an incidental benefit. The ATO accepted that the Court’s decision was “referrable to the facts of the case”. However, the ATO did not consider that the case is authority for the proposition that a superannuation fund trustee can never contravene the sole purpose test when leasing an asset to a related party simply because market-value rent is received. It is the purpose of making and maintaining a fund’s investments that is central to identifying if there is a contravention of the sole purpose test. The ATO also noted the Court’s observations that a collateral purpose and a contravention of s 62 could well be present if the circumstances indicated that leasing to a related party had influenced the fund's investment policy. For example, a superannuation fund trustee will contravene the sole purpose test if the fund acquires residential premises for the collateral purpose of leasing the premises to an associate of the fund, even where the associate pays rent at market value. (ATO Decision impact statement: www.ato.gov.au/law/view/document?docid=LIT/ICD/VID54of2018/00001). ATO guidelines — life insurance under a buy-sell agreement An SMSF contravenes the sole purpose test (and s 65(1)(b) about giving financial assistance: ¶5-440) by purchasing a life insurance policy over the life of a member of the SMSF where the purchase is a condition and consequence of a buy-sell agreement that the member has entered into with his brother as co-owners of their business (ID 2015/10).

¶5-420 Accepting contributions The trustee of an SMSF can only accept contributions in accordance with the SISR rule and its trust deed. The SISR rules on accepting contributions are set out in SISR reg 7.04 and discussed in detail at ¶3-220. Subject to certain exceptions, contributions accepted in breach of the SISR rules must be returned to the contributors. Trustees should note that they are required to allocate contributions received for members in each month within 28 days after the end of the month or, if not reasonably practicable, within such longer period as is

reasonable in the circumstances. The preservation rules applying to contributions and other benefits are discussed at ¶5-460. From 12 May 2004, all of the member’s benefits are “minimum benefits” for SISA purposes (¶3-230). Contributions in relation to a fund includes payments of the SG shortfall component and payments from the SHASA to the fund for the benefit of a member (¶12-500, ¶12-620) but do not include a rollover or transfer of superannuation money to the fund (SISR reg 1.03(1)). The standards do not apply to proceeds from an insurance policy (eg arising from a claim made in respect of a member’s life or disability insurance policy) or to superannuation interests subject to a payment split under the family law as provided for under Pt 7A of SISR. The tax concessions available to the contributor for superannuation contributions and taxes or charges associated with superannuation contributions are discussed in Chapter 6. The taxation of contributions in the hands of the fund are discussed at ¶7-120. The SISR rules on the acceptance of contributions are operating standards which must be complied with at all times. A trustee who fails to do so may be liable to a fine (¶3-800). Taxpayer alert — non-commercial use of promissory note arrangements TA 2009/10 Non-commercial use of negotiable instruments warns about SMSF trustees and members attempting to use negotiable instruments (promissory notes) in a non-commercial and contrived manner which may potentially breach the contribution standards (¶5-450).

¶5-430 Investment of funds The investment of assets is a key fund operation and one of the primary responsibilities for the trustee of an SMSF. The SIS legislation requires the trustee to comply with a range of stringent duties and obligations when making investment decisions to ensure that assets are properly invested for retirement purposes (eg the sole purpose test as discussed at ¶5-410) and member benefits are protected at all times. Trustees of other regulated superannuation funds are subject to similar, but more onerous, investment rules (¶3-400 and following). The SIS legislation does not prescribe the types of investments for superannuation funds and the trustees of an SMSF are generally free to make properly considered decisions consistent with their responsibilities for the sound and productive management of assets for the benefit of members in accordance with the SIS investment rules. From time to time, the Regulators may issue guidelines on particular types of non-traditional investments, such as investing in hedge funds and contracts for differences (¶3-400), and issue tax alerts warning about particular areas of fund operation or investment which are of interest or concern to the ATO (see ¶16-150). These guidelines assist trustees to be aware of their obligations and duties under the SISA to ensure that its investments are made in accordance with a properly considered objective and strategy, the fund is not overly exposed to undue risks, the fund is maintained for the primary purpose of generating retirement benefits, rather than providing current-day support to members, and the fund does not inadvertently breach the SIS legislation. The alerts warn that certain investment arrangements may give rise to regulatory and tax issues, as well as penalties and other consequences. In summary, the SISA investment rules cover the following: • maintaining the fund in accordance with the sole purpose test (SISA s 62: ¶5-410) • formulating, reviewing and implementing an investment strategy (SISA s 52B(2)(f): ¶3-100; SISR reg 4.09: ¶5-432) • making and maintaining investments on an arm’s length basis (SISA s 109: ¶5-435) • complying with rules for investments that are “collectables” or “personal use assets” (SISA s 62A: ¶5437) • complying with restrictions on lending and providing financial assistance to members or relatives

(SISA s 65: ¶5-440) • complying with restrictions on borrowings (SISA s 67; 67A; 67B: ¶5-445) • complying with restrictions on acquisition of assets from related parties (SISA s 66: ¶5-450) • complying with the in-house assets rules (SISA Pt 8: ¶5-455) • complying with restrictions on recognising or sanctioning an assignment or a charge over or in relation to a member’s benefits, or giving a charge over fund assets (SISR reg 13.11 to 13.15A: ¶5-458). A “related party” of a superannuation fund means a “member” of the fund or a “standard employersponsor” of the fund and their “Part 8 associates” (see ¶3-470). If a member’s interest in an SMSF is subject to a payment split under the family law rules dealing with superannuation splitting on a marriage/relationship breakdown, or a superannuation interest has been created for a non-member spouse interest under SISR reg 7A.03B, and before the payment split the nonmember spouse was not a fund member, the non-member spouse is treated as being a member for the purposes of the lending to members and in-house asset restrictions (SISR reg 1.04AAA) (see ¶3-470). The investment rules are the most common SIS prudential requirements that are breached, whether intentionally or inadvertently, and trustees should be aware that they may be subject to penalties for noncompliance with the rules (¶3-800) and the fund may lose its complying fund status in certain circumstances (¶2-140). Other investment controls In addition to the specific SIS investment provisions above, the trustee of an SMSF must comply with other prudential requirements as may be relevant to the fund’s investments or activities, including: • complying with the trust deed and SIS covenants (SISA s 52B; 52C: ¶5-400) • appointing an investment manager (SISA s 124: ¶3-620) • entering into a management agreement with the investment manager which: – allows the trustee to obtain adequate information about the entity’s investments and investment performance – allows for termination of the agreement without liability (SISA s 102), and – does not exempt or limit the investment manager’s liability for negligence (SISA s 116) • keeping fund money and other assets separate (s 52B(2)(d): ¶3-100; SISR reg 4.09A: ¶5-433), and • ensuring proper records and accounts for investments are maintained for at least five years (¶3-315, ¶3-340, ¶3-400, ¶5-510).

¶5-432 Investment objectives and strategy A superannuation fund’s investment objectives set out the desired investment outcome for the fund. The objectives should be measurable, eg by means of comparison with a target or performance benchmark or a desired level of return. Examples of investment objectives include the following: • to obtain a rate of return matching or exceeding, by a specified amount, a benchmark (eg the All Ordinaries Accumulation Index or CPI) over a specified period (eg five years) • to provide real long-term (at least five years) capital growth of at least X% compounded and a level of income no less than X% from a balanced portfolio • to seek to maximise tax-effective returns by the use of imputation credits from a range of Australian

equities. Investment strategy — SIS covenant In pursuance of the investment objectives, the trustee of an SMSF must covenant to prepare, review and implement an investment strategy for the fund that has regard to the whole of the circumstances of the fund, including, but not limited to, the following: • the risks involved in making, holding and realising the investments and the likely returns from the investments, having regard to its objectives and expected cash flow requirements • the composition and diversification of its investments across different asset classes (eg shares, property and fixed deposits), the fund’s exposure to risks from inadequate diversification • the liquidity of the fund’s investments having regard to its expected cash flow requirements, and • the ability of the fund to meet its existing and prospective liabilities (eg paying members their benefits as they reach retirement age or periodically) (s 52B(2)(f)). The above investment strategy requirement is both a trustee covenant (¶5-400) and a prescribed operating standard (see “Investment strategy — operating standard” below) which must be complied with at all times (SISA s 34). The trustee of the SMSF may seek professional investment advice and, where appropriate, appoint investment managers and other specialists (eg tactical asset managers) to advise on the formulation of its investment objectives and strategy and carry out its investment activities. Investment strategy — operating standard The investment strategy covenant in s 52B(2)(f) (see above) is also a prescribed operating standard for SMSFs (SISR reg 4.09(2): ¶3-400). The operating standard in reg 4.09(2) was originally prescribed in similar terms to the SIS covenant in s 52B(2)(f). That is, the trustee must formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the fund including, but not limited to, the matters sets out in the provision (see above). The scope of the operating standard has been expanded in two ways since 7 August 2012: • the first requires the trustee to also review regularly the investment strategy that has regard to the relevant circumstances (reg 4.09(2)), and • the second requires the trustee to consider “whether the trustees fund should hold a contract of insurance that provides insurance cover for one or more members of the fund” as part of the fund’s investment strategy (see below) (reg 4.09(2)(e)). The regularity of investment strategy reviews (eg annually, quarterly or on a “needs basis”) depends on the circumstances of each fund and its members, based on the fund’s investments and/or investment activities, the flow of contributions and benefit payments, and the membership profile. The requirement for regular reviews thus compels the trustees to take into account factors such as the changing circumstances of the fund and its members. Insurance cover for members The operating standard in reg 4.09(2)(e) requiring SMSF trustees to consider insurance cover for members as part of the fund’s investment strategy is a consequence of the Cooper superannuation review in 2010. That review noted that less than 13% of SMSFs have insurance, and that SMSF members were more likely to hold appropriate levels of insurance, or be able to hold insurance outside their superannuation, than members of other superannuation funds. Accordingly, the review panel recommended that SMSF trustees be required to consider life and total and permanent disability (TPD) insurance as part of their investment strategy (Recommendation 8.29). Generally, the trustees of an SMSF must have regard to the members’ personal circumstances when

considering the question of the type and level of insurance cover that members may require, including whether cover is taken within or outside the SMSF, as well as other SIS requirements, such as the sole purpose test in s 62 of the SISA (¶5-410). The SISR also prescribes insurance operating standards for regulated superannuation funds and insurance cover for members (see reg 4.07D; 4.07E: ¶3-240).

¶5-433 Keeping SMSF money and assets separate The trustee of an SMSF must keep the money and other assets of the fund separate from any money or assets held by the trustee personally or by a standard employer-sponsor or an associate of a standard employer-sponsor (SISR reg 4.09A). The above requirement is a prescribed operating standard for all regulated superannuation funds. Possible situations of non-compliance include where an SMSF operates using a member’s personal bank account rather than through a separate SMSF bank account, or where fund assets are recorded in one or more member’s name personally, rather than in their capacity as trustee of the SMSF. An SMSF that shares a bank account with related unit trusts will breach reg 4.09A (Interpretative Decision ID 2014/7). In that ID, the SMSF trustees are members of a family, the fund has a standard employersponsor and all the trustees work for the standard employer-sponsor in various capacities, and there are several unit trusts owned and operated by the SMSF and/or the trustees. The trustees stated that, for administrative simplicity and cost savings, unit trusts jointly owned by the SMSF and trustees as well as unit trusts owned solely by the SMSF all operate using the one bank account which is held in the name of the SMSF. Importantly, while ID 2014/7 looks specifically at bank accounts, the principles therein apply to all types of assets, including shares, units in a trust and other property. A standard employer-sponsor of a fund is an employer who contributes, or would contribute, wholly or partly pursuant to an arrangement between the employer and a trustee of the fund concerned (SISA s 16(2): ¶3-120). This operating standard is also a SIS covenant for SMSF trustees (see s 52B(2)(d): ¶5-400). The replication of the covenant as a prescribed operating standard is because the consequences of an SMSF trustee contravening a SIS covenant are limited to actions between the parties affected by and involved in the contravention. Also, the ATO is unable to enforce compliance with SIS covenants and has to rely on the trustee’s voluntary compliance and any civil liability action. The prescribed operating standard thus gives the ATO a direct power to enforce the requirement. A prescribed operating standard must be complied with at all times. A person who intentionally or recklessly contravenes the standard is guilty of an offence punishable on conviction by a fine not exceeding 100 penalty units.

¶5-435 Investing on an arm’s length basis The trustee of an SMSF must ensure that its investments are made and maintained on an arm’s length basis (the arm’s length rule) (SISA s 109). The rule does not prevent trustees or investment managers from dealing with related or associated parties, but are intended to ensure that investments are made or maintained on a commercial basis or on such terms (eg the sale and purchase price of an investment should be at full market value and returns on the investment reflect a true market rate of return). The term “invest” in SISA means “applying assets in any way, or making a contract, for the purpose of gaining interest, income, profit or gain” (SISA s 10(1)). The arm’s length rule has two limbs. Under the first limb: 1. the trustee of an SMSF (or the investment manager of the SMSF) must not invest money of the fund unless either the trustee or manager and the other party to the transaction are dealing with each other at arm’s length in respect of the transaction (s 109(1)(a)), or 2. if they are not dealing with each other at arm’s length in respect of the transaction, the terms and conditions of the transaction must be no more favourable to the other party than those that are

reasonable to expect would apply if the parties were dealing at arm’s length in the same circumstances (s 109(1)(b)). That is, the SMSF investment must made and maintained be on commercial and business-like terms. This affects all investment decisions made by the trustee, eg acquiring or disposing of an asset, investing in in-house assets, or entering into loan arrangements (see below). Parties must continue to deal with each other at arm’s length or on an arm’s length basis throughout the duration of the transaction. The second limb in s 109(1A) provides that, where an SMSF trustee or investment manager deals with a party who is not at arm’s length in respect of an investment, that dealing must be undertaken in the same manner as it would if the other party was at arm’s length. For example, where an SMSF holds an investment in a related trust, any dealings with the trustee of that trust must be undertaken in the same manner as it would if that trust was at arm’s length. Decisions about whether to seek payment of trust distributions would form part of these dealings and should be done on the same basis as would be expected if the trust was not a related party (see SMSFR 2009/3 below). Section 109(1A) applies to dealings with parties that are not at arm’s length during the term of the investment and it applies after an investment to which s 109(1)(b) applies has commenced and is interpreted in that context (see Interpretative Decision ID 2010/162 below). What is arm’s length basis? The terms “at arm’s length” and “arm’s length basis” are not defined in SISA (see ¶3-440). In determining whether parties deal at “arm’s length”, consider any connection between them and any other relevant circumstance (AXA Asia Pacific Holdings Ltd 2010 ATC ¶20-224). Whether a transaction is made on an “arm’s length basis” is judged according to all the circumstances of each particular investment. The general test is whether a prudent person acting with due regard to his/her own commercial interests would have made such an investment on those terms (¶3-440). For example, if an SMSF were to allow its assets to be used by a related party at no cost, or at a cost which is less than the market value payable for the use of the asset, this would breach the arm’s length rule (examples of such cases may be found in SMSFR 2008/2: see ¶5-410). SMSF Ruling SMSFR 2009/3 states that where an SMSF is presently entitled to a distribution from a related or non-arm’s length trust, and payment of this amount is not sought, contraventions of one or more provisions of the SISA may occur, including the arm’s length rules. The Commissioner considers that where an SMSF trustee does not seek payment of trust distributions within a reasonable time, and no interest is paid or compensation is given for not seeking payment, that dealing is not consistent with the other party being at arm’s length. Consequently, a contravention of s 109(1A) would occur if the other party is not at arm’s length with the SMSF trustee. The Commissioner’s view is that arm’s length beneficiaries would not generally allow substantial amounts of distribution entitlements to remain in the trust without receiving an appropriate return on this amount, for example, a market rate of interest. The possibility of receiving greater distributions from the trust in the future due to the provision of low cost capital would not be adequate compensation where the SMSF is not the sole beneficiary of the trust. Where the SMSF is the sole beneficiary it may be able to validate a view that the non-payment of a trust distribution was undertaken in the same manner as it would if the other party was at arm’s length. However, it is the Commissioner’s view that such a non-payment would be seen as a consensual arrangement meeting the extended definition of a “loan” to a related party and, therefore, an in-house asset of the SMSF (see ¶5-455). Limited recourse borrowing arrangement (LRBA) An SMSF does not contravene s 109 if it borrows money from a related party of the SMSF under an LRBA on terms favourable to the SMSF (LRBAs are discussed in ¶3-415). Trustees should be aware that there may be adverse tax implications where they have LRBAs which contain non-commercial terms. In these cases, the income generated may be viewed as non-arm’s length income if the arrangement results in a greater amount of returns to the SMSF than what might otherwise be expected if the SMSF was dealing with a lender at arm’s length. The non-arm’s length income of a

fund does not enjoy concessional tax treatment (see ¶7-170). Based on a superannuation fund’s particular arrangements, non-arm’s length income could arise under ITAA97 s 295-550(1) (ie deriving income from a non-arm’s length scheme), or under s 295-550(5) (ie income derived through a fixed entitlement in a trust where the income is derived under a non-arm’s length scheme) if the fund has a fixed holding trust rather than a bare holding trust. For practitioner articles on LRBAs and their tax implications, see “Non-arm’s length SMSF loans = huge tax bill!” in the Wolters Kluwer Tax News ¶299, Issue 15, 24 April 2014 and ¶16-400. Practical Compliance Guideline PCG 2016/5 sets out “safe harbour” conditions for LRBAs entered into by SMSF so as to avoid the non-arm’s length tax implications (¶5-448), and Taxation Determination TD 2016/16 examines whether the ordinary or statutory income of an SMSF will be non-arm’s length income under s 295-550(1) when the parties to a scheme have entered into an LRBA terms which are not at arm’s length (¶7-170). CFR and the ATO continue to monitor LRBAs The report by the Council of Financial Regulators (CFR) and ATO to the government stated, among other things, that assets held by SMSFs under LRBAs are unlikely to pose systemic risk to the financial system at this time (www.cfr.gov.au/publications/policy-statements-and-other-reports/2019/leverage-and-risk-inthe-superannuation-system). In light of this, the government announced that it would not be making any changes to LRBAs and that the CFR and ATO would continue to monitor LRBAs in the superannuation system and report again in three years (Treasurer’s media release, 22 March 2019: jaf.ministers.treasury.gov.au/media-release/0462019/). Market value and valuation of assets The term “market value” is defined in s 10(1) of SISA (¶3-430). The meaning of market value and ATO guidelines on the valuation of assets for various SISA purposes are noted at ¶18-775.

¶5-437 Investing in collectables and personal use assets The trustees of an SMSF must comply with prescribed rules when making, holding and realising the investments below: (a) artwork (ie a painting, sculpture, drawing, engraving or photograph; a reproduction of such a thing; or property of a similar description or use: see ITAA97 s 995-1(1)) (b) jewellery (c) antiques (d) artefacts (e) coins or medallions (f) postage stamps or first day covers (g) rare folios, manuscripts or books (h) memorabilia (i) wine (j) cars (k) recreational boats (l) memberships of sporting or social clubs, or

(m) assets of a particular kind, if assets of that kind are ordinarily used or kept mainly for personal use or enjoyment (not including land) (SISA s 62A). The above asset types or classes (“section 62A items” or “section 62A assets”) are broadly equivalent to “collectables” and “personal use assets” for tax purposes (see ITAA97 s 108-10(2); 108-20(2)). The prescribed rules are set out in SISR reg 13.18AA (see “SISR rules for section 62A assets” below). For an SMSF that had investments in section 62A assets on 30 June 2011, the prescribed rules apply only from 1 July 2016. Interaction with other SISA rules The reg 13.18AA rules deal with making, holding and realising of section 62A assets, eg how the asset is acquired, stored and used while in the SMSF, and disposed of (see below). The trustees must comply with these rules in addition to any other SIS provision that may apply to a particular asset type or class, or in a particular case. For instance, they do not override s 62 (the sole purpose test: ¶5-410), and fund investments covered by s 62A must comply with both the sole purpose test and the prescribed rules. Section 62A applies where the asset is the primary investment and also where the asset is attached to an investment or is a related benefit of an investment. Example Jemma, as the trustee of her SMSF, makes an investment in the Evergreen Golf Club. By making the investment, Jemma receives a complimentary membership. Although the membership is not the primary investment, Jemma’s SMSF must comply with reg 13.18AA in relation to the membership.

SISR rules for section 62A assets Regulation 13.18AA sets out the rules involving investments that are section 62A items from 1 July 2011 or from 1 July 2016 for SMSFs which were holding such assets on 30 June 2011. The assets taken to be section 62A items to which reg 13.18AA applies are all the investments set out in s 62A(a) to (l) (see above) (reg 13.18AA(1)). Asset must not be leased to a related party Each trustee of an SMSF commits an offence if the fund enters into a lease or lease arrangement with a related party in relation to an investment involving a section 62A item (reg 13.18AA(2)). “Lease arrangements” are informal arrangements under which a person uses or controls the use of fund property, including where no rent is payable is exchange (SMSFR 2009/4: ¶5-455). This would prevent SMSF trustees from making an investment in a section 62A item for the purpose of leasing it to a related party. For the meaning of “related party”, see ¶3-470. Asset must not be stored in private residence of related party Each trustee of an SMSF commits an offence if the fund stores a section 62A item in the private residence of a related party (reg 13.18AA(3)). This rule would: • allow SMSF trustees to store a section 62A item in premises owned by a related party provided that the premises is not the home of a related party • limit any personal enjoyment that a related party can gain from an investment in a section 62A asset. Decision on storage must be documented Each trustee of an SMSF commits an offence if the fund does not keep a written record of the reasons for the decision on where to store a section 62A item. A written record of the reason must be kept for at least 10 years after the decision (reg 13.18AA(4)).

This rule is to ensure that SMSF trustees give consideration to what is appropriate storage for maintaining an investment involving a section 62A item as an investment that produces retirement income, rather than one that provides current day enjoyment. Item must be insured in fund’s name Each trustee of an SMSF commits an offence if the fund does not insure a section 62A item in the name of the fund within seven days of acquisition of the item (reg 13.18AA(5)). This requirement does not apply to memberships of a sporting or social club, as these items generally cannot be insured. This rule is to protect the section 62A item from damage and to prevent a loss of retirement income. Item must not be used by related party Each trustee of an SMSF commits an offence if a related party uses a section 62A item owned by the fund and the item is an item of jewellery, a car, a recreational boat or a membership of a sporting or social club that is held by the fund (reg 13.18AA(6)). Transfer of asset to related party requires independent valuation Each trustee of an SMSF commits an offence if the fund disposes of a section 62A item to a related party at a price other than a market price determined by a qualified independent valuer (reg 13.18AA(7)). This rule is to ensure that a related party does not receive a current day benefit from such a transaction, and that the transaction does not cause detriment to the fund (for example by purchasing the section 62A item from the fund at below market value). Strict liability offence Each rule in reg 13.18AA(2) to (7) is a strict liability provision (with a penalty not exceeding 10 penalty units). Strict liability is defined in s 6.1 of the Criminal Code (¶3-820). ATO guidelines — valuation of assets The ATO’s guidelines on the valuation of assets for the purposes of the SISR rules for section 62A assets are noted at ¶18-775.

¶5-440 Loans or financial assistance to members or relatives The trustees or investment managers of an SMSF must not lend money of the fund to a member or a relative of a member (SISA s 65(1)(a)) or give any other financial assistance using the resources of the fund to a member or a relative of a member (s 65(1)(b)) (¶3-420). The meaning of “relative” is defined in SISA s 10(1) (see ¶3-020). A “relative”, as defined, does not include an associate of a member. For example, an SMSF may lend money to a “related party” of a member (eg an associated company), but such a loan will be an in-house asset of the fund and be subject to the in-house asset rules (¶5-455). A “loan” includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings (SISA s 10(1)). The concept of financial assistance is very wide (see “ATO guidelines” below). For example, if a fund allows a member or a relative the use of its assets at no cost or uses its assets as a guarantee to secure a personal loan for the member, this may result in a breach. A loan to a partnership where the partners are members of a superannuation fund would contravene the prohibition (ID 2003/711). The prohibition on lending to members or their relatives is not limited by the in-house asset rules in Pt 8 of the SISA (s 65(7)). ATO guidelines SMSFR 2008/1 provides guidelines (and examples) on the meaning of “any other financial assistance”, what constitutes “using the resources of the fund” and what constitutes the giving of financial assistance to “a member of the fund or a relative of a member of the fund” in s 65(1)(b) (¶3-420). Financial assistance can take the form of the giving of a security, charge or guarantee or the taking on of

an obligation, or any other arrangement that, on an objective assessment of the purpose of the arrangement, is in substance a financial accommodation. The ATO considers that the resources of an SMSF are used if an arrangement relies on the fund’s assets, whether or not there is a positive, negative or nil effect on the net assets as a result of that arrangement. Thus, financial assistance using the fund’s resources can include any arrangement if the assets of the SMSF are converted into other assets, diverted, diminished or put at risk, or if there is any prejudice to the fund’s financial position. The ATO states that the prohibition on giving financial assistance to a member or a relative of a member of the fund is not limited to transactions directly between the SMSF and a member or a relative and can cover an arrangement whereby the fund’s resources are used to give financial assistance to a member or a relative through a third party or an interposed entity (SMSFR 2008/1, para 10). The question of whether financial assistance is given using the fund’s resources for the purposes of s 65(1)(b) must be determined taking into account the policy intent of s 65. The Commissioner’s view is that financial assistance using the fund’s resources is given if the arrangement relies on the fund’s assets, whether or not there is a positive, negative or nil effect on the net assets as a result of that arrangement. Thus, financial assistance using the fund’s resources can include any arrangement where the fund’s assets are converted into other assets, diverted, diminished or put at risk, or where there is a prejudice to the financial position of the SMSF. It could also include the payment of a bona fide debt to an SMSF member or a relative before its due date (SMSFR 2008/1, para 71). ATO guidelines — life insurance under a buy-sell agreement An SMSF contravenes the prohibition in s 65(1)(b) about giving financial assistance (and the sole purpose test: ¶5-410) by purchasing a life insurance policy over the life of a member of the SMSF where the purchase is a condition and consequence of a buy-sell agreement that the member has entered into with his brother as co-owners of their business. On the facts and circumstances of the case, the arrangement as stipulated under the agreement constitutes the provision of financial assistance to the member’s brother (ID 2015/10: see further ¶5-410). Taxpayer alert — non-commercial use of promissory note arrangements TA 2009/10 Non-commercial use of negotiable instruments warns about SMSF trustees and members attempting to use negotiable instruments (promissory notes) in a non-commercial and contrived manner which may potentially breach the restriction on SMSFs providing financial assistance to members or relatives (¶5-450). TA 2010/5 The use of an unrelated trust to circumvent superannuation lending restrictions warns about arrangements where an SMSF invests funds in an unrelated trust which on lends the funds to a member or a relative of the member in an attempt to circumvent the s 65 prohibition (¶3-420).

¶5-445 Restrictions on SMSF borrowings The trustee of an SMSF is prohibited from borrowing money or maintaining an existing borrowing, except in limited circumstances (SISA s 67). The exceptions permit temporary borrowings as below: • borrowings for a maximum of 90 days to meet benefit payments due to members or to meet a surcharge liability as long as the borrowing does not exceed 10% of the fund’s total assets • borrowings for a maximum of seven days to cover the settlement of security transactions if the borrowing does not exceed 10% of the fund’s total assets (¶3-410). Exception — borrowing permitted under limited recourse borrowing arrangements Another exception to s 67(1) allows the trustee of an SMSF to borrow money, or maintain a borrowing, for the acquisition of a single acquirable asset under what is commonly called a “limited recourse borrowing arrangement” (LRBA) (see s 67A and 67B). The LRBA rules apply from 7 July 2010. They replaced a similar exception which applied under former s 67(4A) from 24 September 2007 to 7 July 2010. SMSF Ruling SMSFR 2012/11 explains key concepts and application of the LRBA exception, such as:

• what is an “acquirable asset” and a “single acquirable asset” • “maintaining” or “repairing” the acquirable asset distinguished from “improving” it, and • when a single acquirable asset is changed to such an extent that it is a different (replacement) asset. The LRBA exception, including the ruling and examples of LRBAs, are discussed in detail at ¶3-415. Safe harbours for LRBAs The non-arm’s length income (NALI) provisions in s 295-550 of the ITAA97 may apply when an SMSF trustee acquires an asset under an LRBA that is not an arm’s length dealing (¶7-170). The ATO has issued Practical Compliance Guideline PCG 2016/5 which sets out safe harbours for LRBAs entered into by SMSF trustees to acquire assets. The Guidelines states that an LRBA structured in accordance with PCG 2016/5 is consistent with an arm’s length dealing and that the non-arm’s length income provisions do not apply purely because of the terms of the borrowing arrangement (see further ¶5-448). The determination as to whether the ordinary or statutory income of an SMSF will be non-arm’s length income under ITAA97 s 295-550(1) when the parties to a scheme have entered into an LRBA on terms which are not at arm’s length is discussed in TD 2016/16 (see ¶7-170). ATO guidelines on borrowings SMSFR 2009/2 provides guidelines on the meaning of “borrow money”, “maintain an existing borrowing of money” and “money” in s 67. Essentially, a “borrowing” is an arrangement that exhibits two necessary characteristics: • a temporary transfer of an amount of money from one entity (the lender) to another (the borrower), and • an obligation or an intention on the part of the borrower to repay that amount to the lender (which may be satisfied by the provision of an asset). An “existing borrowing is maintained” in circumstances where a borrowing arrangement previously entered into remains in place in circumstances where the SMSF trustee is obliged or intends to repay the money lent. This includes circumstances where an SMSF trustee has borrowed the money and where an SMSF trustee has become liable for obligations under a borrowing arrangement entered into by another party. “Money” is any generally accepted medium of exchange for goods, services or the payment of debts that confers complete liquidity on its holder. It includes both Australian and foreign currency.

¶5-448 LRBAs — safe harbours Practical Compliance Guideline PCG 2016/5 sets out the safe harbour terms upon which SMSF trustees may structure their limited recourse borrowing arrangements (LRBAs) entered into by SMSFs to acquire assets consistent with an arm’s length dealing. That is, for the purposes of the non-arm’s length income (NALI) provisions of the ITAA97 (see ¶7-170), the Commissioner accepts that an LRBA structured in accordance with PCG 2016/5 is consistent with an arm’s length dealing and that the NALI provisions do not apply purely because of the terms of the borrowing arrangement. Relevantly, where SMSF trustees have entered into an LRBA which does not meet all of the “safe harbour” terms set out in the Guideline, and the trustees are unable to be assured that the Commissioner will accept the arrangement as being consistent with an arm’s length dealing, it does not mean that the LRBA is deemed not to be on arm’s length terms. It merely means that there is no certainty provided under this Guideline and the trustees will need to be able to otherwise demonstrate that the arrangement was entered into and maintained on terms consistent with an arm’s length dealing. For example, the trustees may demonstrate this by providing evidence that their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances. Safe harbours

The Guideline applies to SMSF trustees that have entered into LRBAs which meet the requirements of SISA s 67A or former s 67(4A) (¶5-445), regardless of whether the LRBA commenced before or after the publication of the Guideline (ie 6 April 2016). There are two safe harbours: • one for LRBAs used to acquire real property or to refinance a borrowing used to acquire real property, and • one for LRBAs to acquire shares in a stock exchange listed company or units in a listed trust and where an SMSF uses an LRBA to refinance a loan used to acquire such a collection. The safe harbours set out the characteristics of relevant loans, in the 2015/16 and 2016/17 and later income years, which, if present, will be accepted as being consistent with an arm’s length dealing. The characteristics cover the loan agreement, the interest rate (fixed or variable) and term of the loan, the loan to market ratio (LVR), security and guarantee (if any), and loan repayment terms (nature and frequency). LRBA does not meet safe harbour terms If an LRBA does not meet the safe harbour terms, the trustee may still be able to establish that it is on arm’s length terms by providing evidence that the LRBA is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances. The Guideline includes examples of loan arrangements that do not meet the terms of the safe harbours and the options to make them compliant, such as: • altering the terms of the LRBA • refinancing through a commercial lender, and • terminating the loan.

¶5-450 Acquiring assets from a related party The trustee or investment manager of an SMSF is prohibited from intentionally acquiring assets from related parties, subject to certain exceptions (SISA s 66(1)). Before 12 August 1999, the prohibition applied only to acquisition of assets from fund members and their relatives rather than the wider concept of “related party”. Briefly, a “related party” of a fund covers members of the fund and standard employer-sponsors of the fund and their Part 8 associates. A “Part 8 associate” of a member would include the member’s relatives, business partners and any companies or trusts that they control (either alone or with other associates). Similarly, an associate of a standard employer-sponsor would include the business partners and companies or trusts that the employer controls (either alone or with other associates) or companies or trusts which control the employer. The terms “related party”, “Part 8 associate”, “member”, and “standard employer-sponsor” are discussed in detail at ¶3-470. The ATO’s SMSFR 2010/1 provides extensive guidelines and examples on the application of s 66(1) to in specie contributions to an SMSF by a related party of the fund (¶3-430). Exceptions to the s 66(1) prohibition are where the assets are acquired at market value and: • the asset is an in-house asset and its acquisition would not result in the level of in-house assets of the fund exceeding 5% of the fund’s total assets, or an asset that is specifically excluded from being an in-house asset (s 66(2A)) • the asset is a “listed security”, eg shares, units or bonds listed on an approved stock exchange (s 66(2)(a), (5)) • the asset is “business real property” (s 66(2)(b)) • the asset is acquired under a merger between superannuation funds (s 66(2)(c)), or • the Commissioner has made a written determination that the asset is of a kind that may be acquired

by any fund or by a class of funds (s 66(2)(d)). The business real property exception and particular ATO guidelines are discussed below. All of the other exceptions are discussed in ¶3-430. From 17 November 2010, an exception applies to facilitate inter-superannuation fund asset transfers as a consequence of a marriage/relationship breakdown (in specie acquisitions of assets by an SMSF) (s 66(2B), (2C)). This exception incorporated a similar narrower exception previously provided by ATO SPR 2006/MB1 (see ¶3-430). Business real property exception The “business real property” of an entity means: • any freehold or leasehold interest of the entity in real property • any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer, or • another class of interest in relation to real property that is prescribed in regulations for this purpose, where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not) but does not include any interest held in the capacity of beneficiary of a trust estate (s 66(5)) (see “ATO guidelines on business real property” below). For SMSFs (and other regulated superannuation funds with fewer than five members, eg a small APRA fund), the concept of business real property is particularly important due to the concessional treatment of such property as below: • the business real property of a related party of an SMSF acquired at market value by the SMSF trustee or investment manager does not contravene the prohibition on related party asset acquisitions in s 66(1), and • real property that is leased by an SMSF to a related party, or is the subject of an enforceable lease arrangement between an SMSF and a related party, is not an in-house asset of the SMSF under SISA Pt 8 if the interest held in the property by the SMSF is business real property (see ¶5-455). From 12 May 1998, an SMSF may use up to 100% of its assets to acquire business real property from a related party (previously a limit of 40% applied). Examples of business real property include land on which business is conducted (eg a shop or factory) and land that is the subject of a business (eg land held by a property developer for development or redevelopment, or in the process of being developed or redeveloped). Generally, a single residential rental property will not be treated as business real property unless it forms part of a business of owning and leasing residential property. Shares in a property owning company are not regarded as business real property as the shares are personal property and they do not represent freehold or leasehold property rights. Therefore, such shares cannot be acquired from related parties, unless they come within the listed securities exception as noted above. “Business” is defined to include any profession, trade, employment, vocation or calling carried on for the purposes of profit and the carrying on of primary production and the provision of professional services, but not occupation as an employee (s 66(5)). Whether an entity is carrying on a business is determined on a case-by-case basis. The definitions of “business” and “primary production business” for the purposes of the business real property definition are the same as under the income tax law. In this context, the Commissioner’s views expressed in TR 97/11 and SGR 2005/1 are equally applicable. “Wholly and exclusively” test and primary production The use of property “wholly and exclusively” in a business does not mean that the business must be carried on by the entity that is the related party of the fund. For example, the related party may be conducting a business on part of the land to which it has title, but may have subdivided and let out a

vacant area to another business. However, where a property is used only partly for business, the “wholly and exclusively” test will not be satisfied, eg a doctor’s residence where part of the home is set aside for a medical practice, or where a mechanic works from his home garage. In such cases, the trustee of the fund cannot acquire the residential property from the member under the business real property exception. There is a special concession to the “wholly and exclusively” business use test for real property that is used in a primary production business. From 11 August 1999, real property used in one or more primary production businesses will satisfy the test of being used wholly and exclusively in that business, or those businesses, if an area of no more than two hectares of the property contains a dwelling used primarily for domestic or private purposes, and that area (of no more than two hectares) is used primarily for domestic or private purposes. A farming property can thus be business real property where the house and garden of the owner or manager does not exceed two hectares and the domestic or private purposes do not constitute the predominant use of the whole property. This restriction extends the business real property exception to genuine primary production businesses, but not to hobby farms. ATO guidelines on business real property SMSFR 2009/1 sets out the Commissioner’s views on the meaning and application of the term “business real property” in relation to SMSFs. Taxpayer alert — acquiring a promissory note TA 2009/10 Non-commercial use of negotiable instruments warns about arrangements involving noncommercial use of negotiable instruments to pay a benefit from or make a contribution to an SMSF under which the SMSF trustees and members attempt to use negotiable instruments in a non-commercial and contrived manner to artificially avoid liquidity problems, change the timing of transactions or to obtain taxation advantages. Taxpayer alert — non-market value acquisition of shares or share options by an SMSF TA 2010/3 warns about an arrangement where an individual nominates his/her SMSF as the acquirer of shares or share options under an employee share scheme (ESS) where the SMSF pays no, or less than market value, consideration for the shares or share options. This arrangement may give rise to a breach of s 66(1) in certain circumstances, and to tax and other issues concerning the recognition of any superannuation contributions and the application of the excess contributions tax provisions (¶6-500).

¶5-455 Investing in in-house assets Subject to certain exceptions, an “in-house asset” includes an asset of the fund that is: • a loan to a related party of the fund • an investment in a related party or a related trust of the fund • subject to a lease or a lease arrangement with a related party of the fund (SISA s 71(1)). An “asset” means any form of property, including money (whether Australian or foreign currency). A “loan” includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings. To “invest” means to apply assets in any way, or make a contract, for the purpose of gaining interest, income, profit or gain (SISA s 10(1)). A detailed explanation of the meaning of “asset”, “loan”, “investment in”, “lease” and “lease arrangement” may be found in SMSFR 2009/4. The meaning of “related party” is discussed in ¶3-470. A related trust of a fund means a trust that a member or a standard employer-sponsor of the fund “controls” (¶3-450, ¶3-470). The in-house asset rules are set out in SISA Pt 8 and are discussed in detail at ¶3-450. Among other things, the rules limit an SMSF to holding no more than 5% of its assets as in-house assets, based on market value. For the purposes of determining the market value ratio, the trustees must value all of the SMSF’s assets and in-house assets at market value. An SMSF cannot value units held in a related unit

trust at historical cost, ie at its purchase price (SMSFD 2008/2). Assets excluded as in-house assets Certain assets are specifically excluded from the in-house asset definition in SISA s 71(1) (see “What are excluded as in-house assets” in ¶3-450; s 71(1)(a)–(j)). For an SMSF, some of the more important exclusions cover investments in widely-held unit trusts (see ¶3-450) (s 71(1)(h)), investments in related companies and unit trusts that meet the conditions in SISR reg 13.22B to 13.22D (s 71(1)(j)) (see “Investment in related company or trust” below and “Exception — investment in non-geared unit trusts and companies” at ¶3-450) and business real property subject to a lease or lease arrangement between the fund and a related party (see “Leases and lease arrangements” in ¶3-450) (s 71(1)(g)). As part of a limited recourse borrowing arrangement, if, at a time, an asset (the investment asset) of an SMSF is an investment in a related trust of the fund (as described in s 67A(1)(b) in connection with a borrowing covered by s 67A(1) and the only property of the related trust is the acquirable asset mentioned in that paragraph), the investment asset is an in-house asset only if the acquirable asset would be an inhouse asset of the SMSF if it were an asset of the fund at the time (s 71(8)) (see “Interaction with inhouse asset rules” in ¶3-415). ATO determination that an asset is not an in-house asset The Commissioner, as the Regulator of SMSFs, may determine under s 71(1)(e) that a particular asset of an SMSF is not, or will not be, an in-house asset of the fund. Practice Statement PS LA 2009/8 states that the Commissioner would exercise his discretion under s 71(1)(e) based on all relevant facts and circumstances in each case, for example, if the facts of the case indicate circumstances that are unusual or out of the ordinary. Investment in related company or trust Section 71(1)(j)(ii) of SISA excludes certain assets specified in reg 13.22B and 13.22C from the meaning of in-house asset (reg 13.22B applies to an investment in a related company or related unit trust which was made before 28 June 2000, and reg 13.22C applies to such investments made on or after 28 June 2000). It is relevant to note that reg 13.22B and 13.22C apply regardless of whether the shares or units satisfy the requirements contained in reg 13.22B(2) or 13.22C(2) or whether they are excluded from being inhouse assets under another SISA provision. Regulations 13.22B and 13.22C apply subject to reg 13.22D. That is, if any of the events in reg 13.22D(1) happen in respect of an asset to which reg 13.22B or 13.22C apply, these regulations cease to apply to all current and future investments in that company or unit trust. Interpretative Decision ID 2012/52 and ID 2012/53 provide guidelines on the application of the above provisions where an SMSF has investments in a related unit trust where borrowings are made and repaid and additional investments in the unit trusts are made by the SMSF (see ¶3-450: “Exception — investment in non-geared unit trusts and companies” and “Conversion of a geared unit trust to a nongeared unit trust”). SMSFD 2008/1 states that an SMSF’s investment in a related company or unit trust can be excluded from being an in-house asset even though an event in reg 13.22D(1) has happened, which means the SMSF’s investments in a different related company or unit trust are in-house assets of the fund. Interest outstanding after the repayment of the principal loan by the employer-sponsor of a superannuation fund to the wholly-owned unit trust of the fund is not a loan from the fund to the employersponsor (former ID 2003/155). The display of a work of art owned by an SMSF in a member’s residence can give rise to an in-house asset (former ID 2004/250: see SMSFR 2008/2). Unpaid trust distributions — a loan or an investment? SMSFR 2009/3 sets out the Commissioner’s views on the potential contravention of the in-house asset rules if an SMSF is presently entitled to a distribution from a related or non-arm’s length trust, and payment of this amount is not sought. The Commissioner states that the recording of an unpaid trust distribution as a loan in the fund’s accounts will not of itself determine that the amount is a loan for the purposes of the in-house asset rules. However, it is possible for other documents to be executed between

the trustee of the SMSF and the trustee of the trust to bring into existence a loan between the parties. An example of this would be the execution of a loan agreement. In addition, it is the Commissioner’s view that, when an overall consideration of the factors surrounding the non-payment of the trust distribution may be seen as an arrangement for the provision of credit or financial accommodation, this will satisfy the extended definition of loan in s 10(1) (see above). Consequently, the unpaid amount will be included in the in-house assets of the SMSF, where: • the trust in question is a related party of the SMSF, and • the circumstances indicate that a loan agreement has been entered into, or that a consensual agreement for the provision of credit or other form of financial accommodation has been reached, or can be inferred, between the parties. Taxpayer alerts — joint ventures, promissory note arrangements TA 2009/16 describes an arrangement where an SMSF enters into an agreement (sometimes referred to as a joint venture agreement) with a related trust to acquire assets such as rental property. Non-commercial use of promissory note arrangements TA 2009/10 warns about SMSF trustees and members attempting to use negotiable instruments (promissory notes) in a non-commercial and contrived manner which may potentially breach the in-house asset rules.

¶5-458 Investing in derivatives and charging fund assets Subject to certain exceptions, regulated superannuation funds are prohibited from: • recognising, encouraging or sanctioning an assignment of a member’s or beneficiary’s superannuation interest or of a charge over or in relation to a member’s benefits, or • giving of a charge over or in relation to an asset of the fund (SISR reg 13.12, 13.13, 13.14, 13.15A) (¶3-260). An exception allows a fund to give a charge of the fund’s assets in relation to a derivatives contract (generally, an options or futures contract relating to any right, liability or thing) (SISR reg 13.15A(2)). From 10 May 2016, the reg 13.15A exception was expanded to cover fund trustees giving a charge over the fund’s assets in over-the-counter (OTC) derivative transactions, whether cleared or uncleared so as to address certain inadequacies of the exception previously. Consistent with this, the definition of “derivative” has also been amended to mean any of the following: (a) a derivative (within the meaning of Ch 7 of the Corporations Act 2001) (b) a foreign exchange contract (within the meaning of that Chapter) (c) an arrangement that is a forward, swap or option, or any combination of those things, in relation to one or more commodities, excluding any arrangement that is of a kind mentioned in reg 6(2) of the Payment Systems and Netting Regulations 2001 (¶3-260). SMSFs may use derivatives to manage risk by protecting assets against changes in the market (hedging). The use of derivatives must be specified in the fund’s investment strategy under s 52B(2)(f) (see ¶5-432) and, if required, a derivatives risk statement must be prepared and/or obtained from the relevant parties. An SMSF’s ability to invest in derivative products as part of its investment strategy is implied as the SISA contains specific provisions dealing with investment in derivative products. For example, SISR reg 13.15A expressly provides that a regulated superannuation fund (including an SMSF) may give a charge over, or in relation to, an asset of the fund if the charge is given in relation to a derivatives contract where the charge is given in order to comply with the rules of an Australian or international exchange that requires the performance of obligations in relation to the derivatives contract to be secured (¶3-260). For funds that give such a charge, they must have in place a derivatives risks statement prepared in accordance with

reg 13.15A(1)(c) and the investment to which the charge relates must be made in accordance with that statement. Apart from the above, SMSF trustees are not generally required to prepare derivatives management strategies or plans in the same way as APRA-regulated superannuation funds for licensing and registration purposes under SISA Pt 2A as that Part does not apply to SMSFs (¶3-485). However, SMSFs with investments in derivative products should consider having a derivatives management statement in place as part of its monitoring and control process. The ATO states that an SMSF’s derivatives management statement should be subject to an annual signoff by its auditor that the procedures laid down in the statement were followed and any changes to the statement were approved by the trustee of the SMSF. As a general rule, an SMSF should not use derivatives for speculation in situations where: • the net exposure of the fund to an asset class is outside the limits set out in the fund’s investment strategy, or • the fund’s total portfolio is geared up through derivatives to circumvent the borrowing limitations imposed by SISA s 67 (ATO publication “SMSFs — Role and responsibilities of approved auditors”). The derivatives charge ratio reporting requirement in the SISR to APRA, and in the Corporations legislation to fund members, do not apply to SMSFs (SISR reg 2.29(2); CR reg 7.9.38).

¶5-460 Payment of benefits Regulation 6.17 of the SISR sets out restrictions which ensure that the benefits of a member of a regulated superannuation fund (or ADF) can be paid (cashed), rolled over or transferred, or otherwise dealt with only in accordance with the payment and preservation operating standards in SISR Pt 6. The cashing of a member’s benefits comes under two main rules — compulsory cashing and voluntary cashing, as discussed below. Related SISR rules set out the persons to whom benefits are paid and the form of the benefit payment and, restrictions under reg 6.21(2A) and (2B) on the cashing of a deceased member’s benefits as an income stream (see ¶3-286). The governing rules of an SMSF may permit members to make death benefit nominations that are binding on the trustee, whether or not in circumstances that accord with the SISR rules in reg 6.17A which set out the procedures for making binding death benefit nominations (¶3-288). However, a death benefit nomination is not binding on the trustee to the extent that it nominates a person who cannot receive a benefit as prescribed by the SISR operating standards (reg 6.21; 6.22: ¶3-286; SMSFD 2008/3: ¶3-288). The restrictions under reg 6.17 do not apply if a court makes a forfeiture order (however called) forfeiting part or all of the member’s benefits in the fund to the Commonwealth, a state or a territory (reg 6.17(2C)) (¶3-286). When superannuation benefits are paid, trustees must also ensure that tax withholding and reporting under the PAYG rules (if applicable) are also met (see Chapter 11, ¶18-680, ¶18-684). TA 2009/10 warns about SMSF trustees and members attempting to use negotiable instruments (promissory notes) in a non-commercial and contrived manner which may potentially breach the payment standards (¶5-450). TA 2009/1 warns about arrangements incorrectly offering people early release of their preserved superannuation benefits prior to retirement without meeting statutory conditions for such release (see ¶3280). Compulsory cashing of benefits From 10 May 2006, a member’s benefits in an SMSF must be cashed as soon as practicable when the member dies (SISR reg 6.21). This rule applies to all of the member’s benefits in the fund, regardless of whether a pension was previously paid from those benefits to the deceased member. Voluntary cashing of benefits

A member’s benefits in an SMSF are classified as one or more of the following: • preserved benefits • restricted non-preserved benefits, or • unrestricted non-preserved benefits. Subject to grandfathering rules, all contributions which are made by or on behalf of a member to a superannuation fund, and all earnings in respect of periods after that date, are preserved benefits. This applies regardless of who the contributor is (eg a contributing spouse or a member personally) and whether the contributor is entitled to tax concessions for the contributions (eg undeducted contributions must also be preserved). A member’s preserved benefits in the SMSF may only be cashed if a “condition of release” (set out in SISR Sch 1: see ¶3-280) is satisfied by the member, subject to any “cashing restrictions”. Cashing restrictions specify the form in which the benefits must be taken (eg as a non-commutable life pension). An employment termination payment that is rolled over to a superannuation fund is a preserved benefit (such payments from 1 July 2007 cannot be rolled over to a fund, with one exception: ¶8-830). Restricted non-preserved benefits also cannot be cashed until the member satisfies a condition of release. Unrestricted non-preserved benefits can be cashed at any time by the member (ie it does not require a condition of release to be met) and are payable at the request of the member. An example of this type of benefit is where the member previously satisfied a condition of release in respect of the benefits and decided to retain those funds in the superannuation fund. The SISR rules on voluntary cashing of benefits are discussed in detail in ¶3-286 onwards.

¶5-470 Funds providing pensions Where permitted by its governing rules (¶5-300), an SMSF may pay a pension to its members. From 12 May 2004, a superannuation fund providing a “defined benefit pension” (see below) must have at least 50 members. One effect of this rule is that, where permitted by its trust deed, an SMSF may provide a pension that is not a defined benefit pension to members (eg an account-based pension) regardless of its membership number. What is a pension? A benefit provided by a superannuation fund to its members is taken to be a “pension” for SISA purposes, and for tax purposes (ie to qualify for taxation as a superannuation income stream and/or a pension rebate: ¶8-150, ¶8-200), if the pension is provided by a fund whose governing rules meet the minimum standards prescribed in SISR reg 1.06. These standards set out the conditions that must be met, for example, the minimum payment amount, restriction on commutation, and so on (¶3-390). A “defined benefit pension” means a pension mentioned in SISA s 10(1) (ie an income stream which complies with the SISR minimum standards: ¶3-390) other than: • a pension wholly determined by a policy of life insurance purchased or obtained by the trustee of the fund solely for the purposes of providing benefits to a member of the fund • an allocated pension • a market linked pension, or • an account-based pension (SISR reg 1.03(1)). As defined, a defined benefit pension will generally cover income streams such as lifetime pensions or life expectancy pensions provided by a fund. Restriction on SMSF providing defined benefit pensions

An SMSF established on or after 12 May 2004 cannot pay a defined benefit pension to its members, and an SMSF established before 12 May 2004 cannot pay a defined benefit pension if the governing rules of the fund are amended on or after 12 May 2004 to provide for the payment of a defined benefit pension (SISR Div 9.2B; reg 9.04F). This is the effect of SISR reg 9.04I which provides that a regulated superannuation fund with fewer than 50 members must not provide a defined benefit pension. Special concessions for pension funds SMSFs paying current pensions enjoy special tax concessions in the form of a current pension income exemption and a CGT exemption when the CGT assets supporting the fund’s current pension liabilities are disposed of. The concessions are not available when a fund ceases to have current pension liabilities, for example, when an income stream benefit provided by the fund ceases to qualify as a pension due to non-compliance with the SISR pension standards or is commuted to the accumulation phase: ¶3-390. There are special rules which allow the tax concessions to continue for a specified period when a fund ceases to have current pension liabilities due to the death of a member who was receiving a pension that was not reversionary (¶7-153).

¶5-480 Diverting personal services income to SMSFs Taxpayer Alert TA 2016/6 Diverting personal services income to self-managed superannuation funds warns about arrangements where individuals (typically SMSF members at or approaching retirement age) purport to divert income earned from their personal services to an SMSF to minimise or avoid tax on their income under arrangements as below.

These arrangements typically display all or most of the following features: 1. An individual performs services for a client, or an acquirer of the personal services (client), for which the individual does not directly receive any (or adequate) consideration for the services provided. 2. The client does not pay or remit funds to the individual directly; rather the client remits the consideration for, or in respect of, the services provided by the individual to a company, trust or other non-individual entity (entity). The entity may be an unrelated third party. 3. The entity then distributes the income to an SMSF, of which the individual is a member, purportedly as a return on an investment of the SMSF in the entity. 4. The trustee of the SMSF treats the income received as subject to a concessional rate of tax, or as exempt current pension income of the SMSF. The arrangement may also include one or more of the following characteristics or variations:

5. The income may be remitted by the entity to the SMSF via a written or oral agreement between the entity and SMSF, instead of as a return on an investment in the entity. 6. The SMSF may receive the income from more than one entity or through a chain of entities. Alternatively, the entity may distribute the income to more than one SMSF of which the individual and/or associates are members. ATO concerns The ATO is concerned that in order to avoid paying tax at their personal marginal rate these arrangements are being entered into by individuals in an attempt to divert their personal services income to an SMSF, where the income is concessionally taxed, or treated as exempt current pension income (¶5470). The ATO considers that: • the arrangement may be ineffective at alienating income such that it remains the assessable income of the individual under ITAA97 s 6-5 • the income may be included in the individual’s assessable income as personal services income under ITAA97 Pt 2-42 • the amounts received by the SMSF may constitute non-arm’s length income of the SMSF under ITAA97 s 295-550 such that the income is not eligible to be concessionally taxed and is not exempt current pension income (¶7-153) • the general anti-avoidance rules in ITAA36 Pt IVA (¶16-080) may apply to cancel tax benefits obtained by the individual • other compliance issues for arrangements of this type may include: – the amounts received by the SMSF under the arrangement may be a contribution to the fund and subject to the contributions caps which may have excess contributions tax consequences (¶6500), and/or – superannuation regulatory issues (in particular the SMSF is maintained for purposes other than those set out in SISA s 62 (the sole purpose test: ¶3-200), which may lead to the SMSF being made non-complying or the disqualification of an individual as a trustee. Penalties may apply to participants and promoters of this type of arrangement, including serious penalties under Div 290 of Sch 1 to the TAA for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. For information about the personal services income regime, see ATO fact sheet Personal Services Income (www.ato.gov.au/Business/Personal-services-income). Voluntary disclosure offer by ATO The ATO has released a voluntary disclosure offer for those involved in arrangements as described in Taxpayer Alert TA 2016/6.

SMSF Administration and Audit ¶5-500 Administrative duties A range of administrative duties and obligations are imposed on trustees of SMSFs and their auditors and actuaries under the SIS and tax legislation. The principal duties and obligations relating to record-keeping, annual returns, ATO reporting and audit

reports are summarised in ¶5-510 and following. Further commentary on administration matters for regulated superannuation funds generally (including SMSFs, as applicable) may be found in Chapter 3, as below: • Providing information to the Regulators — ¶3-310 • Accounts, audit and reporting by superannuation entities — ¶3-315 • Financial management — ¶3-330 • Other administration obligations — ¶3-340. Reporting and disclosure requirements under the Corporations Act 2001 are discussed in Chapter 4. The tax administration and compliance duties under the PAYG regime for superannuation funds are discussed in Chapter 11. As with most SIS and tax requirements, penalties may be imposed for failure to comply with the requirements. In serious cases of breach, the fund’s complying status may also be put at risk (¶2-140). The Wolters Kluwer online product Australian Practical Guide to SMSFs provides additional coverage of SMSF administration obligations and duties. Valuation of assets In SISA, “market value”, in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made: • the buyer and the seller dealt with each other at arm’s length in relation to the sale • the sale occurred after proper marketing of the asset, and • the buyer and the seller acted knowledgeably and prudentially in relation to the sale (SISA s 10(1)). An SMSF is required to have an appropriate valuation of assets in certain circumstances under SISA, such as: • preparation of financial accounts (¶3-315, ¶5-510) • disposing of certain collectables and personal use assets to a related party of the fund (¶5-437) • acquiring assets between SMSFs and related parties (¶5-450) • ensuring that investments are made and maintained on an arm’s length basis (¶5-435) • determining the market value of an SMSF’s in-house assets as a percentage of all assets in the fund (¶5-455), and • determining the value of assets that support a member’s superannuation pension (¶3-390, ¶5-470). ATO valuation guides • Form for instructing your valuation consultant — www.ato.gov.au/forms/form-for-instructing-yourvaluation-consultant • Valuation guidelines for self managed superannuation funds — www.ato.gov.au/Super/Self-managedsuper-funds/In-detail/SMSF-resources/Valuation-guidelines-for-self-managed-super-funds • Market valuation for tax purposes — www.ato.gov.au/general/capital-gains-tax/in-detail/marketvaluations/market-valuation-for-tax-purposes (¶18-775).

¶5-508 Registration as approved SMSF auditor

The trustee of an SMSF is required to ensure that an approved auditor is appointed to make a financial and compliance audit of the fund and to give a report to the trustee in each financial year (SISA s 35C: ¶5-510). A person must be registered as an “approved SMSF auditor” under the SISA in order to audit an SMSF on or after 1 July 2013. An “approved SMSF auditor” means a person who is registered under SISA s 128B, but does not include: • a person for whom an order disqualifying a person from being an approved SMSF auditor, or suspending a person’s registration as an approved SMSF auditor, is in force under SISA s 130F, or • a person who is disqualified from being or acting as an auditor of all superannuation entities under SISA s 130D (SISA s 10(1)). ASIC regulatory guide and class order Applicants for registration as approved SMSF auditors are encouraged to use the application checklist to ensure that they submit a complete application — available at download.asic.gov.au/media/3305613/website-smsf-auditor-checklist.pdf. ASIC Regulatory Guide RG 243 provides guidelines on how to apply for registration as an approved SMSF auditor, the ASIC registers of SMSF auditors, and the continuing legal obligations of approved auditors of SMSFs (www.asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-243registration-of-self-managed-superannuation-fund-auditors). Class Order CO 12/1687 (made pursuant to SISA s 128Q(1)) specifies the competencies that an approved SMSF auditor is required to have under SISA s 128F(c)(i) in all of the following areas — client acceptance and retention, engagement planning, controls, evaluation and testing, substantive testing, forming an opinion and documentation. The competencies are not intended to be a substitute for an audit or assurance program required by the relevant auditing and assurance standards, or the need to understand and apply the requirements of the relevant auditing and assurance standards and ethical standards, or the SISA. Registration as approved SMSF auditor — requirements ASIC has responsibility for registering “approved SMSF auditors” under the SISA (s 128A–128E). ASIC also maintains a register of Approved SMSF Auditors and register of Disqualified SMSF Auditors (SISA s 128J; see RG 243.74–RG 243.78, s 128K; RG 243.79–RG 243.81). Individuals applying to be an approved SMSF auditor must: • be Australian residents (see Adiga’s case below) • have prescribed qualifications and practical experience (see SISR reg 9A.01 to 9A.03; RG 243.14–RG 243.16; RG 243.17–RG 243.20) • satisfy the required competency examination (SISA s 128C) and auditing standards under SISA s 128F(c) (see CO 12/1687, RG 243.91–RG 243.93) • comply with auditor independence requirements (SISA s 128F(d), SISR reg 9A.06; Accounting Professional and Ethical Standards Board APES 110 “Code of Ethics for Professional Accountants”) (see Whittle’s case below), and • comply with any conditions imposed on registration and with any ongoing obligations under SISA (including undertaking continuing professional development (CPD) and holding professional indemnity (PI) insurance under SISA s 128F(a) and (b) (see RG 243.88–RG 243.90, RG 243.94 (CPD); see RG 243.31–RG 243.35 (PI)) • lodge an annual statement with ASIC under SISA s 128G (see RG 243.95; SMSF auditor annual statements (www.asic.gov.au/asic/asic.nsf/byheadline/Lodge+SMSF+auditor+annual+statement? openDocument), and

• notify ASIC of certain matters under s 128H (see RG 243.96–RG 243.97). ASIC must grant an application under s 128A and register the applicant as an approved SMSF auditor if: (a) the applicant has the prescribed qualifications and practical experience and has passed the competency examination, and (b) ASIC is satisfied that the applicant: (i) is capable of performing the duties of an approved SMSF auditor (ii) is unlikely to contravene the obligations of an approved SMSF auditor under SISA Pt 16 Subdiv B, and (iii) is otherwise a fit and proper person to be an approved SMSF auditor (s 128B(1)). Whether a person is a fit and proper person is based on the individual’s circumstances. A person is considered to be a fit and proper person if ASIC is satisfied as to the honesty, integrity and good reputation of the person (see RG 243.30) (see also Law Administration Practice Statement PS LA 2018/1 for ATO guidelines on the “fit and proper person” test). Applicants must lodge an online application for registration with ASIC and pay the prescribed registration fees under the Superannuation Auditor Registration Imposition Act 2012. The ATO is empowered to monitor the conduct of SMSF auditors and, in some cases, may refer an auditor and matters relating to the auditor to ASIC to consider taking further action (SISA s 128P). The Commissioner may exercise the power under s 128P(1) whether or not an order disqualifying or suspending the approved SMSF auditor has been made under SISA s 130F. Law Administration Practice Statement PS LA 2018/1 provides guidance to ATO staff when considering whether to use the Commissioner’s power to refer an SMSF auditor to ASIC. The statement sets out the factors to take into account in forming an opinion on whether an SMSF auditor: • is not a “fit and proper person” to be an approved SMSF auditor • in conducting an audit of an SMSF, has contravened the SISA or SISR, or • has failed to perform adequately and properly any of their required duties and functions. Whittle’s case — disqualification as auditor under SISA s 130F(2) In Whittle v ASIC [2018] AATA 1861, Whittle was the auditor for an SMSF of which her brother was the sole member and for an SMSF of which her de facto partner was the sole member over a period of several years, in addition to her auditing of other funds. Her auditing of her partner’s fund and brother’s fund breached paras 290.104 and 290.105 of the APES 110 Code of Ethics for Professional Accountants, thereby breaching SISA s 128F(d). The ATO had referred the matter to ASIC pursuant to SISA s 128P which resulted in ASIC disqualifying Whittle as an SMSF approved auditor. The AAT affirmed ASIC’s decision under SISA s 130F(2) to disqualify Whittle as an approved SMSF auditor. The Tribunal did not accept that disqualification was more drastic than the circumstances require having regard to the ultimate purpose of s 130F(2)(a)(i) (distinguishing McCormack v ASIC [2016] AATA 1021, as Whittle was performing the precise duties of an SMSF auditor, carrying out audits of SMSFs). SMSF auditor may be liable for damages for breach of contract and common law duties The Supreme Court of New South Wales has held that the auditor of an SMSF was liable to damages for loss resulting from their breach of audit contracts and their common law duties to take reasonable care in the performance of their engagement (Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502). The trustee contended that the auditor failed to exercise reasonable care and skill in the performance of services, as a result of which irregularities in the SMSF went undetected for many years. It also alleged that the auditor failed to establish the value of assets recorded in the financial statements. The trustee also claimed that the auditor’s conduct was in contravention of their obligations as auditors under s 35C,

113, 129 and 130 of the SIS Act. The auditor admitted their failure to identify and report that the SMSF’s financial statements for 2007, 2008 and 2009 were materially inaccurate. However, the auditor submitted that it was not the job of an auditor to value assets and their admission was only that the opinion in the audit reports ought to have included a qualification. The auditor denied the alleged breach of their duties, any misleading and deceptive conduct, and contravention of obligations under the SIS Act. The court held that: • the auditor had breached the audit contracts and their common law duties to take reasonable care in the performance of their engagement. Had a qualified audit report been issued, the trustee would have “called in” the loans and investments at the relevant time. • representations in the audit reports were misleading and deceptive, or likely to mislead or deceive. These representations were a cause of the trustee’s failure to discover the true position regarding the SMSF and, thus, a cause of loss. The trustee suffered the loss of an opportunity to make recoveries for amounts it did not recover and loss of a chance or opportunity to obtain the benefit of recovering earlier in time recoveries actually made. The court quantified the damages in the sum of $2,260,140. The court did not accept the trustee’s submissions in relation to s 35C, 113, 129, 130 and 315 of the SIS Act. Cancellation of registration as an approved SMSF auditor ASIC may cancel a person’s registration as an approved SMSF auditor: • if the person requests a cancellation in writing • if the Regulator is satisfied that the person: (a) has failed to comply with a condition imposed under s 128D on the person’s registration (b) has not performed any significant audit work during a continuous period of five years, and as a result, has ceased to have the practical experience necessary for carrying out audits of SMSFs under the SISA (c) has failed to comply with the person’s obligation to give the Regulator a statement under s 128G (see below), or (d) has ceased to be an Australian resident (s 128E(1), (2)). Adiga’s case — applicant must be an Australian resident The AAT has held that “section 128A(1) is a deliberately inserted provision which makes Australian residence a precondition to eligibility for registration. That interpretation of section 128A is … not only consistent with the general tenor of section 128B which refers to the existence of qualifications, experience and competency, concepts which … are directed towards individuals, it is also consistent with the provisions of section 128E which clearly presuppose Australian residence being an ongoing prerequisite requirement for continued registration” (Adiga v Australian Securities and Investments Commission [2013] AATA 952). In that case, Mr Adiga, an Indian resident, applied for registration as an approved SMSF auditor under s 128A. ASIC did not accept the application as Mr Adiga was not an Australian resident and refused to review its refusal to accept the application on the grounds that foreign residents were not eligible for approval.

¶5-509 Approved SMSF auditors — Fees and ASIC guidelines and tools This paragraph covers the following: • Fees payable under the Superannuation Auditor Registration Imposition Act 2012

• Fees schedule from 1 July 2019 • ASIC guidelines and information for SMSF auditors and applicants. Fees payable under the Superannuation Auditor Registration Imposition Act 2012 The fees imposed under the Act are prescribed in Superannuation Auditor Registration Imposition Regulation 2012 (SLI 2012 No 329: www.legislation.gov.au/Details/F2012L02405) (see “Fees Schedule” below). Fees may be prescribed and are payable for the matters mentioned in an item of the table and are payable by the person in column 3 of the table (s 128L(1); SISR reg 9A.07). Fee is payable by:

Fee is due and payable:

Item

A fee payable for:

1

Applying for registration as an approved The applicant SMSF auditor

When the application is submitted

1A

Applying for conditions imposed on registration as an approved SMSF auditor to be varied or revoked under s 128D

The applicant

When the application is submitted

1B

Applying for registration as an approved The applicant SMSF auditor to be cancelled under s 128E

When the application is submitted

2

Undertaking a competency examination in accordance with s 128C

The person undertaking the examination

When applying to sit the examination

3

Giving to the Regulator a statement under s 128G

The person giving the statement

When the statement is submitted

4

Giving to the Regulator a statement under s 128G within one month after it fell due (in addition to the fee payable because of item 3)

The person giving the statement

When the statement is submitted

5

Giving to the Regulator a statement under s 128G more than one month after it fell due (in addition to the fee payable because of item 3)

The person giving the statement

When the statement is submitted

6

Giving to the Regulator particulars under The person giving the s 128H within one month after they fell particulars due

When the particulars are submitted

7

Giving to the Regulator particulars under The person giving the s 128H more than one month after they particulars fell due

When the particulars are submitted

8

Inspecting or searching a register that the Regulator keeps under SISA Pt 16 Div 1A

When the request is made

The person who makes a request to inspect or search the register

A fee is due and payable on the day prescribed by the SISR (s 128L(3); SISR reg 9A.07) (see column 4 of the table). The Regulator may, on behalf of the Commonwealth, waive the payment of the whole or a part of the fee, on the Regulator’s own initiative or on written application by a person (s 128L(4)). If a fee is payable for a matter (other than a matter referred to in item 8), the matter is taken, for the

purposes of SISA (other than s 128J), not to have occurred until the fee is paid (s 128L(5)). The Regulator may, on behalf of the Commonwealth, recover a debt due under s 128L. Fees schedule The table below sets out the fees from 1 July 2019 relating to SMSF auditor registration as prescribed by reg 4 and 4A of the Superannuation Auditor Registration Imposition Regulation 2012 (www.legislation.gov.au/Details/ F2019L00390). Regulation 4 — ASIC fees Item

Fee payable for:

Fee

1

Applying for registration as an approved SMSF auditor

$1,927

1A

Applying for conditions imposed on registration as an approved SMSF auditor to be varied or revoked under s 128D of SISA

$1,028

1B

Applying for registration as an approved SMSF auditor to be cancelled under s 128E of SISA

$899

2

Undertaking a competency examination in accordance with s 128C of SISA

$107

3

Giving the Regulator a statement under s 128G of SISA

No fee

4

Giving to the Regulator a statement under s 128G of SISA within one month after it fell due (in addition to the fee payable because of item 3)

No fee

5

Giving to the Regulator a statement under s 128G of SISA more than one month after it fell due (in addition to the fee payable because of item 3)

No fee

6

Giving to the Regulator particulars under s 128H of SISA within one month after they fell due

No fee

7

Giving to the Regulator particulars under s 128H of SISA more than one No fee month after they fell due

Regulation 4A — Registry fees Item

Fee payable for:

Fee

1

Inspecting or searching a register that the Regulator keeps under Div 1A of Pt 16 of SISA for a current extract

No fee

2

Inspecting or searching an extract of 10 pages or less given to or issued $19 by the Regulator under Div 1A of Pt 16 of SISA (other than an order made under s 130F(2) of SISA), except if the request to inspect or search is made by a journalist

3

Inspecting or searching a register that the Regulator keeps under Div 1A of Pt 16 of SISA for a historical extract, if the request to inspect or search is made by a journalist

No fee

4

Inspecting or searching an extract given to or issued by the Regulator under Div 1A of Pt 16 of SISA (other than an order made under subsection 130F(2) of that Act), except if the request to inspect or search is made by a journalist

$19

5

Inspecting or searching an extract given to or issued by the Regulator under Div 1A of Pt 16 of SISA (other than an order made under subsection 130F(2) of that Act), if the request to inspect or search is made by a journalist

No fee

ASIC guidelines and information for SMSF auditors and applicants • ASIC gateway page — Applying for SMSF auditor registration — www.asic.gov.au/for-financeprofessionals/self-managed-superannuation-fund-smsf-auditors/applying-for-smsf-auditorregistration/ • SMSF auditors: Regulatory guidance — www.asic.gov.au/regulatory-resources/financial-reportingand-audit/smsf-auditors • Applying for SMSF auditor registration — www.asic.gov.au/for-finance-professionals/self-managedsuperannuation-fund-smsf-auditors/applying-for-smsf-auditor-registration/ • Updating your details and submitting requests to ASIC — www.asic.gov.au/for-financeprofessionals/self-managed-superannuation-fund-smsf-auditors/updating-your-details-andsubmitting-requests-to-asic • Your ongoing obligations as an SMSF auditor — www.asic.gov.au/for-finance-professionals/selfmanaged-superannuation-fund-smsf-auditors/your-ongoing-obligations-as-an-smsf-auditor • ASIC Information — SMSF auditor registration application and frequently asked questions — download.asic.gov.au/media/1310191/About_the_SMSF_auditor_registration_application.pdf.

¶5-510 SMSF audit, fund records, returns and reports In conjunction with its SIS annual return reporting requirements, an SMSF is required to appoint an approved auditor and to have the financial accounts and statements of the fund audited each year by the auditor. The auditor must also conduct a compliance audit to determine whether the fund has complied with the SIS legislation. The auditor must provide the trustee with a certificate stating that the fund has been audited and a copy of its audit report (see below). The auditor must also notify the trustee of any concerns about the fund’s financial position or compliance with requirements of the SIS legislation. If the auditor is not satisfied that the trustee has taken appropriate action to rectify the problem, the auditor must inform the ATO of the problem (see below and ¶3-600). The ATO has issued an electronic Superannuation Audit Tool (eSAT) to assist fund auditors when carrying out a compliance audit of an SMSF (¶15-700). Record-keeping requirements Stringent record-keeping obligations are imposed under the SISA on the trustees of regulated superannuation funds (including SMSFs) to: • keep accurate and accessible accounting records that explain the transactions and financial position of the fund for a minimum of five years • prepare an annual operating statement and an annual statement of the financial position of the fund, and keep these records for a minimum of five years • keep minutes of trustee meetings and decisions, records of changes of trustees, trustee solvency declaration and consent to be appointed as a trustee, and trustee declaration of understanding of duties for a minimum of 10 years • keep copies of all annual returns lodged for a minimum of 10 years • keep copies of all reports given to members for a minimum of 10 years (¶3-315, ¶3-340). It should be noted that similar obligations may also be imposed on trustees under income tax and related laws, eg record-keeping relating to the contributions received and its tax liabilities (Chapter 11).

Record-keeping — investments SMSF trustees may not have to document all individual investment transactions by written resolution in the minutes of trustee meetings. As a general rule, individual transactions within an investment category do not need to be documented in detail, provided they are in accordance with the SMSF’s investment strategy. However, an SMSF investing in a new investment category must document that decision and adjust its investment strategy accordingly. For example, if an SMSF’s investment strategy includes investments in listed Australian shares, the trustees would not be expected to formally minute each purchase or sale of shares (although proper records of each transaction must be maintained in the books or accounts of the SMSF). However, if the SMSF were to expand or vary its investment strategy to include investments in unlisted property trusts, that decision would have to be formally recorded in the trustee minutes (¶3-340). SISA requirements — compliance audit and financial audit In each financial year, SMSF trustees are required to produce a statement of financial position and an operating statement of the fund. Defined benefit funds require a statement of net assets and statement of changes in net assets (SISA s 35B: ¶3-315). The Australian Auditing Standards which are relevant to an SMSF financial audit are available at www.auasb.gov.au (eg Standards on Assurance Engagements ASAE 3000 and ASAE 3100 on SMSF compliance audits). Key points from the ATO fact sheet Approved auditors and self-managed super funds — Role and responsibilities of approved auditors which sets out the auditors’ obligations under the SISA, the ATO’s expectations and other aids to meeting the obligations are summarised below. • General — An auditor is required to “carry out and perform, adequately and properly”, the duties and functions of an auditor under SISA as well as any other law of the Commonwealth, a state or a territory. The auditor must be a “fit and proper” person to be an approved auditor (see below). • Financial and compliance audit — An auditor must examine and form an opinion on both the financial and compliance aspects of the SMSF (based on the SMSF’s financial statements under s 35B). • Pre-audit — The auditor must consider whether he/she can accept or retain the audit engagement, bearing in mind the ethical and professional requirements, including any threats to audit independence that may impact, or be seen to impact, on the audit report. • Financial audit — An auditor must conduct a financial audit in accordance with the Australian Auditing Standards (ASAs) and to express an opinion on the financial report, based on the audit conducted. For the financial audit, the auditor should: – prepare and document the audit plan with a view to determining the risks and the audit approach to be undertaken – identify the nature, timing and extent of audit procedures necessary to gather sufficient appropriate evidence in support of the statements – gather evidence as planned in support of the financial statement assertions for material account balances and transactions – conduct testing of the assertions made in the financial reports (eg existence of assets, liabilities and entitlements, and their ownership, rights and obligations, completeness of transactions, events and assets recorded, accuracy and valuation of data amounts recorded, classification of relevant events) – form an opinion regarding the fair presentation of the financial report for the reporting period, based on evidence gathered and tests performed, and

– document and retain audit working papers to enable an assurance practitioner who has no previous involvement with the audit to gain an understanding of the work performed and the opinion reached. • Compliance audit — An auditor must conduct a compliance audit in accordance with the Standards on Assurance Engagements (ASAEs) and to express an opinion as to whether the SMSF has complied with the SISA and SISR. The auditor must possess the required capabilities and competencies to conduct an SMSF compliance audit (ie knowledge of the relevant legislation, its application and compliance by SMSFs). When doing the compliance audit, the auditor should: – consider materiality and risk when planning and performing the compliance engagement – obtain sufficient and appropriate evidence on which to base the auditor’s conclusion – if a contravention is identified, test the contravention against the compliance criteria – consider the effect of events up to the date of the compliance report – prepare documentation that would provide another assurance practitioner with an understanding of the work performed and the basis for the opinion reached, and – express a professional opinion in the approved ATO form (Self-managed superannuation fund independent auditor’s report (NAT 11466)). Part B of the form sets out the relevant provisions that the compliance audit should cover (¶18-770). SIS annual return and tax return and member contribution statement From the 2007/08 year, an SMSF is required to lodge a combined Self Managed Superannuation Fund Annual Return with the ATO (SISA s 35D). An annual return that is not in the approved form may be rejected (C & M Baldwin 92 ATC 2063). For the approved forms and ATO instructions, see www.ato.gov.au/Forms/Self-managed-superannuation-fundannual-return. All SMSFs registered on or after 1 January 2015 must lodge an annual return for their first year, regardless of whether they hold any assets or if a nil tax assessment is expected. An SMSF is not legally established until the fund has assets set aside for the benefit of members. The SMSF annual return requirements are discussed further at ¶3-315. The tax return lodgment and payment requirements are discussed at ¶11-070, ¶11-190 and ¶12-530. Fund must have assets to legally exist An SMSF is a trust and it must have assets set aside for the benefit of its members to legally exist. An SMSF is required to lodge an annual return once the fund is established and assets have been set aside for the benefit of members. After that, regardless of whether or not the fund has any activity or assets during a financial year, the SMSF must continue to lodge a return in each year until the fund is being wound up. Unless an SMSF has been wound up during the financial year, the fund cannot lodge an annual return through the ATO electronic lodgment system (ELS) where the SMSF has no assets at the end of the financial year end or member balances at the end of the financial year (www.ato.gov.au/Super/Selfmanaged-super-funds/In-detail/SMSF-resources/SMSF-technical/Recent-changes-to-electroniclodgment-of-the-SMSF-annual-return). SMSF independent auditor’s report After an audit, the approved auditor of an SMSF must give the trustee an audit report using the ATO approved audit report (“Self managed superannuation fund independent auditor’s report”) form for the relevant year (download from www.ato.gov.au/forms/smsf-independent-auditor-s-report; for reports in

earlier years, see ¶18-730). SMSF auditors must comply with prescribed independence requirements as set out in the Accounting Professional and Ethical Standards Board’s pronouncement, APES 110 Code of Ethics for Professional Accountants. The audit report now includes a specific commitment that the auditor has complied with auditor independence requirements prescribed by SISR (¶5-508). Further guidance on auditor independence and adherence to APES 110 is available in the Joint Accounting Bodies publication Independence Guide as well as in the AUASB’s Guidance Statement GS 009.

An SMSF does not have to lodge a copy of the audit report with its tax return, but must provide a brief explanation of any audit qualification and/or other contravention of the SIS legislation that occurred during the income year. In addition, the ATO states that auditors may report anything else they consider will assist the ATO in performing its duties under the SISA or SISR. Auditing and Assurance Standards Board (AUASB) Guidance Statement GS 009 “Auditing Self Managed Superannuation Funds” provides detailed guidelines to auditors conducting the audit of an SMSF’s special purpose financial report (financial audit) and the SMSF compliance audit under the SISA (see ¶15-650). Payment of supervisory levy In conjunction with the lodgment of annual returns, the trustee of an SMSF must pay a flat superannuation supervisory levy to the ATO each year (for the levy amount, see ¶18-650). Reporting contributions received, and provision of TFNs, to ATO As part of the consolidation of reporting obligations, superannuation providers are required to report to the ATO contributions received in respect of their members in each year of income and transfers of contributions to other providers in the income year, as provided by the TAA (¶12-530). This information is used by the ATO for various purposes (eg government co-contribution, superannuation guarantee) and was previously required to be reported under various taxation laws. The provision and use of TFNs under the SISA and income tax law is discussed at ¶11-700. Events-based reporting to the ATO — transfer balance account report From 1 July 2018, all SMSFs must report events that affect their members’ account balances or total superannuation balance by providing a transfer balance account report (TBAR) to the ATO. The timeframe for reporting is as follows: • where all members of the SMSF have a total superannuation balance of less than $1m — the SMSF can report annually at the same time that it lodges its annual return, or • where any member of the SMSF has a total superannuation balance of $1m or more — the SMSF must report quarterly, within 28 days after the end of the quarter in which the event occurs. Detailed information on the TBAR reporting from the ATO (eg transfer balance account events, no report needed, tips and tricks) is available at www.ato.gov.au/forms/super-transfer-balance-account-reportinstructions/. Providing information to ATO about fund regulatory status and other changes A superannuation fund is required to notify the ATO in writing if the fund changes from being an APRAregulated superannuation fund to being regulated by the ATO (ie it becomes an SMSF) or if the fund ceases to be an SMSF (SISA s 106A). The notice must be given as soon as practicable and no later than 21 days after the trustee first becoming aware of the change of the fund’s status. A person who fails to comply may be liable to a fine of 100 penalty units. A fund that is an SMSF at the time it makes an election in the approved form to become a regulated superannuation fund (¶2-130) need not notify the ATO of its status under s 106A at the time of its election. In addition, an SMSF that ceases to be an SMSF or ceases to exist, or a fund that is not an SMSF which becomes an SMSF, must comply with reg 11.07A which sets out the prescribed information to be given to the ATO. An SMSF must also notify the Commissioner in writing of any change in: • the name of the fund, its postal address, registered address or address for service of notices, of the entity • details of the contact person for the fund and his/her contact details, or

• the membership of the fund, the trustees of the fund or the directors of the fund’s corporate trustee (reg 11.07AA). The notice must be given in the ATO approved form within 28 days after the occurrence of the change.

¶5-530 Auditor’s contravention report The auditors and actuaries of superannuation funds have additional reporting obligations to the trustees or to the Regulator (ATO or APRA) under the SISA. For SMSFs, the reporting obligations arise if, in the course of an actuarial or audit function, the actuary or auditor forms the opinion that a contravention of the SIS legislation may have occurred, may be occurring or may occur and: • the matter is specified in the approved ATO form for reporting contraventions Auditor/Actuary Contravention Report (ACR) (SISA s 129(1), (3)), or • the person forms the opinion that the financial position of the fund may or may be about to become unsatisfactory (SISA s 130(1); SISR reg 9.04). Subject to certain exceptions (see s 129(2) or s 130(2A)), the person must, immediately after forming the opinion, inform the fund trustee and the Regulator of the matter (¶3-600). The ACR reporting process and flowchart to determine contraventions are discussed in detail in ¶16-450 of the Wolters Kluwer Australian Practical Guide to SMSFs service.

¶5-540 Monitoring compliance by the SMSFs The Commissioner has extensive powers under the SISA to monitor whether SMSFs have complied with the obligations applicable to them. Where an SMSF fails to comply with its obligation under SISA, various options are available to the Commissioner depending on the provision breached and the seriousness of the breach. These options include: • accepting an enforceable undertaking in relation to a contravention (¶3-850) • disqualifying a trustee of an SMSF (¶3-130) • applying to a court for civil penalties to be imposed, or for criminal penalties for more serious breaches (¶3-820), and • making an SMSF non-complying for taxation purposes (¶2-140). Commentary on the regulatory powers of the Commissioner (and of other Regulators such as APRA and ASIC) under the SISA may be found at ¶3-850 and ¶3-860. Monitoring whether a fund is an SMSF The Commissioner of Taxation or APRA may, by written notice, request the trustee of a regulated superannuation fund to provide information on the fund’s structure so as to determine whether the fund is an APRA-regulated fund or an SMSF. A fund is required to respond within 21 days (or longer, if specified) (SISA s 252A). This information will also allow the Regulators to determine whether the fund has complied with the prudential requirements applicable to it. Section 252A is a strict liability provision and a person who contravenes the section is guilty of an offence, punishable on conviction by a fine of up to 50 penalty units. Non-SMSFs may be given an infringement notice by APRA for non-compliance (see ¶3-840). Commissioner’s power to give rectification or education direction and impose penalties The Commissioner is empowered to give a rectification direction and/or an education direction where it

reasonably believes that a trustee or a director of a corporate trustee of an SMSF has contravened a SIS provision, and to impose an administrative penalty for certain contraventions. These administrative directions and penalties for contraventions are both educational and punitive in nature and are intended to provide the Commissioner with effective, flexible and cost-effective mechanisms for imposing sanctions that reflect the nature and seriousness of the breach (¶5-550).

¶5-550 Administrative directions and penalties for certain contraventions For contraventions that occur on or after 1 July 2014, the Commissioner is empowered under SISA Pt 20 (s 157 to 169): • to give a rectification direction and/or an education direction where it reasonably believes that a trustee, or a director of a corporate trustee, of an SMSF has contravened a SISA or SISR provision (other than SISA Pt 3B), and • to impose administrative penalties in relation to SMSFs if the trustee or director contravenes a SISA provision as specified in s 166 (see below). Part 3B deals with the superannuation data and payment regulations and standards (see ¶9-790). Rectification direction A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time and provide the Regulator with evidence of the person’s compliance with the direction (s 159(2)). The term “rectify” is defined in SISA s 10(1). In relation to a contravention, “rectify” includes putting into operation managerial or administrative arrangements that could reasonably be expected to ensure that there are no further contraventions of a similar kind. Some contraventions only occur in the year of income a particular transaction took place. However, certain transactions, if not rectified, may cause trustees to contravene the SISA or SISR over a number of income years. For example, where the restriction on borrowing in s 67(1)(a) is breached, it may be appropriate for the Commissioner to give a rectification direction specifying that the SMSF trustee must ensure that the borrowing is paid off over a specified period of time. Such action will ensure that the trustee does not continue to maintain a borrowing in contravention of s 67(1)(b). In deciding whether to give a person a rectification direction, the Commissioner must have regard to: (a) any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person’s compliance with the direction (b) the nature and seriousness of the person’s contravention, and (c) any other relevant circumstances (s 159(3)). A rectification direction cannot be given in relation to a contravention if: • the Regulator has accepted an undertaking given by a person under SISA s 262A (see “Enforceable undertakings” in ¶3-850) • the contravention is covered by the undertaking, and • the undertaking has neither been withdrawn nor varied in a way that means the contravention is no longer covered by it (s 159(5)). A person to whom a rectification direction is given must comply with the direction before the end of the period specified in the direction. The specified period must be one that is reasonable in the circumstances. A person commits an offence of strict liability (10 penalty units) if this is not met (s 159(7)). Education direction An education direction will require a person to undertake a specified course of education within a

specified time frame and provide the Regulator with evidence of completion of the course. An education direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances (s 160(2), (3)). A person to whom an education direction is given must comply with the direction before the end of the specified period. A failure to comply with the direction within that period is an offence of strict liability, subject to a maximum of 10 penalty units (s 160(4), (5)). Trustees and directors of corporate trustees will also be required to sign or re-sign the SMSF trustee declaration form to confirm that they understand their obligations and duties as trustees (or directors of corporate trustees) of an SMSF. The Commissioner may approve courses of education for the purposes of the education direction (s 161). A fee must not be charged for an approved course, undertaken in compliance with an education direction (s 161(2)). The EM explains that an approved course of education is intended to provide trustees and directors of a corporate trustee with knowledge relevant to their compliance obligations under SISA or SISR, and not to impose a monetary penalty. Other sanctions, such as administrative penalties imposed under SISA, impose a monetary penalty for a contravention. It is therefore considered appropriate that trustees and directors of a corporate trustee should not be subject to fees from providers for undertaking an education course specified in the direction. If a person undertakes a course of education in compliance with an education direction, the person must ensure that none of the costs associated with undertaking the course are paid or reimbursed from the assets of the fund in relation to which the education direction was given (s 162). The costs in complying with the education direction include costs such as travel costs, costs incurred in notifying the Regulator that the education direction has been complied with and expenses related to using the internet if the course is undertaken online. This is consistent with the broad intention that costs incurred under the SMSF administrative penalty regime are payable personally by the person who has committed the breach, and not paid or reimbursed from assets of the SMSF. Revocation, variation and objection The Commissioner may, at any time, vary or revoke a rectification direction or an education direction by written notice given to the person to whom the direction was given (s 163). A person to whom a rectification direction or an education direction is given may request the Commissioner, by written notice, to vary the direction before the end of the period specified in the direction, setting out the reasons for making the request (s 164). If the Commissioner does not make a decision on the request before the end of 28 days after the day the request was made, the Commissioner is taken, at the end of that period, to have decided to refuse the request. A person who is dissatisfied with a decision of the Commissioner to give a rectification direction or an education direction, or to vary one otherwise than in accordance with a request under s 164 (or a decision under s 164 to refuse to vary a rectification or education direction), may object against the decision in the manner set out in Pt IVC of the TAA (s 165). Administrative penalties in relation to SMSFs A trustee or a director of the corporate trustee of an SMSF who contravenes a SISA provision specified in the table in s 166(2) is liable to an administrative penalty specified in the table (s 166(1)).

Table of provisions and penalties in s 166(2)

Item

SISA provision

Administrative penalty — number of penalty units

1

s 34(1) — prescribed operating standards

20

2

s 35B — keep accounts and statements

10

3

s 65(1) — lend money or give other financial assistance to members or relatives

60

4

s 67(1) — borrow money or maintain an existing borrowing of money

60

5

s 84(1) — in-house asset rules

60

6

s 103(1) — keep and retain for at least 10 years minutes of all trustee meetings (funds with two trustees of more)

10

7

s 103(2) — keep and retain for at least 10 years minutes of all trustee meetings (one trustee fund)

10

8

s 103(2A) — retain for at least 10 years the election, or copy of election, under s 71E (certain geared investments)

10

9

s 104(1) — keep and retain for 10 years up to date records of trustee changes, consents to be trustees under s 118

10

10

s 104A(2) — sign declaration of understanding SMSF trustee duties under the SISA

10

11

s 105(1) — keep member reports for at least 10 years

10

12

s 106(1) — notify ATO of significant adverse events

60

13

s 106A(1) — notify ATO of change of fund status (eg to non-SMSF)

20

14

s 124(1) — appoint investment manager in writing

5

15

s 160(4) — comply with an ATO education direction

5

16

s 254(1) — new fund to give information to the ATO

5

17

s 347A(5) — provide statistical information

5

An administrative penalty must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed (s 168). The power to control the management of a company, its property and affairs is vested collectively in the board of directors. Directors are therefore responsible for the actions of a corporate trustee. If a trustee that is a body corporate becomes liable to an administrative penalty, the directors of that body corporate are jointly and severally liable to pay the amount of the penalty (s 169). This is consistent with the treatment of a corporate trustee of an SMSF in s 284-95 in Sch 1 to the TAA. The Schedule also makes a consequential amendment to s 298-5 in Sch 1 of the TAA (see below). Interaction of administrative penalties with other penalties The explanatory memorandum (to Act No 11 of 2014 which inserted Pt 20) states: “2.49 The Regulator is not prevented from giving a rectification direction in relation to a contravention even if an administrative penalty also applies in relation to a particular contravention under the administrative penalty regime. 2.50 Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving an education direction or issuing a notice of non-compliance, if the rectification direction is not complied with. … 2.61 The Regulator is not prevented from giving an education direction in relation to a contravention even if an administrative penalty is also imposed for that contravention under the administrative penalty regime. 2.62 Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving a rectification direction or issuing a notice of non-compliance, if a

contravention of the same kind occurs in the future.” Administrative penalties and TAA penalty administration regime The machinery provisions for penalties in Div 298 in Sch 1 of the TAA apply to an administrative penalty imposed by SISA s 166 (TAA Sch 1 s 298-5(d)). The TAA provisions deal with: • how the Regulator must notify a person of their liability of an administrative penalty • the due date for payment of the administrative penalty • the ability for the Regulator to remit all or part of the administrative penalty • objection, review and appeal rights, and • the imposition of general interest charge on unpaid penalties. A liability to an administrative penalty imposed by s 166 is a tax-related liability for the purposes of TAA Sch 1 Subdiv 255-A and therefore can be collected by the Commissioner like any other tax debt. See also the collection and recovery rules contained in TAA Sch 1 Pt 4-15 which will apply to administrative penalties imposed by s 166.

¶5-570 Accountants providing financial services to SMSFs — ASIC guidelines ASIC Information Sheet (INFO 216) contains guidelines for accountants who provide services relating to SMSFs (referred to as “SMSF services” in INFO 216) (asic.gov.au/for-finance-professionals/afslicensees/applying-for-and-managing-an-afs-licence/limited-financial-services/afs-licensing-requirementsfor-accountants-who-provide-smsf-services). It covers: • how the Australian financial services (AFS) licensing regime applies to SMSF services provided by accountants, and how the law applying to accountants has changed from 1 July 2016 • the various SMSF services accountants might provide, and whether a licensing exemption applies to them or whether accountants must be covered by an AFS licence for that service. How the AFS licensing regime applies to SMSF services provided by accountants The Corporations Act 2001 regulates people who provide financial services (ie certain types of services or activities) that relate to a “financial product”. A financial product includes an interest in an SMSF and many of the investments that are typically held by an SMSF, such as securities and interests in managed investment schemes. While real property is not itself a financial product, an interest in an SMSF is a financial product. Providing a recommendation or a statement of opinion on using an SMSF as a vehicle to invest in real property is financial product advice, and requires an AFS licence with an appropriate authorisation. Accountants typically provide the following types of financial services in relation to SMSFs and their operations: • providing financial product advice — providing a recommendation or statement of opinion, or a report of either of those things, with the intention of influencing a person’s decision on a financial product, or that could reasonably be regarded as being intended to have such an influence (such as becoming an SMSF) • “dealing” in a financial product — such as applying for, acquiring, varying or disposing of a financial product on behalf of a client, or arranging for someone else to do any of these things. ASIC guidelines on financial products and services are found in: • Regulatory Guide RG 175 Licensing: Financial product advisers — Conduct and disclosure • Regulatory Guide RG 36 Licensing: Financial product advice and dealing.

A person providing financial product advice must also comply with provisions under the Corporations Act that ban conflicted remuneration — see Regulatory Guide RG 246 Conflicted remuneration for more details. Generally, a person who provides financial services must be covered by an AFS licence, either by: • holding an AFS licence, or • becoming the representative of an AFS licensee and providing financial services on behalf of the AFS licensee. There are a number of exemptions from the requirement to be covered by an AFS licence, including for accountants providing services relating to SMSFs. These exemptions apply to a variety of different activities, and are outlined in Table 1: SMSF services and the AFS licensing regime, as noted below. Former exemption and current exemptions Former reg 7.1.29A (repealed from 1 July 2016) previously exempted recognised accountants (ie certain accountants who are members of CPA Australia, Chartered Accountants Australia and New Zealand, or the Institute of Public Accountants) who give financial product advice about acquiring or disposing of an interest in an SMSF, from the AFSL licensing requirement. Despite the repeal of former reg 7.1.29A, a range of other exemptions still continue after 1 July 2016 (see Table 1 below) without being covered by an AFS licence.

Table 1 (reproduced from INFO 216)

Type of SMSF service

What you may do without being covered by an AFS licence Legislation

Establishing, operating, structuring or valuing an SMSF, including advice and assistance on administrative and operational issues, and the process of winding up or exiting an SMSF

You may provide advice on Regulation 7.1.29(5) establishing, operating, structuring and valuing an SMSF, as long as you give your client the appropriate warnings. This includes: • advice provided for the sole purpose of, and only to the extent reasonably necessary for, ensuring compliance with the superannuation legislation • advice on the process of winding up or exiting an SMSF. You may not recommend that your client acquires or disposes of an interest in an SMSF.

Asset allocation and investment strategy

You may provide a recommendation or statement of opinion on how your client should distribute their available funds among different categories of investments. You may not advise your client to make particular investments through the SMSF.

Regulation 7.1.33A For further information, see Asset allocation and investment strategy

Tax advice on SMSFs and other financial products

You may provide tax advice on financial products, such as an interest in an SMSF and

Regulation 7.1.29(4)

underlying investments held by the SMSF, as long as you do not receive a benefit as a result of your client acquiring a financial product (or a financial product that falls within the class of products) mentioned in the advice and you give your client the appropriate warnings. Referring clients to an AFS licensee or representative

You may refer clients on to an Regulations 7.6.01(1)(e)–(ea) AFS licensee or representative for financial product advice, as long as you make the appropriate disclosures.

Detailed guidelines on the specific SMSF service is provided in INFO 216 — see asic.gov.au/for-financeprofessionals/afs-licensees/applying-for-and-managing-an-afs-licence/limited-financial-services/afslicensing-requirements-for-accountants-who-provide-smsf-services. SMSF services SMSF services provided by accountants usually fall into one of three categories: • “traditional” accountant services — for example, preparation and lodgment of tax returns, which are not regulated as financial services • financial product advice relating to SMSFs — this is a financial service that requires the provider to be covered by an AFS licence • exempt SMSF financial services — an AFS licence is not required to provide these services, as they are either not a financial service or they are covered by a licensing exemption. However, in some cases, the accountant may still be required to meet other requirements, such as providing clients with warnings. Limited AFS licence regime To facilitate moving into the AFS licensing regime, accountants could apply for an AFS licence to provide a limited range of financial services relevant to SMSFs (called a “limited” AFS licence: see reg 7.8.12A and 7.8.14B of the Corporations Regulations 2001). The limited AFS licence only authorises the licensee to provide a limited range of financial services relevant to SMSFs, such as advice about SMSFs, advice about a client’s existing superannuation holdings (in certain circumstances) and “class of product advice”, based on the authorisations granted by ASIC to an accountant applying for the limited licence. Accountants who wish to provide broader financial services than those authorised under a limited AFS licence will need to be covered by a full AFS licence with the relevant authorisations. Advice about LRBA and SMSFs An SMSF is permitted to borrow money in limited circumstances and subject to certain rules. One exception is having a borrowing under a limited recourse borrowing arrangements (LBRA) as permitted by SISA s 67 and 67A (¶3-415). INFO 216 states as follows: • an LRBA may be a margin lending facility (and therefore a financial product) if the credit is provided to an individual and is used to acquire a financial product (see Corporations Act s 761EA). An accountant recommending that a client establish a margin lending facility within an SMSF will need to be covered by a full AFS licence with an appropriate authorisation • an accountant discussing options for borrowing for investment in residential property through an SMSF with an SMSF client may need to be covered by an Australian credit licence. For example, if

an accountant suggests an individual SMSF trustee apply for a particular loan from a particular credit provider to invest in residential property, or assist them to do so, the accountant will need to hold a credit licence (or be a representative of a credit licensee). Alternatively, the accountant may refer clients to a credit licensee. More ASIC guidelines For other ASIC guidelines and information sheets on the obligations of limited AFS licensees, see ¶4-657.

Duties and Obligations — Checklists ¶5-600 Checklist of trustee duties and obligations The following paragraphs contain handy checklists of the main SISA duties and obligations for SMSF trustees and their service providers. The checklists are not exhaustive as they only cover the principal provisions of the SIS legislation. Many of the duties and obligations noted in the checklists are common to all regulated superannuation funds (ie SMSFs and non-SMSFs). These duties and obligations are discussed further at the paragraph numbers indicated in the checklist. The ATO's “SMSF Checklists” may be found at www.ato.gov.au/Super/Self-managed-super-funds/Indetail/SMSF-resources/SMSF-checklists/. The checklists are intended to assist members/fund trustees to manage their SMSF and meet their SMSF obligations, covering the following topics: • Setting up • Investment strategy • Trustee reporting obligations • SMSF compliance • Starting to pay an income stream • Winding up Trustees and service providers should also be alert to other obligations imposed by other laws, such as the general trust law or a state Trustee Act (¶5-400). An SMSF is exempted from certain SIS prudential requirements (¶5-650). The administrative directions and penalties regime for SMSFs which contravene certain SISA provisions are discussed in ¶5-550. For a general discussion of other SISA offence provisions and penalties (eg fines, imprisonment, loss of complying fund status, disqualification of trustees, enforceable undertakings) which may apply where there is a contravention of the SIS legislation, see ¶3-800 and ¶3-850. Reference may also be made to Chapter 18 for additional checklists on specific superannuation regulation and taxation topics. Penalties under other Acts In addition to the penalties regime for breaches of the SIS legislation discussed at ¶3-800 and ¶5-550, the trustees of an SMSF are also subject to the penalties regime for non-compliance under other regulatory Acts such as the Corporations Act 2001 (see Chapter 4) and the Taxation Administration Act 1953 (TAA) (see Chapter 11). For instance, administrative penalties may be imposed under the TAA, where the trustees of an SMSF: • fail to lodge returns on time • fail to keep and retain records, or

• fail to advise the ATO of a change of trustee, or other changes in the fund (TAA Sch 1 s 286-75(2A), (5); 288-85). Other record-keeping requirements for SMSFs and related penalties for non-compliance are discussed at ¶3-315 and ¶3-340.

¶5-610 Fund establishment — trust deed and trustees Initial steps to setting up an SMSF An SMSF must be set up correctly so that it can qualify for tax concessions as a complying superannuation fund, and can properly operate. 1. Appoint suitably qualified professionals as necessary to assist in setting up the fund 2. Decide on the fund structure 3. Ensure that the members are eligible to be a trustee (or director of the corporate trustee) 4. Check the residency of the members and of the fund 5. Create the fund trust and trust deed 6. Appoint trustees in accordance with the trust deed and SISA 7. Obtain and record all member information, including each member’s TFN 8. Ensure that the fund has assets (contributions made for the members) and open a bank account for fund 9. Register with the ATO as a regulated superannuation fund (and other purposes as appropriate) 10. Consult with service providers and prepare an investment strategy for the fund. Checklist • Trust deed must contain (or is deemed to contain) SIS covenants (s 52B) — ¶3-100, ¶5-400. • Fund must have individual trustees or a corporate trustee in accordance with the membership and structure of the fund (s 17A) — ¶5-200, ¶5-220. • Fund trustee must not receive remuneration for trustee duties and services (s 17A(1)(f), (g), (2)(c), (d); 17B) — ¶5-230. • Trustee appointment — obtain from each trustee (or director of the corporate trustee) a consent to act and a declaration that he/she is not a disqualified person (s 118) — ¶3-130, ¶5-300. • Trustee declaration — obtain from each trustee (or director of the corporate trustee) appointed a declaration in the approved form (within 21 days after becoming a trustee or director) that they understand their duties as trustee of an SMSF (s 104A) — ¶5-300. • To be a complying superannuation fund under the SISA and ITAA97, the fund must: – be a regulated superannuation fund that is an Australian superannuation fund (¶2-130) (ie it must have made an election to be regulated under the SISA and be a resident fund), and – comply with all the regulatory provisions applicable to it (or, if the regulatory provisions are breached, pass the compliance test), and receive a complying fund notice from the ATO (s 19; 42A) — ¶2-140, ¶5-100.

• Fund must comply with the sole purpose test (s 62) — ¶3-200, ¶5-410. • Individual trustees and directors of a corporate of an SMSF must comply with the SIS covenant in the exercise of their duties and obligations (s 52B; 52C) — ¶3-100, ¶5-400.

¶5-620 Operating standards • Trustee must provide members with prescribed information about the fund within the prescribed time — ¶3-290, ¶4-090. • Trustee must provide members with information about significant events — ¶3-290, ¶4-090. • Trustee must provide members with prescribed information on request — ¶3-290, ¶4-090. • Trustee must provide leaving members with prescribed information about their entitlements — ¶3-290, ¶4-090. • Trustee must notify the ATO of certain fund changes (eg its contact details or winding-up) or of a change to its SMSF status (SISR reg 11.07AA; 11.07A) — ¶3-310; (s 106A) — ¶5-510. • Trustee must comply with the acceptance of contribution rules (SISR reg 7.04) — ¶3-220, ¶5-420. • Trustee must ensure that a member’s minimum benefits are maintained in the fund and are cashed, rolled over or transferred only as allowed by the SISR (SISR reg 5.08; 6.17) — ¶3-230, ¶3-280–¶3286, ¶5-460.

¶5-630 Fund administration • Trustee must lodge SIS annual return with the ATO in the approved form after each year of income (s 35D; former s 36A) — ¶3-315, ¶5-510. • Trustee must keep minutes of all meetings for at least 10 years (s 103) — ¶3-340, ¶5-510. • Trustee must keep and retain, for at least 10 years, relevant trustee records, including written consents to be appointed as a trustee and trustee declarations of recognition of obligations and responsibilities (s 104; 104A) — ¶3-340, ¶5-300, ¶5-510. • Trustee must keep copies of reports to members for at least 10 years (s 105) — ¶3-340, ¶5-510. • Trustee must immediately notify the regulator in writing of significant adverse events relating to the financial position of the fund (s 106) — ¶3-340. • Trustee must notify the ATO in writing if the fund changes its status (eg it ceases to be or becomes an SMSF) (s 106A) — ¶5-510. • SMSFs have moved to events-based reporting from 1 July 2018 (TBAR) — ¶5-510. • Trustee must keep and retain accounting records for at least five years (s 35AE; former s 35A) — ¶3315, ¶5-510. • Trustee must prepare financial accounts and statements as specified by the SISR (s 35B) — ¶3-315, ¶5-510. • Trustee must ensure the appointment of an approved auditor to carry out the audit of the fund (s 35C) — ¶3-315, ¶5-530. • Trustee must not incorrectly keep accounts and records with the intention to deceive or mislead, or provide false or misleading information (Criminal Code Sch 1 s 303; 307) — ¶3-340.

¶5-640 Investment rules Trustee of fund • Fund must comply with the sole purpose test in terms of its investments (s 62) — ¶3-200, ¶5-410. • Fund must comply prescribed rules for its investments in collectables and personal use assets (s 62A) — ¶5-437. • Covenant to formulate and give effect to an investment strategy which has regard to specified factors (s 52B(2)(f); former 52(2)(f); reg 4.09) — ¶3-400, ¶5-432. • Covenant to formulate and give effect to a strategy for the prudential management of reserves (s 52B(2)(g); former s 52(2)(g); 115) — ¶3-100. • Not to assign or recognise or sanction a charge over members’ interests, or give a charge over fund assets (subject to exceptions) (SISR reg 13.11; 13.15A) — ¶3-260, ¶5-458. • Not to make a non-written appointment of an investment manager (s 124) — ¶3-400, ¶5-430. • Ensure that any limited recourse borrowing arrangements (LRBAs) entered comply with the requirements of SISA s 67 (¶5-445) and the LRBA conditions comply with the safe harbours set out by the ATO (¶5-448. • Ensure that the agreement made with the investment manager allows the trustee to obtain adequate information about investments and a performance measurement, and can be terminated without liability (s 102) — ¶3-400, ¶5-430. • Ensure that the investment agreement does not exempt or limit the investment manager’s liability for negligence (s 116) — ¶3-400, ¶5-430. • Ensure that proper records and accounts relating to investments are maintained for at least five years (s 35AE; former s 35A) — ¶3-315, ¶5-430. Trustee and investment manager of fund • All investments must be made on an arm’s length basis (s 109) — ¶3-440, ¶5-435. • Not to lend money or give any financial assistance using resources of the fund to members or relatives, except in the circumstances permitted by the SISA (s 65) — ¶3-420, ¶5-440. • Not to intentionally acquire assets from a related party of the fund, except in the circumstances permitted by the SISA (s 66) — ¶3-430, ¶5-450. • Not to borrow money, or maintain an existing borrowing, except in the circumstances permitted by the SISA (not applicable to the investment manager) (s 67) — ¶3-410, ¶5-445. • Comply with the in-house asset rules (not applicable to the investment manager) (Pt 8) — ¶3-450, ¶5455. Investment manager or custodian of fund • If an individual, the person must not be a disqualified person, and if a body corporate, it must not allow a disqualified person to be, or act as, a responsible officer of the body corporate (s 126K) — ¶3-620, ¶5-300. • Not to appoint a custodian for an entity’s assets without the written consent of the trustee of the entity (s 122) — ¶3-620.

¶5-650 Small APRA funds and exemptions Regulated superannuation funds with fewer than five members, both SMSFs and non-SMSFs, are exempted from some SISA prudential requirements. When the SMSF regime replaced the regime for excluded funds (ie funds with fewer than five members) in 1999, some of the then existing exemptions for excluded funds continued to apply to regulated funds with fewer than five members, even those that are not SMSFs. These small funds, known as “small APRA funds” (SAFs), continued to be regulated under the SISA by APRA, not the ATO. Funds with fewer than five members must have a trustee structure that meets with either the SMSF requirements (¶5-200) or the SAF requirements (see below). If there is a breach of these requirements, the funds risk being suspended. Alternatively, an acting trustee may be appointed by the Regulator with a view to restructuring the fund or, where necessary, winding up the fund. Characteristics of SAFs As noted earlier, funds with fewer than five members that do not meet the SMSF definition discussed at ¶5-200 are not SMSFs and are subject to prudential regulation under the SISA by APRA, rather than the ATO. These funds must have a registrable superannuation entity (RSE) licensee (¶3-500) as its trustee. APRA places considerable reliance on the solvency, capital adequacy and operational capacity requirements that have to be met by each RSE licensee to ensure the prudential management of SAFs. As members of SAFs will, by definition, be at “arm’s length” from the trustee, increased member reporting requirements apply to the trustee as compared with SMSFs. In addition to the above, SAFs have particular features which have similarities with, or which distinguish them from, other APRA-regulated funds or SMSFs. Generally, SAFs: • must lodge an annual return with APRA in accordance with the FSCDA like all other APRA-regulated superannuation funds (¶9-740) • may retain and/or accept arm’s length members, such as employees of the employer-sponsor of the fund • may have member-directed investment within parameters set by the trustee (SISA s 58) • may acquire business real property at market value from related parties (SISA s 66) • must ensure their members have access to an inquiries and complaints mechanism, thus ensuring access to the Superannuation Complaints Tribunal (SISA s 101) • may increase membership to more than four members without being required to restructure. This would mean, however, that the fund would cease to be a SAF, but would remain regulated by APRA, and certain exceptions to investment rules would no longer be available and alternative trustee requirements (eg equal representation) may apply • may pay amounts to an employer-sponsor of the fund in accordance with the SISA (s 117) • are subject to the culpability test (for determining the fund’s compliance status in case of breaches of a regulatory provision: ¶2-140) which is designed to protect arm’s length members who are not involved in trustee decision-making. Where the membership of a SAF increases to five or more, the fund must also determine if it is a public offer fund (¶3-500). Among other things, the fund must then have a trustee structure that complies with the equal representation requirements in the SISA (¶3-120). Exemptions Some of the more common exemptions, as they apply to SAFs and SMSFs, are noted below. The table shows where more detailed discussion of the subject matter can be found. SIS prudential requirements

Exemption

Exemption

for SAFs

for SMSFs

yes

yes

no

yes

no

yes

no

yes

yes

n/a

no

yes

no

n/a

no

yes

no

yes

no

no

no

no

no

yes

Trustee not to be subject to direction (s 58: ¶3-150) Exercise of trustee discretion by others (s 59: ¶3-150) Restrictions on amendment of governing rules (s 60: ¶3-150) Establishing arrangements for dealing with inquiries complaints (s 101: ¶3-300) Establishing procedure for appointing member representatives (standard employer-sponsored fund) (s 107: ¶3-340) Establishing procedure for appointing independent trustee (standard employer-sponsored fund) (s 108: ¶3-340) Restrictions on repaying surplus to employer-sponsors (s 117: ¶3-350) Person cannot be custodian unless capital adequacy conditions satisfied (s 123: ¶3-620) Individual cannot be investment manager (s 125: ¶3-620) Disqualified person cannot be investment manager (s 126K: ¶3-620) Disqualified person cannot be custodian (s 126K: ¶3-620) Financial assistance funding scheme (¶3-930)

Furthermore, a person must not be a trustee of a SAF unless the person was an approved trustee (until 30 June 2006: SISA former s 121A) or an RSE licensee that is a constitutional corporation (¶3-480). APRA may, in addition to other circumstances discussed at ¶3-130, suspend or remove the trustee of a SAF that was not an RSE licensee that is a constitutional corporation (SISA s 133(1)(d)). SISA provisions administered by both APRA and Commissioner A table showing the division of responsibility for the administration of the whole of the SISA between APRA, ASIC and the Commissioner may be found at ¶3-005. The list below highlights some of the other main SISA provisions (which are not covered by the checklists at ¶5-610–¶5-640) that come under the responsibility of APRA and the Commissioner (to the extent that they relate to SMSFs): • reviewable decisions definitions (s 10(1))

• notice to trustees regarding fund’s complying status (s 40 to 45) • late lodgment of election to become a regulated fund (s 50) • prohibiting receipt of employer-sponsor contributions (s 63) • in-house asset rules — determination as in-house asset (s 71) • notification by trustee of disqualified person status (s 126K) • obligations of actuaries and auditors — suspected contravention or insolvency (s 129; 130) • disqualification of auditors (s 131 to 131A) • suspension/removal of trustee, appointment of acting trustee (s 133 to 141) • winding up and/or dissolution of fund (s 142) • application for civil penalty orders, etc (s 197 to 201) • TFN provisions (Pt 25A) • collection/publication of statistical information.

¶5-700 Applying to the ATO for SMSF specific advice Trustees of SMSFs (and other eligible persons such as tax agents, legal personal representatives or auditors) may apply to the ATO for SMSF specific advice (SMSFSA) in accordance with approved procedures using the ATO approved form. While similar in form to a tax private ruling, SMSFSA is not binding on the ATO and does not have the same review rights as a private ruling (see ¶16-090). PS LA 2009/5 outlines the technical assistance (known as either SMSF advice or SMSF guidance) that the ATO can provide. An SMSFSA sets out the Commissioner’s opinion about the way the superannuation law applies, or would apply, to the SMSF in relation to a specified scheme or circumstance in the following areas: • investment rules including: – those relating to an investment by a fund in a company or trust – acquisition of assets from related parties – borrowing or charges – in-house assets – business real property • in-specie contributions or payments • payment of benefits under a condition of release • valuation matters. The ATO will not provide an SMSFSA where the query relates to: • the complying status of the SMSF • SIS trustee covenants as set out in SISA s 52B(2)

• the residency status of the SMSF (apply for a private ruling as this is a taxation issue), or • a fund which is not an SMSF or is a former SMSF (see ¶16-090). The application form and details of how to apply for an SMSFSA may be found at www.ato.gov.au/forms/request-for-smsf-specific-advice/.

6 CONTRIBUTIONS TO SUPERANNUATION FUNDS AND RSAs SUPERANNUATION CONTRIBUTIONS — AN OVERVIEW Tax treatment of contributions

¶6-000

Amounts that fall outside Div 290

¶6-020

Funds must provide member contributions statements

¶6-050

EMPLOYER SUPERANNUATION CONTRIBUTIONS Tax treatment of employer superannuation contributions

¶6-100

Reportable employer superannuation contributions

¶6-110

Conditions for deductibility of employer contributions

¶6-115

Employer makes a “contribution”

¶6-120

The timing of a contribution

¶6-123

Contributions for the purpose of making provision for superannuation benefits for another person

¶6-125

Contribution to a complying superannuation fund

¶6-130

Contribution for an “employee” of the employer

¶6-140

Age of the employee may affect the deduction

¶6-150

Contributions to non-complying superannuation funds

¶6-160

Contributions to formerly tax-exempt entities

¶6-180

Fringe benefits tax on employer contributions

¶6-190

Personal services income rules may deny deduction

¶6-200

Potential application of ITAA36 Pt IVA

¶6-220

Payroll tax on contributions

¶6-240

Salary sacrifice into superannuation

¶6-260

PERSONAL SUPERANNUATION CONTRIBUTIONS Tax treatment of personal superannuation contributions

¶6-300

Persons who can make personal contributions

¶6-320

Deductions for personal contributions

¶6-340

The 10% rule — for income years before 2017/18

¶6-360

Notice requirements for a deduction

¶6-380

First Home Super Saver Scheme

¶6-385

“Downsizer contributions” from the proceeds of selling a home

¶6-390

DIVISION 293 TAX Division 293 tax on concessional contributions of certain high-income earners

¶6-400

TRANSFER BALANCE CAP FROM 1 JULY 2017 Limit on transfers into the retirement phase of superannuation

¶6-420

Transfer balance account event-based reporting

¶6-422

Transfer balance account

¶6-425

Credits to the transfer balance account

¶6-430

Debits to the transfer balance account

¶6-435

Transfer balance cap

¶6-440

Excess transfer balance determinations

¶6-450

Commutation authorities

¶6-455

Excess transfer balance tax

¶6-460

Transitional CGT relief when assets transferred from retirement phase before 1 July 2017

¶6-470

Non-commutable defined benefit income streams

¶6-480

TOTAL SUPERANNUATION BALANCE Total superannuation balance from 2017/18

¶6-490

EXCESS CONTRIBUTIONS Taxation of excess contributions

¶6-500

Reduction of tax liability on excess contributions

¶6-502

TREATMENT OF EXCESS CONCESSIONAL CONTRIBUTIONS Excess concessional contributions

¶6-505

Concessional contributions cap increased by catch-up contributions

¶6-507

Concessional contributions — accumulation interests

¶6-510

Concessional contributions — defined benefit schemes and constitutionally protected funds

¶6-512

Excess concessional contributions included in assessable income

¶6-515

Release of excess concessional contributions

¶6-520

Liability to excess concessional contributions tax before 2013/14

¶6-525

Refund of excess concessional contributions for 2011/12 and 2012/13

¶6-530

TREATMENT OF EXCESS NON-CONCESSIONAL CONTRIBUTIONS Excess non-concessional contributions

¶6-540

Bringing forward non-concessional contributions for two years

¶6-545

Non-concessional contributions

¶6-550

Liability to excess non-concessional contributions tax

¶6-560

Release of excess non-concessional contributions

¶6-565

Single contribution in excess of the “fund-capped contributions” limit

¶6-570

Transitional arrangements from 10 May 2006 to 30 June 2007

¶6-580

ASSESSMENTS OF EXCESS CONTRIBUTIONS TAX Excess non-concessional contributions tax assessments

¶6-600

RELEASE AUTHORITIES Consolidated release authority process from 1 July 2018

¶6-640

COMMISSIONER’S DISCRETION TO DISREGARD OR REALLOCATE CONTRIBUTIONS Determination for contributions to be disregarded or reallocated

¶6-665

REFUND OF CONTRIBUTIONS MADE BY MISTAKE Refund of employer or member contributions made by mistake

¶6-670

INTERACTION WITH TAX FILE NUMBER RULES Tax file numbers and superannuation contributions

¶6-680

Additional tax payable on no-TFN contributions income

¶6-685

Member contributions may not be accepted unless TFN is quoted

¶6-690

GOVERNMENT CO-CONTRIBUTION Government co-contribution scheme

¶6-700

Co-contribution eligibility requirements

¶6-720

Amount of government co-contribution

¶6-740

Payment of government co-contribution

¶6-760

LOW INCOME SUPERANNUATION TAX OFFSET Low income superannuation tax offset

¶6-770

SPOUSE CONTRIBUTIONS Contributions to increase a spouse’s superannuation balance

¶6-800

Tax offset for spouse contributions

¶6-820

CONTRIBUTIONS SPLITTING Splitting contributions with a spouse

¶6-850

Consequences of contributions splitting

¶6-870

Superannuation Contributions — An Overview ¶6-000 Tax treatment of contributions This chapter explains the tax consequences for contributors and members when contributions are made to superannuation funds or RSAs. The consequences may be either: 1. tax concessions such as deductions or offsets — these generally depend on: • who is making the contribution, eg employer or member • the person for whom the contribution is made, eg employee, member or member’s spouse • the status of the entity receiving the contribution, eg a complying or non-complying superannuation fund, and • the amount of the contribution, or 2. tax penalties, eg when an individual’s transfer balance exceeds their transfer balance cap or excess contributions are made for them in a year.

Concessional and non-concessional contributions Superannuation contributions are classified as “concessional” or “non-concessional”. Concessional contributions are contributions that are included in the assessable income of a superannuation fund (¶6-510) — generally they are contributions made by an employer for an employee or personal contributions by a member for which a deduction has been allowed. Non-concessional contributions are contributions that are not included in the assessable income of a superannuation fund (¶6-550) — generally, they are undeducted contributions made by a member from after-tax income. For the Commissioner’s views on the meaning of “contribution” and when a contribution is made, see ¶6120 and ¶6-123. Contributions by employers Employers may be entitled to a deduction when they make a contribution (¶6-120) to a complying superannuation fund (¶6-130) for the purpose of providing superannuation benefits for another person (¶6-125). That person must be either an ordinary employee or a person treated as an employee under the Superannuation Guarantee (Administration) Act 1992 (¶6-140). The employer contribution may be compulsory (ie under the superannuation guarantee (SG) scheme or as required by an industrial law) or voluntary, or it may result from an employee sacrificing salary into superannuation. Contributions by an employer are deductible if they comply with certain conditions (¶6-115). Although the amount of the employer’s deduction is not generally limited, there may be consequences for the employee for whom the contributions are made if the contributions exceed the relevant contributions cap for the year (¶6-500). Salary sacrificed by an employee into superannuation counts as employer contributions (¶6-260). Employer contributions in excess of the minimum amount required by law (most commonly resulting from a salary sacrifice arrangement) generally have to be reported on an employee’s payment summary and are taken into account in determining various entitlements and obligations of the employee (¶6-110). Other issues related to employer contributions include: • the potential liability of the employer to fringe benefits tax (¶6-190) • the relevance of the personal services income rules (¶6-200) • the potential application of the anti-avoidance rules in ITAA36 Pt IVA (¶6-220), and • the imposition of payroll tax on employer contributions (¶6-240). Division 293 tax Concessional contributions are generally taxed at 15% when paid to a fund, whether the contributions are made by a member personally or by an employer on behalf of a member. Concessional contributions of high-income members may be liable to an additional 15% Division 293 tax (¶6-400). Contributions by members Contributions by members are deductible (and are counted as concessional contributions) if the deduction conditions (¶6-340) are satisfied. From 1 July 2017, the deduction conditions apply equally to all members, whether they are employees or self-employed persons. Before 1 July 2017, entitlement to a deduction depended on the work status of the contributing member. • Employees were generally not entitled to a tax deduction for their personal superannuation contributions, the exception being if they earned less than 10% of their income from employmentrelated activities and were substantially self-employed (¶6-360). The underlying assumption was that an employer made deductible contributions for the employee, generally because the employer was required to make SG contributions (Chapter 12).

• Self-employed and substantially self-employed persons were generally entitled to a deduction for their superannuation contributions as long as they satisfied the deduction conditions (¶6-340). Whether contributions are made before or after 1 July 2017, there are adverse tax consequences for a member if the contributions they make in a year exceed the member’s contributions caps for the year (¶6500). Contributions made by a member that are not deductible are non-concessional contributions. Contributions by low income members Low income members may be entitled to: (i) a government co-contribution to match their undeducted personal contributions (¶6-700), and/or (ii) a low income superannuation tax offset to compensate them for the tax on their employer contributions or on their own contributions for which a deduction has been allowed (¶6-770). The co-contribution is only available for members who are aged under 71 years at the end of the year, but there is no age limit for the low income superannuation tax offset. Persons who can make contributions Employers may generally make contributions for an individual who is an employee of the employer within the ordinary meaning or who is deemed to be an employee within the extended meaning in the Superannuation Guarantee (Administration) Act 1992 (¶6-140). An individual’s ability to make personal contributions (¶6-320) is generally affected by their age: • any individual aged under 65 may make personal contributions regardless of their participation in the workforce • an individual aged 65 to 74 may only make personal contributions if they satisfy the work test, which requires them to have been gainfully employed on at least a part-time basis during the year, or from 1 July 2019 they are entitled to the one-year exemption from the work test, and • an individual aged 75 or over cannot make personal contributions (¶6-320). An individual’s ability to make personal contributions is also affected by how much they already have in superannuation. Non-concessional contributions can, for example, only be made by individuals whose “total superannuation balance” (¶6-490) immediately before the beginning of the year is less than the general transfer balance cap (¶6-420). Contributions tied to home ownership Superannuation contributions are allowed in two special circumstances relating to home ownership: • individuals saving for their first home can contribute up to $30,000 (up to $15,000 a year) into superannuation and withdraw the contributions to use as a deposit on a home, with the withdrawn contributions and deemed earnings taxed at the contributor’s marginal tax rates less a 30% offset (¶6-385), and • an individual aged at least 65 may be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling the home that they have owned for at least 10 years (¶6-390). Limit on transfers to support superannuation income streams in retirement From 1 July 2017, a transfer balance cap limits the amount of capital an individual can transfer to an account to support the payment of a superannuation income stream to them in their retirement (¶6-420). The transfer balance cap is intended to limit a fund’s access to the earnings tax exemption (¶7-153) when paying superannuation income stream benefits to an individual in retirement. The general transfer balance cap is $1.6m for 2019/20. An individual’s personal transfer balance cap may vary from the general transfer balance cap (¶6-440).

An individual has a transfer balance account at a particular time if they are the “retirement phase recipient” of a superannuation income stream, which basically means a superannuation income stream benefit is payable to them at that time or may later be payable to them (¶6-425). If the balance of an individual’s transfer balance account exceeds their transfer balance cap, the individual may be required to commute a superannuation income stream in full or in part (¶6-450) and may be liable to pay excess transfer balance tax (¶6-460). Individuals already in retirement before 1 July 2017 with a transfer balance account in excess of the transfer balance cap at 30 June 2017 were required to withdraw the excess amount from superannuation or transfer it into an accumulation account. Transitional CGT relief (¶6-470) allowed superannuation funds to reset the cost base of assets transferred from the retirement phase to the accumulation phase, and this cost base reset ameliorated the CGT consequences of the transfer. Generally, defined benefit income streams are not required to be reduced if their value exceeds the transfer balance cap (¶6-480), but defined benefit pension payments over $100,000 per annum are subject to additional taxation (¶8-210 and ¶8-240). Total superannuation balance from 1 July 2017 From 1 July 2017, a member cannot make non-concessional contributions if their total superannuation balance (¶6-490) exceeds the transfer balance cap for the year. An individual’s total superannuation balance is used to determine eligibility for various superannuation concessions, including government co-contributions (¶6-700), the spouse contributions tax offset (¶6-820) and the carry forward of unused concessional contributions (¶6-505). Treatment of excess contributions Tax consequences arise for individuals for whom excess contributions are made during the year (¶6-500). An individual has excess contributions if the amount of their concessional or non-concessional contributions for the year exceeds the relevant contributions cap. For 2019/20, the basic concessional contributions cap is $25,000 and the non-concessional contributions cap is $100,000. From 2018/19, individuals may be able to increase their concessional contributions cap for a year by applying unused concessional cap amounts from one or more of the previous five financial years (¶6507). An individual’s excess concessional contributions may be included in their assessable income and also be liable to excess concessional contributions charge (¶6-515). As an alternative, an individual may elect for up to 85% of their excess concessional contributions to be released from superannuation (¶6-520), and the released amount is then non-assessable non-exempt income. An individual may elect for the excess amount of their non-concessional contributions (¶6-540) to be released from superannuation. Tax is payable on the associated earnings relating to the excess contributions, and the released contributions are non-assessable non-exempt income (¶6-565). If the individual does not elect for the excess contributions to be released, the individual is liable to excess nonconcessional contributions tax. An individual who has excess contributions for a year may be able to reduce the tax consequences by applying to the Commissioner for contributions to be either disregarded or reallocated to another year (¶6665). Tax file numbers The tax file number rules relating to superannuation (¶6-680) play an important role in controlling who can contribute to superannuation, and in determining the taxation of contributions made to a fund and whether a member will receive a government co-contribution or a low income superannuation tax offset. Contributions for spouses An individual may be entitled to a tax offset if they make a non-deductible contribution to a superannuation fund on behalf of a spouse (¶6-820).

Splitting contributions with a spouse Members may apply to split with their spouse superannuation contributions made on their behalf by an employer or concessional contributions that they have made (¶6-850). Recovery of contributions by bankruptcy trustee The Bankruptcy Act 1966 may allow a trustee in bankruptcy to recover superannuation contributions made by a person prior to bankruptcy with the intention to defeat creditors. The interaction of superannuation and the Bankruptcy Act 1966 is explored at ¶15-300 and following. [FITR ¶268-300 – ¶269-490; SLP ¶36-000]

¶6-020 Amounts that fall outside Div 290 Although Div 290 sets out the rules for deductions and tax offsets for superannuation contributions, the division is specifically stated in s 290-5 not to apply to the following amounts. 1. A “roll-over superannuation benefit” does not come within Div 290 (s 290-5(a)). A roll-over superannuation benefit, as defined in ITAA97 s 306-10, is a superannuation lump sum benefit that: (i) is paid from a complying superannuation fund, is an unclaimed money payment (¶3-380) or arises from the commutation of a superannuation annuity, and (ii) is paid to a complying superannuation plan or to an entity to purchase a superannuation annuity (¶8600). 2. Division 290 does not apply to a contribution that is a superannuation lump sum paid from a “foreign superannuation fund” (s 290-5(b)). The tax treatment of a lump sum paid from a foreign superannuation fund depends on the circumstances in which it is paid (¶8-370). 3. Division 290 does not apply to an amount transferred to a complying superannuation fund or an RSA from a superannuation scheme that: (i) is not and has never been an Australian superannuation fund or foreign superannuation fund (ii) was not established in Australia, and (iii) is not centrally managed or controlled in Australia (s 290-5(c)). Before 1 July 2015, Div 290 did not apply to certain payments to a superannuation fund from a first home saver account (FHSA) or to a government FHSA contribution to a superannuation fund (former s 2905(d), (e)).

¶6-050 Funds must provide member contributions statements Superannuation funds, approved deposit funds and RSAs must give the Commissioner a member contributions statement in relation to every individual who holds a superannuation interest at any time during the financial year. The statement must be lodged by 31 October following the end of the year. The obligation to provide the statement is imposed by TAA Sch 1 Subdiv 390-A (s 390-1 to 390-20). The Commissioner may use the information from the superannuation provider (in conjunction with information in a member’s tax return) for various purposes, such as: • to determine if a member’s concessional contributions are liable to Division 293 tax (¶6-400) • to determine if a member has an excess transfer balance (¶6-450) • to determine a member’s total superannuation balance (¶6-490) • to determine if a member has excess concessional contributions (¶6-505) or excess non-concessional contributions (¶6-540)

• to make assessments of excess contributions tax (¶6-600) • to assess eligibility for a government co-contribution (¶6-700) • to assess eligibility for a low income superannuation tax offset (¶6-770), and • to make a default superannuation guarantee (SG) charge assessment (¶12-350). To improve the quality of information in the superannuation system, the Commissioner keeps a register containing information provided by superannuation providers. This enables superannuation providers and employers to transmit information and payments electronically. Superannuation funds are also required to report certain superannuation income stream events relating to the operation of the transfer balance cap (¶6-422). Obligation to give a member contributions statement A superannuation provider must give the Commissioner a member contributions statement for all members who hold an interest in the fund at any time during the financial year (s 390-5). A statement must be provided not only for members for whom contributions are received, but also for inactive accounts and accounts in pension phase, and defined benefit and other non-account based interests. Before 2012/13, superannuation funds (other than SMSFs) were only required to give a statement for members for whom a contribution was made during the year. Information to be provided A member contributions statement must be in the approved form (TAA Sch 1 Div 388), and may require information about: • the amount and type of contributions made during the year • the value of any superannuation interest, or superannuation account, held by the individual in the fund at a particular time, and • if no contributions were made to the fund for the individual during the year, a statement to that effect (s 390-5(9)). For these purposes, “contributions” include (s 390-5(9A)): (i) notional taxed contributions and defined benefit contributions in relation to a defined benefit interest in the fund (¶6-512); (ii) amounts allocated from reserves as mentioned in s 291-25(3) or s 292-90(4)(a) (¶6-510); (iii) contributions made to a plan that was not a complying superannuation plan at the time, and (iv) defined benefit contributions in relation to a defined benefit interest in the fund. It does not include a superannuation benefit rolled over from one superannuation fund to another superannuation fund on behalf of an individual. The Commissioner’s views on when a contribution is made to a fund are set out in Taxation Ruling TR 2010/1 (¶6-120). According to the ATO, contributions paid into a contributions reserve (¶6-510) should be reported on a statement for the financial year in which the contributions are made to the fund, and not in a later year when they are allocated from the reserve to the member’s account (SMSF News — edition 29, 26 February 2014). The approved form may require the statement to contain the TFN of: (i) the superannuation provider; (ii) the superannuation plan; and (iii) the individual who holds the superannuation interest if the TFN of that individual has been quoted to the fund by the individual or by a person who had authority to do so (s 3905(11)). A superannuation fund must give the same information to the member if asked to do so and must do so within 30 days of the request (s 390-15). A person may make a complaint to the Australian Financial Complaints Authority (or to the Superannuation Complaints Tribunal before 1 November 2018) if they are dissatisfied with a statement given to the Commissioner by a superannuation fund (Chapter 13). An SMSF does not need to separately lodge a statement, but provides the information in its SMSF annual

return (¶5-500). A superannuation fund that becomes aware of a material change or material omission in information given to the Commissioner must, within 30 days, tell the Commissioner of the change or omission (TAA Sch 1 s 390-115). A superannuation provider who is given a release authority in relation to excess contributions tax (¶6-640) or in relation to Division 293 tax (¶6-400), and who pays an amount in accordance with the release authority, must give a statement to the Commissioner (TAA Sch 1 s 390-65). A copy of the statement must also be given to the individual to whom the release authority relates. A superannuation provider that pays a roll-over superannuation benefit (¶8-600) to another superannuation provider or pays a superannuation benefit to another superannuation fund may be required to give a statement about the payment to the other superannuation provider or to the individual in respect of whom the benefit is paid (s 390-10). A superannuation provider that pays a superannuation benefit to a New Zealand KiwiSaver scheme provider (¶8-380) must give a statement to that scheme provider, and to the individual in respect of whom the benefit is paid (s 390-12). A life insurance company must give a statement to the Commissioner in relation to exempt life insurance policies that provide for annuities that are superannuation income streams in the retirement phase and complying superannuation life insurance policies that are held by an individual (s 390-20). The reporting requirement is similar to that for member information statements for superannuation providers. Individuals may ask a life insurance company to give them the same information that is given to the Commissioner and may also make a complaint to the relevant complaints tribunal that a decision by the life insurance company to set out an amount in respect of them was unfair or unreasonable. The Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018, which was introduced into parliament on 24 May 2018, proposed that regulated superannuation funds be required to report limited recourse borrowing arrangement amounts that relate to an individual’s total superannuation balance from 1 July 2018 (¶6-490). Penalties for failure to comply with obligation to provide documents A superannuation provider that is required to give a return, statement, notice or other document by a particular time and does not do so is liable to an administrative penalty. An individual who fails to give a notice to an entity about releasing superannuation or about commutation authorities may also be liable to an administrative penalty (TAA Sch 1 s 286-75). The base penalty amount is one penalty unit for each period (or part of a period) of 28 days starting on the day the document is due and ending when the obligation has been satisfied (up to a maximum of five penalty units). Medium entities may be liable for double, and large entities five times, the base amount (TAA Sch 1 s 286-80). One penalty unit equals $210 from 1 July 2017. It equalled $180 from 1 August 2015 to 30 June 2017 and $170 before that date (Crimes Act 1914, s 4AA). Section 286-75 does not apply to obligations under the Superannuation Guarantee (Administration) Act 1992 which has a separate penalty regime for failure to provide information (¶12-550). A superannuation provider that fails to give a document to the Commissioner may also be liable to an administrative penalty under TAA Sch 1 s 284-75(3). Section 284-75(3) applies where the document that the superannuation provider fails to give is necessary for the Commissioner to determine a “tax-related liability” (as defined in TAA Sch 1 s 255-1) and the Commissioner determines that liability without the document. Practice Statement PS LA 2014/4 explains how the Commissioner administers the penalty and discusses the circumstances under which the discretion to remit the penalty under TAA Sch 1 s 298-20(1) may be exercised. Penalties for making a false or misleading statement A superannuation provider commits an offence if they provide a statement about a tax-related matter to the Commissioner where:

• the statement is false or misleading in a material particular or contains an omission which makes the statement false or misleading in a material particular (TAA s 8K) • the entity recklessly provides a statement that is false or misleading or omits information which makes the statement false or misleading (TAA s 8N), or • the statement is false or misleading in a material particular, whether because of things in it or omitted from it (TAA s 284-75(1)). A statement may be false or misleading “in a material particular” if it is made for a purpose connected with a tax or superannuation law and it is relevant to a decision or power for which the statement is made. A penalty may be imposed for a false or misleading statement whether or not the statement results in a tax shortfall amount. The base penalty amount is 20 penalty units where there is failure to take reasonable care, 40 penalty units where there is recklessness, and 60 penalty units where there is intentional disregard of obligations. No penalty is payable if the provider took reasonable care when making the statement. Practice Statement PS LA 2012/4 explains how the Commissioner administers the penalty for making a false or misleading statement where the statement does not result in a shortfall amount, and PS LA 2012/5 explains the Commissioner’s approach where the statement does result in a shortfall amount. An administrative penalty may be remitted if the Commissioner considers remission to be warranted (TAA Sch 1 s 298-20). Miscellaneous Taxation Ruling MT 2012/3 explains the Commissioner’s approach to remission of penalties where a voluntary disclosure has been made. A superannuation provider is not subject to administrative penalties under s 8K, 8N or 284-75(1) if they make a further statement to the Commissioner to correct the original statement within a grace period determined by the Commissioner under TAA s 390-7. This allows the Commissioner to provide superannuation providers with an ongoing grace period for correcting false or misleading statements relating to member information statements without giving rise to penalties. New reporting services The ATO is building two digital services to replace the annual lodgment by funds of member contribution statements. Member Account Attribute Service The Member Account Attribute Service (MAAS) allows for reporting of an individual’s superannuation account phases and attributes, which include opening and closing of accounts, acceptance of contributions and roll-overs. A statement must be lodged no later than five business days after the day on which: (i) a superannuation account is opened or a life insurance policy is first held, or (ii) any changes to the account phases and/or attributes relating to the account or policy occur. This information is required to be given under s 390-5 and 290-20, and the MAAS form is the approved form for the giving of such a statement. Reporting using the MAAS form commenced from 1 April 2018, but a transitional period allowed the first lodgment of MAAS forms to be no later than five business days from 31 October 2018. Information about MAAS can be found at: www.ato.gov.au/Super/SuperStream/APRA-regulatedfunds/Reporting-obligations/Member-Account-Attribute-Service/. Member Account Transaction Service The member account transaction service (MATS) allows for more frequent, transactional level reporting of member superannuation data to the ATO by superannuation funds (other than SMSFs) and insurance companies. A MATS form must be lodged with the ATO to report details about superannuation account transactions by the following times (unless the ATO approves a later date): • no later than 10 business days after an employer or non-employer contribution is allocated to an individual’s account

• no later than 10 business days after a retirement phase event occurs • no later than 10 business days after a fund acknowledges a s 290-170 notice of intent to deduct a contribution, and • no later than 31 October to report a member contribution balance amount as at the previous 30 June. Reporting using the MATS form applied generally from 1 July 2018, but a transitional period allowed the first lodgment of a MATS form to be no later than 10 business days from 31 March 2019. Information about MATS can be found at: www.ato.gov.au/Super/SuperStream/APRA-regulatedfunds/Reporting-obligations/Member-Account-Transaction-Service/.

Employer Superannuation Contributions ¶6-100 Tax treatment of employer superannuation contributions An employer is entitled to a deduction for contributions to a complying superannuation fund on behalf of an employee as long as the employer complies with the deduction rules in ITAA97 Subdiv 290-B (s 29060 to 290-100). A deduction is not allowed under any other provision of ITAA97 or ITAA36 for employer superannuation contributions (ITAA97 s 290-10). As an exception, superannuation contributions relating to research and development (R&D) activities of an employee must be claimed under the R&D provisions in ITAA97 Div 355. Although there is generally no limit on the amount of an employer’s deduction, there may be tax consequences for the employee if employer contributions on behalf of the employee exceed the contributions cap for the year (¶6-500). For 2013/14 and later years, the excess contributions may be included in the employee’s assessable income and be liable to excess concessional contributions charge, and for previous years the employee may have been liable to excess contributions tax. If employer contributions for an employee exceed the minimum amount required by law, eg because the employee has sacrificed salary into superannuation, the excess amount (the “reportable employer superannuation contributions”) may be recorded on the employee’s payment summary. The circumstances in which superannuation contributions are reported on a payment summary and the consequences for the employee are discussed at ¶6-110. A fund can at any time accept employer contributions on behalf of an employee in compliance with superannuation guarantee (SG) or award obligations (mandated employer contributions). The impact of an employee’s age on an employer’s entitlement to a deduction for contributions is discussed at ¶6-150. Employer contributions are generally subject to 15% tax An employer contribution is generally subject to 15% tax when it is made to a complying superannuation fund (¶7-120). Employer contributions for employees with income above $250,000 may also be liable to a 15% Division 293 tax (¶6-400). For low income individuals, imposition of tax at the 15% rate on employer contributions means that the contributions may be taxed at a higher rate than would apply to the individual’s taxable income. To compensate them for this tax, a low income superannuation tax offset may be payable for individuals whose income is less than $37,000 (¶6-770). Important points to note about employer contributions 1. Contributions by an employer are only deductible if the conditions discussed at ¶6-115 are satisfied. 2. The personal services income rules may deny or limit the deduction available to an employer (¶6-200). 3. Employer contributions in excess of what is commensurate with the value of the services provided by an employee may be deductible, although the potential application of ITAA36 Pt IVA needs to be considered (¶6-220).

4. A deduction is not allowed for a contribution knowingly made by an employer to a non-complying superannuation fund (¶6-130), and fringe benefits tax may be payable on the contribution (¶6-190). 5. A late SG contribution is not deductible if the employer elects that it be offset against the employer’s SG charge liability (¶12-360). 6. Employers are required to pay payroll tax on employer contributions (¶6-240). 7. Salary sacrificed by an employee into superannuation may count as an employer contribution (¶6-260). Such employer contributions must be reported on the employee’s payment summary with consequences for the employee in terms of their entitlements and obligations (¶6-110). 8. Superannuation contributions by an employer for a contractor may be deductible under s 290-60 if the contractor is treated as an employee for SG purposes (¶12-060), but otherwise no deduction would be allowed (not, for example, under s 8-1) (s 290-10(1)). 9. Employers may be required to report on an employee’s pay slips the amount of superannuation contributions made for the employee for a pay period (¶12-520). Deductions for financing costs on loans to pay contributions A deduction is only allowed for financing costs connected with a contribution if the contributor is an employer and the contribution is deductible (ITAA97 s 26-80). A financing cost for this purpose includes interest on a loan taken out to pay contributions and expenses of borrowing such as a loan establishment fee. [FITR ¶268-030; SLP ¶36-050]

¶6-110 Reportable employer superannuation contributions Reportable employer superannuation contributions for an employee must be reported on the employee’s annual or part-year payment summaries (TAA Sch 1 s 16-153; 16-155). Reportable employer superannuation contributions are not taken into account in calculating the employee’s income tax liability for the year, but are taken into account in determining entitlement to certain tax concessions and social security benefits or liability to make certain payments. What are reportable employer superannuation contributions? Reportable employer superannuation contributions are contributions made by an employer under a salary sacrifice arrangement, or contributions for an employee above the minimum amount required by law. A reportable employer superannuation contribution for an individual for an income year is an amount contributed: (a) by an employer of the individual, or an associate of the employer, for the individual to a superannuation fund or RSA (b) to the extent that the individual has the capacity, or might reasonably be expected to have the capacity, to influence: (i) the size of the amount, and/or (ii) the way the amount is contributed so that their assessable income is reduced (TAA Sch 1 s 16182(1)). For these purposes, “employer” has the expanded meaning given by SGAA s 12 (¶12-060). “Associate” is defined in ITAA36 s 318. For a corporate employer, the definition would include any company in the same company group and the trustee of any trust of which the employer is a beneficiary. For a partnership, the definition would include any partner in the partnership. For an individual, the definition would include a relative of the individual, a partner of the individual (and spouse or child of that partner), a partnership in which the individual is a partner, a trust of which the individual is a beneficiary and a company that is controlled by the individual. The fact that a superannuation death benefit arising from a contribution may be payable to a dependant of

the individual if the individual dies does not prevent the contribution being taken into account for these purposes (s 16-182(3), (4)). Compulsory superannuation amounts are not reported An amount is not a reportable employer superannuation contribution if it is a contribution required by the superannuation guarantee (SG) scheme, by an industrial award, under an individual employment contract or under a fund’s rules or trust deed. If, however, an employer makes additional superannuation contributions to cover the cost of premiums for insurance cover for an employee due to the choice of superannuation fund made by the employee (¶12040), the additional contributions are reportable employer superannuation contributions. This is the case whether the employer contributes to the employee’s chosen fund or the employee does not choose a fund and the employer contributes to a default fund (Interpretative DecisionID 2010/112). Capacity to influence the size of the contribution Only contributions made on behalf of an individual where the individual had some capacity, or might reasonably be expected to have some capacity, to influence the size of the contribution or the way it is made, are reportable employer superannuation contributions. Most commonly, this will be employer contributions resulting from a salary sacrifice arrangement entered into by the employee (¶6-260). If an employee enters into an arrangement for the employer to contribute more than is required by law, that employee will be considered by the ATO to have capacity to influence the size of the contribution. The employee’s capacity to influence may be shown by factors such as: • the nature of the relationship between the employer and the employee • the involvement of the employee in the negotiations concerning the terms of any industrial agreement governing the contributions • the size of the contribution relative to the compulsory contributions the employer must make • the superannuation contribution arrangements the employer has with other employees, and • any non-arm’s length dealings between the employer and the employee (ATO guide “Reportable employer super contributions”, available at www.ato.gov.au). According to the explanatory memorandum to the Tax Laws Amendment (2009 Measures No 1) Act 2009 (Act No 27 of 2009), if an employee is related to the employer, eg by family: • there is a rebuttable presumption that the employee has the capacity to influence the size of the employer contributions, and • the burden of proving that the employee had no capacity to influence falls on the employer (and not, as might have been expected, on the employee). Generally, an employee will not be taken to have the capacity to influence the amount of contributions if they simply vote for a collective agreement or are part of a group that negotiates a collective agreement. But they will be taken to have the capacity to influence if they can directly negotiate a contribution in excess of the minimum required. Example In 2019/20, Tran’s employer, BFD Pty Ltd, contributes 9.5% of Tran’s total remuneration package (which includes a reportable fringe benefit amount) to a superannuation fund under an enterprise agreement that was negotiated between BFD and the union. Because Tran was not involved in the negotiations (although he did vote for the agreement), he had no capacity to influence the amount of the contribution. Although BFD’s 9.5% contribution exceeds the amount required under the SG rules (because reportable fringe benefit amounts are not included in the earnings base for calculating the minimum SG contribution (¶12-215)), the excess contribution is not a reportable employer superannuation contribution. If Tran also entered into a salary sacrifice arrangement with BFD for the employer contribution to be increased by $20,000, this additional contribution would be a reportable employer superannuation contribution because Tran had the capacity to influence the size of the contribution.

Contribution in excess of minimum required by law If an employee has the capacity to influence the size of an employer’s contribution, it is only the amount of the contribution in excess of the amount required to be made by law (eg under the SG scheme or an industrial agreement) that is a reportable employer superannuation contribution. Even if an employee had the relevant capacity to influence, an employer contribution above that mandated by law may not be a reportable employer superannuation contribution if the employer makes the higher contribution: • for administrative reasons, eg because the employer’s payroll system automatically includes overtime in the earnings base, or • because of an employer policy relating to employees who are employed under collectively negotiated industrial agreements or single employment contracts. Example Cobalt Ltd employs a range of different types of workers on individual contracts and collective industrial agreements. Cobalt has always contributed 12% for employees even if the minimum contribution required under their individual contract or agreement is lower, and employees are not able to negotiate a lower employer contribution (eg in exchange for increased wages). As long as Cobalt documents the contributions in its record keeping system and can show that the employees have not influenced the amount of the contributions, the amounts over the compulsory contributions are not reportable employer superannuation contributions.

Capacity to influence the way the contribution is made so that assessable income is reduced An employer contribution that is made after an employee arranges for a contribution previously made out of after-tax income to be made out of pre-tax income (eg as a salary sacrifice contribution) may be a reportable employer superannuation contribution because the arrangement reduces the employee’s assessable income. Example Sharad’s employer contributes to a defined benefit fund on Sharad’s behalf and the contributions are applied to a pool to fund the liability of the entire fund. As a defined benefit member, Sharad is required to make member contributions and these are made out of post-tax income. When the rules of the fund are changed to allow members to contribute out of pre-tax salary, Sharad arranges for the “grossed-up” amount of his member contributions to be deducted from his pre-tax salary so that he makes the same net contribution to the fund as he previously made. The total grossed-up amount of the contribution is reportable employer superannuation contributions because it represents the amount that Sharad has chosen to have made from pre-tax salary with the effect that his assessable income is reduced.

Contributions from an employee’s after-tax income An amount is not a reportable employer superannuation contribution to the extent that it is included in the individual’s assessable income for the year (ie it is paid out of post-tax income) (s 16-182(2)). This is the case even if the employer deducts the amounts from the employee’s take-home pay and forwards the amount to their superannuation fund on their behalf. Example An employee asks his employer to pay $55 per fortnight to his superannuation fund from his after-tax salary. Although the employee has directly influenced the amount of contributions made by the employer, the additional superannuation is not a reportable employer superannuation contribution because it comes from the employee’s after-tax income. Even though the contributions are sent to the fund by the employer, they are not employer contributions but are the employee’s personal contributions.

Consequences for employee of reportable employer superannuation contributions on their payment summary Reportable employer superannuation contributions on an employee’s payment summary are not included in their income and no tax is payable on the amount. Nevertheless, they can have significant

consequences for the employee. For superannuation purposes, the contributions are taken into account in determining liability to Division 293 tax on the contributions (¶6-400) and eligibility for: • a government co-contribution (¶6-700) • a low income superannuation tax offset (¶6-770), and • a tax offset for spouse contributions (¶6-820). For income tax purposes, the contributions are also included in the income tests for: • eligibility for certain tax offsets • liability to Medicare levy surcharge and repayments of higher education loan program debts • entitlement to benefits from Centrelink, and • obligations to make payments to the Child Support Agency.

¶6-115 Conditions for deductibility of employer contributions An employer can deduct a contribution made to a superannuation fund for the purpose of providing superannuation benefits for another person who is the employer’s employee. For a contribution to be deductible, the following conditions must be satisfied (ITAA97 s 290-60): (1) a contribution is made by the employer (¶6-120) for the purpose of providing superannuation benefits for another person (¶6-125) who is an employee of the employer (¶6-140) (even if the benefits are payable to a dependant of the employee if the employee dies before or after becoming entitled to receive the benefits) (2) a deduction is only allowed for the income year in which the contribution is made (¶6-123) (3) if the contribution is made to a superannuation fund, the fund must generally be a complying superannuation fund (¶6-130) — contributions to a non-complying superannuation fund are generally non-deductible and are also subject to fringe benefits tax (¶6-160) (4) the employment activity conditions must be satisfied by the employee for whom the contribution is made (¶6-140), and (5) the contribution must be made for an employee whose age is within prescribed limits (¶6-150). Even if these conditions are satisfied, the personal services income rules may deny or limit the deduction (¶6-200). Offsetting late superannuation guarantee contributions Employers that make a superannuation guarantee (SG) contribution after the due date may be able to offset the late payment against certain components of the employer’s SG charge liability (¶12-360). Contributions that are offset against an employer’s SG charge liability are not deductible (ITAA97 s 29095). Payment split on marriage breakdown A deduction is not allowed for contributions to superannuation for a non-member spouse to satisfy a payment split obligation (¶14-000), made under the Family Law (Superannuation) Regulations 2001 (ITAA97 s 290-60(4)). The contribution is not treated as either a spouse contribution (¶6-800) or as a contribution that is included in the fund’s taxable income (¶7-120). [FITR ¶268-350 – ¶268-370; SLP ¶36-050]

¶6-120 Employer makes a “contribution” To be entitled to a deduction, an employer must make a contribution for the purpose of making provision for superannuation benefits for a person who is an employee of the employer (even if the benefits are payable to a dependant of the employee if the employee dies before or after becoming entitled to receive the benefits) (s 290-60(1)). Contributions must be actually made to a superannuation fund. The mere setting aside of amounts or crediting of amounts by book entry is not sufficient (P Iori & Sons 87 ATC 4775; Lend Lease 90 ATC 4401). Generally, there would need to be a payment of cash or of a cheque into the fund’s bank account or the transfer of assets to the fund. Makes a “contribution” — Taxation Ruling TR 2010/1 “Contribution” is not defined in the legislation, but the Commissioner’s views on the meaning of contributions to a superannuation fund are set out in TR 2010/1. According to TR 2010/1, a “contribution” is anything of value that increases the capital of a fund and that is provided by a person whose purpose is to provide superannuation benefits for one or more particular members of the fund or the members in general. A person’s purpose is the object which they have in view or in mind. Generally, a person will be said to intend the natural and probable consequences of their acts and, likewise, their purpose may be inferred from their acts. This is a determination of a person’s objective purpose, not their subjective intention. Although providing superannuation benefits must be the person’s sole purpose, it does not matter that a person takes account of the incidental consequences of making a contribution, such as obtaining a tax deduction. Not every increase in the capital of a fund would be a contribution as a person who increases the fund’s capital may have a purpose other than to benefit a member. TR 2010/1 notes, for example, that an arm’s length tenant’s improvements to a commercial property owned by a fund would not be a contribution if made to further the tenant’s business even though it may increase the fund’s capital. While a contribution will most commonly be made in money, the ruling states that a contribution can be made in various ways such as: • by transferring an asset, eg shares, to the fund (an in specie contribution) — the amount of an in specie contribution is the market value of the asset at the time the contribution is received by the fund • when a liability incurred by the fund is forgiven by the person to whom the liability is owed — a contribution by forgiveness of debt will be taken to occur on execution of a deed of release that relieves the fund from the obligation to pay the liability or when the creditor is legally barred from enforcing the liability, or • by increasing the value of an existing asset, eg by making an improvement to the asset. If a contribution is made by the transfer of property, or includes the transfer of property, the value of the contribution is the market value of the property reduced by the value of any consideration given for the transfer of the property (ITAA97 s 285-5). If the improvement to an SMSF’s asset by a related party at no cost to the fund increases the value of the asset and therefore the capital of the SMSF, and if the improvement is made by the related party for the purpose of benefiting the members of the fund, it will be a “contribution” to the fund (NTLG Superannuation Technical Sub-group minutes, 5 March 2013). The example being considered by the Superannuation Technical Sub-group involved the related party supplying materials worth $12,000 and labour worth $13,000 and the market value of the property, after the renovation, appreciating by $40,000. Asked to put a value on the contribution, the ATO said that the value would be equal to the value of the improvement, being the resulting $40,000 increase in the value of the asset owned by the fund (NTLG Superannuation Technical Sub-group minutes, 3 September 2013). An employer’s payment of insurance premiums through superannuation on behalf of an employee also counts as a contribution.

The time a contribution is treated as being made is discussed at ¶6-123. Payment of fund expenses by the employer Although the ATO prefers superannuation fund expenses to be paid directly by a fund and contributions to be made directly to a fund, the ATO recognises that, for administrative ease, an employer may pay an expense on behalf of a fund. This practice involves the making of journal entries, after the expense is paid, that reclassify the payment as a superannuation contribution by the employer to the fund. In relation to such arrangements, the ATO’s view is that payments by an employer to a third party on behalf of a fund to meet expenses incurred by the fund may be deductible contributions (TR 2010/1 at para 172– 174). The fund should recognise the payments as contributions by the employer in its accounts in the same way as it would for any direct cash contribution paid to it. If a superannuation fund makes an acquisition with GST included in the acquisition price and the employer pays the expense on behalf of the fund, the employer is not entitled to a GST input tax credit. This is because the supply is made to the fund and not to the employer. The fund itself may be entitled to claim a reduced input tax credit if the GST requirements (¶7-800) are met (GST Determination GSTD 2016/1). Employer contributions after employee sacrifices salary Employer contributions may result from an employee’s entitlement to future income being sacrificed into superannuation. In such a case, the employee forgoes income which has not yet been earned in return for the employer making contributions of an equivalent value to a superannuation fund on behalf of the employee. The employer contributions may count for superannuation guarantee (SG) purposes and may entitle the employer to tax deductions (¶6-260). The employer is not liable to fringe benefits tax on the contributions if they are made to a complying superannuation fund for an employee (¶6-190). If the contributions are reportable employer superannuation contributions (¶6-110), they must be included on the employee’s payment summary. Transfer from reserve account to member’s account The transfer of money at the employer’s direction from an accumulation fund’s reserve account or surplus to a member’s account in the fund may be treated as employer contributions. Because there is not an actual payment by the employer, there will only be an employer contribution if the employer can demonstrate an offsetting entitlement to be paid an equivalent amount by the trustee. It is not sufficient that the deed merely provides for the use of the surplus for the benefit of members — the employer must legally be entitled to withdraw those funds from the reserve account for its own benefit. If these circumstances are met, the Commissioner will treat a transfer from the reserve account to a member’s account at the direction of the employer as a contribution by that employer for SG purposes (SGD 94/8). Contributions reserves are discussed further at ¶6-510. Employer assessable on returned contributions A payment or benefit received by an employer in a year is assessable income of the employer so far as it reasonably represents the direct or indirect return of: • a contribution for which the employer or another entity can deduct an amount, or • earnings on such a contribution (ITAA97 s 290-100(1)). Example Contributions made by an employer to Fund A are transferred by Fund A to Fund B. If Fund B later returns the contributions to the employer, the payment would be an indirect return of the contributions and would be assessable income of the employer.

The rule in s 290-100(1) does not apply if the employer receives the payment or the benefit as a superannuation benefit (s 290-100(2)).

[FITR ¶268-334; SLP ¶36-050]

¶6-123 The timing of a contribution The time an employer contribution is made is important because the employer can only deduct a contribution “for the income year in which you made the contribution” (s 290-60(3)). The timing of a contribution may also affect: • when an employer’s superannuation guarantee (SG) contribution is made (¶12-230) • a member’s entitlement to a tax deduction for a year (¶6-320) • a member’s liability to Division 293 tax (¶6-400) • a member’s liability if excess contributions are made for the member in a year (¶6-500) • eligibility for a government co-contribution (¶6-700) or low income superannuation tax offset (¶6-770) in a year, and • the inclusion of the contribution in a fund’s assessable income for the year (¶7-120). Taxation Ruling TR 2010/1 TR 2010/1 states the Commissioner’s views on when a contribution is made. The general rule is that a superannuation contribution is made when the capital of the fund is increased. This may be when an amount is received, when ownership of an asset is obtained or when the fund otherwise obtains the benefit of an amount. In the ordinary case: • a contribution in cash is made when received by the fund • a contribution by electronic funds transfer or internet banking is made when the amount is credited to the fund’s bank account — this may occur sometime after the contributor has done all that is necessary to effect the payment, and • a contribution by cheque is made when the cheque is received by the fund, unless it is subsequently dishonoured. An in specie contribution (a contribution of property) is made when either legal or beneficial ownership of the property passes to the fund (generally under a formal registration process or when actual physical possession passes). The Commissioner accepts that beneficial ownership of the property may pass to the fund some time before the formal registration of the change of legal ownership where the property is, for example, shares in a publicly listed company or Torrens title land. The ruling warns that an argument that a contribution is made when beneficial (but not yet legal) ownership of property passes to the fund must be supported by evidence of the transactions to precisely identify the fact and timing of the ownership change. Contributions made on 30 June which is a Saturday, Sunday or public holiday Where the last day of the income year (ie 30 June) is a Saturday, Sunday or public holiday, there may be uncertainty about the latest date a contribution to a superannuation fund can be made for the contribution to count as being made in the year ended that 30 June. This can be seen from a number of cases where taxpayers have been assessed to excess contributions tax for contributions that they believed were made on 30 June but which, because 30 June fell on a weekend, were not received by, and counted as made to, the fund until a later day (¶6-665). Because of the difficulties that can arise, the ATO was asked at the NTLG Superannuation Technical Sub-group meeting on 4 September 2012 whether s 36 of the Acts Interpretation Act 1901 can be interpreted to allow contributions that cannot be made on the last day of an income year (because the day falls on a weekend or holiday) to be treated as being made by 30 June if they are made on the next

business day. Section 36 provides that if an Act “requires or allows a thing to be done” and the last day for doing the thing is a Saturday, Sunday or public holiday, then the thing may be done on the next day that is not a Saturday, Sunday or holiday. The ATO’s initial response was that s 36 would not apply to extend the income year for the purposes of the relevant taxation provisions because those provisions do not “require or allow” a contribution to be made or received by the last day of a particular year. They provide instead for a particular outcome if a contribution is made or received on or before the last day of a particular year. Contributions to a superannuation clearing house Since 1 July 2010, small business employers have been able to satisfy their superannuation guarantee (SG) obligations by making contributions to an approved clearing house — the Small Business Superannuation Clearing House — rather than directly to a superannuation fund (¶12-010). For deduction purposes, a contribution to a clearing house (whether or not it is the approved clearing house) is not a contribution to a fund until an amount is credited to a bank account of the fund. This is discussed in Taxation Ruling TR 2010/1 (at para 186 and 187) in the context of “when” a contribution is made. In Colless [2012] AATA 441, employer contributions in 2007 to a clearing house were held by the AAT not to have been “made” when the clearing house received the money from the employer but when the superannuation fund’s account was credited with the money after an electronic transfer from the clearing house. For SG purposes, a payment by an employer to the approved clearing house at a particular time (but not to other clearing houses) is treated as an employer contribution to a complying superannuation fund or an RSA at that time (SGAA s 23B). This means there may be a timing mismatch when an employer makes a payment to the approved clearing house for distribution to an employee’s superannuation fund: • for deduction purposes, a contribution is treated as having been made to the fund when it is received by the fund, which is likely to be some time after it is paid to the clearing house, and • for SG purposes, a contribution is treated as having been made to the fund when payment is made to the clearing house. The timing of a contribution to a fund may also be significant for a member in terms of liability to penalties for excess contributions (¶6-500). This was the case in Colless where the member was liable to excess contributions tax because a contribution made by an employer to a clearing house on 29 June 2007 was held not to have been made to the member’s superannuation fund until it was received by the fund on 2 July 2007. This caused the member to have excess contributions in the 2007/08 year. Further information for employers can be found at: www.ato.gov.au/Business/Super-for-employers/Paying-super-contributions/Small-BusinessSuperannuation-Clearing-House/. [FITR ¶268-334; SLP ¶36-050]

¶6-125 Contributions for the purpose of making provision for superannuation benefits for another person A contribution by an employer to a superannuation fund is only deductible if it is “for the purpose of providing superannuation benefits for another person” (s 290-60(1)). Purpose Whether a superannuation contribution is deductible depends on the purpose of the contributor. The contributor’s purpose must be to provide superannuation benefits for a particular person or class of persons. The Commissioner considers that a contribution is only deductible if the contributor’s sole purpose is to obtain superannuation benefits for a person (Taxation Ruling TR 2010/1). A deduction is not available for contributions made to a superannuation fund established directly for the benefit of a dependant of the person, although the dependant may become a beneficiary if the person dies.

A person’s purpose is the object which they have in mind, and generally a person will be said to intend the natural and probable consequences of their acts. This is a determination of a person’s objective purpose, not their subjective intention. Employer contributions to an employer-sponsored fund were held not deductible in Raymor Contractors 91 ATC 4259 because the main purpose was to generate tax deductible payments which could be returned to the employer as low interest loans rather than for the purpose of providing superannuation benefits for employees. Superannuation benefits “Superannuation benefits” means “individual personal benefits, pensions or retiring allowances” (ITAA36 s 6(1)). This would not include contributions to a fund providing collective, as distinct from individual, benefits. A contribution will provide superannuation benefits for an employee if it will benefit a particular employee who is a member of the fund, or if it will benefit all or an identifiable class of employees who are members of the fund (TR 2010/1). An employer is not required to make a formal allocation of its contribution to individual employees for the purpose of claiming a deduction. An actuarially calculated amount which covers the totality of the benefits payable by the fund is sufficient (Raymor Contractors 91 ATC 4259). The employee for whom a contribution is made must have fully secured rights to the superannuation benefit — it is not sufficient that they are entitled to the benefit only through the exercise of discretion by the fund trustee (TR 2010/1). A deduction was not allowable in Cameron Brae 2007 ATC 4936 because the trustee of the fund had discretion as to whether and to whom it would pay benefits. The discretionary nature of the trustee’s powers meant that it could not be said that the contributions were made to provide personal benefits for a particular person. The AAT found in Case 13/2004 2004 ATC 243 that an arrangement whereby a company made superannuation contributions that the fund then lent back to the company was not done for the purpose of providing superannuation benefits. In finding that the company was not entitled to a deduction for the contributions, the AAT noted that: (a) the exact amount of the contributions was lent back to the company shortly after the contributions were made, and (b) the company had no realistic prospect of repaying the loan because of its financial position, while the guaranteeing of the loan by the directors of the company effectively rendered any superannuation benefit to them illusory. As an alternative, the AAT said that ITAA36 Pt IVA would otherwise apply to strike down the deduction as, after applying the eight factors in ITAA36 s 177D(b), it would be concluded that the arrangement was entered into for “tax benefit” purposes. [FITR ¶268-332; SLP ¶36-050]

¶6-130 Contribution to a complying superannuation fund If an employer contribution is made to a superannuation fund, at least one of the following conditions must be satisfied (s 290-75): (1) the fund was a complying superannuation fund (¶2-140) for the income year of the fund in which the contribution was made, or (2) at the time the contribution was made, the employer had reasonable grounds to believe that the fund was a complying fund, or (3) at or before the time the contribution was made, the employer obtained a written statement (given

by or on behalf of the trustee of the fund) that the fund: (i) was a resident regulated superannuation fund (¶2-130), and (ii) was not subject to a direction under SISA s 63 (¶3-120) that prevented the fund from accepting employer contributions. A fund cannot satisfy condition (2) or (3) if, when the contribution was made: (i) the employer was the trustee or manager of the fund or an associate of the trustee or manager; and (ii) the employer had reasonable grounds to believe that the fund was not a resident regulated superannuation fund or that the fund was operating in contravention of a regulatory provision within SISA s 38A (as established on the balance of probabilities) (¶2-140). For this purpose, a contravention is to be ignored unless it is an offence or a contravention of a civil penalty provision of the SIS legislation. Unless condition (2) or (3) is satisfied, a contribution to a non-complying superannuation fund is not deductible (s 290-10(2)). Contribution to an RSA As with a contribution to a complying superannuation fund, a contribution to an RSA is deductible if it satisfies the conditions in s 290-70 to 290-80. [FITR ¶268-360; SLP ¶36-050]

¶6-140 Contribution for an “employee” of the employer To be deductible, an employer contribution must be made for another person who is an “employee” of the employer when the contribution is made (ITAA97 s 290-60(1)). Contribution for “another person” who is an employee of the employer There are two types of persons who are employees for the purposes of the deductibility of employer superannuation contributions: • persons who are employees within the ordinary meaning, and • persons who are employees under the expanded meaning in SGAA s 12 (¶12-060) — most commonly, this is an individual who works for the employer under a contract wholly or principally for their labour. In either case, the wording of s 290-60(1) indicates that the person for whom the contribution is made must be “another person” — it cannot be the same person as the employer taxpayer who is claiming the deduction. Compliance with the requirement that a contribution be made for another person was tested in Harris 2002 ATC 4659 (under ITAA36 former s 82AAA(1)), which concerned a taxpayer who had a controlling interest in a company of which he was, as a director, an employee. The director was denied a deduction for contributions to provide superannuation benefits because the taxpayer making the contributions was the same person as the employee for whom the contributions were made. For these purposes, if a partnership makes a contribution on behalf of an employee of the partnership the employee is treated as an employee of the partnership, and if a partner in a partnership makes the contribution the employee is treated as an employee of the partner (s 290-65(2)). Individuals for whom an employer can make deductible contributions To be deductible, an employer’s contribution must be made for an employee of the employer. An employee for these purposes means an individual who is an employee within the expanded meaning of employee in SGAA s 12 (s 290-65(1)). SGAA s 12 requires an employer to make SG contributions on behalf of: • persons who are employees within the ordinary meaning, and • persons who are deemed to be employees under s 12 (¶12-060) unless there is a specific exemption.

Persons who work under a contract wholly or principally for their labour One significant deeming in s 12 is provided by s 12(3), which states: “If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.” In World Book (Australia) 92 ATC 4327, agents who were contracted to sell encyclopaedias could either do so themselves or engage others to do so on their behalf. The court held that payments to the agents were payments under a contract whereby the contractor had undertaken to produce a result, rather than under a contract for labour, and that the agents were not employees within the expanded meaning in s 12(3). The Commissioner’s view is that a contract is considered to be “wholly or principally for the labour” of a contractor, and that the contractor is an employee under s 12(3), where the terms of the contract and the conduct of the parties indicate that the contractor: (a) is remunerated wholly or principally for their personal labour and skills (b) must perform the work personally, and (c) is paid by reference to hours worked rather than for the amount of work performed (SGR 2005/1). Directors Directors are deemed to be employees by s 12(2) if they are “entitled to payment for the performance of duties as a member of the executive body … of a body corporate”. In Kelly (No 2) 2012 ATC ¶20-329, the Federal Court considered whether a director of a trustee company was “entitled to be paid” and therefore fell within s 12(2) when he was paid a superannuation benefit by the trustee company. Dismissing the director’s argument that actual payment was evidence of entitlement to payment, the court held that a director of a company is not entitled to be paid unless this is specifically provided for in the company’s constitution or approved by resolution of the shareholders (Hutton v West Cork Railway Co (1883) 23 Ch D 654). In the Kelly case, the constitution of the trustee company provided that remuneration of the directors was such amount as was voted to them by resolution of the company in general meeting, but there was no evidence of such a resolution and therefore it could not be said that the director was entitled to be paid. The director was not therefore deemed to be an employee under s 12(2) and the trustee company was not entitled to a deduction for contributions made on his behalf. The taxpayer’s appeal to the Full Federal Court was dismissed (Kelly 2013 ATC ¶20-408). The court held that entitlement to be paid was the key issue and that the fact that payments had been made did not necessarily prove that entitlement. The decision in Kelly affirms the ATO view of the circumstances in which a director is deemed to be an employee under s 12(2) as stated in para 238–243 of Taxation Ruling TR 2010/1. Person may be deemed to be an employee although SG contributions are not required The effect of s 12 is that certain persons are deemed to be employees even though the employer may not be required to make SG contributions for them (¶12-070). This would include: • non-resident employees paid for work done outside Australia • resident employees employed by non-resident employers for work done outside Australia • employees receiving salary or wages of less than $450 in a month • part-time employees (that is, persons employed to work not more than 30 hours per week) under 18 years of age, and • a person employed for not more than 30 hours per week to carry out work of a domestic or private nature. An employer who chooses to contribute for such employees, although not required to do so for SG

purposes, is entitled to a deduction for the contributions if the deduction conditions (¶6-120) are satisfied. Taxpayers were found by the AAT not to be entitled to a deduction for superannuation contributions because of the lack of an employment relationship in Brown 2010 ATC ¶10-156 and France 2010 ATC ¶10-158. In both cases, the taxpayer owned an investment property and made contributions on behalf of a spouse who assisted with administrative tasks. In neither case was the AAT satisfied that there was an employment relationship or that there was anything other than a domestic arrangement. The ordinary meaning of employee and the expanded meaning in SGAA s 12 are discussed at ¶12-060. Contribution for a person who is not yet a member of the fund An employer contribution for an employee who is not yet a member of the fund (eg a contribution to the employer’s default fund while waiting for details of the employee’s chosen fund) is acceptable to the Commissioner as long as the employee becomes a member of the fund in due course and the contribution is appropriately allocated to the employee as required by the legislation (TR 2010/1). Employment activity conditions An employer contribution is only deductible if employment activity conditions are satisfied by the person for whom the contribution is made (s 290-70). This means that the person is: • an employee of the employer within the expanded meaning in SGAA s 12 (s 290-70(aa)), or • engaged in producing the assessable income of the employer (s 290-70(a)), or • an Australian resident who is engaged in the employer’s business (s 290-70(b)). The term “engaged” is not defined and takes its ordinary meaning of being busy or occupied. TR 2010/1 states that a person is “engaged” in an activity if their involvement in the activity in the income year results in them being treated as an employee for the purposes of the SGAA. Contributions may thus be deductible if they are made on behalf of SG employees (¶12-060) even if they are not engaged in producing the assessable income of the employer nor engaged in the employer’s business, eg contributions for an employee who is on unpaid leave. A contribution for an individual who is not an SG employee is, however, only deductible if the individual is engaged in producing the assessable income of the employer or is engaged in the employer’s business. A director is an employee for SG purposes if the director is entitled to payment for the performance of duties as a member of the company’s executive board (SGAA s 12(2)). A director entitled to remuneration will satisfy the employment activity test even if not engaged in producing the company’s assessable income or its business. The deductibility of contributions for directors was considered in Interpretative Decision ID 2007/144 where the Commissioner states that contributions for directors of a company that derived its assessable income from passive investments were deductible as long as the directors were entitled to payment for their services. Contributions for former employees A former employee of an employer may be treated as an employee for the purposes of the deduction rules in s 290-60(1), enabling the employer to make a deductible contribution for the person. This will be the case if the contribution by the employer: (a) reduces the employer’s SG charge percentage (¶12-150) for the employee (s 290-85(1)(a)) (b) is a one-off payment made in lieu of salary or wages that relate to a period of service during which the person was an employee of the employer (s 290-85(1)(b)) (c) is a payment (other than a one-off payment) made in respect of a former employee where the payment: (i) relates to a period of service during which the person was an employee of the employer; (ii) is made within four months of the employee’s cessation of employment; and (iii) would have been deductible if the employer had made it when the other person was their employee and if the current law had applied when the person was employed by the employer (s 290-85(1AA)), or

(d) is a payment made in respect of a former employee to fund a defined benefit interest (¶6-512) which accrued while the member was an employee (regardless of when the payment is made) where: (i) the employer is at arm’s length with the former employee in relation to the contribution; (ii) an actuary’s certificate confirms that the additional contributions do not exceed the amount required by the fund to meet its liabilities in connection with the defined benefit interest; and (iii) the payment would have been deductible if the employer made it when the other person was their employee and if the current law had applied when the person was employed by the employer (s 290-85(1AB)). The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 notes that one-off payments made in lieu of salary or wages (s 290-85(1)(b)) would normally be made under a salary sacrifice agreement. It states at para 1.38 that, for a one-off payment to be deductible, it should reflect the normal contributions to superannuation for the employee just before they ceased employment. The Commissioner’s view is that a contribution for a former employee is only covered by para (b) if: “… it is a one-off payment made following termination of employment pursuant to an effective salary sacrifice agreement that was in place before the termination. The deduction is limited to the normal contributions to superannuation for the employee just before they ceased employment.” (TR 2010/1 at para 227) Section 290-60 may also apply if a person with a controlling interest in an employer makes a contribution on behalf of a former employee of the employer (s 290-85(1A), (1B), (1C)). The deduction is subject to the controlling interest deduction rules in s 290-90 being satisfied (see below). Example Company 1, which has a controlling interest in Company 2, makes a contribution on behalf of Company 2 to a superannuation fund to satisfy Company 2’s SG obligation for a former employee. Company 1 may be allowed a deduction for the contribution even though the former employee was never an employee of Company 1.

Contributions made in respect of a former employee may be deductible if made within four months of the employee ceasing employment, or at any time if the contribution relates to a defined benefit interest of a former employee. Contributions by taxpayers with controlling interests A deduction for a contribution may be allowed under s 290-60 if a taxpayer makes a contribution for another person and: • that other person is an employee of a company in which the taxpayer has a controlling interest, or • the taxpayer is connected to the employee in the following circumstances: – the taxpayer is the beneficial owner of shares in the company that employs the employee, but does not have a controlling interest – the taxpayer is at arm’s length from the employee in relation to the contribution, and – neither the employee nor a relative of the employee has set aside an amount to provide superannuation benefits for the taxpayer, or • the taxpayer is a company connected to the employee either because: – the employee is an employee of an entity that has a controlling interest in the company, or – an entity that has a controlling interest in the company also has a controlling interest in a company in which the employee is an employee (s 290-90). If any one of these conditions is satisfied, the employee is treated as an employee of the taxpayer for the purposes of s 290-60(1). The term “controlling interest” is not defined and takes its ordinary meaning. TR 2010/1 gives as

examples: • a bare majority, being more than one-half of the voting power • a shareholder’s power, by the exercise of voting rights (including a casting vote), to carry a resolution at a general meeting of a company, and • a shareholding that is more powerful than all other shareholders put together in a general meeting. [FITR ¶268-350, ¶268-370 – ¶268-390; SLP ¶36-050]

¶6-150 Age of the employee may affect the deduction Contributions made in 2013/14 and later income years An employer contribution made for an employee on or after 1 July 2013 may be deductible if: (a) it is made on or before the 28th day after the end of the month in which the employee turns 75 (s 290-80(1)(a)), or (b) the employer is required to make the contribution by an industrial award, determination or notional agreement preserving state awards (within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009) that is in force under an Australian law (s 290-80(1)(b)), or (c) the contribution reduces the employer’s charge percentage for the employee under s 22 or s 23 of the SGAA, ie it is taken into account in determining if the employer has made sufficient SG contributions for the employee (s 290-80(1)(c)). An industrial agreement, such as an enterprise agreement within the meaning of the Fair Work Act 2009, or a similar agreement made under a state law, is not an award or determination. For the purposes of s 290-80, a reference to a determination does not include a reference to a workplace determination made under the Fair Work Act 2009 or the Workplace Relations Act 1996 (s 290-80(3)). From 1 July 2013, there is no maximum age limit for SG contributions and employers may be able to claim deductions for SG contributions made for employees regardless of their age. These contributions must reduce the employer’s charge percentage under SGAA s 22 or 23 in respect of the employee, ie they must be counted in calculating if the employer has made sufficient SG contributions for the employee (¶12-180). Amount of the deduction The amount of the deduction for an employer’s contribution depends on whether s 290-80(1)(a), (b) or (c) (as discussed above) applies: • where para (a) applies, all of the contribution may be deductible • where only para (c) applies, the employer can deduct only the amount of the contribution that reduces their charge percentage for the year (¶12-200), and • where both para (b) and (c) apply and para (a) does not apply, the employer can deduct only the greater of: (i) the amount of the contribution that is required by the industrial award etc; and (ii) the amount of the contribution that reduces the employer’s charge percentage (s 290-80(2A), (2B)). Example Jessica, aged 77, has ordinary time earnings of $12,000 during the period 1 July 2019 to 30 September 2019. The charge percentage for this quarter is 9.5% (¶12-200). Jessica’s employer makes a superannuation contribution of $1,800 (a 15% contribution) for her on 28 September 2019. If the employer is not required to contribute under an industrial award, the deduction would be limited to the amount that reduces the employer’s charge percentage to nil for Jessica. The employer would therefore be entitled to a deduction of $1,140 — this is equivalent to a 9.5% contribution, being the amount that reduces the employer’s charge percentage to nil for Jessica. If the employer is required to contribute for Jessica under an industrial award and the required contribution is less than 9.5% of

Jessica’s ordinary time earnings, the employer would still be able to deduct $1,140 (ie the charge percentage amount of 9.5% × $12,000). If the employer is required under the industrial award to contribute an amount that is greater than 9.5% of Jessica’s ordinary time earnings, that higher amount would be deductible.

¶6-160 Contributions to non-complying superannuation funds Contributions to non-complying superannuation funds are generally not deductible (s 290-10(2)). The exception is if an employer makes a superannuation contribution on behalf of an employee and at the time the employer had reasonable grounds to believe that the fund was a complying fund (s 290-75(1)) (¶6-130). In other cases, the contribution is not deductible and may be subject to fringe benefits tax (¶6190).

¶6-180 Contributions to formerly tax-exempt entities Special rules apply to formerly tax-exempt entities. These rules affect government exempt entities which are privatised either by legislation or by sale to private interests, and non-government exempt entities which cease to be exempt, eg an entity that previously engaged in activities for the promotion of sport but which begins to carry on activities for the purpose of profit. Gains, losses, income and deductions that relate to the period of exemption are not included in calculating assessable income, and only outgoings which relate to the derivation of assessable income are allowed as deductions. The effect is that a formerly tax-exempt entity is allowed deductions for superannuation contributions only to the extent that they relate to the period when the entity is taxable. [FTR ¶11-357/60]

¶6-190 Fringe benefits tax on employer contributions Fringe benefits tax (FBT) may be payable by an employer when a fringe benefit is provided to an employee. The definition of a fringe benefit in s 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) includes benefits provided to an employee or an associate of an employee by an employer, an associate of the employer or a third party, in respect of the employee’s employment. FBT is payable at the rate of 47% for the 2019/20 FBT year, ie from 1 April 2019 to 31 March 2020 (the same rate as for the 2018/19 FBT year). When is FBT payable on superannuation contributions? Unless an exemption applies, the making of a superannuation contribution by an employer, eg under a salary sacrifice arrangement, may be a fringe benefit if it is made on behalf of an employee, or an associate of an employee such as a spouse. “Employee” is defined for FBT purposes as a person who receives, or is entitled to receive, salary or wages (FBTAA s 136(1)). This definition would apply to a person who is an employee within the ordinary meaning, but not a person who is only treated as an employee because they come within the extended superannuation guarantee meaning (¶12-060), eg a person who works under a contract that is primarily for their labour. Exemptions from FBT liability FBT is not payable if the benefit provided to the employee is not a fringe benefit. The following are specifically excluded from being a fringe benefit (para (j) of definition of fringe benefit in FBTAA s 136(1)): • a contribution to a complying superannuation fund for the purpose of providing superannuation benefits for an employee, or to a non-complying superannuation fund for an employee where the employer had reasonable grounds for believing the fund was a complying superannuation fund • a contribution to a foreign superannuation fund for the purpose of providing superannuation benefits for an employee who is a “temporary resident” (basically, a person with a temporary visa of less than four years), and

• a contribution to an RSA held by an employee. The exemption from being a fringe benefit extends to “contributions” to a fund, and not just to “a payment” as was the case before 1 July 2007. This means that in specie contributions to a superannuation fund, such as shares or real property, may be exempt from being taxed as a fringe benefit, and there is consistent FBT treatment between employer contributions made in the form of money and in specie contributions. Superannuation contributions that are caught by FBT The definition of a fringe benefit means that FBT is payable if the employer makes a contribution: • to a non-complying superannuation fund that the employer did not have reasonable grounds for believing was a complying fund (¶6-130), or • on behalf of a person who is not an employee of the employer, eg a spouse or other related person. Employer contributions arising from a salary sacrifice arrangement entered into by an employee receive the same FBT treatment as other employer contributions, and the possible imposition of FBT on employer superannuation contributions is an important factor for an employee considering sacrificing salary into superannuation (¶6-260). [SLP ¶36-090]

¶6-200 Personal services income rules may deny deduction Under the personal services income rules, a tax deduction may be denied to an individual or personal services entity when they make superannuation contributions. A “personal services entity” is a company, trust or partnership whose assessable income includes the personal services income of one or more individuals (ITAA97 s 86-15). Personal services income is income that is gained mainly as a reward for the personal efforts or skills of an individual (ITAA97 s 84-5). The limitations on deductions for superannuation contributions do not apply if the individual or personal services entity is conducting a personal services business (ie it satisfies one of the personal services business tests) (ITAA97 s 87-1). Contributions by individuals Unless an individual is conducting a personal services business, they cannot generally deduct a contribution made to a superannuation fund or RSA to provide for superannuation benefits for an associate (eg a spouse), to the extent that the associate’s work relates to gaining or producing the individual’s personal services income (ITAA97 s 85-25). This is the case even if the associate is an employee of the individual. A deduction may, however, be allowed to the extent that the associate performs work which is the principal work of the individual. “Principal work” is work that is central to meeting the individual’s obligations under agreements between the individual or a personal services entity and the acquirer of the personal services. Generally, principal work would not include clerical or administrative work. If the associate is engaged in providing part of the individual’s principal work, superannuation contributions that are related to that engagement may be deductible, but the deduction is limited to the minimum amount required to be contributed under the superannuation guarantee (SG) scheme (¶12-150). The minimum contribution is calculated as if the associate’s ordinary time earnings for SG purposes are the amount paid to the associate to perform the principal work. Example Mary employs her husband Brad in her sign writing business. He is paid $40,000 in 2019/20 — $15,000 for delivering signs to clients and $25,000 for administrative support. Although Mary contributes $3,800 to a superannuation fund on behalf of Brad (ie 9.5% of $40,000), she is only entitled to a deduction of $1,425. This is the amount of the contribution (ie 9.5% of $15,000) that relates to the income earned by Brad from performing the principal work of Mary’s business.

The individual is not denied a deduction for contributions to a superannuation fund or RSA to provide superannuation benefits for themselves or, in the event of their death, for their dependants. Contributions by personal services entity A personal services entity is entitled to deduct certain contributions it makes to a superannuation fund or RSA on behalf of an individual whose personal services income is included in its assessable income (ITAA97 s 86-75). This applies, for instance, if an individual provides personal services and the personal services income from providing those services is paid to a personal services entity (eg a company, trust or partnership) rather than to the individual. If a contribution is made on behalf of an associate of an individual whose personal services income is included in the entity’s income, and the associate performs less than 20% (by market value) of the entity’s principal work, the deduction is limited to the amount required to be contributed under the SG scheme. The deduction may be limited, for example, if the entity contributes for a non-working spouse of the main worker. The required minimum contribution is calculated as if the associate’s ordinary time earnings for SG purposes are the amount paid to the associate to perform the principal work. Example Napco, a personal services entity, is paid $200,000 for personal services performed by Jacob in 2019/20. Jacob’s son, Jim, is paid $10,000 to carry out certain tasks, comprising 10% (by market value) of the principal work that generates Napco’s personal services income. Jim is also paid $30,000 for administrative support. Regardless of the actual contributions made, the maximum deduction to which Napco is entitled for superannuation contributions made for Jim is: 9.5% × $10,000 = $950 Contributions in excess of $950 are not deductible.

[FITR ¶133-130, ¶133-320; SLP ¶36-050]

¶6-220 Potential application of ITAA36 Pt IVA If a business (including a personal services business) pays superannuation contributions that are considerably in excess of the value of the services provided by the employee, the question arises whether ITAA36 Pt IVA applies. Following the AAT decision in Ryan 2004 ATC 2181 that Pt IVA did not to apply to the payment of employer superannuation contributions for an employee that were very high relative to the salary earned by the employee (but within the age-based limits that applied at that time), the ATO set out its views in Taxation Determination TD 2005/29. The ATO accepted that, in the absence of unusual features, Pt IVA would not apply where a company or trust conducting a personal services business paid genuine superannuation contributions up to the age-based limits to a complying superannuation fund in respect of the associate of the main service provider (eg the wife of the taxpayer in Ryan). A personal services business, as defined in ITAA97 s 87-15, exists if there is a personal services business determination or if one or more of four tests for what is a personal services business are met. For this ATO policy to apply, the provision of personal services through the entity would have to be commercially justified (eg because the relevant service acquirer will not contract with individuals but with entities only). Further, the application of the policy would be reconsidered if there are “unusual features”, such as where an employee is engaged by the entity solely to allow the diversion of superannuation contributions from the main service provider. As the ATO’s concession in TD 2005/29 was targeted to a business paying contributions up to the agebased limits that applied before 1 July 2007, the potential application of Pt IVA would still be open if participants in a scheme received a tax benefit from the making of contributions in excess of statutory limits. From 1 July 2007, there is no age-based limit on the deductibility of employer contributions (¶6115), which raises the question whether, in the absence of a statutory limit, there is an ATO-imposed limit on acceptable contributions.

The Commissioner’s views as stated in this determination are equally applicable to businesses that are not personal services businesses. In that case though, ITAA97 s 86-75 may limit the deductions for superannuation contributions made by the personal services entity, eg for an associate of an individual whose personal services income is included in the entity’s income (¶6-200). The potential application of Pt IVA is also discussed at ¶6-470 in the context of transitional CGT relief when assets were transferred from the retirement phase before 1 July 2017 and at ¶6-510 in the context of the use of reserves by SMSF trustees to circumvent superannuation and tax restrictions. Sacrifice of salary into a transition to retirement pension Where a taxpayer enters into a salary sacrifice arrangement (¶6-260) that is tied to a transition to retirement pension (¶3-390), the Commissioner has stated that, although the taxpayer may receive a tax benefit, Pt IVA would not apply unless the arrangement was “artificial or contrived”. There would be no grounds for applying anti-avoidance rules to arrangements which are entered into in a straightforward way and are consistent with the operation of the law (Media release No 2005/66, 17 November 2005).

¶6-240 Payroll tax on contributions Payroll tax is a tax on wages paid or payable by an employer to an employee. Each of the eight state and territory legislatures imposes a separate payroll tax. This means the obligations, liabilities and rates of tax may vary so that, for example, an allowance that is subject to payroll tax in Victoria may be exempt in Queensland. While the meaning of the term “wages” varies from state to state, it is generally defined to mean any wages, salary, commission, bonuses or allowances paid or payable (whether in cash or in kind) to an employee as such. A common stumbling block for employers has been whether employer contributions to superannuation funds are wages in a particular jurisdiction. If such contributions are wages for payroll tax purposes, they may lever an employer over the payroll tax threshold. Other payments that may unexpectedly affect an employer’s payroll tax liability are fringe benefits, payments to contractors for the performance of services, payments for annual leave and long service leave, termination payments and directors’ fees. In all the states and territories, employer superannuation contributions are “wages” for payroll tax purposes. In NSW, for example, “wages” upon which payroll tax may be payable include “a superannuation contribution”, which is defined as a contribution paid or payable by an employer in respect of an employee to a superannuation fund, as a SG charge or as any other form of superannuation, provident or retirement fund or scheme (Payroll Tax Act 2007 (NSW), s 17). This may include superannuation contributions made under a salary sacrifice arrangement entered into between an employee and employer. It may also include non-monetary contributions and top-up contributions to a defined benefit fund (CSR Ltd v Chief Commissioner of State Revenue (NSW) [2006] NSWSC 1380).

¶6-260 Salary sacrifice into superannuation In some workplaces, it is common for employees to sacrifice some of their salary in return for fringe benefits or increased superannuation contributions by the employer on their behalf. Salary sacrifice is attractive because it results in a lower tax liability for the employee if the fringe benefits which replace the salary are taxed at a rate that is lower than the employee’s marginal tax rate. Although the FBT rate is generally the same as the highest marginal tax rate, many fringe benefits (eg cars) are valued concessionally, resulting in an effective FBT rate which is much lower. Some fringe benefits (eg child care on the employer’s business premises and certain taxi travel) are exempt from FBT. Employer contributions to a complying superannuation fund on behalf of an employee are not a fringe benefit (FBTAA s 136(1)), and there may therefore be a considerable tax saving if salary is sacrificed into superannuation. The contribution would generally be taxed at 15% when paid into the fund, but not again if the member is aged at least 60 when the benefit is withdrawn. Superannuation contributions on behalf of an associate of an employee (eg a spouse) are, however, a fringe benefit even if made to a complying superannuation fund, as are contributions to a non-complying superannuation fund (¶6-190).

Tax consequences of salary sacrifice arrangement An effective salary sacrifice arrangement results in the employee’s income on which income tax is payable being reduced by the amount that is sacrificed. The employee’s income tax liability may thereby be reduced. There are also less positive consequences of a decision to salary sacrifice: • if salary is sacrificed in return for fringe benefits and the taxable value of the fringe benefits received by the employee in the year is more than $2,000, a “reportable fringe benefits amount” results from the provision of the benefit and is taken into account when calculating the employee’s entitlement to, for example, the government co-contribution or liability to Medicare levy surcharge — the reportable fringe benefits amount is the taxable value of the fringe benefits grossed up, for the 2019/20 FBT year, by 1.8868 (the same as for the 2018/19 FBT year) • the employer’s superannuation guarantee (SG) obligations may be calculated on the reduced salary (but see proposed changes below) • if the employee is entitled to a defined benefit from the superannuation fund, the defined benefit may be calculated on the employee’s salary after it has been reduced, and • if salary is sacrificed into superannuation, the employer contributions (“reportable employer superannuation contributions”) must be reported on the employee’s payment summary and are taken into account in calculating the employee’s entitlement to certain tax concessions and benefits and liability to certain tax charges (¶6-110). Superannuation contributions made by an employer to a complying superannuation fund under an effective salary sacrifice arrangement qualify as deductible employer contributions under ITAA97 s 29060. They may also count towards the employer’s obligation to provide a minimum level of superannuation support for the employee under the SG legislation (but see proposed changes below). Example Andrew, who is aged 41, had a remuneration package for 2018/19 made up of $80,000 in salary plus $8,000 in employer superannuation contributions. On 30 June 2019, Andrew negotiates his employment contract for the 2019/20 income year to receive $50,000 in salary and $38,000 in employer contributions to a complying superannuation fund. This is an effective salary sacrifice arrangement because it is entered into before performance of the services for which payment is to be made. The superannuation contributions made on Andrew’s behalf are not taken to be salary or wages. Instead, they qualify as employer superannuation contributions and Andrew’s employer qualifies for a tax deduction. As the employer contributions are concessional contributions (¶6-510), the $38,000 would exceed the $25,000 concessional contributions cap (¶6-505) and the excess contributions would be included in his assessable income and be liable to excess concessional contributions charge (¶6-515).

The ATO’s view on when a salary sacrifice arrangement is “effective” and the SG consequences are set out in TR 2001/10 (discussed at ¶12-250). ATO view extends to SG employees TR 2001/10 applies only to common law employees and does not extend to persons who are employees only because of the extended definition in SGAA s 12 (¶12-060). Nevertheless, the ATO states in SGD 2006/2 that the reasoning applies equally to similar arrangements between SG employees and their employers, but not to contractors who are not deemed to be employees under SGAA s 12. SGD 2006/2 is discussed further at ¶12-250. Proposal that salary sacrifice contributions not count towards SG compliance The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Bill 2019 proposes that, from 1 July 2020, salary sacrifice contributions do not count in calculating an employer’s compliance with their SG obligations and cannot reduce the earnings base upon which SG is calculated. The salary sacrifice changes proposed in the Bill are discussed at ¶12-250.

[FITR ¶268-334]

Personal Superannuation Contributions ¶6-300 Tax treatment of personal superannuation contributions Individuals who make superannuation contributions in order to obtain superannuation benefits for themselves, or for their dependants in the event of their own death, may be entitled to tax concessions for those contributions. The term “contribution” is not defined, but Taxation Ruling TR 2010/1 states that a contribution is anything of value that increases the capital of a superannuation fund, where it is provided for the purpose of benefiting one or more members of the fund or members in general (¶6-120). Tax concessions for personal contributions The most valuable concession is entitlement to a deduction (¶6-340) which is available to all individuals who make personal contributions. Before 1 July 2017, a deduction was available only to self-employed or substantially self-employed persons who derived less than 10% of their income from employment-related activities. Another concession is the tax-free government co-contribution which may benefit a low income individual who makes undeducted personal contributions (¶6-700). To be eligible for the co-contribution, the individual must receive at least 10% of their total income for the year from employment or business. Low income earners may also be entitled to a low income superannuation tax offset to compensate them for the 15% tax on concessional contributions made on their behalf by their employer or by themselves (¶6-770). Who can contribute? An individual may only make contributions to a superannuation fund if, under the SIS Regulations, the fund is allowed to accept contributions from such a person (¶6-320). A fund may only accept contributions from a member if the member’s tax file number has been quoted to the fund (¶6-680). Is there a limit on the amount of personal contributions? No limit is directly imposed on the amount of personal concessional contributions (ie deducted contributions) (¶6-510) that may be made by a member in a year. It is important to note, however, that the treatment of the amount of concessional contributions that exceeds the concessional contributions cap for the year (¶6-505) may indirectly create a limit. This is because the excess contributions may be included in the member’s assessable income and may also be liable to excess concessional contributions charge (¶6-515). Before 2013/14, the excess contributions may have been liable to excess concessional contributions tax (¶6-520). From 2018/19, individuals may be able to increase their concessional contributions cap for a year and make additional concessional contributions if they have not used all their concessional contributions cap amounts during the previous five years (¶6-507). This is available only to individuals with a total superannuation balance (¶6-490) of less than $500,000. From the 2017/18 income year, an individual cannot make any non-concessional contributions (ie undeducted contributions) for a year if their total superannuation balance equals or exceeds the general transfer balance cap, ie $1.6m for 2019/20 (¶6-540). The transfer balance cap rules may also limit the transfer or payment of contributions to a superannuation account that is paying a pension (¶6-430). Although no limit is otherwise imposed on the non-concessional contributions that a member may make in a year, there are consequences if a member’s non-concessional contributions exceed their nonconcessional contributions cap (¶6-540) for the year. A member may elect to release the excess contributions from superannuation, in which case the earnings associated with the excess amount are included in the member’s assessable income (¶6-565). The member may be liable to excess nonconcessional contributions tax on excess contributions that are left in the fund (¶6-560).

Excess concessional contributions may be taken into account in calculating the amount of a member’s non-concessional contributions (¶6-550), and this may reduce the amount of non-concessional contributions the member can make without exceeding their non-concessional contributions cap. Deduction for the contributions An individual is entitled to a deduction for their contributions if they pass the threshold test of being eligible to contribute (¶6-320), and satisfy the deductibility conditions (¶6-340). There is generally no limit on the amount of the deduction, although a deduction for personal contributions cannot create or increase a tax loss (ITAA97 s 26-55). A personal contribution for which a deduction is allowed is generally taxed at 15% when it is made to the superannuation fund (¶7-120), but may be liable to an additional 15% Division 293 tax if the contributor has income above $250,000 (¶6-400). Amount contributed from a New Zealand KiwiSaver scheme An amount transferred from a New Zealand KiwiSaver scheme to a complying superannuation fund (¶8380) is treated as a personal contribution but is neither deductible nor eligible for a government cocontribution (ITAA97 s 312-10). Spouse contributions Individuals who make contributions on behalf of a low income spouse may be entitled to a tax offset for the contributions (¶6-800). Members of accumulation funds may apply to split with their spouse certain contributions that they made to a superannuation fund in the previous year or that were made on their behalf (¶6-850). [FITR ¶268-040, ¶268-420; SLP ¶36-460]

¶6-320 Persons who can make personal contributions A person can make superannuation contributions if the fund can accept contributions from them. The rules on acceptance of contributions by funds are in SISR reg 7.04 (¶3-220). A person’s ability to make contributions in a year is subject to the following contribution rules: • a person under age 65 can make personal contributions without restrictions • a person who has reached age 65 but not age 75 can contribute if they satisfy the “work test”, and the contributions are received on or before 28 days after the end of the month in which the person turns 75, and • personal contributions cannot be made by a person who has reached age 75 (reg 7.04(1)). Work tests for individuals aged 65 years and older The “work test” requires a person who has reached age 65 but not age 75 to be “gainfully employed on at least a part-time basis” during the financial year in which they make contributions. A person is “gainfully employed” if they are employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. “Gain or reward” means remuneration for personal services, such as wages, business income, bonuses and commissions, but does not include passive income such as dividends (SISR reg 1.03(1)). A person is “gainfully employed on at least a part-time basis” during a financial year if they work at least 40 hours in a period of not more than 30 consecutive days in that financial year (SISR reg 7.01(3)). The fund trustee cannot take prospective employment into account — the member must have worked at least 40 hours in the financial year before the trustee can accept the contribution. A trustee may accept contributions for a member if the trustee is reasonably satisfied that the contributions are for a period during which the trustee could have accepted contributions for the member (reg 7.04(2)).

The work test for members can be passed at any time during a year and it is only at 30 June that the trustee can decide that a contribution should not have been accepted. In that case, the trustee must return the contribution within 30 days of becoming aware of the breach (reg 7.04(4)). Even if the member does not pass the test, the trustee would be protected from liability as long as the trustee was “reasonably satisfied”, when it accepted the contribution, that it could accept the contribution from the member (reg 7.04(6)). APRA’s views on the acceptance of contributions are set out in APRA Superannuation Circular IA1. One-year exemption from the work test from 1 July 2019 From 1 July 2019, individuals aged 65 to 74 with a total superannuation balance (¶6-490) below $300,000 may be able to make personal contributions for 12 months from the end of the financial year in which they last met the work test. The Treasury Laws Amendment (Work Test Exemption) Regulations 2018, which were registered on 7 December 2018, amend reg 7.04 to provide for the exemption. To be eligible for the exemption for a financial year, a member’s total superannuation balance must be less than $300,000 at the end of the previous financial year (reg 7.04(1)) but is not required to remain at less than $300,000 during the year the contribution is made. The member must have met the work test in the previous financial year and must not have made use of the exemption in any financial year before the current financial year. Example Remi is aged 66 in 2017/18 and satisfies the work test because he works full-time. He intends to continue working full-time in 2018/19 but is injured on 26 July 2018 and is forced to retire from the workforce. Remi satisfies the work test and is able to make personal contributions for 2017/18 because he works full-time and for 2018/19 because he works at least 40 hours in July 2018. Remi does not meet the work test for 2019/20 because he no longer works but he can still make personal contributions as long as his total superannuation balance is less than $300,000 at 30 June 2019 and he makes the contributions within 12 months from the end of the year in which he last met the work test, ie 12 months from 30 June 2018. He is not able to make personal contributions for any later year.

Contributions for a spouse Contributions can be accepted without restriction for a spouse who is aged under 65. If the spouse is aged between 65 and 70, contributions can only be accepted if the spouse has been gainfully employed on at least a part-time basis during the year. A fund cannot accept contributions for a spouse who has reached age 70. There are no age limit or employment tests applicable to a taxpayer making contributions for a spouse. Contributions relating to an individual’s housing In two cases, an individual may be able to make contributions relating to their housing arrangements. 1. Under the First Home Super Saver (FHSS) Scheme, an individual may be able to contribute up to $30,000 for use as a deposit on a first home. Contributions may be withdrawn from 1 July 2018, and the contributions plus deemed earnings taxed at the individual’s marginal tax rate less a 30% offset (¶6-385). 2. From 1 July 2018, an individual aged 65 or over may be able to make a non-concessional contribution of up to $300,000 to a superannuation fund from the proceeds of selling their home (¶6390). Under the former first home saver account (FHSA) scheme, the holder of an FHSA could transfer the account balance to a superannuation fund if the savings were not used to buy or build a home. The FHSA scheme was abolished from 1 July 2015. Proposed changes to the contributions rules The government announced in the 2019 Federal Budget that individuals aged 65 and 66 would be able to make voluntary superannuation contributions from 1 July 2020 without needing to meet the work test. The

age limit for making spouse contributions would also be increased from 69 to 74. The legislation would also be amended: (1) to allow individuals with unused concessional cap space to contribute more than $25,000 under the concessional cap carry forward rules (¶6-507) during the exemption year, and (2) to allow individuals whose non-concessional contributions, excluding contributions made under the exemption, exceed $100,000 to access the bring forward arrangements (¶6545). Legislation to enact these proposals has not yet been introduced into parliament. [SLP ¶2-980]

¶6-340 Deductions for personal contributions An individual who makes personal superannuation contributions may wish to claim a deduction for the contributions. Restrictions on an individual being allowed to make contributions are discussed at ¶6-320. The most important restriction is the work test affecting individuals aged 65 years and older. Personal contributions are only deductible if the conditions in ITAA97 Subdiv 290-C (s 290-150 to 290180) are satisfied. To be deductible, the contribution must be for the purpose of providing superannuation benefits for the member making the contribution, even if the benefits are payable to dependants on the member’s death. A deduction is allowed only for the income year in which the contribution is made (s 290-150(3)). The time when a contribution is made is discussed at ¶6-123. An individual who cannot claim a tax deduction for personal contributions may benefit from a government co-contribution (¶6-700) or a low income superannuation tax offset (¶6-770) or may be entitled to a tax offset for spouse contributions (¶6-800). An individual may also benefit if contributions are made on their behalf from a salary sacrifice arrangement entered into with their employer (¶6-260). Conditions to be satisfied From 2017/18, personal contributions are deductible if the following conditions are satisfied. 1. Complying superannuation fund condition If the contribution is to a superannuation fund, it must be a complying superannuation fund (¶2-140). There is no flexibility in this requirement, unlike for employers whose contributions to a non-complying fund may, in some cases, be treated in the same way as contributions to a complying fund (¶6-130). Personal contributions to the following superannuation funds are not deductible: (a) contributions to Commonwealth public sector superannuation schemes by members with defined benefit interests (members of these schemes may be able to deduct personal contributions they make to other types of superannuation funds such as accumulation funds) (s 290-155(1)(a)(i)) (b) funds (including constitutionally protected funds) that do not include an amount in their assessable income under s 295-190 as a result of receiving a superannuation contribution (untaxed funds) (s 290-155(1)(a)(ii), (2)) — in determining if a fund is an untaxed fund in respect of a contribution, amounts that are excluded from the assessable income from the fund due to Subdiv 295-D, eg transfers of liability for contributions to a life insurer or pooled superannuation trust, are disregarded, and (c) prescribed funds and prescribed contributions (s 290-155(1)(a)(iii), (b)). ITAR reg 290-155.01 states that a superannuation fund is prescribed for the purpose of personal contributions not being deductible if the fund has one or more members that hold a defined benefit interest, and ITAR reg 290-155.05 states that a contribution is a prescribed contribution to a prescribed kind of fund if the contribution is made to a defined benefit interest in the fund. In the case of both prescribed funds and prescribed contributions: (i) the trustee of the fund must elect for the regulation to apply, and (ii) the election must be made before the start of the income year of the fund in which the contribution is made, must not be revoked before the start of that year and

must be notified to the Commissioner in the approved form. This means that, for the 2019/20 income year, trustees must have notified the Commissioner before 1 July 2019 of an election for the regulation to apply. If an election is not made by the due date, the fund, or a defined benefit interest within the fund, will need to accept tax deductible contributions from members in the 2019/20 income year. A fund with defined benefit interests could face significant restructuring costs if it failed to make this election. An individual may make a contribution to a non-complying fund of which the individual is a member, but no deduction is allowable for the contribution. 2. Age-related condition If the contributor is aged under 18 at the end of the income year in which the contribution is made, the contributor must have derived income in the year: • from the carrying on a business, or • from activities or circumstances that resulted in the individual being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (disregarding s 12(11) of that Act) (s 290-165(1)). This condition means that, for a person under 18 to be entitled to a deduction, the person must have derived income from business (this would not include passive income such as dividends or interest) or from activities for which they are treated as an employee for SG purposes (¶12-060). In any other case, the contribution must be made no later than the 28th day after the month in which the contributor turns age 75 (s 290-165(2)). This condition accords with SISR reg 7.04 which states that a fund cannot accept a personal contribution from a person aged 75 or older (¶6-320). 3. Notice requirements The contributor must satisfy the notice requirements discussed at ¶6-380. Deduction for personal contributions cannot create or increase a tax loss There is a limit on the amount a member can deduct for personal superannuation contributions for an income year. The limit is the amount of the member’s assessable income minus deductions (other than tax losses) to which the member is entitled for the year (ITAA97 s 26-55). The effect of the limit is that the deduction cannot create or increase a loss to be carried forward. Example A self-employed landscape gardener has assessable income of $33,000, business deductions of $12,000 and makes personal superannuation contributions of $25,000. The deduction for the contributions is limited to $21,000 ($33,000 − $12,000).

In Sutton 2013 ATC ¶10-336, the taxpayer claimed a deduction of $50,000 for personal contributions made in 2010/11, but only had sufficient assessable income to deduct $13,468. The part of the $50,000 contribution that exceeded the deduction limit (ie $36,532) was treated as a non-concessional contribution, with the result that the taxpayer was liable to excess non-concessional contributions tax (¶6540). Contribution of exempt capital gain from disposal of assets of small business Section 152-305 allows a taxpayer a CGT exemption of up to $500,000 when the taxpayer makes a choice that the capital gain from the disposal of small business assets is used for retirement. If the taxpayer is less than 55 years, the CGT exempt amount must be contributed to a complying superannuation fund or an RSA. Only the amount of the contribution that exceeds the $500,000 exempt amount could be deductible. A contribution is not deductible (s 290-150(4)) to the extent that it is attributable to: (a) a capital gain from the disposal of small business assets where the taxpayer, who is aged under 55

years, elects under s 152-305 to disregard the capital gain for CGT purposes and to use the asset proceeds for retirement, or (b) a capital gain from the disposal of small business assets where a company or trust elects under s 152-305 to disregard the capital gain for CGT purposes and the taxpayer (generally the controlling individual of the company or trust) is aged under 55 years just before the contribution is made. No deduction for housing-related contributions Under the FHSS Scheme, an individual may make non-concessional contributions to save for a deposit on a first home. If the contributions are released to the individual but are not used to purchase or construct a new home, the individual must either re-contribute the amount to superannuation or pay first home super saver tax. A contribution that is a re-contribution is not deductible (s 290-168) (¶6-385). An individual aged 65 or over may be able to make a contribution of up to $300,000 to a superannuation fund from the proceeds of selling their home. Such a contribution is not deductible (s 290-167) (¶6-390). Other limits on deduction A member’s entitlement to a deduction may be limited in other ways. 1. A deduction is personal to the contributor and cannot be taken into account in calculating the income or loss of a partnership in which the contributor is a partner (ITAA36 s 90). 2. A fund cannot accept personal contributions from a person who has not quoted their TFN to the fund (¶6-680). 3. A member is not entitled to a deduction for interest on a loan to pay a superannuation contribution. Such a deduction is available only to an employer making a contribution on behalf of an employee (ITAA97 s 26-80). 4. Contributions resulting from an employee’s sacrifice of salary are employer (not employee) contributions and were, before 2017/18, counted as income in determining the employee’s entitlement to a deduction for personal contributions (¶6-360). 5. Payments made by an individual to a third party on behalf of a superannuation fund to meet expenses incurred by the fund may be deductible contributions if the deduction conditions are met. The fund should recognise the payments as contributions by the individual in its accounts in the same way as it would for any direct cash contribution paid to it (Taxation Ruling TR 2010/1 at para 172-174). 10% rule no longer limits deductions from 2017/18 For income years before 2017/18, a contributor who engaged in employment-related activities in the year was required to satisfy the 10% rule (¶6-360) for a personal contribution to be deductible. This rule meant that less than 10% of the total of the contributor’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions for the year could be attributable to their employmentrelated activities. The 10% rule had the effect that an employee was rarely entitled to a deduction for personal contributions. The removal of the 10% rule was enacted by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Act No 81 of 2016). The amending Act repealed s 290-155 and 290-160 and inserted new s 290-155 with the effect that the 10% rule does not apply from the 2017/18 income year. Individuals who meet other relevant deduction conditions are generally able to deduct a personal contribution, making the contribution a concessional contribution (¶6-505). This ensures that individuals who receive employment income and wish to make contributions from their pre-tax income are not dependent on their employer offering salary sacrifice arrangements. It also means self-employed individuals and individuals in receipt of passive income, eg dividends, can make deductible personal contributions regardless of the amount of income they earn from employment. [FITR ¶268-420 – ¶268-480; SLP ¶36-460 – ¶36-468]

¶6-360 The 10% rule — for income years before 2017/18

For income years before 2017/18, an individual was only entitled to a tax deduction for their personal contributions if they satisfied the 10% rule in s 290-160. This rule required that less than 10% of the total of the individual’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions for the year was “attributable to”, in the sense of having a causal connection with, employment-related activities. The 10% rule had two components: • the person’s engagement in employment-related activities in the year, and • the extent to which the person earned income from those activities in the year. 1. Employment-related activities This test was only relevant for an individual who engaged in employment-related activities, stated by s 290-160(1) to be: • holding an office or appointment • performing functions or duties • engaging in work, and • doing acts or things, where the activities resulted in the individual being treated as an employee for the purposes of the SGAA. This test could apply to an individual who was an employee or who was deemed to be an employee within the ordinary meaning for SG purposes. The test could apply therefore to an individual who worked under a contract that was wholly or principally for their labour, but not to a worker who, for example, worked to produce a result. The circumstances in which an individual is an employee within the ordinary meaning or is treated as an employee for SG purposes are explored at ¶12-060 and ¶12-070. In determining whether an individual would be treated as an employee for the purposes of the SGAA, s 290-160 stated that it should be assumed that SGAA s 12(11) had not been enacted. Section 12(11) states that a person who receives payment to do work wholly or principally of a domestic or private nature for not more than 30 hours per week is not an employee of the person for whom the work is done. The Commissioner states in TR 2010/1 that, for the majority of persons who are treated as employees for the purposes of the SGAA, they need not be physically engaged in the employment activity for the condition to be satisfied. For example: • an employee within the ordinary meaning will be engaged in the activity while they remain employed • a director who is entitled to payment for services will be engaged in the activity while they remain a director, and • a person who is engaged under a contract wholly or principally for labour is engaged in the activity throughout the duration of the contract. Receipt of workers’ compensation payments A person who is no longer employed in the year but is in receipt of workers’ compensation payments attributable to previous employment would not have engaged in employment activities in the year (TR 2010/1). In contrast, a person who is still employed and is in receipt of workers’ compensation payments attributable to the employment may be engaged in employment activities in the year. Overseas employment activities In the application of the 10% rule, the relevant employment activity need not be an activity in Australia, and the employment income of an Australian resident employed overseas by a foreign employer would be counted in the maximum earnings test if the income is assessable income (TR 2010/1, para 66). Since 1 July 2009, foreign employment income is, with limited exceptions (ITAA36 s 23AG), assessable

income and is therefore counted in determining if the 10% rule is satisfied. At the same time, the employee may not be eligible for superannuation guarantee (SG) support if they are paid by a nonresident employer for work done outside Australia (SGAA s 27(1)(c)) (¶12-100). A resident employee who is paid by a non-resident employer for work done outside Australia may, therefore, be ineligible for a deduction for their personal contributions and also ineligible for SG support from their employer. For a foreign resident, the income attributable to employment outside Australia is not assessable income in Australia and so would not be counted in the maximum earnings test. A foreign resident with Australian sourced income that is not attributable to employment activities may therefore be able to deduct a personal superannuation contribution made to an Australian superannuation fund. A temporary resident (basically, an individual who is working in Australia on a visa of less than four years and who is not entitled to social security benefits (ITAA97 s 995-1(1))) is generally exempt from tax in Australia on foreign source income, but this exemption does not extend to income from employment or services provided overseas (ITAA97 Subdiv 768-R). Income attributable to employment outside Australia would therefore be taken into account in determining if the temporary resident is eligible for a deduction for personal contributions. 2. Income test The income test was only applied to an individual who engaged in employment-related activities in the income year in which contributions were made. If no income was derived from employment-related activities, the contributions would be deductible as long as other relevant conditions were satisfied. Personal contributions were only deductible if less than 10% of the total of the following was attributable to an individual’s employment-related activities: (a) the individual’s assessable income for the income year (b) the individual’s reportable fringe benefits total for the income year, and (c) the individual’s reportable employer superannuation contributions for the year (s 290-160(2)). (a) Assessable income for the income year A person’s assessable income includes ordinary and statutory income, but does not include exempt income or non-assessable non-exempt income (ITAA97 s 6-15). It would include, therefore, a person’s net capital gain for the income year (ITAA97 s 102-5). This means capital gains made during the income year reduced by capital losses during the year, previously unapplied net capital losses from earlier income years, any CGT discount that is available (Greenhatch 2012 ATC ¶20-322) and the small business CGT concessions in ITAA97 Div 152. A person’s assessable income could also include superannuation benefits, dividends, rent and interest. Expenses incurred in gaining the income are ignored. Excess concessional contributions (¶6-505) are not included in the individual’s assessable income for the purposes of the income test (s 290-160(3)). Amounts of assessable income that are attributable to an employment-related activity include: • salary or wages • other payments such as commission, director’s remuneration and contract payments that are treated as salary or wages for superannuation guarantee (SG) purposes (¶12-080) • the assessable amount of payments received in consequence of the termination of employment, and • workers’ compensation and like payments made because of injury or illness received by a person while holding the employment, office or appointment the performance of which gave rise to the entitlement to the compensation payments (TR 2010/1). (b) Reportable fringe benefits total Reportable fringe benefits are fringe benefits that must be recorded on an employee’s payment summary

because their taxable value exceeds $2,000 for a year. Fringe benefits provided by an employer in a year must generally be allocated to employees and their grossed-up value (that is, inclusive of fringe benefits tax paid by the employer) must be reported on the payment summary. The taxable value of a fringe benefit was grossed up by 1.9608 for the 2016/17 FBT year to reach the reportable fringe benefits total for the year (FBTAA s 135M). (c) Reportable employer superannuation contributions Reportable employer superannuation contributions are contributions to a superannuation fund by an employer for an employee where the employee had, or might reasonably be expected to have had, the capacity to influence the size of the contribution or the way the amount is contributed so that the employee’s assessable income is reduced (TAA Sch 1 s 16-182). Most commonly, reportable employer superannuation contributions result from salary being sacrificed into superannuation. Only the amount of the employer’s contribution that exceeds the amount required by law is a reportable employer superannuation contribution. Reportable employer superannuation contributions are discussed at ¶6-110. Example During the period 1 July 2016 to 13 August 2016, Edward works as an employee plumber. From 14 August 2016 to 30 June 2017, he carries on his own plumbing business and receives no income from employment-related activities. In determining whether he is eligible for a tax deduction for personal superannuation contributions for 2016/17, Edward’s 2016/17 year can be broken up into the following segments. During the period 1 July 2016 to 13 August 2016: • Edward earns $9,000 from employment as a plumber • Edward receives a property fringe benefit with a taxable value of $3,000 — when grossed up by 1.9608, this gives Edward a reportable fringe benefit total of $5,882, and • Edward’s employer makes SG contributions of $855 for Edward (the minimum required) and also makes an employer contribution of $2,000 after Edward sacrifices $2,000 of salary into superannuation. During the period 14 August 2016 to 30 June 2017: • Edward derives income of $130,000 from carrying on his business • Edward receives $3,392 in unfranked dividends, and • Edward incurs business expenses of $45,000. The sum of Edward’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions for the 2016/17 year is: $9,000 + $5,882 + $2,000 + $130,000 + $3,392 = $150,274 Edward’s reportable employer superannuation contributions only includes the $2,000 contribution resulting from the salary sacrifice — it does not include the $855 contribution because it was required to be made by law. The business expenses are not taken into account as it is assessable income and not taxable income that is considered. The sum of Edward’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions that is attributable to his employment-related activities for the year is: $9,000 + $5,882 + $2,000 = $16,882 The percentage of Edward’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions that is attributable to his employment-related activities for the year is 11.23%, that is, $16,882/$150,274 × 100 = 11.23%. Because 11.23% is not less than 10%, Edward does not satisfy the 10% rule, and he is not eligible for a tax deduction for the personal contributions he makes in 2016/17.

[FITR ¶268-440; SLP ¶36-463]

¶6-380 Notice requirements for a deduction A deduction for personal superannuation contributions is only allowable if the contributor has given a notice to the trustee of the complying superannuation fund or to the RSA provider stating the intention to claim a deduction for the whole or a part of the contributions covered by the notice, and an

acknowledgment of the notice has been received (ITAA97 s 290-170). The notice must be in the form approved by the Commissioner. When must the notice be given? The notice must be given by the earlier of: (a) the day the person lodges their income tax return for the year in which the contributions are made, and (b) the end of the financial year following the year the contributions are made (s 290-170(1)(b)). A taxpayer who failed to give notice of his intention to claim a deduction within the strict time limit was denied a deduction by the Commissioner and also became liable for a 25% administrative penalty. The AAT remitted the penalty, finding that, although the penalty had been properly imposed by the Commissioner due to a failure by the taxpayer’s tax agent to take reasonable care, it would be harsh for the taxpayer to be required to pay a penalty of $10,000 in addition to the $40,000 increase in his tax liability from the denial of the deduction (Johnston [2011] AATA 20). Restrictions on the notice A deduction notice is restricted in the following ways: • it must be in respect of the contributions • it cannot cover the whole or part of an amount covered by an earlier notice • it cannot be given once the person has ceased to be a member of the fund (eg the member has rolled all their benefits into another fund) • it cannot be given when the trustee no longer holds the contributions • it cannot be given once the trustee has begun to pay a superannuation income stream based in whole or part on the contribution • if the person has made a contributions-splitting application (¶6-850) in respect of the contributions and the trustee of the fund has not rejected the application, the person cannot give a notice in respect of those contributions (this does not prevent a person from giving a notice before a contributionssplitting application is made), and • if the contribution is made to a superannuation fund, the condition in s 290-155 (¶6-340) must be satisfied in relation to the fund and the contribution (s 290-170(2)). A person may choose how much of their contributions to deduct, and may choose not to deduct a portion of their personal contributions to ensure they are entitled to the superannuation co-contribution. A deduction for a contribution cannot exceed the amount stated in the notice (s 290-175). Notice cannot be given if the trustee no longer holds the contributions A notice cannot be given if the trustee no longer holds the contributions, eg if a member has requested a partial roll-over of a superannuation benefit which includes the contribution covered in the notice. Example Fin’s superannuation interest is valued at $5,000 (tax free component). He makes a $10,000 personal contribution in March 2019 which would be counted as part of the tax free component of his superannuation interest when it is received. His total superannuation account balance is $15,000. In June 2019, Fin requests to roll over $6,000 leaving him with a balance of $9,000. He then lodges a notice in September 2019 advising that he intends to claim a deduction for the $10,000 contribution made in the 2018/19 income year. As his account balance is only $9,000, all of the $10,000 contribution is no longer held by the trustee and therefore the notice is not valid. If Fin had lodged a notice for $9,000, this notice would have been valid. The trustee would then convert the $9,000 from a tax free component to a taxable component and include this amount in the fund’s assessable income.

The Commissioner’s view is that the validity of a notice may be affected whenever a superannuation benefit is paid from a superannuation interest, whether a superannuation income stream is commenced or a superannuation lump sum is paid (Taxation Ruling TR 2010/1, para 272-274). Deduction notice for deceased person Usually, an individual would personally give the notice to their superannuation fund, although this may be done by their agent. A legal personal representative may give a fund a notice of intention to deduct on behalf of a deceased person who made a contribution prior to death. If the legal personal representative intends to lodge a notice of intention to claim a deduction they must do so before lodgment of the deceased’s final tax return (or within 12 months of the end of the income year in which the deceased died if that is earlier) (TR 2010/1). Notice when member’s interest is transferred to a successor fund or MySuper product If contributions are made for a member to a fund (the original fund) and, after the contributions are made, the member’s superannuation interest is transferred to a successor fund (eg where funds are merged following a corporate restructure), the member can, as long as a deduction notice has not already been given to the original fund in relation to the contributions, provide a notice to the successor fund (s 290170(5)). A successor fund is defined in s 995-1(1), in relation to a transfer of a superannuation interest of a member of a fund, as a fund that: (a) before the transfer, agreed with the original fund that it would confer on the member equivalent rights to those that the member had in the original fund; and (b) does confer those equivalent rights on the member. A member whose “accrued default amount” (¶9-130) was transferred to a fund offering a MySuper product, as was required to be done by 1 July 2017, could also give a deduction notice to the successor fund in relation to a contribution they made to the original fund (s 290-170(6)). Acknowledgement of notice A trustee or RSA provider is required to acknowledge receipt of a notice “without delay”. To ensure that other members of the superannuation fund are not disadvantaged, the trustee may refuse to give an acknowledgement if the value of the superannuation interest into which the contribution is made is less than the tax that would be payable in respect of the contribution if receipt of the notice were acknowledged (s 290-170(3), (4)). Notice may be varied, but not revoked or withdrawn A notice cannot be revoked or withdrawn. It may, however, be varied, but only so as to reduce the amount stated in relation to the contribution (including to nil). A variation is not effective if the individual is not at that time a member of the fund, or the trustee no longer holds the contribution or has commenced to pay a superannuation income stream based on the contribution (s 290-180). A valid notice cannot be varied after the earlier of the time the person lodges their income tax return and the end of the financial year following the year the contribution is made. These time limits do not apply to a variation where the contribution was not ever deductible. These rules on the variation of a notice extend to notices given to successor funds when a member’s benefit has been transferred from the member’s original fund to the successor fund (see above) (s 290180(5), (6)). Penalty for false or misleading statement in a notice If a member gives a notice of intent to deduct contributions and the notice contains a statement that is “false or misleading in a material particular”, the member may be liable to an administrative penalty under TAA Sch 1 Subdiv 284-B. The penalty may be imposed even if the member’s statement does not result in a tax shortfall (¶6-050). The superannuation fund could also be liable to an administrative penalty if its acknowledgement of the member’s notice contained a false or misleading statement and was not issued with reasonable care. [FITR ¶268-460 – ¶268-480; SLP ¶36-468]

¶6-385 First Home Super Saver Scheme The purpose of the First Home Super Saver (FHSS) Scheme is to help individuals boost their savings for their first home by allowing them to build a deposit inside superannuation. Individuals saving for their first home can contribute up to $30,000 into superannuation and withdraw the contributions to use as a deposit on a home. The withdrawn contributions and deemed earnings on the contributions are taxed at the contributor’s marginal tax rates less a 30% offset. The FHSS Scheme applies to voluntary contributions made into superannuation on or after 1 July 2017. The contributions can be withdrawn from 1 July 2018. The FHSS Scheme was enacted by the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 1) Act 2017 and the First Home Super Saver Tax Act 2017. The FHSS Scheme is a companion to another measure enacted at the same time which allows individuals aged 65 and over to sell their home and contribute up to $300,000 from the proceeds into their superannuation (¶6-390). The FHSS Scheme, enacted primarily in ITAA97 Div 313 and TAA Sch 1 Div 138, operates as follows. Eligible individuals The FHSS Scheme is designed to provide financial assistance to individuals who are genuinely saving for their first home. The only individuals who can participate are those who: (i) are aged 18 years or older (ii) have not previously held a freehold interest in real property, a long-term lease of land or a company title interest in land in Australia, unless the Commissioner determines they have suffered financial hardship and should be eligible to participate, and (iii) have not previously requested the release of superannuation contributions under the FHSS Scheme (TAA Sch 1 s 138-10(1)). Although an individual must generally never have held an ownership in Australian real property to be eligible, an individual who has held such an interest can still qualify if the ATO determines that they have suffered a “financial hardship”. The ATO is required to make such a determination if: (i) an individual requests that the ATO do so, (ii) financial hardship suffered by the individual caused them to no longer hold the property interests, and (iii) the individual has not later held any other such property interests (TAA reg 61A). To be eligible, an individual is not required to be an Australian citizen, Australian resident or Australian resident for tax purposes. Eligible contributions To be “eligible” contributions for an individual, contributions must have been made: (i) as voluntary employer contributions (such as salary sacrifice contributions but not including compulsory employer contributions) or voluntary contributions made by the individual, and (ii) as concessional contributions within the concessional contributions cap for the year ($25,000 for 2019/20) or as non-concessional contributions within the non-concessional contributions cap for the year ($100,000 for 2019/20). The requirement that a contribution is a concessional or non-concessional contribution prevents a contribution that is not counted towards an individual’s contribution caps from being eligible, eg structured settlement contributions or small business CGT contributions. Excess concessional contributions (¶6-500) are disregarded in working out an individual’s nonconcessional contributions for FHSS Scheme purposes. Contributions must not have been made in respect of a defined benefit interest or be made to a constitutionally protected fund (TAA Sch 1 s 138-35(2) to (4)). Law Companion Ruling LCR 2018/5 lists various contributions that are not eligible for release, including

amounts that reduce an employer’s potential superannuation charge liability or that are required to be made under an industrial agreement, government co-contributions and amounts paid due to a contributions splitting arrangement. Limit on eligible contributions A $15,000 limit applies to the contributions that can be eligible from any one financial year and a $30,000 limit applies to the total contributions that can be eligible across all years (TAA Sch 1 s 138-35(1)). FHSS maximum release amount From 1 July 2018, eligible individuals can apply to withdraw up to their “FHSS maximum release amount”, which is the sum of the individual’s: (a) “FHSS releasable contributions amount”, and (b) “associated earnings” (TAA Sch 1 s 138-25). An individual’s “FHSS releasable contributions amount” is the sum of their FHSS eligible nonconcessional contributions for the year and 85% of their FHSS eligible concessional contributions for the year. In working out which contributions are counted towards an individual’s FHSS releasable contributions amount, the ordering rules in TAA Sch 1 s 138-30 provide that: (i) contributions are counted in the order in which they were made, ie from earliest to latest, and (ii) if an eligible concessional contribution and an eligible non-concessional contribution are made at the same time, the non-concessional contribution is taken to have been made first. The ordering rules in s 138-30 are explained in Law Companion Ruling LCR 2018/5. An individual’s “associated earnings” are calculated on the FHSS releasable contributions amount on a daily basis, generally from the beginning of the month in which the contribution is made (or is taken to have been made under the ordering rule) to the date of the determination. Associated earnings are calculated on a compounding basis based on the shortfall interest charge rate which is essentially the 90-day Bank Accepted Bill rate with an uplift factor of 3% (TAA Sch 1 s 138-40). FHSS determination To initiate the process for the release of their eligible contributions, an eligible individual may request that the Commissioner make an FHSS determination. This is a written determination stating: (i) the individual’s “FHSS maximum release amount”; and (ii) the amount of the individual’s concessional contributions, nonconcessional contributions and associated earnings that make up their FHSS maximum release amount. The Commissioner must make an FHSS determination if an individual makes a valid request (TAA Sch 1 s 138-5 and 138-10). An individual who is dissatisfied with an FHSS determination made in relation to them may object in the manner set out in TAA Pt IVC (TAA Sch 1 s 138-15). Release authority An individual who receives an FHSS determination has 60 days to request that the Commissioner issue a release authority to a nominated superannuation fund or funds for an amount up to the FHSS maximum release amount identified in the FHSS determination. Specifying an amount up to the maximum release amount allows an individual to leave amounts in superannuation if they choose to do so. An individual can only request a release once. The process for requesting and issuing release authorities is set out in TAA Sch 1 Div 131 (¶6-640). Payment of FHSS Scheme amounts to the individual In accordance with the rules in Div 131, when the individual’s superannuation fund receives the release authority, it must pay the amount to be released to the Commissioner, who would pay an amount to the individual who made the request. The Commissioner must withhold an amount from the payment to the

individual (TAA Sch 1 s 12-460). The amount withheld would be based on an estimate of the amount of tax payable in relation to an individual’s assessable FHSS amount, generally considering recent notices of assessment, PAYG withholding amounts from the employer and other relevant information. Regulation 53A of the Taxation Administration Regulations 2017 states that, if the ATO cannot make an estimate of an individual’s marginal tax rate, 17% of the assessable FHSS released amount should be withheld. This default 17% rate is based on the maximum amount of tax the individual would be expected to pay on the FHSS released amount if they were on the top marginal tax rate (47%) less a 30% rebate. If the individual is not on the top marginal tax rate, the difference in the amount withheld and the actual tax liability would be refunded through the assessment process. After tax is withheld, the released amount could be reduced further if the individual has debts to the ATO or other Commonwealth agencies such as the Child Support Agency. Income tax treatment of amounts released FHSS released amounts receive concessional tax treatment. Concessional contributions and associated earnings that are withdrawn are included in the contributor’s assessable income and benefit from a nonrefundable offset equal to 30% of the contributor’s assessable FHSS released amount for the income year. For released amounts of non-concessional contributions, only the associated earnings are taxed, with a 30% tax offset (ITAA97 s 313-20 and 313-25). Although superannuation contributions released by the Commissioner may be included in an individual’s assessable income, they are not taken into account for other income tests. They are not, for example, included in the calculation of HELP repayment income, income for surcharge purposes which applies to Division 293 tax, total income for government co-contribution purposes or in calculating entitlement to the low income superannuation tax offset. Contract to purchase or construct a home Once an FHSS determination is received, individuals may enter into a contract to purchase or construct residential premises. They are not required to wait until they receive their released amount before entering into the contract, but once a contract has been entered into they have a maximum of 14 days to apply for the release of their money. The purchase or construction contract may be entered into within the period beginning 14 days before they make the valid request and ending 12 months after the day they make the valid request. The price of the purchase or construction must be at least equal to the released amount, and the home must be occupied as soon as practicable and for at least six months of the first year after it is practicable to do so (ITAA97 s 313-35). Example Ellie contributes $12,000 in personal voluntary contributions to her superannuation fund during 2017/18 and $14,000 in 2018/19. In July 2019, she applies for and receives an FHSS determination. In September 2019, Ellie signs a contract to purchase her first home and a week later requests a release of her money. Her superannuation fund complies with her release request and Ellie uses the amount released in the settlement of her home.

A request to release an amount is only valid if made to the Commissioner on or after 1 July 2018, and the contract to purchase or construct the residential premises to which the valid request relates must also be entered into on or after 1 July 2018. The Commissioner must generally be notified of the matters set out in s 313-35 within 28 days after the individual enters into the contract to purchase or construct the residential premises (ITAA97 s 313-40). Action by an individual who does not enter into contract to purchase or construct An individual who does not enter into a contract within the required period to purchase a home or vacant land on which to construct a home may: (a) apply for an extension up to a further 12 months (b) notify the Commissioner that they have re-contributed an amount into superannuation, or

(c) pay FHSS tax. Notification of a re-contribution can only be made if the individual makes one or more non-concessional contributions during the period that they were required to enter into a contract, and the total amount of the non-concessional contributions is at least equal to their assessable FHSS amount less any amounts that were withheld by the Commissioner (ITAA97 s 313-50). A re-contributed contribution is specifically stated by ITAA97 s 290-168 to not be deductible, and it is therefore a non-concessional contribution. Liability to first home super saver tax Individuals are liable to pay first home super saver tax (FHSS tax) if: (i) they do not enter into a contract to purchase or construct residential premises or re-contribute the required amount into superannuation, or (ii) they do not notify the Commissioner that they have purchased residential premises or re-contributed the required amount into superannuation (ITAA97 s 313-60). FHSS tax is imposed by the First Home Super Saver Tax Act 2017 and is equal to 20% of an individual’s assessable FHSS released amounts. An individual’s assessed FHSS tax is due and payable at the end of 21 days after the Commissioner gives the individual a notice of assessment of the tax (ITAA97 s 313-65). If the Commissioner amends an individual’s assessment, any extra assessed FHSS tax is due and payable at the end of 21 days after the Commissioner gives the individual a notice of the amended assessment (ITAA97 s 313-70). Individuals who fail to pay an amount of assessed FHSS tax by the time it is due and payable are liable to general interest charge for each day in the period over which the amount is due and unpaid (ITAA97 s 313-75). Super Guidance Note SPR GN 2018/1 and LCR 2018/5 (as amended by its addendum) contain further information about the FHSS Scheme and examples for individuals.

¶6-390 “Downsizer contributions” from the proceeds of selling a home From 1 July 2018, individuals aged 65 and over may be able to make a non-concessional contribution to a complying superannuation fund of up to $300,000 from the proceeds of selling their home. This measure is intended to make it easier for older individuals to “downsize” from homes that no longer meet their needs. The measure was enacted by the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 1) Act 2017. It is a companion to the measure enacted at the same time which allows individuals to use voluntary contributions to superannuation as a deposit for a first home (¶6-385). Acceptance of contributions made by person aged 65 or older Contributions can be made by certain individuals from the proceeds of the sale of a dwelling even though a superannuation fund would not generally be allowed to accept the contributions. This involves individuals who are aged 65 or older and do not satisfy the work test or are aged over 75 years (¶6-320). The contributions acceptance rules (¶3-220) in SISR reg 7.04 have been amended to enable superannuation funds to accept downsizer contributions from these individuals. Downsizer contributions are treated in the same way as other contributions that a superannuation fund is allowed to accept, and funds are not generally obliged to accept a downsizer contribution. The exception is where an individual wishes to make a downsizer contribution into a MySuper product. A superannuation provider must accept the contribution, in line with the MySuper rules in SISA s 29TC(1)(f) (¶9-150). Requirements for a downsizer contribution The requirements for a downsizer contribution, primarily in ITAA97 s 292-102, are as follows. 1. A contribution is made to a complying superannuation fund for an individual aged 65 years or over. 2. The contribution is made from the capital proceeds from the disposal of an “ownership interest” (ITAA97 s 118-115) in a “dwelling” (ITAA97 s 118-130) that is an individual’s “main residence” for at

least part of the ownership period and where the capital proceeds would be CGT exempt or partially exempt under the CGT main residence exemption. The ownership interest may be an equitable interest or an interest as a joint tenant or tenant in common and the fact that a third party holds an interest in the dwelling does not prevent a downsizer contribution (Law Companion Ruling LCR 2018/9). The dwelling must be located in Australia and is not a caravan, houseboat or other mobile home. 3. Either the individual or their spouse (including a former or deceased spouse) must generally have owned the property at all times during the 10 years ending when it is sold. The 10-year minimum ownership does not require the taxpayer to have physically lived in the property continuously for 10 years, but the property must have been lived in for some of the 10-year period so that it can qualify as the taxpayer’s main residence. The fact that the taxpayer lives in the property for some time and treats the property as their main residence triggers at least a partial CGT exemption. As long as other requirements are satisfied, a taxpayer could be eligible to make a downsizer contribution if, for example, they live in a property for the first 12 months of ownership then rent it out for the next 10 years but continue to treat it as their main residence. 4. Both members of a couple could make a contribution from the disposal of the same property but the maximum contribution is $300,000 per contributor and the contributions must come from the capital proceeds of the disposal. 5. If the proceeds relate to the sale of a business where the owner lives on site and it is the owner’s main residence, the proceeds do not need to be apportioned so that only the capital proceeds relating to the sale of the owner’s main residence are used to make a downsizer contribution. 6. The contribution must be made within 90 days, or a longer time allowed by the Commissioner, after the property is disposed of. An individual can make multiple downsizer contributions within the 90 days, provided they do not exceed the $300,000 cap and they meet all other requirements. 7. The individual makes the choice to treat a contribution as a downsizer contribution. The choice is made in the approved form and given to the superannuation provider at or before the time the contribution is made. The superannuation provider is not required to accept the contribution if it does not meet their trust deed rules. 8. A downsizer contribution only applies to the sale of homes where the contract of sale is entered into on or after 1 July 2018. If the exchange of contracts occurs before, but the settlement occurs on or after, 1 July 2018, a downsizer contribution is not allowed. Interaction with other rules The interaction between a downsizer contribution and other contribution rules are as follows. • A downsizer contribution is excluded from being a non-concessional contribution (ITAA97 s 292-90(2) (c)(iiia)), and does not count towards an individual’s non-concessional contributions cap (¶6-540). • A deduction is not allowed for a downsizer contribution (s 290-167). • The $1.6m transfer balance cap rules (¶6-440) apply, so a downsizer contribution would need to remain in accumulation phase if the individual’s transfer balance is already at the amount of their transfer balance cap when they make the contribution. • The inability to make non-concessional contributions where an individual has a total superannuation balance (¶6-490) above $1.6m does not apply to the making of a downsizer contribution. The downsizer contribution, once made, would, however, count towards the individual’s total superannuation balance in later years, which may limit the amount of non-concessional contributions in those later years. Fund accepts a contribution that is not a downsizer contribution

A superannuation provider that becomes aware that a contribution it has received is inconsistent with the definition of downsizer contribution in s 292-102 must assess whether they could have accepted the contribution under the general contribution rules (¶6-320), eg because the individual satisfies the work test. If the contribution can be accepted, it will count towards the individual’s contributions caps, generally as a non-concessional contribution. If this causes the individual to exceed their non-concessional contributions cap for the year (¶6-540), the excess will have to be released from superannuation or excess non-concessional contributions tax may be payable. As an alternative, the contribution may have to be returned to the individual, eg where it is not a downsizer contribution and does not satisfy any other conditions for being accepted by a fund. The contribution would need to be returned within 30 days of the fund becoming aware that the contribution should not have been accepted (SISR reg 7.04(4)). ATO guidance on downsizer contributions is contained in Law Companion Ruling LCR 2018/9. Super Guidance Note SPR GN 2018/2 contains general information about downsizer contributions and examples for individuals.

Division 293 Tax ¶6-400 Division 293 tax on concessional contributions of certain high-income earners Concessional contributions are generally taxed at 15% when made to a complying superannuation fund (¶7-120) with the tax paid by the receiving superannuation fund. Concessional contributions of high income individuals may also be liable to an additional 15% Division 293 tax. From the 2017/18 income year, Division 293 tax applies to individuals who exceed the high income threshold of $250,000. From 2012/13 to 2016/17, the high income threshold was $300,000. In relation to both accumulation and defined benefit schemes, Division 293 tax may apply to: • employer contributions, including superannuation guarantee and salary sacrifice contributions and notional employer contributions for members of defined benefit schemes, and • personal contributions for which a member has claimed a deduction. Division 293 tax is not imposed on excess concessional contributions, ie concessional contributions in excess of the individual’s concessional contributions cap for the year. Object of Div 293 The object of Div 293 is to reduce the concessional tax treatment of superannuation contributions for high income earners. A flat 15% tax on concessional contributions provides high income earners with a significantly larger tax concession than is available to those on lower marginal tax rates. If the ordinary tax rates for individuals for 2019/20 (¶18-040) are taken into account, a 15% flat tax on concessional contributions would provide taxpayers with taxable income above $180,000 with a 32% tax concession (taking account of the 2% Medicare levy), compared with a 6% tax concession for taxpayers with taxable income between $18,200 and $37,000, or a negative 15% impact for taxpayers with taxable income below $18,200. The purpose of Div 293 is to reduce this inequity. Liability to Division 293 tax An individual is liable to pay Division 293 tax if they have “taxable contributions” for an income year (s 293-15). Division 293 tax is imposed on the taxable contributions at the rate of 15% (Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Act 2013, s 5). Taxable contributions An individual has “taxable contributions” if the sum of: • their “income for surcharge purposes” for an income year (disregarding their “reportable

superannuation contributions”), and • their “low tax contributions” for the corresponding year, exceeds $250,000 (or $300,000 before 2017/18) (s 293-20(1)). The individual’s taxable contributions are the lesser of the amount of the low tax contributions and the excess of the sum over $250,000. An individual does not have taxable contributions for an income year if the amount of their low tax contributions is nil (s 293-20(2)). This ensures that Division 293 tax applies to low tax contributions only to the extent that they exceed the $250,000 threshold when added to income for surcharge purposes, other than reportable superannuation contributions. An individual who has income exceeding the $250,000 threshold but does not have low tax contributions is not liable to Division 293 tax. Income for surcharge purposes An individual’s “income for surcharge purposes” for an income year (s 995-1(1)) means the sum of the individual’s: • taxable income, including salary, a capital gain from the sale of a property or dividends from shares • reportable fringe benefits total • reportable superannuation contributions, and • total net financial investment and net rental property losses. A taxpayer who received a $342,114 lump sum payment in arrears of salary in 2013/14 argued that the $342,114 should not be taken into account for 2013/14 because it related to four prior years where he earned less than $300,000 each year. This argument, if accepted, would mean the taxpayer was not liable to Division 293 tax because the income threshold of $300,000 had not been breached in 2013/14. The AAT dismissed the taxpayer’s argument on the basis that a payment in arrears of salary is assessable income in the year it is actually received even if it relates to services in a prior year. Superannuation lump sums are not included in the calculation of income for surcharge purposes to the extent that they are subject to a zero tax rate, but are included if they are liable to taxation. This could include, for example, the taxed element of the taxable component of a superannuation lump sum benefit for individuals aged below 60 (¶8-210). An individual’s “reportable superannuation contributions” (s 995-1(1)) consists of: • reportable employer superannuation contributions, ie contributions made by an employer for the individual to the extent that the individual has the capacity to influence the size or manner of the contribution (¶6-110), and • personal contributions made by the individual for which a deduction has been allowed. An individual only has taxable contributions (and therefore can be liable to Division 293 tax) if the sum of their: (i) income for surcharge purposes (but not including their reportable superannuation contributions), and (ii) low tax contributions, exceeds $250,000 (or $300,000 before 2017/18). The taxable contributions for the income year are equal to the lesser of the low tax contributions and the amount of the excess (s 293-20). When measuring if the $250,000 threshold is exceeded, the calculation of the individual’s income for surcharge purposes disregards the individual’s reportable superannuation contributions. This prevents double counting of the contributions which are already included in “low tax contributions”. An individual’s income for surcharge purposes does not include their “assessable FHSS released amount

for the income year”, which basically means the contributions released under the FHSS Scheme for the individual to use to purchase or construct a first home (¶6-385). Low tax contributions The amount of an individual’s low tax contributions for a financial year (s 293-25, 293-30) is worked out: • under the general rules that apply to individuals with accumulation interests, or • under special rules that apply to individuals with defined benefit interests, certain state higher level office holders and certain Commonwealth justices and judges. General rules that apply to accumulation interests When an individual only has contributions to accumulation interests, the individual’s low tax contributions for a financial year are calculated as: • low tax contributed amounts for the year — concessional contributions (¶6-510) (most commonly employer contributions made for the individual, including SG contributions and salary sacrifice contributions, and deductible personal contributions made by the individual) and certain roll-over superannuation benefits that are included in the assessable income of a complying superannuation fund, less • excess concessional contributions for the year, ie the amount of the individual’s concessional contributions for the year that exceeds the individual’s concessional contributions cap for the year (¶6-505). To calculate a member’s low tax contributions, the ATO looks at an individual’s member contribution statement and/or SMSF annual return (¶6-050) and takes account of: • employer contributed amounts • other family and friend contributions • assessable foreign fund amounts, and • assessable amounts transferred from reserves. Non-concessional contributions (¶6-550) are not included in low tax contributed amounts. Excess concessional contributions are not subject to Division 293 tax because they are already taxed at a rate that is higher than 15%. The higher tax may arise from the fact that, from 2013/14, excess concessional contributions are included in assessable income and are also liable to excess concessional contributions charge (¶6-515) and, for 2012/13, excess concessional contributions tax of 31.5% was payable on the excess contributions (¶6-525). Concessional contributions that are disregarded or allocated to another financial year by the Commissioner under s 292-465 (¶6-665) are not included in excess concessional contributions, and so are included in low tax contributions and are potentially subject to Division 293 tax. Example For 2019/20, Xin’s only superannuation interest is an accumulation interest, and he has concessional contributions of $40,000. Xin’s concessional contributions cap is $25,000 and so he has excess concessional contributions of $15,000.

Xin’s low tax contributions are $25,000, being his $40,000 concessional contributions minus the $15,000 excess concessional contributions. The $15,000 excess concessional contributions are not included in the $250,000 threshold to determine if he has taxable contributions. This is because excess concessional contributions are excluded not only from low tax contributions but also from the income test (income for surcharge purposes less reportable superannuation contributions).

Because Division 293 tax does not apply to excess concessional contributions, the maximum amount of Division 293 tax that can be payable in a year is 15% of the concessional contributions cap, ie for 2019/20, $3,750 ($25,000 × 15%). Example For 2019/20, Hanna, who is aged 31, has taxable income of $210,000, a reportable fringe benefits total of $33,000 and concessional contributions (not including salary sacrifice contributions) of $40,000. Hanna’s concessional contributions cap is $25,000. Without the concessional contributions, Hanna’s income would be $243,000, and therefore below the $250,000 threshold for the 2019/20 income year. When the concessional contributions (but not including the $15,000 excess contributions) are added, the $250,000 threshold is exceeded. Hanna has $18,000 taxable contributions (the amount that, when the $25,000 concessional contributions are added, is in excess of the $250,000 threshold). Division 293 tax of $2,700 ($18,000 × 15%) is imposed on the $18,000.

Special rules for defined benefit interests Subdivision 293-D (s 293-100 to 293-115) modifies the meaning of low tax contributions for individuals who have a defined benefit interest in a financial year. Low tax contributions for defined benefit interests are worked out as follows (s 293-105). Step 1. Include low tax contributed amounts as calculated under the general rules, but only to the extent that they relate to accumulation interests. Step 2. Subtract excess concessional contributions — this is the same as under the general rules. Step 3. Add “defined benefit contributions” for the defined benefit interests. “Defined benefit contributions” for a financial year, and the method of determining the amount of defined benefit contributions, have the meaning given by regulation (s 293-115). A regulation may take into account: (a) the person who has the defined benefit interest; (b) the superannuation plan in which the interest exists; (c) the superannuation provider in relation to the superannuation plan; and (d) any other matters. According to ITAR Subdiv 293-DA, the amount of defined benefit contributions, for 2013/14 and later years, is: • nil for an individual who is a non-accruing member for the whole of a financial year in respect of a defined benefit interest (reg 293-115.10), where “non-accruing member” includes individuals in the pension phase, members who have ceased employment and whose benefits are deferred in the fund for the whole of the financial year and employed members who have reached their maximum benefit accrual, and • for an individual who is an accruing member with a funded benefit interest, the individual’s notional taxed contributions for the financial year but without limiting the amount to the individual’s concessional contributions cap under grandfathered arrangements (reg 293-115.15). An individual’s notional taxed contributions in respect of a defined benefit interest are the amount determined under ITAR Subdiv 292-D and Sch 1A for the purposes of determining excess concessional contributions (¶6-512). The amount of notional taxed contributions is an estimate, using prescribed assumptions, of the cost of providing the benefits financed by employer contributions to the fund, payable to the member on voluntary exit. Special rules for other individuals

The low tax contributions of some other individuals are calculated under special rules: • certain “state higher level office holders” do not pay Division 293 tax in respect of contributions to constitutionally protected funds, unless the contributions are made as part of a salary package (Subdiv 293-E: s 293-140 to 293-160), and • Division 293 tax is not payable by Commonwealth justices and judges in respect of contributions to a defined benefit interest established under the Judges’ Pensions Act 1968 (Subdiv 293-F: s 293-185 to 293-200). The Tax Laws Amendment (2013 Measures No 1) Regulation 2013 specifies the “state higher level office holders” who are not subject to Division 293 tax in respect of certain superannuation contributions to constitutionally protected funds. These individuals include state ministers, judges and magistrates, state governors and state public service departmental heads (ITAR reg 293-145.01). Assessment and payment of Division 293 tax Assessments for Division 293 tax for an income year are made by the Commissioner (TAA Sch 1 s 1555), and are issued to the individual as soon as practicable after the assessment is made. Assessments are based on an individual’s income tax return and on information given to the Commissioner by superannuation providers in member contributions statements (¶6-050) and/or SMSF annual returns. Accumulation interests The simple payment process for accumulation interests can be summarised as follows: 1. The Commissioner issues a notice of assessment to an individual that states the amount of their assessed Division 293 tax for an income year (TAA Sch 1 s 155-10). 2. The amount of assessed tax is due and payable 21 days after the Commissioner gives the notice of assessment, except in relation to defined benefit interests where assessed Division 293 tax is deferred to a debt account (s 293-65). 3. Amounts that remain unpaid after the due date are subject to general interest charge (s 293-75). Defined benefit interests The complex payment process for defined benefit interests can be summarised as follows (TAA Sch 1 Div 133: s 133-1 to 133-145): 1. Payment of Division 293 tax liability for contributions attributable to defined benefit interests is generally deferred to a debt account (s 133-10; 133-60). 2. The Commissioner makes a determination of the amount of tax that is deferred by working out the extent to which the assessed Division 293 tax is attributable to defined benefit interests (s 133-15; 133-20). 3. If a debt account is in debit at the end of a financial year, the Commissioner debits the account for interest on the amount by which the account is in debit, calculated at the long term bond rate (s 13365). The long-term bond rate generally means the average 10-year Treasury bond rate (ITAA97 s 995-1(1)). 4. An individual may make voluntary payments of the debt account (s 133-70). 5. The ATO must notify a fund of a Div 293 debt account it keeps on behalf of a member of the fund (s 133-75). 6. An individual has a debt account discharge liability and is liable to pay it if the Commissioner keeps a deferred tax debt account for the individual and an “end benefit” (s 133-130), eg a superannuation member benefit, becomes payable. The liability arises when the end benefit becomes payable or, if the end benefit is a superannuation death benefit, just before the death (s 133-105).

Family law superannuation payments arising from property settlements following the end of relationships between spouses are not end benefits under Div 133 and therefore do not trigger an individual’s liability to pay Division 293 tax (Taxation Administration Act 1953 (Meaning of End Benefit) Instrument 2013). 7. An individual’s debt account discharge liability for a superannuation interest is due and payable at the end of 21 days after the day the end benefit for the superannuation interest is paid (s 133-110). If the debt account discharge liability is not paid in full by the due and payable date, it is subject to general interest charge (s 133-115). 8. An individual’s debt account discharge liability for a superannuation interest is the lesser of: (a) the amount by which the debt account is in debit when the end benefit for the superannuation interest becomes payable, and (b) the individual’s “end benefit cap” for that superannuation interest (s 133-120(1) and (1A)). The end benefit cap is 15% of the employer-financed component of any part of the value of the superannuation interest that accrued after 1 July 2012 (s 133-120(2)), where the value of the superannuation interest is worked out at the end of the financial year before the financial year in which the end benefit becomes payable (s 133-120(3)). If requested by the Commissioner, a superannuation provider must give the Commissioner notice of the end benefit cap. The notice must be given in the approved form and within 14 days of the Commissioner making the request (s 133-120(4)). 9. The Commissioner must give an individual a notice if the end benefit becomes payable from a superannuation interest for which the Commissioner keeps a debt account. The notice must state that the individual is liable to pay their debt account discharge liability for the superannuation interest and specify the amount of the debt, the day it is due and payable and whether it is the amount the debt account is in debt or the end benefit cap (s 133-125). 10. If a superannuation provider has been given a notice from the Commissioner under s 133-75 stating that a debt account for Division 293 tax is being kept for the superannuation interest of an individual and the superannuation provider receives a request from the individual to pay the end benefit, or the end benefit becomes payable, from the superannuation interest, the superannuation provider may request the Commissioner to advise as to the status of the debt account. If the Commissioner receives a request, the superannuation provider must be given the advice as soon as practicable whether or not the debt account is in debit (s 133-135). Before 1 July 2017, if an individual requested a superannuation provider to pay the end benefit from a superannuation interest for which the Commissioner kept a debt account, the individual was required to notify the Commissioner of the request within 21 days of making the request (former s 133-135). From 1 July 2017, an individual does not need to notify the Commissioner of their request. 11. Before 1 July 2017, a superannuation provider was required to send an end benefit notice within 14 days of the earlier of the fund receiving a request to pay a superannuation benefit for the member and a superannuation benefit becoming payable. From 1 July 2017, a superannuation provider does not need to advise the Commissioner of an end benefit cap amount if the superannuation provider has already given the Commissioner notice of the end benefit cap under s 133-120(2) or the Commissioner has advised the superannuation provider under s 133-135(2) that the debt account is not in debit (s 133-140). 12. If a fund becomes aware of a material change or omission in any information provided on a notice under s 133-140, the notice must be resubmitted within seven days (s 133-145). Neither Division 293 tax nor debt account discharge liability paid by an individual are deductible (s 26-98). Objections to Division 293 tax liability

An unpaid amount of assessed Division 293 tax is treated the same as other tax debts, and the Commissioner may take legal action to recover amounts that remain unpaid after they are due and payable (s 255-5 in Sch 1 TAA). A person who is dissatisfied with an assessment of Division 293 tax may lodge an objection to the assessment (¶11-500). A person with a defined benefit interest may object if an assessment of Division 293 tax has been made but the amount determined by the Commissioner to be payable is not deferred to a debt account or if the person is dissatisfied with the notice of the debt account discharge liability. An objection may not relate to the amount of the liability except in relation to the application of the end benefit cap. A person can apply to the relevant complaints body (¶13-115) for review of the amount of the defined benefit contributions or of the amount of the end benefit cap. Release authorities for payment of Division 293 tax amounts Division 293 tax may be paid from an individual’s own money or from their superannuation interest using a release authority. Release authority for assessed Division 293 tax From 1 July 2018, there is a common legislative framework in TAA Sch 1 Div 131 for the release of amounts from superannuation. Division 131 sets out the release authority process for various tax liabilities including assessed Division 293 tax, but excluding amounts relating to Division 293 tax debt account discharge liabilities. Before 1 July 2018, the release authority process for the payment of assessed Division 293 tax was in TAA Sch 1 Div 135. Individuals who receive a notice of assessment for Division 293 tax can request the Commissioner to release amounts from superannuation, and the Commissioner will then be required to issue a release authority to the superannuation provider that holds the individual’s superannuation interest. Superannuation providers generally have 10 business days to pay an amount to the Commissioner in accordance with a release authority and to notify the Commissioner of the payment. Release authorities for assessed Division 293 tax are discussed at ¶6-640. Release authority for debt account discharge liability When an individual becomes liable to pay their debt account discharge liability, the Commissioner must issue the individual with a release authority to allow money to be released from a superannuation fund to pay the liability. An individual’s debt account discharge liability arises when an “end benefit” (s 133-130), eg a superannuation member benefit, becomes payable (TAA Sch 1 s 133-105). The release authority must state the amount of the release entitlement, ie the amount of the individual’s debt account discharge liability. The Commissioner may not issue a release authority to the trustee of a deceased estate (TAA Sch 1 s 135-10). An individual who receives a release authority may give it to a superannuation provider that holds the superannuation interest to which the debt account relates within 120 days of being issued with the release authority (TAA Sch 1 s 135-40). On receipt of a release authority, a superannuation provider must pay the amount stated in the release authority to the Commissioner within 30 days (TAA Sch 1 s 135-75). A payment received by the Commissioner is taken to have been received in respect of a current or anticipated tax debt of the individual (TAA Sch 1 s 135-90). A superannuation benefit that an individual is taken to receive, paid in relation to such a release authority issued to them, is non-assessable non-exempt income (s 303-20). Despite s 303-20, any amount paid in relation to the release authority is included in the taxpayer’s assessable income to the extent that it exceeds the amount of the release entitlement reduced by the amount of any superannuation benefit that has already been treated as non-assessable non-exempt income in relation to that release entitlement (s 304-20) (¶8-520). Refund to former temporary residents

Former temporary residents who receive a departing Australia superannuation payment (¶8-400) are entitled to a refund of any Division 293 tax that they have paid (ITAA97 s 293-230). This reflects the fact that any concessional tax treatment of their superannuation contributions is removed by a final withholding tax on the superannuation benefit.

Transfer balance cap from 1 July 2017 ¶6-420 Limit on transfers into the retirement phase of superannuation From 1 July 2017, a transfer balance cap restricts the amount of capital an individual can transfer to the retirement phase to support a superannuation income stream. The transfer balance cap is intended to limit the extent to which the superannuation interests of high wealth individuals benefit from an earnings tax exemption when they are receiving superannuation income stream benefits. The limit is the amount of the transfer balance cap. The transfer balance cap is $1.6m for 2019/20, the same as for 2018/19 and 2017/18. The transfer balance cap rules are primarily in ITAA97 Div 294, 303 and 307 and in TAA Sch 1 Div 136, with transitional provisions in ITTPA Div 294. Various aspects of the legislation are supported by regulations, and the Commissioner’s views are set out in Law Companion Rulings. The transfer balance cap rules were enacted by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016, with later changes in the Treasury Laws Amendment (2017 Measures No 2) Act 2017. Background to the introduction of the transfer balance cap — the pre-1 July 2017 rules An individual’s investments in superannuation are generally subject to a 15% earnings tax imposed on the individual’s superannuation fund. This rate applies during the accumulation phase, generally while the individual is of working age and contributions are being made to their superannuation. When an individual accesses their superannuation, they may choose to receive a superannuation lump sum or a superannuation income stream, both of which are taxed at concessional tax rates. If the individual commences a superannuation income stream, income earned from the investment of the capital that supports the income stream may be exempt from tax (the earnings tax exemption) (¶7-153). Individuals in receipt of a superannuation income stream, and the assets supporting the income stream, are said to be in the retirement phase. The purpose of the earnings tax exemption is to encourage individuals to save for their retirement and to take their retirement income as an income stream, rather than a lump sum. Reliance on the age pension system would thereby be reduced. Before 1 July 2017, there was no limit on the amount of superannuation an individual could transfer into the retirement phase to benefit from the exemption. This provided a tax advantage to high wealth individuals with significant superannuation balances. Guide to the transfer balance cap rules The transfer balance cap rules are contained in complex legislation which can be summarised very briefly as follows. • An individual has a transfer balance account if they are the retirement phase recipient of a superannuation income stream, which generally means a superannuation income stream benefit is payable to them: ¶6-425. • Credits are made to the transfer balance account at various times, including when a pension is payable to the individual: ¶6-430. • Debits are made to the transfer balance account at various times, including when superannuation income streams that were previously credited lose the earnings tax exemption: ¶6-435. • When an individual first commences a retirement phase superannuation income stream, their

personal transfer balance cap equals the general transfer balance cap for that financial year, ie $1.6m for 2019/20: ¶6-440. • An individual has an excess transfer balance when the balance of their transfer balance account exceeds their personal transfer balance cap, and the Commissioner may make a determination requiring the individual to take action to remove the excess amount: ¶6-450. • The Commissioner must issue a commutation authority to one or more superannuation providers, authorising the commutation in full or in part of an individual’s superannuation income stream, if an individual has not acted on an excess transfer balance determination by the due date: ¶6-455. • An individual whose transfer balance exceeds their transfer balance cap may be liable to excess transfer balance tax on excess transfer balance earnings accrued while the cap was exceeded: ¶6460. • Transitional rules provided CGT relief for complying superannuation funds that held assets for individuals in the retirement phase and needed to reallocate the assets to the accumulation phase before 1 July 2017 in order to comply with the $1.6m transfer balance cap from that date: ¶6-470. • The transfer balance cap rules are modified for certain defined benefit income streams that are subject to commutation restrictions which make some general transfer balance cap rules unworkable, eg the requirement to commute an excess balance and transfer it to the accumulation phase or take it in cash: ¶6-480. Guidance Note GN 2017/1 provides a brief summary of the transfer balance cap rules that commenced from 1 July 2017.

¶6-422 Transfer balance account event-based reporting All superannuation funds are required to report certain retirement phase income stream events to the ATO on an events basis using a transfer balance account report (TBAR). This reporting is required to enable the ATO to track an individual’s transfer balance account across all funds and to administer the appropriate consequences if an individual exceeds their transfer balance cap. Reporting is also required to enable a member’s total superannuation balance to be calculated. Events that must be reported to the ATO include: • the commencement date and start value of retirement phase superannuation income streams (¶6425) on or after 1 July 2017 • member commutations from a retirement phase income stream, including commutations that occur before an income stream is rolled over to another fund and commutations requested by a member after an excess transfer balance determination (¶6-450) has been issued to them • the commencement of a death benefit income stream (¶6-430) • personal injury (structured settlement) contributions from 1 July 2017 (¶6-550) • that a commutation authority (¶6-455) has been complied with or that the fund is unable to comply because of a capped defined benefit income stream (¶6-480) or because the member is deceased • limited recourse borrowing arrangement (LBRA) (¶6-430) payments when: (i) the LBRA was entered into on or after 1 July 2017 (or was previously entered into and was refinanced on or that date), (ii) the payments resulted in an increase in the value of the member’s superannuation interest supporting their retirement phase income stream, and (iii) the member’s interest is in an SMSF or other complying fund with fewer than five members, and • that an income stream stops being in the retirement phase (¶6-425).

Funds do not need to report pension payments, investment earnings or losses, when an income stream is closed because the interest is exhausted, concessional contributions or the death of a member. Lump sum payments from a member’s accumulation account do not need to be reported, but a partial commutation of a retirement phase pension account must be reported. The TBAR form and instructions are available on www.ato.gov.au. Deadlines for lodging a report A TBAR is generally required to be lodged no later than 10 business days after the end of the month in which the relevant reporting event occurs, or such later date as the Commissioner allows (Legislative Instrument “Reporting of event-based transfer balance account information in accordance with the Taxation Administration Act 1953”, available at www.legislation.gov.au/Details/F2017L01273). Penalties may be applied for failure to lodge on time in the approved form. Event based reporting by SMSFs The ATO provided a number of administrative concessions to self-managed super funds (SMSFs) in recognition of the significant changes involved in moving to event based reporting. SMSFs were given until 1 July 2018 to commence reporting and only need to report to the ATO events that have an impact on a member’s transfer balance account (¶6-425). Reporting is only required for members with total superannuation balances (¶6-490) of $1m or more. In addition, the ATO allows: • annual reporting (at the same time as the SMSF annual return is lodged) where all members of an SMSF have a total superannuation balance below $1m, and • quarterly reporting by SMSFs which have any members with a total superannuation balance of at least $1m, where the report would be required within 28 days after the end of the quarter in which an event occurs (ATO media release, 9 November 2017). Whether an SMSF has any members with a total superannuation balance of at least $1m is tested as at 30 June in the financial year before a fund’s first report becomes due. The ATO estimates that up to 85% of SMSFs will not be required to undertake any additional reporting outside of current annual reporting timeframes. This contrasts with the monthly reporting regime for APRA-regulated funds, where event based reports are generally required to be lodged within 10 days after the month in which the event occurs. ATO warning The ATO has warned (“First quarterly TBARs due 28 October for some SMSFs”) that, if a transfer balance account event occurs and an SMSF fails to lodge a TBAR by the due date, the member's transfer balance account will be adversely affected and the member may be penalised. The ATO also reminded SMSFs that they can choose to report events as they occur, and this is recommended in some cases to avoid potential negative consequences. The ATO recommends, for example, that SMSFs lodge a TBAR earlier than the required due date if a member rolls over their benefit to an APRA-regulated fund to start a new retirement phase income stream there. The commutation should be reported as it occurs, or no later than at the time of the rollover, to avoid double counting of the member's income streams. The ATO warns that it has no discretion to disregard a member's excess or adjust the information reported by a member's fund. ATO guidance on reporting by SMSFs can be found at: www.ato.gov.au/Super/Self-managed-superfunds/Administering-and-reporting/New-reporting-obligations-for-SMSFs.

¶6-425 Transfer balance account An individual has a transfer balance account if they are, or have at any time been, the “retirement phase recipient” of a superannuation income stream (s 294-15(1)).

Retirement phase recipient An individual is a retirement phase recipient of a superannuation income stream at a time if a superannuation income stream benefit (¶8-150): (a) is payable to the individual at that time from a superannuation income stream that is in the “retirement phase” at that time (s 294-20(1)), or (b) will be payable to the individual after that time from a superannuation income stream that is in the retirement phase at that time and is a deferred superannuation income stream (s 294-20(2)). A “deferred superannuation income stream” is defined in ITAA97 s 995-1(1) as having the same meaning as in the SIS Regulations. SISR reg 1.03(1) defines a deferred superannuation income stream as a benefit supported by a superannuation interest where the contract or rules for the provision of the benefit provide for payments to start more than 12 months after the superannuation interest is acquired and to be made at least annually afterwards. Superannuation income stream that is in the retirement phase From 1 July 2017, the concept of retirement phase is used to identify superannuation income streams that count towards the transfer balance cap and are suitable for the earnings tax exemption (¶7-153) (s 295385(3)(a), (4)(a) and (5)). A superannuation income stream is in the retirement phase if: (i) it supports a superannuation income stream where a superannuation income stream benefit is currently payable from it, or (ii) it is a deferred superannuation income stream (as defined in SISR reg 1.03(1)) that has not yet become payable but the member has satisfied a condition of release for retirement, terminal medical condition, permanent incapacity or attaining age 65 (s 307-80(1) and (2)). The circumstances in which a member can satisfy these conditions of release are discussed at ¶3-280. A transition to retirement income stream (TRIS) is only in the retirement phase if it satisfies the conditions in s 307-80 — see “Transition to retirement income streams” below. Superannuation income stream that is not in the retirement phase Certain superannuation income streams are excluded from being in the retirement phase, either because the law specifically excludes that superannuation income stream or because the superannuation income stream fails to meet the definition of a superannuation income stream in the retirement phase. The following superannuation income streams are excluded from being in the retirement phase and are instead in the accumulation phase: • a deferred superannuation income stream that has not become payable and the member has not yet met a relevant condition of release — if an individual purchases a deferred superannuation income stream before meeting a relevant condition of release it forms part of the accumulation phase value until the individual meets a relevant condition of release or it starts to be payable • a superannuation income stream that fails to comply with the pension or annuity standards under which it is provided Taxation Ruling TR 2013/5 (para 18 to 20, 96 to 102), and • a superannuation income stream that stops being in the retirement phase because the superannuation provider fails to pay a superannuation lump sum as required by a commutation authority (¶6-455) by the due date (s 307-80(4)). Transition to retirement income streams From 1 July 2017, TRISs and other superannuation income streams covered by s 307-80(3) are in the retirement phase at a time if, at or before that time: • the person to whom the benefit is payable from the income stream has satisfied a condition of release for retirement, terminal medical condition, permanent incapacity or attaining age 65, and

• except in the case of attaining age 65 where notification is not necessary, has notified the superannuation income stream provider that the condition of release has been satisfied. The circumstances in which a member can satisfy these conditions of release are discussed at ¶3-280. A consequence of the income stream being in the retirement phase is that, at the relevant time (ie turning 65 or notification of a condition of release), the transfer balance cap rules will apply. There will be a credit to the recipient’s transfer balance account (¶6-430) equal to the value of the account balance supporting the income stream at the relevant time. If the account balance is more than the transfer balance cap, the recipient will exceed their cap, which can lead to excess transfer balance tax, and an excess transfer balance determination and commutation authority from the Commissioner. TRISs, and the other superannuation income streams covered by s 307-80(3), can qualify for the earnings tax exemption (¶7-153) once the superannuation income stream provider is notified that the condition of release has been satisfied (or automatically for attaining age 65). The income streams do not need to be restructured or to be commuted and rolled over to a replacement superannuation income stream that is in the retirement phase to have access to the earnings tax exemption. As originally enacted by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016, TRISs and other superannuation income streams covered by s 307-80(3) were excluded from being in the retirement phase. This covered a TRIS within the meaning of SIS Regulations Pt 6 or a non-commutable allocated annuity or pension within the meaning of those regulations, and a transition to retirement income pension within the meaning of RSA Regulations Pt 4 or a non-commutable allocated pension within the meaning of those regulations. Subsequently, s 307-80(3) was substituted by the Treasury Laws Amendment (2017 Measures No 2) Act 2017 effective from 1 July 2017. Reversionary transition to retirement income streams A TRIS is automatically in the retirement phase if the superannuation income stream starts to be paid to a reversionary beneficiary after the member’s death. A reversionary TRIS can be paid to a reversionary beneficiary irrespective of whether they have satisfied a condition of release. From 1 July 2017, such an income stream is subject to the general retirement phase definition in s 307-80(1) which simply requires that a superannuation income stream benefit is payable from it at that time. Example On 1 July 2012, when Roger was aged 61 he started a TRIS valued at $600,000. This was his only superannuation income stream. On 1 July 2017, Roger’s TRIS was in the retirement phase as he was now aged over 65. When Roger died on 2 August 2019, his TRIS automatically reverted to his wife Mary who was aged 55 and still working. The TRIS continued to be in the retirement phase when it reverted to Mary even though she had not met a condition of release. On 2 August 2019, as the TRIS was in the retirement phase, Mary started to have a transfer balance account. The amount would be credited with $600,000 but not until 2 August 2020 (¶6-430).

Before being amended by the Treasury Laws Amendment (2018 Measures No 4) Act 2019 effective from 1 July 2017, s 307-80(3) had the effect that a reversionary TRIS would not remain in the retirement phase if it was transferred to a dependant on the death of the deceased member unless the dependant had satisfied a condition of release with a nil cashing restriction. If the reversionary beneficiary, eg a surviving spouse, did not satisfy a relevant condition of release, the TRIS would need to be commuted and a new account-based pension started. The insertion of para (aa) into s 307-80(3) means that a TRIS can automatically transfer to a dependant on the death of the original pension recipient rather than a condition of release having to be satisfied. The reversionary beneficiary must satisfy SISR reg 6.21(2A), ie be a SIS dependant (¶3-020) of the deceased member. The retrospective application of the amendment from 1 July 2017 ensures that any relevant payments since 1 July 2017 do not result in a contravention of the SIS reg 6.21 requirement that only superannuation income streams that are in the retirement phase can be paid to dependant beneficiaries. When the entitlement to a TRIS transfers to a reversionary beneficiary, the reversionary beneficiary receives a credit to their transfer balance account (¶6-430). The amount of the credit and when it arises

depends on the date of death of the member. The ATO’s views on TRISs are set out in Guidance Note GN 2019/1. Reversionary income streams are discussed further at ¶6-430. When an individual starts to have a transfer balance account An individual starts to have a transfer balance account on the later of: (i) 1 July 2017 if they were a retirement phase recipient of a superannuation income before that date, and (ii) the day they first start to be a retirement phase recipient of a superannuation income stream (s 29415(2)). The transfer balance account operates like a bank account, with the value of an individual’s account changing according to the credit and debit entries made. A credit reduces the amount of available cap space an individual has, and a debit increases the available cap space. End of a transfer balance account A transfer balance account ends when the individual who is the retirement phase recipient of the superannuation income stream dies (s 294-45).

¶6-430 Credits to the transfer balance account Generally, a credit to a transfer balance account arises when an individual is the “retirement phase recipient” of a superannuation income stream. This is when a superannuation income stream benefit is payable to the individual from a superannuation income stream, or will be payable under a deferred superannuation income stream, where the superannuation income stream is “in the retirement phase” (¶6-425). Law Companion Ruling LCR 2016/9 provides guidance on credits to a transfer balance account, including the credit for SMSF repayments under limited recourse borrowing arrangements. Amounts that are credited The following amounts are credited towards an individual’s transfer balance account (s 294-25). 1. If, just before 1 July 2017, the individual is the retirement phase recipient of a superannuation income stream, there is a credit of the value, just before 1 July 2017, of the superannuation interest (worked out under ITAA97 s 307-205: ¶8-165) that supports the superannuation income stream. The credit arises on the later of: (i) 1 July 2017, and (ii) if the individual is a reversionary beneficiary, the last day of the 12-month period beginning on the day a superannuation income stream benefit first becomes payable from the income stream. 2. If the individual starts to be the retirement phase recipient of a superannuation income stream on a day (the starting day) on or after 1 July 2017, there is a credit for the value on the starting day of the superannuation interest that supports the superannuation income stream. The credit generally arises on the starting day. If the recipient is a reversionary beneficiary, the credit arises at the end of the 12-month period beginning on the starting day. The starting day for a reversionary beneficiary would be the date of death of the original superannuation member (see “Death benefit income streams” below). The same treatment arises if a reversionary transition to retirement income stream (TRIS) is payable to a reversionary beneficiary (¶6-425). TRISs and other superannuation income streams covered by s 307-80(3) are in the retirement phase only when the person to whom the benefit is payable reaches age 65 or notifies the trustee that they have satisfied a condition of release for retirement, terminal medical condition or permanent incapacity (¶6-425). At that time, there will be a credit equal to the value of the account balance that supports the income stream. This does not include payments to reversionary beneficiaries (s 307-

80(3)(aa)). 3. If the individual has excess transfer balance at the end of a day, there is a credit of their excess transfer balance earnings for that day. The credit arises at the start of the next day. An individual has an excess transfer balance when the balance of their account exceeds their personal transfer balance cap on a particular day (s 294-30). Excess transfer balance earnings accrue on excess transfer balances daily at the general interest charge rate and are generally credited towards an individual’s account. This means the earnings compound daily until the breach of the transfer balance cap is rectified or the Commissioner issues a determination (¶6-450). Excess transfer balance earnings continue to accrue but are no longer credited to an individual’s transfer balance account once the Commissioner issues a transfer balance determination (¶6-450) (s 294-25(2)). The earnings start to be credited again if the individual receives another credit in their transfer balance account for starting a new superannuation income stream. Despite s 294-30, an excess transfer balance may be disregarded if it is less than $100,000, is caused by existing superannuation income streams on 30 June 2017, and the individual rectifies the breach within six months (¶6-460). 4. A credit may arise because of a repayment of a limited recourse borrowing arrangement (see below). 5. Regulations may prescribe additional circumstances in which a transfer balance credit arises in an individual’s transfer balance account. Any such regulation would have to identify the condition for the credit arising, the amount of the credit and when the credit arises. This regulation-making power ensures transfer balance credit rules can be updated to include new superannuation income stream products, such as the innovative income stream products that are being developed, or to address unforeseen issues. The amount of transfer balance credits is modified for certain capped defined benefit income streams (¶6480). Once a superannuation income stream has commenced, changes in the value of its supporting interest are not counted as credits (or debits). This means a superannuation interest that supports a superannuation income stream that increases in value because of investment earnings does not have the growth counted towards the cap. Example Claude starts a pension worth $850,000 on 1 July 2017. The value of the superannuation interest that supports the pension grows to $980,000 by 1 July 2019 by investment earnings. Claude draws down the full value of the superannuation interest by 16 September 2036. At all times, Claude has a transfer balance of $850,000 reflecting the credit that arose on 1 July 2017 and disregarding the investment earnings and pension drawdowns.

Credits from limited recourse borrowing arrangements An individual receives a transfer balance credit where a superannuation provider makes a payment in respect of a limited recourse borrowing arrangement that increases the value of a superannuation interest supporting a retirement phase superannuation income stream (s 294-55). This ensures the transfer balance cap captures the shift of value that occurs where liabilities from a limited recourse borrowing arrangement are paid using accumulation phase assets. The ATO notes in Law Companion Ruling LCR 2016/9 that it is not generally necessary to separately determine the market value of the superannuation interest as the increase in value is determined by reference to the repayment amount. The credit must, however, be apportioned on a fair and reasonable basis across the different members’ interests if the increase in value affects more than one member’s interest. A methodology acceptable to the ATO is apportionment based on the value of the members’ interests that are in the retirement phase as at 30 June of the previous financial year, provided there have not been significant changes in value.

Section 294-55 only applies where the superannuation interest is in a complying superannuation fund that has fewer than five members, ie it is either an SMSF or a small APRA fund. The credit arises at the time of the payment and the amount of the credit is the amount by which the individual’s superannuation income stream increases in value because of the payment. This means the credit can only arise where the payments in respect of a limited recourse borrowing arrangement supporting a retirement phase superannuation income stream are sourced from assets that do not support the same income stream, eg from assets that support accumulation interests in the fund. A repayment sourced from assets supporting the same retirement phase interest will not result in a transfer balance credit as the limited recourse borrowing arrangement reduction is naturally offset by a corresponding reduction in cash. Example (from the Explanatory Memorandum) James is 65 and is the only member of his SMSF. His superannuation interests are valued at $1.6m. James’ SMSF acquires a $300,000 property using $150,000 of the fund’s cash and $150,000 borrowed through a limited recourse borrowing arrangement. James then commences a superannuation income stream supported by his $1.6m superannuation interest, which is backed in part by the property. James’ SMSF uses rental income from the property and its other cash deposits to repay the loan over time. As the repayments are sourced from assets that support James’ retirement phase interests, the repayments do not increase the values of James’ superannuation interest supporting his superannuation income stream and James does not receive a transfer balance credit.

Section 294-55 applies to borrowings arising under contracts entered into on or after 1 July 2017. It does not apply to contracts entered into before 1 July 2017 but completed after that date. Section 294-55 also does not apply to the refinancing of the outstanding balance of borrowings arising under contracts entered into before 1 July 2017, although a transitional measure in ITTPA s 294-55 provides that, to qualify for this exemption, the refinancing arrangement must apply to the same asset and the refinanced amount must not be greater than the outstanding balance on the limited recourse borrowing arrangement just before the refinancing. Assumptions about income streams For the purposes of determining if an individual is a retirement phase recipient of a superannuation income stream and the credit that arises in their transfer balance account, it is assumed that: (i) the rules or standards (¶3-280) for the superannuation income stream are complied with; and (ii) the superannuation income steam remains in the retirement phase, even if it later leaves the retirement phase because of non-compliance with a commutation authority issued by the Commissioner (s 294-50). Death benefit income streams A superannuation death benefit (¶8-300) may be paid to a dependant beneficiary as a superannuation income stream or as a lump sum. A beneficiary is a dependant of the deceased member if they are a spouse, a child of the deceased less than 18 years, financially dependent or with a disability, or in an interdependency relationship with the deceased (¶8-310). Payments to non-dependants must be made as a lump sum. If a death benefit income stream, in combination with an individual’s own superannuation income stream, results in the individual’s transfer balance cap being exceeded, they can choose to commute, fully or partially, either the death benefit income stream or a superannuation income stream that the individual already had in retirement phase. If the individual chooses to commute their own superannuation income steam, the commuted amount can remain within the superannuation system as an accumulation interest. If they choose to commute the death benefit income stream, the commuted amount cannot be held in an accumulation interest as this contravenes the regulatory requirement to cash the benefit as soon as practicable (SISR reg 6.21). From 1 July 2017, a superannuation lump sum death benefit for dependant beneficiaries can be rolled over to a complying superannuation fund (¶8-600). This does not enable the amount to remain in an accumulation phase interest or be mixed with the dependant beneficiary’s own superannuation interest, as the compulsory cashing rules required the interest to be cashed as soon as practicable.

Where a deceased member’s superannuation interest is cashed to a dependant beneficiary in the form of a death benefit income stream, a credit will arise in the dependant beneficiary’s transfer balance account (s 294-25(1)). The amount and timing of the credit depends on whether the income stream is a reversionary or a non-reversionary income stream. The ATO’s views on death benefit income streams are set out in Guidance Note GN 2017/7. Reversionary and non-reversionary income streams The ATO’s views on reversionary or non-reversionary income streams are set out in Law Companion Ruling LCR 2017/3. As a general rule, a superannuation income stream ceases when the member dies and the superannuation provider’s liability to make periodic superannuation income stream benefit payments comes to an end. A reversionary death benefit income stream is the exception to this general rule. A reversionary death benefit income stream is a superannuation income stream that reverts to the reversionary beneficiary automatically upon the member’s death. The superannuation income stream continues with the entitlement to it passing from one person (the member) to another (the dependant beneficiary). The superannuation income stream reverts in this manner because the governing rules of the superannuation income stream expressly provide for reversion, as opposed to the superannuation provider exercising a power or discretion in the beneficiary’s favour. If the preconditions for a superannuation income stream to revert do not exist within the governing rules before the member’s death, the superannuation income stream ceases on the member’s death. A death benefit income stream is not precluded from being reversionary just because the rules under which the superannuation income stream is provided set the value of a reversionary death benefit income stream, eg if it limits the value to a set percentage of the amount that was payable to the deceased member. A binding death benefit nomination, by itself, would not make a superannuation income stream reversionary. Even a nomination that has the effect of directing the superannuation provider as to whom the death benefit is to be paid and the form would not turn a non-reversionary superannuation income stream into a reversionary superannuation income stream. A non-reversionary death benefit income stream is a new superannuation income stream created and paid to the dependant beneficiary or beneficiaries. Death benefit income streams are non-reversionary if the superannuation provider has the power or discretion to determine: (i) the recipient, (ii) the form in which the death benefit will be paid, eg as a superannuation lump sum or a superannuation income stream, or (iii) the amount of the death benefit. Credits from death benefit income streams Where the deceased member’s interest is retained within the superannuation system and paid to a dependant beneficiary as a death benefit income stream, a credit arises in the dependant beneficiary’s transfer balance account. A transfer balance credit does not arise if a superannuation death benefit is paid as a superannuation lump sum. The amount that is credited may include any investment earnings that accrued to the deceased member’s interest between the date of death and the date the dependant beneficiary becomes entitled to be paid the death benefit income stream. It may also include other amounts, eg from the deceased member’s accumulation interest or an amount paid under a life insurance policy held by the superannuation provider in respect of the member, if the superannuation provider has made a decision to pay these amounts out as a death benefit income stream. Timing of the credit In the case of a non-reversionary death benefit income stream, the value of the supporting superannuation interest is credited to the beneficiary’s transfer balance account on the later of 1 July 2017 and the day the benefit is payable to the beneficiary (s 294-25). In the case of a reversionary death benefit income stream, a credit for the value of the supporting superannuation interest does not arise in the beneficiary’s transfer balance account until 12 months after

a superannuation income stream benefit first becomes payable, ie 12 months after the date of death. This deferral gives the beneficiary time to adjust their affairs following the death of the member before consequences such as a breach of their transfer balance cap arise. Payment splits on relationship breakdown The circumstances in which credits or debits arise when, following a divorce or other relationship breakdown, superannuation interests are split as part of the division of property are discussed at ¶6-435.

¶6-435 Debits to the transfer balance account An individual’s transfer balance account is debited when superannuation income streams that were previously credited (because they receive the earnings tax exemption: ¶7-153) are reduced (other than by draw-downs or investment losses) or lose the earnings tax exemption (s 294-75). This facilitates roll-overs and ensures that an individual’s transfer balance reflects the net amount of capital the individual has transferred to the retirement phase of superannuation. A debit also arises in an individual’s transfer balance account when the individual makes a contribution relating to a structured settlement or personal injury, or where certain other events reduce the value of their superannuation interests. Pension draw-downs are not debited from an individual’s transfer balance. This reflects the expectation that, once an individual has used their transfer balance cap, the value of their retirement phase assets will decline as they use this income to support themselves in their retirement. The circumstances in which a transfer balance debit arises, and the amount of the debit, are set out in s 294-80. A debit arises in the transfer balance account in the following cases. 1. If an individual receives a superannuation lump sum because a superannuation income stream of which the individual is a retirement phase recipient (¶6-425) is commuted in full or in part, a debit of the amount of the superannuation lump sum arises when the lump sum is received. 2. If a structured settlement contribution (defined in s 292-95 in the context of non-concessional contributions: ¶6-550) is made in respect of an individual, a debit of the amount of the contribution arises at the later of when the contribution is made and the day the individual first starts to have a transfer balance account. There is an alternative transfer balance debit for structured settlements (ITTPA s 294-80). This alternative debit applies where an individual would have otherwise received a debit under s 294-80 for contributing the proceeds of a structured settlement into superannuation before 1 July 2017 but the amount of that debit would be less than the combined values of the retirement phase superannuation interests that they had at that time. In such a case, an individual receives a debit equal to the combined values of all transfer balance credits they receive for those superannuation interests instead of a debit for the amount of the contributions. 3. If an individual loses some or all of the value in their superannuation interest because of fraud or dishonesty or a void transaction under the Bankruptcy Act 1966 (s 294-85), a debit equal to the amount of the reduction in the superannuation interest arises at the time of the loss. 4. A transfer balance debit arises because of a payment split (see below). 5. If a superannuation income stream provider does not comply with a commutation authority (¶6-455) and the relevant superannuation income stream stops being in the retirement phase, a debit equal to the value of the superannuation income stream arises, at the time the commutation authority should have been complied with, to reflect that the income stream is no longer in the retirement phase. 6. If an income stream stops being a superannuation income stream that is in the retirement phase at a time (the stop time) for a reason not covered elsewhere in s 294-80(1), a debit equal to the value of the superannuation income stream just before the stop time arises at the stop time.

7. If an individual has insufficient superannuation interests available to rectify an excess transfer balance, a debit of the amount of the excess transfer balance arises when the Commissioner issues a notice to the individual under TAA Sch 1 s 136-70. 8. Regulations may prescribe additional circumstances in which a transfer balance debit arises in an individual’s transfer balance account. Any such regulation would have to identify the condition for the debit arising, the amount of the debit and when the debit arises. This regulation making power ensures transfer balance debit rules can be updated to include new superannuation income stream products, such as the innovative income stream products that are being developed, or to address unforeseen issues. Where a superannuation provider fails to comply with the relevant rules or standards (¶3-390) for a superannuation income stream, eg it fails to pay the minimum amount required, the income stream ceases to be a superannuation income stream that is in the retirement phase and ceases to be eligible for the earnings tax exemption. Because the income stream is no longer in the retirement phase, no debit will arise in the individual’s transfer balance account if the income stream is fully commuted. For the superannuation interest to once again be eligible for the earnings tax exemption it must be commuted in full and a new superannuation income stream that complies with the standards started. To enable this to happen, a debit arises in the individual’s transfer balance account at the end of the superannuation provider’s income year in which the income stream ceased to be a superannuation income stream. Once a superannuation income stream has commenced, changes in the value of its supporting interest are not counted as debits (or credits). This means a superannuation interest that supports a superannuation income stream that increases or decreases in value because of investment earnings does not have the change counted towards the cap. Law Companion Ruling LCR 2016/9 provides guidance on debits to a transfer balance account. Payment splits arising from a court order or a superannuation agreement After a divorce or other relationship breakdown, superannuation interests may be split as part of the division of property. Payment splits may arise from a court order or a superannuation agreement between the parties (¶14-110). There are two ways in which a payment split may affect an individual’s superannuation income stream for transfer balance cap purposes. This depends on how the payment split occurs. A payment split may involve the member spouse: (i) commuting part of their superannuation income stream into a lump sum and paying it to the non-member spouse, or (ii) retaining complete ownership of their superannuation interest but having a portion of each payment from their superannuation income stream directed to the non-member spouse. If there is a partial commutation and payment of a lump sum to a non-member spouse, a debit will arise in the member’s transfer balance account equal to the amount paid. If the non-member spouse uses the lump sum to start a new superannuation income stream, this will give rise to a credit in their transfer balance account. If the non-member spouse does not use the lump sum to start a superannuation income stream, their transfer balance account will not be affected. If a portion of the member’s superannuation income stream payments is directed to the non-member spouse, both spouses will have the entire value of the superannuation income stream credited to their transfer balance account. However, as the member and non-member spouse only receive part of the superannuation income stream payments: (i) the member’s transfer balance account is debited by the proportion of the superannuation income stream the non-member spouse is entitled to, and (ii) the nonmember spouse’s transfer balance account is also debited by the member’s portion of the superannuation income stream. Transfer balance accounts are debited when the payment split becomes operative under the FLA, or when the individual starts to have a transfer balance account, whichever is the later. For the ATO’s views on payment splits, see: www.ato.gov.au/individuals/super/super-changes/newtransfer-balance-cap-for-retirement-phase-accounts/new-transfer-balance-cap---payment-splits.

Payment splits arising from relationship breakdowns are discussed in Chapter 14.

¶6-440 Transfer balance cap When an individual first commences a retirement phase superannuation income stream (¶6-425), their personal transfer balance cap equals the general transfer balance cap for that financial year (s 29435(1)). The general transfer balance cap is $1.6m for the 2019/20 financial year (the same as for 2018/19 and 2017/18) and is subject to indexation on an annual basis in line with the CPI (s 294-35(3); Subdiv 960-M). Example Magnus first commences a $1.2m retirement phase superannuation income stream on 1 July 2019. A transfer balance account is created for Magnus at that time. His personal transfer balance cap equals the general transfer balance cap for the financial year in which he started the superannuation income stream, ie $1.6m for 2019/20.

Although the general transfer balance cap is indexed in line with the CPI, it is only increased in $100,000 increments. CPI increases for 2017/18 and 2018/19 were not sufficient for the transfer balance cap to be indexed for those years. The first adjustment of the cap to $1.7m is unlikely to occur before 2022/23. Proportional indexation of the personal transfer balance cap Where an individual starts to have a transfer balance account and has not used the full amount of their cap, their personal transfer balance cap is subject to proportional indexation in line with increases in the general transfer balance cap (s 294-35(2)). Proportional indexation is intended to keep constant the proportion of an individual’s used and unused cap space as the general transfer balance cap increases. Indexation is only applied to an individual’s unused cap percentage. This is worked out by finding the individual’s highest transfer balance at the end of a day at an earlier point in time, comparing it to their personal transfer balance cap on that day and expressing the unused cap space as a percentage (s 294-40). Because the transfer balance cap is intended to limit the amount that can be transferred to the retirement phase, once a proportion of cap space is used it is not subject to indexation, even if the individual subsequently removes capital from their retirement phase. Individuals could, otherwise, continue to “top up” the amount they can have in the retirement phase. Example Katrine first commences a $1.2m retirement phase superannuation income stream on 1 July 2019 and there are no further credits to her transfer balance account. Her highest transfer balance is $1.2m which means that, at that time, she has used 75% of her $1.6m personal transfer balance cap. Assuming the general transfer balance cap is indexed to $1.8m in 2025/26, Katrine’s personal transfer balance cap is increased proportionally to $1.75m. Katrine’s personal transfer balance cap is increased by 75% of the corresponding increase to the general transfer balance cap.

Law Companion Ruling LCR 2016/9 provides guidance on the operation of the general transfer balance cap and personal transfer balance cap. Modified transfer balance cap for death benefit income streams payable to a child Death benefit amounts that are sourced as reversions from income streams payable to the deceased prior to death come within a child’s transfer balance cap. Other amounts payable as death benefits to the child must be cashed as lump sums. The transfer balance cap that applies to child dependants in receipt of a death benefit income stream from a deceased parent (a “reversionary pension”) is subject to modifications (s 294-170; 294-175) that generally allow the child to receive their share of the deceased’s retirement phase interest without

prejudice to the child’s future retirement. This recognises that child dependants are generally required to commute the death benefit income streams by age 25 (SISR reg 6.21(2B)). Their transfer balance account and modified transfer balance cap will generally cease at that time and their reversionary pension paid as a lump sum. An exception applies where the child recipient has a permanent disability and is not required to cash the pension. In that case, the modified transfer balance cap ceases at the time amounts supporting the death benefit income stream cease, or may continue if the child is in receipt of a superannuation income stream such as a disability pension or income stream funded in superannuation from a structured settlement. The personal transfer balance cap of a child who is only receiving death benefit income streams as a child recipient is not set to the indexed value of the general transfer balance cap, but is generally determined by reference to the value of the deceased’s retirement phase interests that they receive. This is achieved through a series of transfer balance cap increments that accrue to the child (s 294-185(1)). If a child recipient receives a death benefit income stream from a parent and has other superannuation income streams, their transfer balance cap is worked out as the sum of: (i) their personal transfer balance cap worked out under the general rules; and (ii) the total amount of transfer balance cap increments the child receives as a child recipient. The amount of a child’s transfer balance cap increments is as follows: • if the child started to receive death benefit income streams before 1 July 2017 — $1.6m (s 294-190) • if the deceased parent did not have a transfer balance account at the time of their death and the child starts to receive a death benefit income stream on or after 1 July 2017 — (i) the general transfer balance cap if the child is the sole beneficiary of the deceased parent’s superannuation interests; or (ii) the child’s proportionate share of the deceased’s superannuation interests multiplied by the general transfer balance cap if the child is not the sole beneficiary (s 294-195), and • if the deceased parent did have a transfer balance account at the time of their death — the child’s portion of the deceased parent’s superannuation interests that were in the retirement phase that the child receives as a death benefit income stream (s 294-200). A transfer balance cap increment arises at the time of each death benefit income stream the child receives from the parent, except in the case of a reversionary superannuation income stream where the cap increment is deferred for 12 months. To be within the cap increment, each death benefit income stream the child receives must be sourced solely from the retirement phase interests of the deceased parent. The child will otherwise have an excess transfer balance unless they have a cap increment resulting from the death of another parent or they have a personal transfer balance cap from another non-death benefit income stream.

¶6-450 Excess transfer balance determinations An individual has an excess transfer balance when the balance of their transfer balance account (¶6-425) exceeds their personal transfer balance cap (¶6-440) on a particular day. The amount of the excess transfer balance is the amount of the excess (s 294-30). If an individual has excess transfer balance, the Commissioner may require the individual and their superannuation income stream provider to reduce the total amount of the individual’s “superannuation income streams that are in the retirement phase” (¶6-425) (TAA Sch 1 s 136-1). This is done by commuting the superannuation income streams in full or in part. An individual with more than one superannuation income stream can choose which one to commute (TAA Sch 1 s 136-5). Individuals already in retirement before 1 July 2017 with transfer balances in excess of the cap at 30 June 2017 were required to either withdraw the excess amounts from superannuation or transfer the excess amounts into an accumulation account. Transitional arrangements applied for balances that exceeded the cap by no more than $100,000 (¶6-460). In order to comply with the commencement of the $1.6m transfer balance cap arrangements, superannuation funds may have needed to transfer assets from the retirement phase to the accumulation

phase before 1 July 2017. Transitional CGT relief allowed funds to reset the cost base of the transferred assets to ameliorate the CGT consequences of the transfer (¶6-470). Certain defined benefit income streams do not need to be reduced if their value exceeds the transfer balance cap. Rather, defined benefit pension payments over the defined benefit income cap ($100,000 for 2019/20) are subject to additional taxation to broadly replicate the effect of the transfer balance cap (¶6480). Commissioner makes an excess transfer balance determination The first step the Commissioner may take when an individual has an excess transfer balance is to make a written excess transfer balance determination stating the amount of the individual’s excess transfer balance. The purpose of the determination is to advise the individual of the excess transfer balance and to crystallise the amount of the excess. The amount of excess transfer balance stated in the determination is a “crystallised reduction amount” (TAA Sch 1 s 136-10). Default commutation notice The Commissioner’s determination must include a notice (a “default commutation notice”): (a) stating that, if the individual does not make an election under s 136-20 within the period specified by the section to commute a superannuation income stream, the Commissioner will issue one or more commutation authorities (¶6-455), and (b) specifying: (i) the superannuation income stream provider or providers to whom a commutation authority will be issued; (ii) the superannuation income stream or streams that the providers will be obliged to commute in full or in part; and (iii) if more than one commutation authority will be issued — the amount to be stated in each commutation authority, or the method the Commissioner will use to work out the amount (s 136-10(6)). The default commutation notice is intended to notify an individual of the steps the Commissioner will take if the individual does not make an election under s 136-20 or choose to reduce a superannuation income stream themselves. Example Sasha’s transfer balance account is $1.5m on 1 July 2019 and it is $1.75m on 1 August 2019 when the transfer balance account is credited with a further $250,000. This means that she has excess transfer balance of $150,000 because the transfer balance cap is $1.6m. On 20 August 2019, the Commissioner issues an excess transfer balance determination to Sasha setting out a crystallised reduction amount of $150,718 (excess of $150,000 plus 19 days of excess transfer balance earnings — like the explanatory memorandum, this assumes an annual excess transfer balance earnings rate of 9.2%). Included with the determination is a default commutation authority which lets Sasha know that, if she does not make an election within 60 days of 20 August 2019, the Commissioner will issue a commutation authority to her superannuation provider requiring the trustee to commute her superannuation income stream by $150,718.

Where an individual has already taken steps to rectify their breach and has removed their excess transfer balance, the Commissioner is not required to issue a determination but the individual may still be liable for excess transfer balance tax (¶6-460). Individual may make election for the commutation An individual with more than one superannuation income stream may elect the income stream or streams that are to be commuted, and the total amount of the commutations specified in the individual’s election must equal the crystallised reduction amount. The election must be made in the approved form to the Commissioner within 60 days from the date the determination was issued, or within a further time allowed by the Commissioner. The election is irrevocable and the Commissioner will issue commutation authorities according to the election (TAA Sch 1 s 136-20). An individual does not need to make an election if the superannuation income stream they wish to be commuted is the superannuation income stream included in the Commissioner’s default commutation notice. Before making an election, and before the end of the 60-day period in which they are allowed to make an

election, an individual may, after receiving a determination, advise the Commissioner of a debit that has arisen in their transfer balance account, eg where a superannuation income stream has been fully or partially commuted since the determination was issued (TAA Sch 1 s 136-25). This information allows the Commissioner to determine if the individual still has an excess transfer balance. Objections against a determination An individual who is dissatisfied with an excess transfer balance determination issued to them may object against the determination in the manner set out in TAA Pt IVC (¶11-500) (TAA Sch 1 s 136-15). The objection must be lodged within 60 days from the date the determination is served on them (TAA s 14ZW(1)(c)). Pre-1 July 2017 commutation requests by SMSF members Commutation requests made before 1 July 2017 by a member of an SMSF to avoid exceeding the transfer balance cap may have faced the problem that the member did not know precisely the value of the superannuation interests that supported their superannuation income streams. This was particularly the case for SMSFs that needed to wait a few months after 30 June 2017 to receive tax statements from managed funds to finalise their accounts, or where small funds did not finalise their accounts until close to the time their tax return was due under their tax agent’s lodgement program. The ATO accepts that a valid strategy to address this problem was for the member to make an irrevocable request to commute their income stream by the amount that exceeded $1.6m at 30 June 2017. The commutation request and acceptance by the fund trustee: (i) had to be made in writing before 1 July 2017, (ii) had to specify a methodology that allowed the precise amount to be commuted to be calculated, (iii) had to specify the superannuation income stream which would be subject to the commutation, and (iv) could not conflict with a similar agreement to commute that the member had agreed to with a trustee of a different superannuation fund. The fund could then determine the precise commutation amount by the due date for the SMSF’s annual return for 2016/17 (Practical Compliance Guideline PCG 2017/5).

¶6-455 Commutation authorities The first step the Commissioner may take when an individual has an excess transfer balance is to make a written excess transfer balance determination stating the amount of the individual’s excess transfer balance (¶6-450). The purpose of the determination is to advise the individual of the excess transfer balance and to crystallise the amount of the excess. The second step the Commissioner may take is to issue a commutation authority. The purpose is to ensure that the individual’s transfer balance is brought back to their transfer balance cap (¶6-440) by the excess being removed. The Commissioner must issue a commutation authority to one or more superannuation providers if: • an excess transfer balance determination (¶6-450) has been issued to an individual • the determination has not been revoked • the period within which an election may be made by the individual under s 136-20 (generally 60 days) has ended, and • an amount (the “commutable amount”) greater than nil remains after the crystallised reduction amount has been reduced by the sum of any transfer balance debits notified to the Commissioner under s 136-25 (TAA Sch 1 s 136-55). If the individual has made a valid election under s 136-20 for a different superannuation income stream to be commuted, the Commissioner’s commutation authority must be in accordance with that election. If the individual’s election would not result in the commutable amount being commuted because it applies to a smaller amount, the Commissioner must issue a commutation authority to one or more of the superannuation income stream providers specified in the default commutation notice. If the individual does not make a valid election under s 136-20 to commute a different superannuation income stream, the

Commissioner must issue a commutation authority consistent with the default commutation notice. Each commutation authority must specify the superannuation income stream that the superannuation income stream provider is to commute in full or in part and state the amount (the “reduction amount”) by which the superannuation income stream is to be reduced. The authority must be dated and contain any other information that the Commissioner considers relevant. The total of all reduction amounts stated in commutation authorities issued under s 136-55 relating to an excess transfer balance determination must not exceed the commutable amount. A commutation authority may be varied or revoked at any time before the Commissioner receives a response from the superannuation income stream provider (TAA Sch 1 s 136-60). Superannuation provider must comply with a commutation authority A superannuation income stream provider issued with a commutation authority must, within 60 days, pay by way of commutation a superannuation lump sum equal to the lesser of: • the reduction amount stated in the commutation authority, and • the maximum available release amount for the superannuation interest that supports the specified superannuation income stream (TAA Sch 1 s 136-80), where the “maximum available release amount” means the total amount of all superannuation lump sums that could be paid from the superannuation interest at that time (TAA Sch 1 s 96-30). The superannuation income stream provider should consult the individual on whether they wish the commutation amount to remain within superannuation in an accumulation account or, if the individual meets a relevant condition of release, to be paid as a superannuation lump sum. A superannuation income stream provider may choose not to comply with the commutation authority if the specified superannuation income stream is a capped defined benefit income stream (¶6-480) or if the retirement phase recipient has died. A superannuation income stream provider must, within 60 days, notify the Commissioner and the individual in the approved form: (a) of the amount by which the superannuation income stream has been commuted; or (b) that the superannuation income stream provider has not complied with the commutation authority because the superannuation income stream is a “capped defined benefit income stream” (¶6480) (TAA Sch 1 s 136-85). Non-commutable excess transfer balance amounts Where an individual has an excess transfer balance but no remaining account-based superannuation income streams to be commuted, the Commissioner must notify the individual that they have a noncommutable excess transfer balance (TAA Sch 1 s 136-70). A debit for the remaining excess balance identified in the notice is applied to the individual’s transfer balance account (¶6-435), which effectively writes off the remainder of the excess so that excess transfer balance earnings do not continue to accrue (item 7 of the table in s 294-80(1)). An individual may be notified of a non-commutable excess transfer balance if the only superannuation income streams of which the individual is a retirement phase recipient are capped defined benefit income streams or the individual is no longer a retirement phase recipient of any superannuation income stream. Consequences of not complying with a commutation authority Where a superannuation income stream provider fails to comply with a commutation authority: • the relevant superannuation income stream is no longer in the retirement phase (ITAA97 s 307-80(4)) and does not qualify for the earnings tax exemption (¶7-153) from the start of the financial year in which the non-compliance occurred • a debit arises in the individual’s transfer balance account, at the end of the period in which the superannuation provider was required to comply, for the value of the superannuation interest that supports the superannuation income stream that has ceased to be in the retirement phase, which generally will mean the individual no longer has an excess transfer balance (item 5 of the table in s 294-80(1)), and

• if the individual wishes to again have a superannuation income stream in the retirement phase which qualifies for the earnings tax exemption, the individual would need to commute the superannuation income stream in full and start a new superannuation income stream.

¶6-460 Excess transfer balance tax An individual whose transfer balance exceeds their transfer balance cap (¶6-440) has an excess transfer balance, and this has two consequences: • the excess transfer balance is removed from the retirement phase — see “Excess transfer balance determinations” at ¶6-450 and “Commutation authorities” at ¶6-455, and • the individual is subject to excess transfer balance tax on the excess transfer balance earnings accrued while the cap was exceeded. Excess transfer balance tax is imposed by the Superannuation (Excess Transfer Balance Tax) Imposition Act 2016. Excess transfer balance tax is not deductible (ITAA97 s 26-99). For first breaches of the transfer balance cap (whether in 2017/18 or in a later year), the tax rate is set at 15%, which broadly replicates the outcome if the excess capital had been in the accumulation phase. For breaches from 1 July 2018, the tax rate is 30% if the person has previously been liable to pay excess transfer balance tax for an excess transfer balance period starting on or after 1 July 2018. Excess transfer balance earnings Excess transfer balance tax is applied to the accrued amount of an individual’s excess transfer balance earnings over a period the individual had an excess transfer balance (s 294-230). The excess transfer balance earnings are calculated for the period from the date the individual’s transfer balance first exceeds their transfer balance cap to the date when the transfer balance is no longer in excess. Excess transfer balance earnings accrue daily on excess transfer balances at a rate based on the general interest charge, ie the rate worked out under TAA s 8AAD(1) (¶11-380) (s 294-235). Although excess transfer balance earnings generally compound daily while the individual has an excess transfer balance, notional earnings are no longer credited to the individual’s transfer balance account once the Commissioner issues an excess transfer balance determination (¶6-450). To account for this, an adjustment is made to the tax calculation to include amounts of excess transfer balance earnings that would have arisen but for the determination (s 294-230(3)(b)). Payment of excess transfer balance tax Excess transfer balance tax is due and payable at the end of 21 days after the Commissioner gives an individual notice of the assessment of the amount of the tax (s 294-240). Assessments of excess transfer balance tax are made by the Commissioner under TAA Sch 1 Div 155. If excess transfer balance tax is not paid by the due date, general interest charge starts accruing on the unpaid amount (s 294-250; TAA s 8AAB(4)). An individual who is dissatisfied with an excess transfer balance assessment may object under TAA Pt IVC (¶11-500). Schemes designed to exceed an individual’s transfer balance cap for the purpose of producing a tax benefit are subject to the general anti-avoidance rules in ITAA36 Pt IVA. Part IVA may also apply to other schemes that seek to circumvent the transfer balance cap, eg washing assets through the retirement phase. Transitional relief for small excess transfer balance at 30 June 2017 Transitional rules apply to excess transfer balances that come within ITTPA s 294-30, ie where: (a) the only transfer balance credits in the individual’s transfer balance account in the six-month period beginning on 1 July 2017 arose under item 1 of the table in s 294-25(1) (which is about superannuation income streams the individual had just before 1 July 2017)

(b) the sum of those transfer balance credits exceeds the individual’s transfer balance cap, but is less than or equal to $1,700,000, and (c) at the end of the six-month period from 1 July 2017, the sum of all the transfer balance debits arising in the transfer balance account equalled or exceeded the amount of the excess from para (b). These debits could arise because the excess was identified and acted upon by the individual, or because the Commissioner issued a determination that caused the breach to be rectified. The purpose of ITTPA s 294-30 is to ensure that transfer balance cap breaches of less than $100,000 that occurred on 30 June 2017 are not penalised by giving rise to notional earnings or an excess transfer balance tax liability if they were rectified within six months. The rationale for the transitional relief is that it may have been difficult for individuals with existing superannuation income streams to predict their retirement phase balances at 30 June 2017 and ensure they were not in breach of their $1.6m transfer balance cap. The assumption is that such small breaches are likely to be unintentional.

¶6-470 Transitional CGT relief when assets transferred from retirement phase before 1 July 2017 Transitional rules were introduced for complying superannuation funds that held assets for individuals in the retirement phase and needed to reallocate the assets to the accumulation phase before 1 July 2017 in order to comply with the $1.6m transfer balance cap (¶6-440) from that date. Under the law before 1 July 2017, capital gains on the disposal of assets that supported a “superannuation income stream in the retirement phase” (¶6-425) could be exempt from tax (the earnings tax exemption: ¶7-153). From 1 July 2017, individuals with a transfer balance over the $1.6m transfer balance cap (¶6-440) may have to commute or roll back any excess amount to the accumulation phase. Earnings on that amount will no longer be exempt but will be subject to 15% tax. In the absence of CGT relief, a fund that takes action to comply with the changed law might be liable to CGT on capital gains accumulated before 1 July 2017 where the gains would otherwise have been exempt income. This could have encouraged trustees to dispose of CGT assets tax free before 1 July 2017 rather than face a CGT liability after that date on capital gains accrued over many years. The object of transitional provisions in ITTPA Subdiv 294-B (s 295-100 to 294-120) is to provide temporary relief from certain capital gains consequences that might arise as a result of individuals complying with the introduction of a transfer balance cap (¶6-425). The transitional provisions allow complying superannuation funds to reset the cost base of assets to their market value where those assets were reallocated or reapportioned from the retirement phase to the accumulation phase before 1 July 2017 in order to comply with the new laws. Conditions for CGT relief For CGT relief to be available, two conditions had to be satisfied: • the reallocation or reapportionment had to be during the “pre-commencement period” between 9 November 2016 (the date the amending legislation was introduced to parliament) and 30 June 2017, in relation to assets a complying superannuation fund held through that period, and • the superannuation fund must have chosen to apply the relief and the choice (which is irrevocable) had to be notified to the Commissioner in the approved form on or before the day the trustee was required to lodge the fund’s 2016/17 income tax return. Once a fund’s 2017 SMSF annual return was lodged, the decision to make an election for CGT relief was irrevocable. How the CGT relief applies CGT relief applies differently depending on whether a superannuation fund segregates assets to support its current pension liabilities (ITTPA s 294-110) or applies the proportionate method (ITTPA s 294-115) for the purposes of the earnings tax exemption (¶7-153). CGT relief is also available to pooled

superannuation trusts (ITTPA s 294-125 and 294-130). CGT relief operates on an asset-by-asset basis and has the effect that: (a) the fund is deemed to have sold and reacquired the relevant asset for market value at the following times: (i) if the asset was a segregated pension asset for the purposes of the earnings tax exemption on 9 November 2016 and stopped being a segregated pension asset before 1 July 2017 — on the day it stopped being a segregated pension asset, or (ii) if the fund obtains an actuarial certificate to claim an exemption based on a proportion of its assets (the fund uses the proportionate method rather than the segregated method) — immediately before 1 July 2017 (b) the deemed sale triggered CGT event A1 (ITAA97 s 104-10) and resulted in the reacquired asset having its cost base set at its current market value (exclusive of GST) (c) when the asset is sold after 1 July 2017, a capital gain only arises in relation to capital growth that accrued to the asset after the CGT relief was applied, ie once the asset is no longer supporting superannuation interests in the retirement phase (d) the 12-month eligibility period for the CGT discount commences on the date the asset was deemed to be sold and reacquired, and (e) any subsequent events that could affect the asset’s cost base apply to the reset cost base amount. Any assets held by a superannuation fund that were not the subject of a choice for CGT relief continued to be exempt from tax on earnings for 2016/17 but were not eligible for a cost base reset. Where a fund uses the proportionate approach for the purposes of the earnings tax exemption, a portion of each asset relates to a combination of both pension and accumulation accounts. In recognition of this, the fund was required, after it had chosen CGT relief and had reset the cost base of an asset, to calculate a “notional gain” amount relating to the accumulation account proportion of the asset at 30 June 2017. Tax would be payable on the notional gain attributable to the accumulation account as calculated using the 2016/17 actuarial percentage for the fund. The fund could pay tax on the notional gain triggered by the cost base reset with its 2016/17 income tax return or it could choose to defer a capital gain (but not a capital loss) until the asset is actually disposed of. Transitional CGT relief is discussed further at ¶7-153. Law Companion Ruling LCR 2016/8 Law Companion Ruling LCR 2016/8 sets out the Commissioner’s approach to applying transitional CGT relief for complying superannuation funds and PSTs where assets supporting superannuation income streams were reallocated or reapportioned to accumulation phase interests before 1 July 2017. LCR 2016/8 includes a discussion of CGT relief for segregated current pension assets supporting a transition to retirement income stream (TRIS). Where a fund uses the proportionate method, if a member discontinued a TRIS, transferred the value supporting it back to the accumulation phase in order to add assets to the TRIS, and commenced a larger value TRIS within the pre-commencement period, CGT relief could be available for all of the fund’s assets as long as certain conditions were satisfied. CGT relief could only apply once, immediately before 1 July 2017, and not again when the original TRIS is discontinued. Although the choice by a fund trustee for CGT relief was generally required to be made by 31 October 2017, the Commissioner could defer the lodgment day, eg if there are exceptional and unforeseen circumstances. The anti-avoidance provisions in ITAA36 Pt IVA could potentially apply if a superannuation trustee entered into a scheme for the main purpose of placing the trustee in a position to be able to choose the CGT relief so as to obtain a tax benefit. If a scheme went further than was necessary to comply with the

transfer balance cap rules, and involved additional steps unnecessary for that purpose but necessary to obtain a tax benefit, the Commissioner could generally infer that the scheme was entered into for the purpose of obtaining a tax benefit. To monitor the potential application of Pt IVA, the Commissioner warned that arrangements would be scrutinised if they: • placed the taxpayer in a position to make a choice for CGT relief • went further than was necessary to provide temporary relief from CGT, and • appeared contrived, had a form that did not correspond with their substance or, under ITAA36 s 177D, suggested the purpose of avoiding tax. The ATO would also look out for: (i) any “asset washing schemes” in the period up to 1 July 2017, (ii) the swapping of assets between segregated classes, and (iii) large differences between the expected excesses in a member’s transfer balance account on 1 July 2017 and the gains sheltered by the CGT relief. Merely commencing a pension during the pre-commencement period (9 November 2016 to 30 June 2017) was not of concern to the ATO from a Pt IVA perspective, but a commutation of the pension shortly after its commencement might suggest the purpose of obtaining a tax benefit.

¶6-480 Non-commutable defined benefit income streams Modifications to the transfer balance cap rules in Subdiv 294-D (s 294-120 to 294-145) apply to certain defined benefit income streams. The modifications are required because many defined benefit superannuation income streams are subject to commutation restrictions which make the general transfer balance cap rules unworkable, eg the requirement to commute an excess balance and transfer it to the accumulation phase or take it in cash. The purpose of the modifications is to provide taxation treatment to certain non-commutable superannuation income streams that is commensurate with the treatment accorded to other income streams under the transfer balance cap rules. The modifications: (i) change the valuation rules; (ii) prevent an individual from having an excess transfer balance in certain circumstances; and (iii) change the tax treatment of a superannuation income stream benefit. Capped defined benefit income streams The modifications apply to superannuation income streams that are subject to commutation restrictions under the SIS or RSA Regulations and are listed in s 294-130(1) as “capped defined benefit income streams”. The list basically covers two categories of superannuation income streams. (1) Lifetime pensions that meet the standards in SISR reg 1.06(2) whether they existed at 30 June 2017 or commenced after that date. These pensions, which are generally closed to new members but existing members continue to be entitled to receive pensions, are often provided to Commonwealth, state and territory public office holders and military and civilian employees. The extension of the modifications to new income streams that start on or after 1 July 2017 reflects the fact that, while a pension might not have started before 1 July 2017, it is part of a long-standing arrangement to which there is an existing legal entitlement. (2) Other superannuation income streams that already existed at 30 June 2017 The definition covers: (i) a lifetime annuity meeting the standards of an annuity under SISR reg 1.05(2) (ii) a life expectancy pension meeting the standards of a pension under SISR reg 1.06(7) (iii) a life expectancy annuity meeting the standards of an annuity under SISR reg 1.05(9)

(iv) a market linked pension meeting the standards of a pension under SISR reg 1.06(8) (v) a market linked annuity meeting the standards of an annuity under SISR reg 1.05(10), and (vi) a market linked pension (RSA) meeting the standards of a pension under RSAR reg 1.07(3A). Capped defined benefit income streams prescribed by the regulations Generally, lifetime pensions need to meet the standards in SISR reg 1.06(2) to be subject to the modified income tax and valuation rules for the purposes of the transfer balance cap. Regulation 1.06(2) requires lifetime pensions to be paid at least annually throughout the life of the primary beneficiary (and reversionary beneficiary, if any) with the size of the pension payments in a given year generally fixed. The amount paid as a benefit in each year cannot be reduced except when the CPI falls. The income streams can only be commuted to lump sum amounts in very limited circumstances, including within six months of the pension commencing. A superannuation income stream is also a capped defined benefit income stream if it is prescribed by the regulations (s 294-130(2)). SISR reg 1.06A prescribes certain innovative superannuation income streams for this purpose and applies in relation to a benefit provided under fund rules or a contract made on or after 1 July 2017. An income stream comes within reg 1.06A if the governing conditions for the provision of an annuity or pension satisfy four requirements: (a) a benefit payment cannot commence before the primary beneficiary has retired, has a terminal medical condition, is permanently incapacitated or has reached age 65 (b) benefits are payable throughout the life of the beneficiary (c) the amount of benefit payments is determined using a method that ensures payments are not unreasonably deferred after they start, and (d) the amount of capital that can be accessed through a commutation is restricted. ITAR reg 294-130.01(2) expands the definition of a capped defined benefit income stream effective from 1 July 2017 to include certain lifetime pensions that may be commuted in limited circumstances or where payments cease or are varied for a child beneficiary. The additional income streams receiving capped defined benefit income stream treatment include: • lifetime pensions where commutation is permitted outside of six months of the commencement day, eg at certain ages • reversionary pensions that allow a child beneficiary to commute at any time, even if the primary pensioner had very restricted commutation rights • lifetime pensions where the reversionary beneficiary may commute, even if the primary beneficiary has been receiving the pension for more than 20 years • public sector scheme invalidity pensions that can be varied, suspended or terminated in certain circumstances — ITAR reg 294-130.01(3) applies to pensions payable on the grounds of invalidity under a government superannuation scheme of the Commonwealth, state or territory, and takes into account circumstances such as where pension payments are varied because of the primary beneficiary’s level of incapacity being reclassified or suspended because the primary beneficiary fails to provide information as required by the rules, and • partial invalidity pensions provided by public service schemes, where salary is permanently reduced because of a medical condition. Invalidity pensioners may be subject to earnings reviews until age 65 to assess if they become well enough to return to work, and their payments may be adjusted not only for CPI changes but also if their income exceeds a certain level. Invalidity pensions generally cease if

the individual is re-employed, eg if taking up a statutory office. The minimum standards that an income stream must meet to comply with SISR reg 1.05, 1.06 and 1.06A and be a pension or annuity for SIS purposes are discussed at ¶3-390. Special value of capped defined benefit income streams Modifications in s 294-135 allow an individual to determine the “special value” of a capped defined benefit income stream. The special value amount only applies for the purposes of the individual’s transfer balance account, which, however, is used to determine the individual’s eligibility in relation to other areas of the law, eg to make catch-up concessional contributions (¶6-507). 1. Where an individual receives a lifetime pension (SISR reg 1.06(2)) or lifetime annuity (SISR reg 1.05(2)) that is a capped defined benefit income stream, a credit arises in their transfer balance account equal to the special value of the superannuation interest that supports the income stream. The special value is worked out by multiplying the “annual entitlement” by a factor of 16. An individual’s annual entitlement is worked out by annualising the first income stream benefit payable from the income stream across an income year (s 294-135(2)). Subsequent increases to the income steam benefit due to indexation are not relevant to the calculation of the annual entitlement. Example Jon is entitled to a lifetime pension under which he receives $1,500 each fortnight. His first payment on 1 July 2019 is $1,500 for a 14-day period. Jon’s annual entitlement is worked out as:

$1,500 14 days

×  365 days = $39,107

Multiplying the annual entitlement by a factor of 16 gives Jon’s pension a special value of $626,712, and a credit arises in his transfer balance account on 1 July 2019 equal to this amount (s 294-25).

The use of a factor of 16 means that a pension that pays $100,000 per annum would fully exhaust the $1.6m transfer balance cap in the 2019/20 (or 2018/19 or 2017/18) financial year. According to the explanatory memorandum, the use of a single factor of 16 is consistent with the general transfer balance cap which is set at $1.6m regardless of the age or gender of a retiree, the earnings they are able to achieve on their assets or the rate at which these are drawn down. 2. The special value of life expectancy pensions (SISR reg 1.06(7)), life expectancy annuities (SISR reg 1.05(9)), market linked pensions (SISR reg 1.06(8) and RSAR reg 1.07(3A)) and market linked annuities (SISR reg 1.05(10)) is worked out according to the superannuation income stream’s annual entitlement multiplied by the number of years (rounded up to the nearest whole number) remaining on the term of the product (s 294-135(3)). Credit and debit amounts The special value rules are used to determine the amount of credits and debits that arise in relation to capped defined benefit income streams. Where a credit arises in an individual’s transfer balance account, the amount of the credit is the special value of the superannuation interest that supports the superannuation income stream (s 294-25; 294135). Where a life expectancy or market linked pension or annuity being paid before 1 July 2017 becomes payable to a reversionary beneficiary on or after 1 July 2017, the credit that arises in the beneficiary’s transfer balance account is equal to the special value of the superannuation interest that supports that income stream on the date it first becomes payable to the beneficiary. The credit arises in the transfer balance account 12 months later (Addendum to Law Companion Ruling LCR 2017/1 para 15). Example

Just before 1 July 2017, Zach has a market linked pension. The first benefit he is entitled to receive from his pension just after that time is his fortnightly payment of $2,301.37 due on 4 July 2017. The remaining term in Zach’s pension just before 1 July 2017 is 9.75 years. Zach’s annual entitlement just before 1 July 2017 is $60,000, which is worked out as follows:

The remaining term in Zach’s pension just before 1 July 2017 is rounded up from 9.75 years to 10 years (being the next whole number) when determining the pension’s special value. The special value of his pension just before 1 July 2017 is $600,000 ($60,000 × 10 years), and a credit arises in his transfer balance account on 1 July 2018, ie 12 months after the date the pension is first payable to Zach.

The debit amount that arises is worked out by reference to the superannuation income stream’s “debit value” which is: (i) for a lifetime pension or annuity, the residual of its starting special value taking into account previous associated debit amounts (other than debits for payment splits) (s 294-145(5)), and (ii) for a life expectancy or market linked pension or annuity, its special value at the relevant time (s 294-80; 294-145(6)). A transfer balance debit arises: (i) for a full commutation of a superannuation income stream — equal to the income stream’s debit value at that time (s 294-145(1)(a)); (ii) for a partial commutation — equal to a proportion of the income stream’s debit value, worked out by subtracting from 1 the special value of the income stream immediately after the commutation divided by the special value of the income stream immediately before that time (s 294-145(1)(b)); and (iii) where an income stream ceases to be in the retirement phase — equal to the income stream’s debit value (s 294-145(4)). Excess transfer balance If an individual only has a capped defined benefit income stream, the transfer balance in their transfer balance account can never exceed their capped defined benefit balance, as worked out under s 294140(3). This means the individual does not have an excess transfer balance regardless of whether the special value of the capped defined benefit income stream exceeds their transfer balance cap. If an individual who has both a capped defined benefit income stream and another superannuation income stream, eg an account-based pension, exceeds both their transfer balance cap and their capped defined benefit balance, the individual may choose to make a full or partial commutation of the other superannuation income stream to reduce the balance of their transfer balance account below their transfer balance cap. Where the value of the superannuation interest supporting the other superannuation income stream is reduced to nil, eg by superannuation income stream benefits being paid or due to fund losses, so that the individual only has the capped defined benefit income stream, the Commissioner will issue a notice to the individual. At the time the notice is issued, a debit arises in the individual’s transfer balance account equal to the amount of the excess transfer balance stated in the notice. An individual will as a consequence cease to have an excess transfer balance in their transfer balance account (Law Companion Ruling LCR 2016/10). LCR 2016/10 provides commentary and examples on lifetime pensions and annuities that are capped defined benefit income streams. Law Companion Ruling LCR 2017/1 clarifies how the defined benefit income cap applies to superannuation income stream pensions or annuities that are paid from non-

commutable life expectancy or market linked products. Income tax consequences Capped defined benefit income streams do not, of themselves, result in an excess transfer balance for an individual that is required to be remedied by removing the excess. This is because of the commutation restrictions applying to the income streams. Income tax consequences may, however, arise for an individual with defined benefit pension or annuity income that exceeds the defined benefit income cap ($100,000 for 2019/20, 2018/19 and 2017/18) for a financial year. These consequences are that: (a) for benefits paid from a taxed element, 50% of the excess may be included in the individual’s assessable income and taxed at marginal rates (¶8-210), or (b) for benefits paid from an untaxed element, the 10% tax offset may be limited to the first $100,000 of defined benefit income the individual receives (¶8-240). PAYG withholding obligations (¶11-340) apply to the amounts of defined benefit income that are subject to taxation from 1 July 2017. ATO advice where members have a market linked pension The ATO says it is aware of circumstances where an individual was receiving a life expectancy or market linked pension just before 1 July 2017 which was a capped defined benefit income stream and, if the individual commuted the pension on or after 1 July 2017, the transfer balance debit as worked out under the special value rule in s 294-145(1) is nil. In such a case, the commencement by the individual of a new market linked pension could cause them to exceed their transfer balance cap (¶6-440) or have a higher than anticipated account balance. Recognising this unintended consequence, the ATO has said that it would not take compliance action at this stage where: • a fund does not report the transfer balance account events (¶6-422) relating to the commutation or the commencement of the new pension, or • the fund has reported the transfer balance debit for the commutation as other than nil (SMSF News Alert 2018/3).

Total Superannuation Balance ¶6-490 Total superannuation balance from 2017/18 The concept of a “total superannuation balance” applies from 1 July 2017 as a method for valuing an individual’s total superannuation interests at a particular time and for limiting the amount of superannuation contributions that can be made. The concept was introduced as part of the superannuation reforms enacted by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Act No 81 of 2016). Significance of an individual’s total superannuation balance An individual’s total superannuation balance is used to determine their eligibility for the following superannuation concessions. 1. Non-concessional contributions cap. An individual is only entitled to make non-concessional contributions from 2017/18 if their total superannuation balance at the end of 30 June in the previous financial year is less than the general transfer balance cap, which is $1.6m for 2019/20 (¶6-440). An individual’s total superannuation balance also affects whether the individual can take advantage of the bring forward rule for non-concessional contributions (¶6-545). 2. Government co-contribution. From 2017/18, an individual is not eligible for a government cocontribution if their total superannuation balance is equal to or greater than the general transfer

balance cap at the end of 30 June in the previous financial year (¶6-700). 3. Tax offset for spouse contributions. From 2017/18, an individual is not eligible for a tax offset for spouse contributions if their spouse’s total superannuation balance is greater than the general transfer balance cap at the end of 30 June of the previous financial year (¶6-820). 4. Calculation of exempt current pension income. From 2017/18, an SMSF or a small APRA fund is not able to use the segregated assets method for determining exempt current pension income in a financial year (¶7-153), and must use the proportionate method for the full year, if: (i) the fund has at least one member who has a superannuation interest in the fund that is in the retirement phase, and (ii) at the end of 30 June of the previous financial year, the individual has a total superannuation balance that exceeds the general transfer balance cap and is a retirement phase recipient (¶6-425) of a superannuation income stream. 5. Increasing the concessional contributions cap by catch-up contributions. An individual may be able to carry forward, and use in a later year, up to five years of their unused concessional contributions cap accrued from 2018/19 (¶6-507). To be eligible, the individual’s total superannuation balance must be under $500,000 at the end of 30 June of the previous financial year. 6. Transfer balance account reporting. If any member of an SMSF has a total superannuation balance of $1m or more, the SMSF must report their transfer balance account transactions within 28 days after the end of the quarter in which the event occurs. Where no member of an SMSF has a total superannuation balance of $1m the SMSF can report on an annual basis at the same time as the fund’s tax return is due (¶6-422). 7. Exemption from the work test for individuals aged 65 to 74. From 1 July 2019, individuals aged 65 to 74 with a total superannuation balance below $300,000 can make personal contributions for 12 months from the end of the financial year in which they last met the work test (¶6-320). Working out an individual’s total superannuation balance An individual’s total superannuation balance (s 307-230) at a particular time is calculated as the sum of: • the accumulation phase value of their superannuation interests that are not in the retirement phase • if the individual has a superannuation income stream that is in the retirement phase, their transfer balance or modified transfer balance, and • the amount of any roll-over superannuation benefit not already reflected in the accumulation phase value of their superannuation interests or their transfer balance, reduced by the sum of any structured settlement contributions. The ATO notes in Law Companion Ruling LCR 2016/12 that the time a contribution is made to a fund may be relevant for determining an individual’s total superannuation balance at a particular time. For example, a transfer of money initiated on 29 June 2019 but not received by the superannuation fund until 1 July 2019 would not be included in an individual’s total superannuation balance at 30 June 2019. Accumulation phase value of superannuation interests that are not in the retirement phase This first component of an individual’s total superannuation balance is the total amount of superannuation benefits that would become payable if the individual voluntarily caused the superannuation interest to cease at that time. This is generally the withdrawal value for an accumulation fund. Alternatively, the regulations may specify a different method for determining the accumulation phase value. A superannuation interest is in the retirement phase if it supports a superannuation income stream that is in the retirement phase at that time (para (b) of definition of retirement phase in s 995-1(1)). This is the case if the interest: (i) supports a superannuation income stream where a superannuation income stream benefit is currently payable from it, (ii) is a “deferred superannuation income stream” that has not yet become payable but the member has met a relevant condition of release, such as retirement or attaining

age 65, (iii) is a transition to retirement income stream (TRIS) to a reversionary beneficiary or where the person to whom the benefit is payable has satisfied a condition of release for retirement, terminal medical condition, permanent incapacity or attaining age 65, and, except in the case of attaining age 65 where notification is not necessary, has notified the superannuation income stream provider that the condition of release has been satisfied (s 307-80(1) and (2)). Certain superannuation income streams are excluded from being the retirement phase by operation of the law, either because the law specifically excludes that superannuation income stream or because the superannuation income stream fails to meet the definition of a superannuation income stream in the retirement phase (s 307-80(3) and (4)). The following superannuation income streams are excluded from being in the retirement phase and are instead in the accumulation phase: • a deferred superannuation income stream that has not become payable and the member has not yet met a relevant condition of release — if, therefore, an individual purchases a deferred superannuation income stream before meeting a relevant condition of release it forms part of the accumulation phase value until the individual meets a relevant condition of release or it starts to be payable • except where payment is to a reversionary beneficiary (¶6-425), TRISs and pensions where a relevant condition of release has not been satisfied, and non-commutable allocated annuities and pensions, and • a superannuation income stream that stops being in the retirement phase, ie when a commutation authority (¶6-455) is not complied with (s 307-80(4)) or when a superannuation income stream ceases to be a superannuation income stream because it has failed to comply with the pension or annuity standards under which it is provided Taxation Ruling TR 2013/5 (para 18 to 20, 96 to 102). The circumstances in which a superannuation interest is, or is not, in the retirement phase are discussed at ¶6-425. Transfer balance or modified transfer balance If an individual has a transfer balance account (¶6-425), their transfer balance (but not less than nil) is the second component of their total superannuation balance. An individual’s transfer balance is, however, modified if they have a prescribed account-based superannuation income stream in the retirement phase and/or they have made a structured settlement contribution. The transfer balance is adjusted: (i) to reflect the current value of those account based superannuation interests in the retirement phase, and (ii) to disregard certain credits and debits that have arisen in the transfer balance account in respect of the account based superannuation income streams (s 307-230(3)). Disregarding credits and debits means the credits are subtracted from, and the debits are added back to, the individual’s transfer balance. The following are prescribed account based superannuation income streams (s 307-230(4)): (i) allocated annuities, (ii) allocated pensions, (iii) account-based annuities, (iv) account-based pensions, (v) market linked annuities, and (vi) market linked pensions. Credits are disregarded if they have arisen from the individual becoming a retirement phase recipient of the prescribed account based superannuation income stream (s 294-25(1) items 1 and 2). Debits are disregarded if they have arisen from: (i) commutations of the prescribed account based superannuation income stream in the retirement phase, (ii) an event such as fraud or bankruptcy that results in the superannuation interest that supports the prescribed account based superannuation income stream being reduced, (iii) a payment split that applies to the income stream, eg where there is a divorce or relationship breakdown, (iv) a superannuation income stream provider failing to comply with a commutation authority in respect of the income stream, or (v) a prescribed account based superannuation income stream that fails to comply with the relevant pension or annuity standards (s 294-80(1) items 1, 3 to 6). Certain credits and debits that have arisen in an individual’s transfer balance account are not disregarded

(s 307-230(3)(b)). These are credits that have arisen from excess transfer balance earnings (s 294-25(1) item 3), and debits that have arisen from structured settlement contributions (s 294-80(1) item 2), or from a notice under TAA Sch 1 s 136-70 of non-commutable excess transfer balance (¶6-455) (s 294-80(1) item 7). The individual’s transfer balance is then increased by the total amount of superannuation benefits that would become payable if they had the right to, and voluntarily did, cause the superannuation interest that supports the prescribed account based superannuation income stream to cease at that time. This would equate to the superannuation lump sum that the individual could be paid at that time from that superannuation interest. If the individual has made a structured settlement contribution, their transfer balance is further modified by the debit that has arisen in the transfer balance account in respect of the contribution being disregarded (s 307-230(2)(b)(i)). The effect is that the structured settlement contribution debit is added back to the transfer balance. Where an individual’s total superannuation balance needs to be calculated just before 1 July 2017 (eg to determine eligibility to access the bring forward non-concessional contributions cap in 2017/18), the calculation of the transfer balance is based on the credits to their transfer balance account that arise at the start of 1 July 2017 (because of existing superannuation income streams) less payment split debits that may apply to those income steams on 1 July 2017 (ITTPA s 307-230). Roll-over superannuation benefits The third component of an individual’s total superannuation balance at a particular time is any roll-over superannuation benefits paid at or before that time and received by the fund after that time, and not reflected in the individual’s accumulation phase value or balance of their transfer balance account (¶6430), where, for example, the amount is in transit because it is rolled over at the end of a financial year. This ensures that roll-overs that occur just before the end of a financial year are included in an individual’s total superannuation balance calculated at the end of 30 June of that financial year. Reduced by structured settlement contributions The last component in calculating an individual’s total superannuation balance is a reduction by the sum of any structured settlement contributions (s 307-230(2)(a) and (2)(b)(ii)). These contributions are not counted towards the annual contributions caps (¶6-550) and are excluded from the total superannuation balance to recognise that they are usually large payments to provide funds for ongoing medical and care expenses resulting from serious injury and income loss. Example Igor is 55 years old and his only superannuation interest is $1m in accumulation phase. In 2018/19, Igor is involved in a car accident that results in him receiving a structured settlement of $2m which he contributes to his superannuation fund on 18 June 2019. Igor works out his total superannuation balance at 30 June 2019 as follows: • his accumulation phase value ($3m), minus • his structured settlement contribution ($2m).

His total superannuation balance is $1m. Law Companion Ruling LCR 2016/12 Law Companion Ruling LCR 2016/12 explains how an individual’s total superannuation balance is calculated. The ruling includes examples relating to: (i) an account-based pension and defined benefit lifetime pension; (ii) partial commutation of an account-based annuity; (iii) excess transfer balance credit; (iv) a roll-over superannuation benefit; (v) a structured settlement contribution; (vi) structured settlement contribution split between an account-based pension and a lifetime pension; (vii) transitional arrangements at 30 June 2017 for an account-based pension; and (viii) transitional arrangement at 30 June 2017 for a structured settlement contribution and payment split. The following example illustrates the calculation of an individual’s total superannuation balance where there is an excess transfer balance credit.

Example On 1 April 2019, Erin commences an account based pension. The value of the superannuation interest at the commencement of the pension was $2,000,000. The balance of her transfer balance account on 1 April 2019 is $2,000,000. Her transfer balance cap is $1,600,000. She has an excess transfer balance of $400,000. On 1 May 2019, having realised her mistake in starting an account based pension that exceeded her transfer balance cap, Erin partially commutes the pension to remove the excess amount and as a result receives a superannuation lump sum of $500,000 which is transferred to an accumulation phase interest in her superannuation fund. For the 30 days that Erin’s transfer balance account was in excess she accrued excess transfer balance earnings of $3,036 (assuming an earnings rate of 9.2%). The amount that would be paid to Erin if she voluntarily ceased the account based pension at the end of 30 June 2019 is $1,460,000. The amount that would be paid to Erin if she voluntarily ceased her interest in the accumulation phase at the end of 30 June 2019 is $500,000. Erin’s total superannuation balance at the end of 30 June 2019 is the sum of steps 1, 2 and 3 reduced by step 4. Step 1 — Accumulation phase value = $500,000 Step 2 — Modified transfer balance Erin’s transfer balance account at the end of 30 June 2019 is $1,503,036.

Credit

Debit

Balance

1 April 2019

Account based pension

$2,000,000

$2,000,000

2 April–1 May 2019*

Excess transfer balance earnings

$3,036

$2,003,036

1 May 2019

Partial commutation

$500,000

$1,503,036

*Credits for excess transfer balance earnings arise on the start of the day after they have accrued. (a) Disregard the credit that has arisen in respect of the account based pension ($2,000,000). (b) The credit arising from the excess transfer balance earnings is not disregarded. (c) Disregard the debit that has arisen from the partial commutation of the account-based pension ($500,000). (d) Increase the balance by the amount that would become payable if the account based pension was voluntarily ceased at the end of 30 June 2019 ($1,460,000). Modified transfer balance is $1,503,036 − $2,000,000 + $500,000 + $1,460,000 = $1,463,036. Step 3 — Roll-over superannuation benefits = $0 Step 4 — Structured settlement contributions = $0 Erin’s total superannuation balance at the end of 30 June 2019 is $1,963,036.

ATO Guidance Note GN 2017/8 gives further information about the meaning of “total superannuation balance”. Proposal for limited recourse borrowing arrangements to be counted in total superannuation balance The Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2019 proposes that a member’s share of the outstanding balance of certain limited recourse borrowing arrangements be included in their total superannuation balance. The measure was originally introduced into parliament on 24 May 2018 in the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018 which lapsed when parliament was prorogued for the May 2019 Federal election, and was reintroduced on 24 July 2019. Limited recourse borrowing arrangements (¶3-415) are an exception to the general prohibition on borrowing in SISA s 67(1) that applies to the trustees of regulated superannuation funds (¶3-410). The proposed amendment to s 307-230 and new s 307-231 would mean that an individual’s total superannuation balance may be increased by an amount if an asset that supports one or more of their superannuation interests is subject to limited recourse borrowing arrangements. The amount of the increase would be a proportion of the outstanding balance of the limited recourse borrowing arrangements. This proportion is based on the individual’s share of the total superannuation interests that are supported by the asset that is subject to limited recourse borrowing arrangements. Including this proportion of the outstanding balance in a member’s total superannuation balance prevents double

counting of the outstanding balance from occurring where more than one member has an interest supported by the relevant asset. An increase to an individual’s total superannuation balance could only occur where the limited recourse borrowing arrangement is entered into by the trustee of a regulated superannuation fund that is an SMSF or that has fewer than five members. In addition, an increase would only apply in respect of an arrangement where: • the member has satisfied a nil condition of release relating to retirement, terminal medical condition, permanent incapacity or attaining age 65, or • the arrangement is between an SMSF and one of its associates. For an increase to apply to an individual’s total superannuation balance, the fund must have used the borrowing to acquire one or more assets and any such assets must support the superannuation interests of an individual at the time the total superannuation balance is determined. For the purposes of the non-concessional contribution cap rules, the unused concessional cap carry forward rules, the disregarded small fund asset rule and the spouse tax offset rule, an individual’s total superannuation balance is only relevant at the end of a particular income year. These rules refer to the total superannuation balance either “just before” or “immediately before” the start of the relevant income year. This means the outstanding balance of a limited recourse borrowing arrangement only needs to be identified at the end of an income year for the purposes of adding a share of that outstanding balance to an individual’s total superannuation balance. Where an increase applies solely because one or more members have satisfied a nil condition of release, the increase is only applied in respect of those members. It would not apply to other members even though their interests may be supported by the same assets to which the limited recourse borrowing arrangements relate. The definition of “associate” in ITAA36 s 318 as it relates to a trustee is adopted where there is a relatedparty arrangement between a fund and one of its associates. This means the provisions apply to any entity that benefits under a trust, eg the fund members, as well as the associates of those entities. This is intended to ensure that an additional amount is included in a member’s total superannuation balance where there is an increased risk that the terms of the arrangement are inconsistent with those that would have been entered into between independent parties. Where an increase applies because the limited recourse borrowing arrangement is with an associate, all members whose interests are supported by the assets to which the arrangement relates would have their total superannuation balance adjusted. The changes to the total superannuation balance test are intended to apply to borrowings arising under contracts entered into on or after 1 July 2018. They would not apply to the refinancing of the outstanding balance of borrowings arising under contracts entered into before 1 July 2018.

Excess Contributions ¶6-500 Taxation of excess contributions Since 1 July 2007, there has been no limit on the amount of superannuation contributions that employers can make on behalf of their employees in a particular year and a deduction may be allowed for all of those contributions if certain conditions are met (¶6-115). Individuals have also been able to make unlimited deductible contributions as long as they satisfy the deduction conditions (¶6-340). Contributions for which a deduction is allowed, whether made by an employer or a member, are included in the assessable income of the fund and are called concessional contributions. Contributions for which a deduction is not allowed are called non-concessional contributions. These are not generally included in the assessable income of the fund. Caps on concessional tax treatment

In the absence of rules to provide otherwise, superannuation contributions receive concessional tax treatment. For a concessional contribution, the concessional treatment generally arises from the contribution being taxed at only 15% when paid to the fund and, potentially, at 0% when paid from the fund as a superannuation benefit. For a non-concessional contribution, the concessional treatment arises from the contribution being taxed at 0% when paid to the fund and, potentially, at 0% when paid from the fund as a superannuation benefit. The concessional tax treatment for an individual’s contributions in a financial year is, however, limited by contributions caps which have the effect that additional tax is imposed on an individual’s “excess” superannuation contributions for the financial year. The object is to ensure that the amount of concessionally taxed superannuation benefits that an individual receives results from contributions that have been made gradually over the course of the individual’s life. Treatment of excess contributions The treatment of excess contributions depends on the type of contributions and the year in which the contributions are made. The treatment of excess contributions can be summarised as follows. Concessional contributions 1. Excess concessional contributions made in 2013/14 and later income years are included in the individual’s assessable income and a tax offset is allowed equal to 15% of the excess contributions (¶6-515). 2. The individual is liable to pay excess concessional contributions charge (¶6-515). Excess concessional contributions charge is not deductible (ITAA97 s 26-74). 3. The individual may elect to release from superannuation up to 85% of their excess concessional contributions. The released amount is credited to the individual and is non-assessable non-exempt income (¶6-520). Excess concessional contributions made before 2013/14 were liable to excess concessional contributions tax (¶6-525). Non-concessional contributions 1. An individual can elect to release from superannuation excess non-concessional contributions made in 2013/14 and later income years plus 85% of the associated earnings on the excess contributions, in which case tax is payable at ordinary rates on the total associated earnings (¶6-565). 2. Excess non-concessional contributions made from 2013/14 that an individual does not elect to release from superannuation are liable to excess non-concessional contributions tax (¶6-560). Excess non-concessional contributions tax is not deductible (ITAA97 s 26-75). Excess non-concessional contributions made before 2013/14 were liable to excess non-concessional contributions tax. Excess concessional contributions An individual has excess concessional contributions for a financial year if the amount of their concessional contributions exceeds the relevant concessional contributions cap for the financial year. For the caps that apply to concessional contributions, see ¶6-505. Individuals with a total superannuation balance (¶6-490) below $500,000 may be able to make additional concessional contributions where they have “unused cap amounts” from the previous five years (¶6-507). The meaning of “concessional contributions” is discussed at ¶6-510. Excess non-concessional contributions An individual has excess non-concessional contributions for a financial year if the amount of their nonconcessional contributions exceeds the relevant non-concessional contributions cap for the financial year. For the caps that apply to non-concessional contributions, see ¶6-540.

The meaning of “non-concessional contributions” is discussed at ¶6-550. Timing of contributions A contribution is counted for the financial year in which an individual’s superannuation fund actually receives the contribution (¶6-123), and the onus is on the individual to keep track of contributions, whether made personally, by an employer or by someone else on the taxpayer’s behalf. Superannuation guarantee contributions by an employer for a quarter may be made by the 28th day after the end of the quarter (¶12-230), so the employer is entitled to make contributions for the quarter ending on 30 June by 28 July, ie in the next financial year. Failure to take that into account may cause taxpayers to miscalculate the contributions made on their behalf for a year and to become liable to penalties for excess contributions.

¶6-502 Reduction of tax liability on excess contributions An individual may be liable to additional tax if excess contributions are made to a superannuation fund on their behalf or by them personally (¶6-500). To ameliorate their potential tax liability when excess contributions are made: • an individual may be able to avoid liability to non-concessional contributions tax by electing to release from superannuation excess non-concessional contributions (¶6-565) • an individual can apply to the Commissioner for contributions to be either disregarded or allocated to another year (¶6-665), and • an application can be made for the refund of contributions made by mistake (¶6-670). Contributions limiting clauses — ATO view Some funds have sought to minimise the risk of their members being exposed to penalties for excess contributions by including contributions limiting clauses in their trust deeds purporting to cap the amount of contributions able to be made and to return any excess contributions to the member. Taxpayer Alert TA 2010/2, issued by the ATO in 2010, stated that such clauses are ineffective and that entities involved may be considered to be promoters of tax exploitation schemes. After concern was expressed about this interpretation, the ATO replaced TA 2010/2 with a fact sheet entitled Fund rules intended to prevent excess contributions tax. The non-binding fact sheet states that a governing rule that is designed to prevent certain payments from being a contribution may, or may not, achieve this result, depending on its effect as a matter of trust law and, in particular, whether the rule prevents the payment from increasing the capital of the fund. A rule that merely empowers the trustee to return or otherwise deal with a payment which is already a contribution to the fund will not prevent a payment being a contribution. The Inspector-General of Taxation’s Review into the Australian Taxation Office’s compliance approach to individual taxpayers — superannuation excess contributions tax, released on 13 May 2014, noted that contributions limiting clauses present difficult legal issues as they involve the interaction of superannuation, trust and taxation laws. Employers may, for example, be found to have not complied with their SG obligations where fund trustees do not accept SG payments, and, if contributions are later refunded to taxpayers, the ATO may find it difficult to identify such contributions to bring them into account under income tax law and ensure that deductions previously allowed are reversed. The review recommended the ATO seek an appropriate test case to obtain a judicial declaration on the effectiveness of contributions limiting clauses, and the ATO has agreed.

Treatment of Excess Concessional Contributions ¶6-505 Excess concessional contributions An individual has excess concessional contributions for a year if their concessional contributions (¶6-510,

¶6-512) exceed the concessional contributions cap for the year (s 291-20). The amount of the excess concessional contributions is the amount of the excess. For 2013/14 and later income years, an individual’s excess concessional contributions are included in their assessable income and taxed at ordinary rates and are also liable to excess concessional contributions charge (¶6-515). For earlier years, an individual with excess contributions may have been liable to excess concessional contributions tax (¶6-525). Concessional contributions cap The basic concessional contributions cap is $25,000 for all individuals for 2019/20, the same as for 2018/19 and 2017/18. From 2018/19, individuals may be able to increase their concessional contributions cap for a year by applying unused concessional cap amounts from one or more of the previous five financial years (¶6507). The concessional contributions cap was $30,000 for 2014/15, 2015/16 and 2016/17, with a higher cap of $35,000 applying for members aged 49 years or over on the 30 June before the year commenced. The concessional contributions cap for 2013/14 and later years is set out in ITAA97 s 291-20(2). For years before 2013/14, the cap was set out in ITAA97 s 292-20. Indexation of concessional contributions cap The concessional contributions cap is indexed annually to average weekly ordinary time earnings (AWOTE) (ITAA97 s 960-285). Increases in the cap from indexation are rounded down to the nearest multiple of $2,500, which means the cap increases only once indexation in the threshold equals or exceeds a multiple of $2,500. The concessional contributions cap has remained at $25,000 for 2019/20, unchanged from the previous two years. This is because the AWOTE indexation factor is insufficient to trigger an increase to $27,500. At the current rate of wages growth, it is not expected to do so before 2023/24. For years before 2017/18, increases in the cap were rounded down to the nearest multiple of $5,000. Higher concessional contributions cap for older individuals before 2017/18 For years before 2017/18, a higher concessional contributions cap applied for older individuals. For 2014/15, 2015/16 and 2016/17, the concessional contributions cap was $35,000 for an individual aged 49 years or over on the last day of the previous financial year (ITTPA s 291-20(1)(b)). For the 2013/14 financial year, a higher concessional contributions cap of $35,000 applied to individuals who were 59 years or older on 30 June 2013 (ITTPA s 291-20(1)(a)). There was no higher concessional contributions cap for older individuals for 2012/13. For the years 2007/08 to 2011/12 (inclusive), a higher concessional contributions cap applied to contributions made by individuals aged 50 or over on the last day of the financial year. The higher cap was $50,000 for 2009/10, 2010/11 and 2011/12, and $100,000 for 2007/08 and 2008/09. Concessional contributions cap may be increased by catch-up contributions Individuals with a total superannuation balance (¶6-490) of less than $500,000 just before the start of a financial year may be able to increase their concessional contributions cap in the financial year by applying unused concessional contributions cap amounts from one or more of the previous five financial years (¶6-507). Only unused amounts accrued from the 2018/19 financial year onwards can be carried forward. [FITR ¶269-020 – ¶269-050, ¶269-150 – ¶269-190; SLP ¶37-320]

¶6-507 Concessional contributions cap increased by catch-up contributions Individuals with a total superannuation balance (¶6-490) of less than $500,000 just before the start of a financial year may be able to increase their concessional contributions cap (¶6-505) in the financial year by applying previously unused concessional contributions cap amounts from one or more of the previous

five financial years. Only unused amounts accrued from the 2018/19 financial year onwards can be carried forward. An individual’s concessional contributions cap for a financial year may be increased if: (a) their concessional contributions for the year would otherwise exceed their concessional contributions cap for the year (b) their total superannuation balance (¶6-490) just before the start of the financial year is less than $500,000, and (c) they have previously unapplied “unused concessional contributions cap” for one or more of the previous five financial years (s 291-20(3)). An individual’s “unused concessional contributions cap” for a financial year is the amount by which their concessional contributions for the year falls short of their concessional contributions cap for the year (s 291-20(6)). An individual cannot have unused concessional contributions cap earlier than the 2018/19 financial year (s 291-20(7)). As a result, the first year in which an individual can make additional concessional contributions by applying their unused concessional contributions cap amounts is the 2019/20 financial year. An individual’s concessional contributions cap cannot be increased by more than the amount by which they would otherwise exceed the concessional contributions cap. Only the exact amount of unused concessional contributions cap that is necessary is used, and any remaining unapplied unused concessional contributions cap is preserved to be carried forward for another year (s 291-20(4)). Amounts of unused concessional contributions cap are applied in order from the earliest year to the most recent year (s 291-20(5)) and amounts not used after five financial years are no longer able to be carried forward. Example In the 2018/19 financial year, Josh’s employer makes concessional superannuation guarantee contributions of $10,000 on his behalf and Josh does not make any deductible personal contributions. As the concessional contributions cap for 2018/19 is $25,000, Josh’s unused concessional contributions cap amount is $15,000. Assuming the concessional contributions cap is $25,000 for all years between 2018/19 and 2023/24, Josh’s concessional contributions and available unused concessional contributions cap are as follows.

2018/19

2019/20

2020/21

2021/22

2022/23

2023/24

Concessional contributions

$10,000

$10,000

$10,000

$10,000

$10,000

$40,000

Available unused cap

$15,000

$15,000

$15,000

$15,000

$15,000

$0

Cumulative available unused cap

$15,000

$30,000

$45,000

$60,000

$75,000

$60,000

In the 2023/24 financial year, Josh has $40,000 concessional contributions, comprising a deductible personal contribution of $30,000 and his employer’s superannuation guarantee contribution of $10,000 on his behalf. At 30 June 2023, Josh has a total superannuation balance of less than $500,000. The fact that Josh has $40,000 concessional contributions for 2023/24 means that he will have exceeded the $25,000 concessional contributions cap by $15,000 in that year. He will be able to increase his concessional contributions cap for 2023/24 by using $15,000 of unused concessional contributions cap from the 2018/19 financial year. Josh still has $45,000 of unused concessional contributions cap after using $15,000 in 2023/24. This amount is carried forward for use in another year within five years of the contribution having been made. The unused cap amount for 2019/20 would have to be used in 2024/25 as if cannot be carried forward for more than five years.

¶6-510 Concessional contributions — accumulation interests Concessional contributions of an individual in relation to an accumulation interest in a superannuation fund are worked out under ITAA97 s 291-25 for 2013/14 and later financial years. For years before 2013/14, concessional contributions were worked out, in identical terms, in ITAA97 s 292-25. The amount of the concessional contributions of an individual in relation to a defined benefit interest in a superannuation fund is worked out under ITAA97 Subdiv 291-C (¶6-512). In relation to an accumulation interest in a superannuation fund, s 291-25(1) provides that the amount of an individual’s concessional contributions is the sum of: (1) each contribution covered under s 291-25(2), that is, a contribution that: (a) is made in the financial year to a complying superannuation plan in respect of the individual, and (b) is included: (i) in the assessable income of the superannuation provider (see “Contributions that are included in a fund’s assessable income” below), or (ii) by way of a roll-over superannuation benefit (¶8-600), in the assessable income of a complying superannuation fund or RSA provider in the circumstances mentioned in s 290170(5) (where the superannuation interest of an individual has been transferred from a fund to a successor fund after the funds have merged) (¶7-120) or mentioned in s 290-170(6) (where, in relation to a MySuper product, a fund transfers a member’s accrued default amount to another fund) (¶9-130), and (c) is not an amount mentioned in s 295-200(2), ie an amount transferred to a complying superannuation fund from a foreign superannuation fund where the former member of the foreign fund chooses that the amount be included in the assessable income of the receiving fund rather than the member being taxed on the amount (¶8-370), and (d) is not an amount mentioned in item 2 in the table in s 295-190(1), ie a roll-over superannuation benefit (¶8-600), that an individual is taken to receive, to the extent that it consists of an element untaxed in the fund and is not an excess untaxed roll-over amount, and (2) an amount covered by s 291-25(3), ie an amount allocated by the superannuation provider for the individual in accordance with conditions specified in the regulations (see “Allocations from reserves treated as concessional contributions” below). Contributions that are included in a fund’s assessable income Three types of contributions, generally contributions for which the contributor is allowed a tax deduction, are included in the assessable income of a superannuation fund (¶7-120): (a) contributions made by a contributor on behalf of someone else, eg by an employer for an employee (¶6-115) (b) contributions made on the contributor’s own behalf for which the contributor notifies the fund that they intend to claim a deduction (¶6-340), and (c) certain amounts transferred from a foreign superannuation fund to an Australian superannuation fund (¶8-370). Generally, contributions coming within (a) and (b) are concessional contributions, but amounts coming within (c) are not (see “Amounts that are not concessional contributions” below). In Jendahl Investments 2009 ATC ¶10-115, the AAT decided that substantial amounts transferred directly from the taxpayer’s family trust to his self managed superannuation fund were concessional contributions.

The taxpayer had argued that they were personal contributions and were not included in the fund’s assessable income, but the AAT was satisfied that this was in conflict with the characterisation of the amounts in various documents. These included the fund’s tax return and an annual return lodged with the Commissioner that stated that large sums received by the fund were employer contributions. Allocations from reserves treated as concessional contributions Additional amounts allocated from a reserve for a member in accordance with conditions specified in the regulations are treated as concessional contributions (s 291-25(3) from 1 July 2013 or s 292-25(3) before 1 July 2013). The conditions are set out in ITAR reg 292-25.01, applicable to the calculation of concessional contributions under both s 291-25 and 292-25. In general, the regulations cover an amount that is allocated under SISR Div 7.2 and is an assessable contribution under ITAA97 Subdiv 295-C. From 1 July 2013, Div 7.2 prescribes operating standards and data and payment standards (¶9-790) for the allocation of employer contributions to members of regulated superannuation funds. From that date, there are two different time periods within which contributions must be allocated: • funds other than SMSFs must allocate the payment to a member’s account within three business days of receiving both the contribution and certain information relevant to the contribution, eg the member’s full name, residential address and tax file number (Subdiv 7.2.1), and • SMSFs that receive a contribution in a month must allocate the contribution to a member within 28 days after the end of the month or, if this is not reasonably practicable, within a reasonable period (Subdiv 7.2.2). Example A fund which is not an SMSF accepts employer contributions for a member into a reserve. Amounts are then allocated to the member within three business days after the fund receives both the contributions and the required information relevant to the contributions. The amounts are concessional contributions for the member.

There is no definition of “reserve” in the legislation, but, according to the Macquarie Dictionary, its ordinary meaning is “an amount of capital retained by a company to meet contingencies, or for any other purpose to which the profits of the company may be profitably applied … something reserved, as for some purpose or contingency, a store or stock”. For the purposes of reg 292-25.01(4), the Commissioner’s view is that “reserve” is intended to have a broader meaning than the ordinary meaning or the meaning for SISA and SISR purposes (¶3-400), and would include the self-insurance reserve maintained by the trustee of the fund (Interpretative Decision 2015/21 applicable from 2013/14; Interpretative DecisionID 2012/32 stated a similar view for earlier years). ID 2015/21 states that, for the purposes of reg 292-25.01(4), a reserve includes not only an amount set aside from amounts allocated to particular members to be used for a certain purpose or on the happening of a certain event, but can have a broader meaning. It could include for example: (a) employer contributions that are accepted into a reserve prior to allocation to a member in compliance with SISR Div 7.2, ie as a suspense account used to record contributions pending their allocation to members, or (b) contributions received by the fund, but not yet allocated to the member under Div 7.2 although they are required to be allocated. If a superannuation fund allocates an amount from a reserve as a substitute for an actual contribution made on behalf of a member and the amount allocated is net of tax that would be applied against the contribution, the amount must be grossed up by 1.176 to include the tax liability. Example An employer is required to contribute $1,000 to a superannuation fund for an employee. Instead, the trustee of the fund allocates $850 to the member’s account, being what would have been the post-tax amount if the employer had made the contribution. The $850 must be grossed up by 1.176 ($850 × 1.176 = $1,000) to work out the amount that is taken to have been allocated.

Where a member of a self managed superannuation fund commutes a complying lifetime pension payable to them, the member will have concessional contributions for a financial year if the trustees of the fund: (i) use the amount standing to the credit of a pension account maintained in relation to the complying lifetime pension as the superannuation lump sum, resulting from the commutation of the pension to commence a market linked pension payable to the member; and (ii) allocate the amount standing to the credit of a pension reserve account maintained in relation to the complying lifetime pension to enable an account-based pension payable to the member to be commenced. The member would, in such a case, have concessional contributions equal to the amount allocated to the member from the pension reserve account. Although the amount that went to the market linked pension is not a concessional contribution, the amount that went to the account-based pension counts as a concessional contribution with associated contributions cap and tax consequences (Interpretative DecisionID 2015/22 applicable from 2013/14; Interpretative DecisionID 2012/84 stated similar views for earlier years). Allocation of contribution to a member at a later date Although Div 7.2 requires contributions for a member to be allocated within a certain time, it does not specify the date the allocation has effect, and this may become an issue where the trustee allocates the contribution to a member on a date later than when the contribution is received by the trustee. A contribution received by a fund on 28 June in one financial year but not allocated to a member’s accumulation interest until 1 July in the next financial year could, for example, be interpreted as being: • included in the member’s concessional contributions under s 291-25(2) for the financial year it is received by the fund, and also • included in the member’s concessional contributions under s 291-25(3) for the financial year it is allocated to the member’s accumulation interest, where the amount is included in the assessable income of the fund and is not any of the amounts mentioned in ITAR reg 292-25.01(3) (these are the same as the amounts discussed below under “Amounts that are not concessional contributions”). The Commissioner’s view, however, is that the law should not be interpreted so that it results in double taxation (Taxation Determination TD 2013/22). Instead, the amount of the contribution is included in the member’s concessional contributions only for the financial year in which the allocation of the amount to the member’s accumulation interest has effect. The Commissioner’s view is illustrated in the following example adapted from TD 2013/22. Example Harry’s concessional contributions cap for 2019/20 is $25,000. Harry is a member of a complying superannuation fund which is not a constitutionally protected fund. Harry makes a personal contribution of $25,000 which is received by his fund on 30 June 2020 and applied on the same day to an unallocated contributions account established in accordance with the governing rules of the fund. On 2 July 2020, the trustees allocate the $25,000 to Harry’s member account in the fund with effect from that day. Harry’s contribution is covered by a valid and acknowledged notice given to his fund under ITAA97 s 290-170 of his intention to deduct the amount of the contribution. The $25,000 contribution is included in the amount of Harry’s concessional contributions for 2020/21 as an amount covered under ITAA97 s 291-25(3).

Taxation Determination TD 2013/22 applies only to contributions made on or after 1 July 2013 and to amounts allocated with effect on or after 1 July 2013, including an allocation with effect on or after 1 July 2013 of a contribution made before that date. Although earlier contributions and allocations are not covered by TD 2013/22, they may nevertheless be treated in the same way as Interpretative DecisionID 2012/16 stated a similar view for income years before 2013/14. Although ID 2012/16 was withdrawn on 6 August 2015, the ATO has said that it continues to be a precedential ATO view for the years before 2013/14. The ATO form Request to adjust concessional contributions allows a member of an SMSF to notify the ATO that, in line with the strategy discussed in Taxation Determination TD 2013/22, the member has made concessional contributions in one financial year (Year 1) but their SMSF does not allocate the

contributions to the member until the next financial year (Year 2). Provided all the associated legal requirements are met, the ATO says the contributions can be recognised for income tax deductibility in Year 1 but not counted towards the concessional contributions cap until Year 2. The ATO has said it is important that members use this form because the SMSF annual return does not make provision for the strategy. The form should be lodged before, or at the same time as, both the fund’s SMSF annual return and the member’s own individual tax return are lodged. ATO advice about use of the form and the records that should be kept can be found at: www.ato.gov.au/Forms/Request-to-adjust-concessionalcontributions. Allocations from a reserve that are not concessional contributions Regulation 292-25.01(4) states that certain allocations from a reserve are not concessional contributions. These exceptions are: (a) where an amount: (i) is allocated on a “fair and reasonable basis” to all members of the fund or to a class of members, and (ii) is less than 5% of the member’s interest at the time, or (b) where an allocation is used solely for the purpose of discharging superannuation income stream liabilities that are currently payable, and (i) is used to satisfy a pension liability paid during the same financial year, or (ii) arises in the event of commutation of a pension during a pensioner’s life and is allocated as soon as practicable to commence another pension for that person, or (iii) on the commutation of the income stream as a result of death, is allocated to pay a death benefit. The ATO view is that, where a member has multiple interests in a superannuation fund, an amount is only allocated on a “fair and reasonable basis” for the purposes of reg 292-25.01(4)(a) if it is spread across the member’s interests and is allocated in proportion to the member’s interest in the fund. If the allocation is made to only one of the member’s interests, the amount allocated would be a concessional contribution (NTLG Superannuation Technical Sub-group minutes, 8 September 2009). An allocation made in respect of a superannuation income stream may be covered by the exception in reg 292-25.01(4)(b) if the reserve is used only to support superannuation income stream benefits, but not if it is used to fund both lump sum and income stream benefits (NTLG Superannuation Technical Sub-group minutes, 5 June 2012). Although SISR reg 1.06(2)(e)(iii) provides that a complying lifetime pension may be commuted if the superannuation lump sum resulting from the commutation is transferred directly for the purpose of purchasing one of the specified types of income stream, an account-based pension is not one of those types. This means that, although an amount allocated to provide a market linked pension would be exempt from being assessed against the concessional contributions cap, this would not be the case where an amount is allocated to provide an account-based pension (Interpretative DecisionID 2015/22). Use of reserves by SMSFs — ATO’s compliance approach The Commissioner considers that any need to maintain reserves in SMSFs is distinct from the need to maintain reserves in superannuation funds regulated by APRA (¶3-400). Reserves in large APRA funds are, for example, intended to spread potential costs across different generations of members, whereas SMSFs by their nature only have a small membership. In SMSF Regulator’s Bulletin SMSFRB 2018/1, the ATO indicates that reserves should be used by SMSFs only in limited circumstances and for legitimate purposes, and arrangements where amounts within an SMSF are held in a reserve as opposed to being allocated directly to a member’s superannuation interest will be closely scrutinised. The Commissioner is concerned that the use of reserves by SMSFs may raise regulatory concerns such

as: • whether use of the reserve adheres to the sole purpose test in SISA s 62 (¶3-200), or • whether the SMSF trustee satisfies SISA s 52B(2)(g) (¶5-400) which requires trustees to give effect to a strategy for the prudential management of reserves consistent with the fund’s investment strategy and its capacity to discharge liabilities. The Commissioner is also concerned that the use of reserves by SMSF trustees may circumvent superannuation and tax restrictions introduced by the superannuation reform measures that apply generally from 1 July 2017. These measures introduced limits on the amounts of capital within superannuation that can be transferred to the retirement phase (the transfer balance cap (¶6-440)) and limits on the amount of contributions that can be made to superannuation (lowering of the concessional contributions cap (¶6-540)) and a total superannuation balance (¶6-490) to limit other contributions. Rules were also introduced to limit when an SMSF can use the segregated method to calculate their exempt current pension income (¶7-153) for an income year by reference to a member’s total superannuation balance. In the context of these superannuation reform measures, the creation and maintenance of a reserve may raise concerns that it is a step in a scheme to achieve potential tax benefits to which the anti-avoidance rules in ITAA36 Pt IVA may apply. Part IVA applies to a scheme if a tax benefit has been obtained in connection with the scheme and the main purpose of a person who participated in the scheme, or a part of it, was to obtain that tax benefit. The Commissioner will scrutinise various arrangements involving the use of reserves by SMSFs to determine whether Pt IVA applies. The arrangements include the intentional use of a reserve: • to reduce a member’s total superannuation balance (¶6-490) to enable them to make nonconcessional contributions without breaching their non-concessional contributions cap (¶6-540) • to reduce a member’s total superannuation balance below $500,000 to allow the member to access the catch-up concessional contributions arrangements (¶6-507), thereby allowing the member to either claim a higher personal superannuation contributions deduction (¶6-340) or have a higher amount of their salary and wages income subject to a salary sacrifice arrangement (¶6-260) for an income year • to reduce the balance of a member’s transfer balance account (¶6-425) below the member’s transfer balance cap (¶6-440) to allow the member to allocate a greater amount to retirement phase (¶6-420) and thereby having a greater amount of earnings within the SMSF being exempt current pension income (¶7-153), and • to reduce a member’s total superannuation balance below $1.6m in order to allow the SMSF to use the segregated method (¶7-153) to calculate its exempt current pension income. The ATO will not apply compliance resources to review arrangements entered into by SMSFs before 1 July 2017 provided: • the reserve was permitted by SISA s 115 which provides that an SMSF may maintain a reserve as long as it is not prohibited by its governing rules (¶5-400), and • the facts do not indicate that the reserve was used to circumvent the restrictions imposed by the superannuation reform measures that commenced on 1 July 2017. On the other hand, SMSF trustees are warned that an amount allocated from a reserve before and after 1 July 2017 will generally be counted as a concessional contribution unless otherwise excluded because relevant conditions are met. Any unexplained increases in the creation of new reserves, in the balances of existing reserves maintained by SMSFs or allocation of amounts from a reserve directly into the retirement phase are likely to attract close scrutiny from the ATO. Amounts that are not concessional contributions

Concessional contributions do not include contributions made for a spouse or for a child aged under 18, unless the spouse or child is an employee of the contributor (s 295-165, 295-170), but they could include contributions made for other family members even if not deductible. An amount transferred to a complying superannuation fund from a New Zealand KiwiSaver scheme (¶8380) is not a concessional contribution but may be included in non-concessional contributions (ITAA97 s 312-10(3)). An amount released from a superannuation fund under the First Home Super Saver Scheme and later recontributed is not a concessional contribution (¶6-385). A contribution by an individual aged 65 or over from the proceeds of selling their home is also not a concessional contribution (¶6-390). Where a “directed termination payment” (¶8-830) was paid to a superannuation fund before 1 July 2012, generally only the amount of the payment in excess of $1m was a concessional contribution. [FITR ¶269-050; SLP ¶37-320]

¶6-512 Concessional contributions — defined benefit schemes and constitutionally protected funds Defined benefit schemes The meaning of concessional contributions is modified for members who have defined benefit interests in a defined benefit superannuation scheme. This is because employer contributions into a funded defined benefit scheme (eg the NSW State Super Scheme or State Authorities Super Scheme) may be paid into a general fund and not allocated to individual members. In general, no concessional contributions were, before 1 July 2017, attributable to a member of an unfunded defined benefit scheme, eg a scheme for government employees, because in such a scheme a member’s benefits are not financed until just before they become payable to the member. The meaning of concessional contributions relating to defined benefit interests is set out in Subdiv 291-C (s 291-160 to 291-175) for 2013/14 and later financial years. For years before 2013/14, the meaning was set out, in identical terms, in Subdiv 292-D (former s 292-155 to 292-175). Defined benefit interest A defined benefit interest exists where all or part of the superannuation benefits payable to a person are defined by reference to the person’s (or another person’s) salary, a specified amount or specified conversion factors (s 291-175). However, an individual’s superannuation interest is not a defined benefit interest if it defines that entitlement solely by reference to one or more of the following: • disability superannuation benefits (¶8-170) • superannuation death benefits (¶8-300), or • income stream payments because a person is temporarily unable to engage in gainful employment (s 307-10(a)). Concessional contributions from 1 July 2017 From 1 July 2017, the concessional contributions of an individual who has one or more defined benefit interests is the sum of: (a) contributions and amounts that relate to their accumulation interests if these amounts would be included in their concessional contributions under s 291-25 (¶6-510) (b) “notional taxed contributions” for the financial year in respect of each defined benefit interest, and (c) the amount by which their “defined benefit contributions” for the financial year exceeds those notional taxed contributions (s 291-165(1)). For financial years commencing on or after 1 July 2017, an additional amount is included in an individual’s

concessional contributions to ensure the amount of concessional contributions better reflects the full amount of accrued benefits (funded and unfunded) for the defined benefit interest for the financial year. This is achieved by the insertion of s 291-165(1)(c). The additional amount included in concessional contributions is the amount by which the defined benefit contributions for the defined benefit interest exceed the notional taxed contributions for the interest. For schemes that are unfunded or partially unfunded, the individual’s defined benefit contributions will typically be greater than their notional taxed contributions and they will therefore have an additional amount to include in their concessional contributions. Defined benefit contributions are generally calculated using the modified rules for Division 293 tax purposes (¶6-400) in s 293-115 and ITAR Sch 1A (s 995-1(1)). The provisions also apply to defined benefit interests in constitutionally protected funds (see below). Before 1 July 2017, the concessional contributions amount for a defined benefit interest was basically an individual’s notional taxed contributions. Notional taxed contributions An individual’s notional taxed contributions for a financial year in respect of a defined benefit interest has the meaning given by the regulations (s 291-170(1)). The meaning of notional taxed contributions in various circumstances (eg for a fund with five or more defined benefit members or where notional taxed contributions are taken to be at the maximum level of the contributions cap for the year) is set out in ITAR Subdiv 292-D (reg 292-170.01 to 292-170.06). A savings provision in Act No 118 of 2013 Sch 1 Pt 7 has the effect that, despite the repeal of Div 292 and the insertion of Div 291 effective from 1 July 2013, ITAR Subdiv 292-D continues to apply in the same way that it applied before Div 292 was repealed. The level of notional taxed contributions for a member of a defined benefit scheme is largely beyond their control and it can be hard for a member to adjust their notional taxed contributions when the contributions caps change. In order that members with defined benefit interests are not unfairly taxed as a result, special grandfathering arrangements have the effect that members with a defined benefit interest with notional taxed contributions in excess of the concessional contributions cap may be taken to be at, but not in excess of, the maximum level of the cap (ITTPA s 291-170). To be eligible for the grandfathering provisions, an individual must: • for 2007/08 and 2008/09, have been a member of an eligible defined benefit fund on 5 September 2006 or, for 2009/10 onwards, have been a member of an eligible defined benefit fund on 12 May 2009 • not have had a substantial change to the rules that apply to their benefit since that date, and • not have had a non-arm’s length change to their salary of more than 50% in a year or 75% in three years since that date. Generally, grandfathering ceases to apply if the rules of the scheme change to increase the member’s benefit, although minor changes may be allowed. Schemes may be able to amend their rules to meet requirements in other legislation without members losing access to grandfathering. Example An employer who in 2007/08 was able to pay lower superannuation guarantee contributions for their employees because of having a pre-21 August 1991 earnings base is, since 1 July 2008, required to use ordinary time earnings to determine the contributions they are required to make (¶12-150). Although this may result in the employee’s benefit increasing, the member would not lose access to the grandfathering provisions.

Grandfathering may continue to apply if an individual’s defined benefit interest is transferred to a successor superannuation fund that retains equivalent rights for members. Constitutionally protected funds Before 1 July 2017, contributions made or amounts allocated to a superannuation interest in a

constitutionally protected fund (ie to an untaxed fund, such as a fund operated by a state government for its employees, that does not pay income tax on contributions or earnings: ¶7-500) were specifically excluded from concessional contributions (s 291-25(2)(c)(iii)). This allowed members of these funds to receive or accrue any amount of employer contributions, other contributions and amounts without it affecting their ability to have concessional contributions made to other superannuation interests. The exclusion from concessional contributions was removed from 1 July 2017, and contributions made or amounts allocated from that date in respect of interests in a constitutionally protected fund are included in an individual’s concessional contributions where the conditions in s 291-25 (¶6-510) are satisfied. ITAR reg 292-25.01 has been amended to remove the exclusion from concessional contributions for constitutionally protected funds. Inclusion as concessional contributions cannot result in excess contributions Although contributions to defined benefit schemes or to constitutionally protected funds may, from 1 July 2017, be included in an individual’s concessional contributions and counted towards their concessional contributions cap, the contributions do not, on their own, result in excess concessional contributions (s 291-370). Where those concessional contributions exceed the concessional contributions cap (disregarding increases due to the carry forward of unused concessional cap space: ¶6-507), the sum of those contributions is taken to equal (but not exceed) the concessional contributions cap. The fact that they are counted towards an individual’s concessional contributions cap may, however, limit the individual’s ability to make further concessional contributions. Members will have excess concessional contributions if they have other concessional contributions and, as a result, their total concessional contributions exceed the cap. Law Companion Ruling LCR 2016/11 Law Companion Ruling LCR 2016/11 explains how concessional contributions are calculated for defined benefit interests and constitutionally protected funds from 1 July 2017. Seven examples are included to illustrate the ATO’s view. [FITR ¶269-180 – ¶269-190]

¶6-515 Excess concessional contributions included in assessable income An individual has excess concessional contributions for a year if their concessional contributions (¶6-510, ¶6-512) exceed their concessional contributions cap (¶6-505) for the year (s 291-20). The amount of the excess concessional contributions is the amount of the excess. For 2013/14 and later years, the consequences of having excess contributions are that: • an individual’s excess concessional contributions are included in their assessable income and a tax offset is allowed equal to 15% of the excess contributions (s 291-15), and • the individual is liable to pay excess concessional contributions charge (TAA Sch 1 s 95-10). An individual can elect to release from superannuation an amount not exceeding 85% of their excess concessional contributions (TAA Sch 1 s 131-5) (¶6-640). This treatment replaced excess concessional contributions tax (¶6-525) which was imposed on an individual’s excess concessional contributions before 2013/14. Excess concessional contributions tax replaced by fairer system The system that applies from 2013/14 is intended to be a fairer system for the treatment of individuals with excess concessional contributions. The unfairness of the pre-2013/14 system was that, regardless of an individual’s marginal tax rate, their excess concessional contributions were taxed at 46.5%. This was the sum of the 15% tax on the contributions when they were paid to the fund and the 31.5% tax on the amount of the contributions that exceeded the contributions cap for the year. This meant that individuals below the top marginal tax rate were taxed on the excess contributions at a higher tax rate than if they had received the excess amount

as assessable salary, wages or business income. In contrast, individuals on the top marginal rate effectively faced no penalty and benefited from being able to defer the timing of their tax liability. In addition, the inclusion of excess concessional contributions when calculating an individual’s nonconcessional contributions (¶6-550) meant that excess concessional contributions could cause liability not only to excess concessional contributions tax but also to excess non-concessional contributions tax (¶6560). This consequence has been ameliorated from 2013/14 when excess concessional contributions are, on the member’s application, released (¶6-520) from superannuation (see “Impact on the amount of an individual’s non-concessional contributions” below). Taxation of excess concessional contributions from 2013/14 From 2013/14, excess concessional contributions are treated as follows. 1. Excess contributions are included in assessable income. If an individual has excess concessional contributions for a financial year, the amount of the excess concessional contributions is included in their assessable income (s 291-15(a)). The excess contributions are then taxed at the individual’s marginal tax rate. 2. Tax offset of 15% of the excess contributions. An individual is entitled to an offset equal to 15% of their excess concessional contributions (s 291-15(b)). This offset reduces the individual’s tax liability to account for the 15% tax on the contributions when they were paid to the superannuation fund. The offset cannot be refunded, transferred or carried forward. Example For the 2019/20 financial year, Nicola, who is aged 33 and runs her own business, claims a $35,000 deduction for the contributions she makes to her superannuation fund. Because Nicola’s concessional contributions cap is $25,000 (¶6-505), she has excess concessional contributions of $10,000. Nicola’s taxable income for 2019/20 from her business activities is $91,000, which means that excess concessional contributions, when added to her business income, will, when taxed at ordinary rates, be taxed at 37% plus 2% Medicare levy. The tax consequences are as follows: (1) The $10,000 of excess concessional contributions are included in Nicola’s assessable income and taxed at her marginal tax rate. The tax on $101,000 (the sum of the business income and the excess concessional contributions) is $24,867. (2) Nicola is entitled to a tax offset equal to 15% of the excess concessional contributions, ie a tax offset of $1,500 ($10,000 × 15%). This reduces her tax liability to $23,367. (3) Medicare liability of $2,020 (2% of $101,000) is added.

3. Liability to excess concessional contributions charge. If an individual who has excess concessional contributions for a financial year is liable to pay tax for the year and their tax liability exceeds what would have been their tax liability if the excess contributions were disregarded, the individual is liable to pay excess concessional contributions charge (TAA Sch 1 s 95-10). The charge is calculated from the first day of the income year in which the excess concessional contributions were made and ends on the day before the tax under the individual’s first notice of assessment for the income year is due to be paid, or would be due to be paid if any tax was payable. The intent of the charge is to acknowledge that the tax is collected later than normal income tax. The excess concessional contributions charge for a day is worked out by multiplying the rate worked out under s 4 of the Superannuation (Excess Concessional Contributions Charge) Act 2013 for that day by the sum of: (i) the amount of tax on which the individual is liable to pay the charge; and (ii) the excess concessional contributions charge on that amount from previous days (TAA s 95-15). The calculation of the charge takes into account both the increase in the individual’s income tax liability due to the inclusion of their excess concessional contributions and the reduction in their tax liability due to the offset. Under s 4 of the Superannuation (Excess Concessional Contributions Charge) Act 2013, the rate of charge for a day is based on the monthly average yield of 90-day Bank Accepted Bills published by the Reserve Bank plus a 3% uplift factor. Excess concessional contributions charge is calculated

daily and compounds daily. The charge is not deductible (ITAA97 s 26-74) and the Commissioner does not have a discretion to remit it. The excess concessional charge rates are published by the ATO on its webpage www.ato.gov.au. Example In 2019/20, Fang has excess concessional contributions of $15,000 and, when this amount is included in his assessable income, he has taxable income of $105,000. Fang’s marginal tax rate is 37% and he is also liable to Medicare levy of 2%. As a result of the excess concessional contributions, Fang’s taxable income has increased by $15,000, and his additional tax liability is $5,550 ($15,000 × 37%). Fang is also entitled to a tax offset equal to 15% of his excess concessional contributions (ie 15% × $15,000), decreasing his tax liability by $2,250. The amount of Fang’s income tax liability that is attributable to his excess concessional contributions is $3,300 ($5,550 − $2,250). Excess concessional contributions charge is payable at the relevant charge rate on $3,300. Medicare levy of $2,100 ($105,000 x 2%) is also payable.

If an individual has excess concessional contributions in a financial year, the Commissioner must make a determination (an “excess concessional contributions determination”) of the amount of excess contributions and the amount of charge the individual is liable to pay (TAA Sch 1 s 97-5). Excess concessional contributions charge is not payable until the Commissioner provides notice of this determination (TAA Sch 1 s 95-20). Once notice is provided, the charge becomes due and payable on the day the individual is liable to pay the tax due under their first notice of assessment that includes an amount of tax on which the individual is liable to pay the charge. General interest charge is also payable if the charge remains unpaid after the due date (s 95-25). 4. Individual may apply for release of excess contributions. An individual may elect to have up to 85% of their excess concessional contributions for a financial year released from superannuation. The choice of how much to release, up to the 85% limit, is at the discretion of the individual. The release of excess concessional contributions is discussed at ¶6-520. 5. Impact on the amount of an individual’s non-concessional contributions. Although an individual’s non-concessional contributions continue to include their excess concessional contributions (¶6-550), the amount of excess concessional contributions that is counted is reduced if the individual elects that excess concessional contributions be released (¶6-520). The amount of the reduction is equal to 100/85 of the amount released (s 292-90(1A)). As a result, if an individual chooses to release the full 85% of their excess concessional contributions, their excess concessional contributions will have no impact on their non-concessional contributions. Example William makes undeducted personal contributions (non-concessional contributions) of $100,000 in 2019/20 and he also has excess concessional contributions of $8,000. If the excess concessional contributions are included, he would have nonconcessional contributions of $108,000. William’s non-concessional contributions cap is $100,000 for 2019/20 (¶6-540) and he would have therefore $8,000 of excess non-concessional contributions. If William elects to release $6,800 of his excess concessional contributions from superannuation, this reduces his nonconcessional contributions by $8,000: $6,800 × 100/85 = $8,000. As a result, William has non-concessional contributions of $100,000 and has not exceeded his cap. If William had not released the $6,800 from superannuation, the $8,000 excess non-concessional contributions would have been liable to excess non-concessional contributions tax.

The impact of excess concessional contributions on non-concessional contributions tax liability is discussed further at ¶6-550. The Commissioner has discretion to disregard or reallocate excess concessional contributions upon the

application of an individual (¶6-665).

¶6-520 Release of excess concessional contributions If an individual has excess concessional contributions (¶6-505) for a financial year, the Commissioner must make a written determination stating the amount of the excess contributions and the amount of excess concessional contributions charge (¶6-515) the individual is liable to pay (TAA Sch 1 s 97-5). An individual who receives an excess concessional contributions determination may request to release from a superannuation interest up to 85% of the excess concessional contributions stated in the determination (TAA Sch 1 s 131-5 and 131-10 from 1 July 2018). There is an 85% cap because the remaining 15% represents the income tax liability that the fund incurred when it received the contributions. The choice of how much to release, up to the 85% limit, is at the discretion of the individual, and replaced the restrictive one-off $10,000 limit that applied for 2011/12 and 2012/13 (¶6-530). A request to release an amount must generally be made by the individual within 60 days of receiving the excess concessional contributions notice, or within a further period allowed by the Commissioner. The request must specify the amount to be released and the superannuation interest or interests from which the amount is to be released (s 131-5). Once the Commissioner receives an individual’s request to release an amount, the Commissioner must provide a release authority for the specified amount to each superannuation provider that holds a superannuation interest identified in the election (s 131-15). Action by superannuation fund on receipt of release authority A superannuation fund that has been issued with a release authority must, generally within 10 days, pay to the Commissioner the lesser of: (a) the amount stated in the release authority, and (b) the sum of the “maximum available release amounts” for each superannuation interest held by the superannuation provider for the individual (s 131-35(1)). The “maximum available release amount” for a superannuation interest at a particular time is the total amount of all the superannuation lump sums that could be payable from the interest at that time (s 13145), but the calculation does not include an interest that is a defined benefit interest (s 131-35(2)). A superannuation provider of defined benefit interests is not required, but can choose, to comply with a release authority, in which case it must pay the same amount to the Commissioner as if the interest was not a defined benefit interest (s 131-40). Superannuation providers who do not comply with a release authority are subject to an administrative penalty of 20 penalty units (TAA Sch 1 s 288-95(3)). Consequences of releasing amounts If a superannuation provider pays an amount in relation to a release authority, the Commissioner must credit the amount paid to the individual (s 131-65(1))). The released amount is non-assessable nonexempt income for the individual (s 303-15). To the extent that the amount released exceeds the individual’s outstanding tax liabilities, the Commissioner must refund the excess to the individual (TAA s 8AAZLF). The Commissioner must pay interest to the individual if there is an unreasonable delay between an amount being paid by the superannuation provider and the excess being refunded to the individual (s 131-70). The release authority process from 1 July 2018 is discussed further at ¶6-640.

¶6-525 Liability to excess concessional contributions tax before 2013/14 Excess concessional contributions tax was imposed on excess concessional contributions made in 2012/13 and earlier years. The rules on excess concessional contributions tax were in ITAA97 Subdiv 292-B (former s 292-10 to 292-25) and Subdiv 292-D (former s 292-155 to 292-175).

Excess concessional contributions tax was payable on the amount of an individual’s concessional contributions (¶6-510) that exceeded the individual’s concessional contributions cap (¶6-505) for the year (former ITAA97 s 292-20). Excess concessional contributions tax of 31.5% was imposed on the excess contributions by the Superannuation (Excess Concessional Contributions Tax) Act 2007. With 15% tax having already been paid when the contributions were made to the superannuation fund, the additional 31.5% tax brought the tax liability on the excess contributions to 46.5%, the top marginal rate. Excess concessional contributions were also counted as non-concessional contributions (¶6-550). If satisfied that excess concessional contributions had been made for a person for 2012/13 or an earlier year, the Commissioner was required to make an assessment of the amount of the person’s excess contributions and the amount of excess concessional contributions tax the person was liable to pay (¶6600). Measures to relieve the excess contributions tax burden A member could attempt to relieve their excess concessional contributions tax burden by: 1. applying to the Commissioner to have concessional contributions for a year disregarded or allocated to another year (¶6-665), or 2. applying for a refund of excess contributions for 2011/12 or 2012/13 if the excess contributions did not exceed $10,000 (¶6-530). 2013/14 and later years Instead of being liable to excess concessional contributions tax, excess concessional contributions made in 2013/14 and later years are included in the individual’s assessable income and taxed at marginal rates and are also liable to an excess concessional contributions charge (¶6-515). [FITR ¶269-030; SLP ¶37-290]

¶6-530 Refund of excess concessional contributions for 2011/12 and 2012/13 For contributions made in 2011/12 and 2012/13, individuals who breached the concessional contributions cap (¶6-505) by up to $10,000 may have been entitled to a refund of the excess contributions. The Commissioner could make a written determination that excess contributions were to be disregarded if satisfied that an individual had excess concessional contributions of $10,000 or less (former s 292-467). If an individual exceeded their concessional cap in more than one financial year before receiving notification from the Commissioner, they were only eligible for the refund in the first year, and if they did not accept a refund offer they were not entitled to a refund offer in any later year.

Once a determination was accepted, the Commissioner could give a release authority to a superannuation provider that held a superannuation interest for the individual. The release authority stated the amount to be released, which was usually 85% of the excess concessional contributions. A superannuation provider was generally required to release the amount requested to the Commissioner within 30 days. An individual for whom a superannuation provider paid an amount to the Commissioner was generally entitled to a credit equal to that amount. If the Commissioner made a determination that excess contributions were to be disregarded, the amount of excess contributions were included in the individual’s assessable income and the individual was entitled to a refundable tax offset equal to 15% of the excess contributions. [SLP ¶2-982]

Treatment of Excess Non-Concessional Contributions ¶6-540 Excess non-concessional contributions An individual has excess non-concessional contributions for a financial year if (s 292-85(1)): (a) they receive one or more excess non-concessional contributions determinations for the year (TAA Sch 1 s 97-25) from the Commissioner (b) the excess amount stated in the most recent of those determinations exceeds the sum of any amounts paid in response to release authorities (¶6-640) issued in relation to those determinations, and (c) the Commissioner is not satisfied that the value of the individual’s superannuation interests is nil. The amount of an individual’s excess non-concessional contributions (s 292-85(1A)) is: (a) if no amounts have been paid under release authorities issued in relation to excess nonconcessional contributions determinations -- the excess amount stated in the most recent determination, or (b) if amounts have been paid to the individual under such release authorities -- the amount by which the excess amount stated in that determination exceeds what has been paid under the release authorities. If an individual has excess non-concessional contributions from 1 July 2013, the individual can elect to release the excess contributions from superannuation. The consequences that flow from such an election are discussed at ¶6-565. An individual who has excess non-concessional contributions from 1 July 2013 and leaves excess contributions in superannuation is liable to excess non-concessional contributions tax on those contributions (¶6-560). Excess non-concessional contributions tax is also payable on excess nonconcessional contributions for years before 2013/14. Non-concessional contributions cap An individual’s non-concessional contributions cap for 2019/20 (and also for 2018/19 and 2017/18) is either $100,000 or nil (s 292-85(2)). As a general rule, the cap is $100,000, being the general non-concessional contributions cap for the year, which is four times the $25,000 concessional contributions cap (¶6-505). The cap is nil if, immediately before the start of the year, the individual’s total superannuation balance (¶6490) equals or exceeds the general transfer balance cap (¶6-440) for the year ($1.6m for 2019/20) (s 29285(2)). This means the individual cannot make any non-concessional contributions for that year. The annual non-concessional contributions cap is indexed as the concessional contributions cap is indexed, ie in increments of $2,500 in line with average weekly ordinary time earnings (s 960-285(7) table

item 2). The non-concessional contributions cap was $180,000 for 2016/17, 2015/16 and 2014/15 and was $150,000 for years before 2014/15. An individual may have a higher non-concessional contributions cap if the bring forward provisions apply (¶6-545). [FITR ¶269-080; SLP ¶37-300]

¶6-545 Bringing forward non-concessional contributions for two years Certain individuals may be able to bring forward two years’ worth of entitlements to make nonconcessional contributions, and so can make three years’ non-concessional contributions in one year without exceeding their non-concessional contributions cap. For 2019/20, an individual who is eligible to bring forward two years of entitlements would have a non-concessional contributions cap of $300,000. The bring forward of two years of non-concessional contributions cap is only available when nonconcessional contributions in excess of the non-concessional contributions cap are made in a financial year by a person who is under 65 at any time in the year. The individual must be under 65 at some time in the year, but it is not necessary that the contribution is made while the individual is under 65. In determining the amount of non-concessional contributions that has been made, excess concessional contributions count as non-concessional contributions. Individuals who are aged 63 or 64 when they make a contribution and who fully take advantage of the bring forward provisions in the first year (that is, their contribution uses the full three-year entitlement in that year) are not required to meet the work test in SISR reg 7.04 (¶6-320) in either of the following two financial years. If, however, the individual brings forward the three-year entitlement but does not make the full contribution in the first year, the individual would have to meet the work test in any later year that a contribution is being made and the individual is no longer under 65. The work test requires an individual to show that they worked for at least 40 hours over a 30-day period in the financial year. For 2017/18 and later financial years, an individual is eligible to use the bring forward provisions if: • their non-concessional contributions (¶6-550) for that year exceed the general non-concessional contributions cap ($100,000 for 2019/20) • their total superannuation balance (¶6-490) immediately before the start of the year is less than the general transfer balance cap ($1.6m for 2019/20) • the difference between the general transfer balance cap and their total superannuation balance is greater than the general non-concessional contributions cap • they are under 65 years at any time in the year, and • a bring forward period is not already in operation in respect of the year for the individual because of an earlier application of the bring forward rules (s 292-85(3)). Example Albert is 51 and his total superannuation balance on 30 June 2019 is $400,000. In the 2019/20 financial year, he makes $158,000 of non-concessional contributions. Albert can access the bring forward provisions in 2019/20 because: • his non-concessional contributions ($158,000) exceed the $100,000 general non-concessional contributions cap • his total superannuation balance ($400,000) is less than the $1.6m general transfer balance cap • the difference between the $1.6m general transfer balance cap and his $400,000 total superannuation balance is greater than $100,000 • he is under 65 years, and • a bring forward period is not already in operation for Albert for 2019/20 because of an earlier application of the bring forward

rules.

Amount that can be brought forward The amount of the non-concessional cap that an individual may bring forward from 2017/18 is: (i) three times the annual cap, ie $300,000, over three years if their total superannuation balance is less than $1.4m (ii) two times the annual cap, ie $200,000, over two years if their total superannuation balance is above $1.4m and less than $1.5m, and (iii) nil if their superannuation balance is $1.5m or above, ie there is no bring forward period and the general non-concessional contributions cap applies (s 292-85(5)). An individual who has brought forward their non-concessional contributions cap can make further nonconcessional contributions in the second year of the bring forward period if their total superannuation balance on 30 June of the financial year before the start of the second year is less than the general transfer balance cap in that second year. The individual’s cap for the second year is the unused portion of their cap from the first year. Similar rules apply for the third year (s 292-85(6), (7)). An individual cannot make a non-concessional contribution at all in 2019/20 if their total superannuation balance at 30 June 2019 is $1.6m or more (s 292-85(2)(b)). Transitional bring forward arrangements Transitional arrangements apply to individuals who brought forward their non-concessional contributions cap in the 2015/16 or 2016/17 financial years (ITTPA s 292-85). These rules ensured an individual did not retain the benefit of higher pre-2017/18 caps for any part of the bring forward period that occurred in 2017/18 or later years. Where an individual triggered their bring forward period in the 2015/16 financial year, their nonconcessional contributions cap for the first (2015/16) and second (2016/17) years are set by the rules that applied to those years. Their cap for the 2017/18 year is determined under the standard calculation for the third year cap under s 292-85(6), but applied as if the first year cap had been $460,000 (ie $180,000 for 2015/16, $180,000 for 2016/17 and $100,000 for 2017/18). The individual is entitled to contribute $460,000 over the bring forward period. Where an individual triggered the bring forward in the 2016/17 financial year, their non-concessional contributions cap for the first (2016/17) year is set by the rules that applied to that year. Their cap for the second (2017/18) and third (2018/19) years is determined under the standard calculation for those caps, but applied as if the first year cap had been $380,000 (ie $180,000 for 2016/17, $100,000 for 2017/18 and $100,000 for 2018/19). The individual is entitled to contribute $380,000 over the bring forward period. Proposed change to bring forward rules during “work test exemption” period As a general rule, individuals who have reached age 65 can only make personal contributions if they have not reached 75 and they are gainfully employed on at least a part-time basis during the year. An exemption from this rule from 1 July 2019 allows individuals aged 65 to 74 with a total superannuation balance below $300,000 to contribute to their superannuation for 12 months from the end of the previous financial year in which they last met the work test (¶6-320). The government has proposed that contributions made under the work test exemption would not be taken into account when assessing eligibility for the bring forward arrangements from 1 July 2019. An individual would only be eligible to access the first year of the bring forward non-concessional contributions cap in a particular financial year if their non-concessional contributions, excluding any work test exemption contributions for that financial year, exceed their general non-concessional contributions cap. Legislation for this amendment has not been introduced into parliament. [FITR ¶269-080; SLP ¶37-300]

¶6-550 Non-concessional contributions An individual’s non-concessional contributions are generally contributions (¶6-125) made to a complying superannuation fund in respect of the individual that are not included in the assessable income of the fund (¶7-120). These are generally undeducted contributions from after-tax income. A person’s non-concessional contributions for a financial year include (s 292-90): • contributions which are made to a complying superannuation fund for a person and which: (a) are not included in the assessable income of the superannuation provider, eg because they are not deductible; or (b) are not, by way of a roll-over superannuation benefit (¶8-600), included in the assessable income of any complying fund or RSA in the circumstances mentioned in s 290-170(5) (about successor funds) or s 290-170(6) (about MySuper products) (¶6-380) • contributions made for the person by their spouse (¶6-800) • contributions in excess of the person’s CGT cap amount (see below) • amounts transferred from foreign superannuation funds, excluding amounts included in the fund’s assessable income (¶8-370) • an amount in a superannuation fund that is not assessable income of the fund and that is allocated for a member in accordance with conditions in ITAR reg 292-90.01 and SISR Div 7.2 • the amount of a contribution that is covered by a valid and acknowledged notice under s 290-170 (¶6380) to the extent that the contributor is not entitled to a deduction, eg because a deduction condition (¶6-340) has not been satisfied • contributions made to non-complying superannuation funds in previous financial years when the fund becomes complying (eg contributions made to a fund in 2014/15 when it was non-complying would be included in the member’s non-concessional contributions cap in 2015/16 if the fund became complying in 2015/16) • for the transitional period from 10 May 2006 to 30 June 2007, employer contributions in excess of the person’s age-based deduction limit, and • contributions made for the benefit of a person under 18 years of age that are not employer contributions for the person. According to Interpretative DecisionID 2010/104, if a non-concessional contribution is returned to a member (¶6-670) who has voluntarily made the contribution and was unaware at the time that the contributions cap would be exceeded, the contribution would still be counted as a non-concessional contribution for the purposes of s 292-90. The Commissioner’s view is that the contribution should be classified as intentional and not made by mistake, unlike in the Personalised Transport case where a mistake of law caused the payment to be made or SCT Determination D06-07\129 where a member inadvertently made a contribution by electronic transfer to his fund instead of paying the amount as rent to his estate agent (¶6-670). Excess concessional contributions counted as non-concessional contributions An individual’s non-concessional contributions for a financial year include the amount of their excess concessional contributions (¶6-505) for the year (s 292-90(1)(b)). The amount of excess concessional contributions that is counted as non-concessional contributions is reduced for contributions made in 2013/14 and later years if the individual elects for the release of excess concessional contributions from the superannuation fund (¶6-520). In such a case, the amount of the reduction is equal to 100/85 of the amount released (s 292-90(1A)). As a result, if an individual chooses to release the full 85% of their excess concessional contributions (¶6-640), their excess concessional contributions will have no impact on their non-concessional contributions.

Where the excess concessional contributions were made for 2012/13 or earlier years and were liable to excess concessional contributions tax, the inclusion of the contributions in non-concessional contributions could have the effect that some or all of the excess concessional contributions were taxed at 93%. This could also be the case where the excess concessional contributions relate to later years, and the taxpayer chooses not to take advantage of the option of releasing excess concessional contributions from the fund. The contribution would be included in the taxpayer’s assessable income and also be subject to excess non-concessional contributions tax. For 2019/20, 2018/19 and 2017/18, the excess non-concessional contributions tax rate is 47%. For 2014/15, 2015/16 and 2016/17 (the temporary budget repair levy years), the rate was 49%. This meant the total rate of tax on excess concessional contributions that were not withdrawn and that were counted as non-concessional contributions could reach 98% if the taxpayer was subject to the highest marginal rate (45%) plus Medicare levy (2%) and temporary budget repair levy (2%). To avoid this, the overall tax payable for those years was limited to a maximum of 95%. This was achieved by the rate of excess non-concessional contributions tax that would otherwise apply being reduced where that was necessary to ensure the overall tax payable on the contributions did not exceed 95% (Superannuation (Excess Non-concessional Contributions Tax) Act 2007, s 6). Excluded contributions The following amounts are excluded from being non-concessional contributions (s 292-90(2)(c)): • government co-contributions for the person (¶6-700) • contributions arising from certain structured settlements or orders for personal injuries (see “Payments for personal injury” below) • contributions arising from the small business CGT concessions which are within the person’s CGT cap amount (see “Disposal of small business assets — contributions up to the CGT cap amount” below) • “downsizer contributions” (¶6-390) made on or after 1 July 2018 • contributions made to a constitutionally protected fund (other than a contribution included in the contributions segment of the person’s superannuation interest in the fund (¶8-170)) • contributions that are not included in the assessable income of a public sector superannuation scheme because the trustee chooses, under s 295-180, that they not be included (¶7-120), and • contributions that are roll-over superannuation benefits (¶8-600). Structured settlement and workers compensation payment contributions Contributions made from certain personal injury payments may be excluded from being non-concessional contributions (s 292-95). There is no limit on the amount of a personal injury payment that can be excluded, but unless all the conditions are satisfied the fund must report the amount as a nonconcessional contribution. To be excluded, the following conditions must be satisfied. 1. The contribution arises from: (a) a payment made under a written settlement agreement of a claim for damages for personal injury or a court order for such a claim, or (b) a workers’ compensation payment that is taken as a lump sum. 2. Two legally qualified medical practitioners certify that, because of the personal injury, the person is unlikely to ever be gainfully employed in a capacity for which the person is reasonably qualified because of education, experience or training. 3. The contribution is made to the fund within 90 days, or such longer period as the Commissioner allows,

of whichever of the following events occurs last: (a) the contributor receives the personal injury payment (b) an agreement for settlement of the personal injury payment is entered into, and (c) a court order for the personal injury payment is made. From 2017/18, if an individual requests the Commissioner to allow a longer period of time for the contribution to be made and is dissatisfied with the Commissioner’s decision, the individual may object against the decision in the manner set out in TAA Pt IVC (¶11-500). 4. The member must notify the fund of the election for the amount not to be counted as a nonconcessional contribution before or when the contribution is made to the fund. The member may use the approved form (Contributions for personal injury form (NAT 71162)) or another form that gives their fund all the information required by the approved form. Disposal of small business assets — contributions up to the CGT cap amount A contribution of certain amounts gained from the disposal of small business assets may be excluded from being counted as a non-concessional contribution of a person up to their CGT cap amount when the contribution is made. The CGT cap amount is $1.515m for 2019/20 and was $1.480m for 2018/19 (¶18-350). Eligibility criteria To qualify for the exemption of contributions up to the CGT cap amount, an entity must satisfy the eligibility criteria in ITAA97 Subdiv 152-A. This means the entity must: • be a “CGT small business entity” (basically, as defined in ITAA97 s 152-10, an entity that carries on business in the year and has an aggregate turnover of less than $10m) • satisfy a maximum $6m net asset value test, or • be a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership. CGT-related payments that may be excluded A CGT-related payment may be excluded from being a non-concessional contribution to the extent that it does not exceed the taxpayer’s CGT cap amount when it is made (s 292-90(2)(c)(iii)). To be excluded, a contribution must come within s 292-100. A contribution is covered by s 292-100 if: (a) it is made to a complying superannuation fund (b) the contributor makes a choice in the approved form that s 292-100 applies and gives the choice to the superannuation fund no later than when the contribution is made, and (c) it is one of the following amounts: • a contribution which: (a) is equal to all or part of the capital proceeds from the disposal of active assets held continuously for the 15-year period ending just before the assets were disposed of and for which the contributor can disregard any capital gain under the small business concessions in ITAA97 s 152-105; and (b) is made by the later of the day the contributor is required to lodge their income tax return for the income year in which the CGT event happened, and 30 days after the capital proceeds are received (s 292-100(2)) • a contribution by a CGT concession stakeholder of a company or trust of an amount from the disposal of active assets held continuously for 15 years, where the company or trust makes a payment to the CGT concession stakeholder by the later of: (a) two years after the relevant CGT event; and (b) if the disposal involves look-through earnout rights created on or after 24 April

2015 (rights to future payments linked to the performance of an asset after sale), six months after the latest time a possible financial benefit could become due under a look-through earnout right relating to the CGT asset and that disposal. (See “Look-through earnout rights” below.) The CGT concession stakeholder must make the contribution within 30 days of the payment from the company or trust, and the amount of the contribution is limited to their stakeholder’s participation percentage (within the meaning of s 152-125(2)) of the capital proceeds from the CGT event and cannot be more than the payment made to them by the company or trust (s 292100(4)). A “CGT concession stakeholder” of a small business entity (within the meaning of s 15260) is a person with a significant interest in the entity or the spouse of such a person. • a contribution of a CGT exempt amount of up to $500,000 that is disregarded under the small business retirement exemption in s 152-305 — under s 152-305, an individual (and in some cases a company or trust) can choose to disregard a capital gain from the disposal of small business assets if certain conditions are satisfied, one of the conditions being that, if the individual is under 55, they must contribute the CGT exempt amount to a complying superannuation fund or an RSA (an individual aged at least 55 may choose, but is not required, to contribute the amount to a superannuation fund) (s 292-100(7) and (8)), or • a contribution of capital proceeds from the disposal of assets that would have qualified for the 15year asset exemption but for the asset being disposed of before the required 15-year holding period had elapsed because of the permanent incapacity of the person which occurred after the asset was purchased. Look-through earnout rights A look-through earnout right is a right created under an arrangement for the disposal of a CGT asset where the right is to future financial benefits that are not reasonably ascertainable when the right is created and are contingent on the economic performance of the asset being disposed of (s 118-565). Contributions derived from look-through earnout rights created on or after 24 April 2015 may be accepted by a fund and treated as a CGT exempt contribution as long as: (i) the financial benefits under the earnout right are provided within five years after the end of the financial year in which the CGT event (eg the sale of the business) occurred; and (ii) the conditions in SISR reg 7.04(6A) are satisfied. These conditions require that: • the amount does not exceed the member’s CGT cap amount • were the amount to be accepted as a contribution, it could be covered under s 292-100 in relation to a CGT event referred to in that section • the capital proceeds from the CGT event were, or could have been, affected by one or more financial benefits received under a look-through earnout right, and • reg 7.04(1) would not have prevented the fund from accepting the amount as a contribution had it been made to the fund in the financial year in which the CGT event happened. A member would satisfy this condition if, for example, the member is aged over 65 and is no longer working at the time of the payment from the look-through earnout right, but was under 65 and met the requirements of reg 7.04(1) at the time of the CGT event that gave rise to the payment. CGT cap amount may be reduced The CGT cap is a lifetime, not an annual, cap. If a contribution covered by s 292-100 is made in respect of a person at a particular time, that person’s CGT cap amount is reduced just after that time by the amount of the contribution, including to nil if the contribution is equal to the CGT cap amount at that time (ITAA97 s 292-105). This includes elections made for contributions made between 10 May 2006 and 30 June 2007 (ITTPA s 292-80(3)(h)). Example

In 2019/20, Jon wishes to contribute $1.4m from the disposal of active assets from his small business. In the previous year, he had elected that a $300,000 contribution from the disposal of active assets from his business not be counted as non-concessional contributions. Although the CGT cap amount for 2019/20 is $1.515m, Jon has already made a contribution of $300,000 that is covered by the exemption. For 2019/20, his CGT cap amount is therefore reduced to $1.215m ($1,515,000 − $300,000) and, when he contributes $1.4m, $185,000 (that is, the excess over his $1.215m cap) is counted as a non-concessional contribution. Jon has used the whole of his CGT cap amount and will not be able to take advantage of the exemption in later years.

Fund must be notified of contributor’s choice The member must notify the fund of the election to exclude the amounts in the approved form (Capital gains tax cap election (NAT 71161)) before or when they make the contribution to the fund. Otherwise, the fund must report the amount as a non-concessional contribution. A contribution will only count towards the CGT cap if the person notifies the superannuation fund before or when the contribution is made. This is to ensure that the superannuation fund is able to accept the contribution and the contribution is not reported against the non-concessional contributions cap. This also gives the person the choice as to whether all or part of a contribution is counted against the nonconcessional contributions cap or the CGT cap (ITAA97 s 292-100(9)). Amounts contributed to complying superannuation funds from KiwiSaver schemes An amount transferred from a New Zealand KiwiSaver scheme to a complying superannuation fund (¶8380) is treated as a non-concessional contribution. An “Australian-sourced amount” and a “returning New Zealand-sourced amount” may, however, be excluded from being non-concessional contributions as these amounts may already have been counted as non-concessional contributions when they were first contributed to the complying fund (ITAA97 s 312-10(3)). The amounts are only excluded if the member or the KiwiSaver scheme provider informs the trustee of the complying superannuation fund of the Australian-sourced or returning New Zealand-sourced amounts of the contribution. Excess non-concessional contributions released from superannuation Individuals may choose to release from superannuation excess non-concessional contributions and associated earnings (¶6-565). The earnings will be taxed at the individual’s marginal tax rate. Individuals who leave their excess non-concessional contributions in the fund will continue to be liable to excess nonconcessional contributions tax (¶6-560). Downsizer contributions From 1 July 2018, individuals aged 65 and over may be able to make a non-concessional contribution into their superannuation of up to $300,000 from the proceeds of selling their home. The general contribution rules for individuals aged 65 and older (a work test for those aged 65 to 74 and no contribution by those aged 75 and over) and restrictions on non-concessional contributions for individuals with balances above $1.6m do not apply to these contributions. Downsizer contributions are discussed at ¶6-390. [FITR ¶269-090; SLP ¶37-300]

¶6-560 Liability to excess non-concessional contributions tax From 2013/14, liability to excess non-concessional contributions tax arises where an individual who has excess non-concessional contributions (¶6-540) leaves excess contributions in superannuation rather than electing to release the contributions and to pay tax at ordinary rates on associated earnings (¶6565). Excess non-concessional contributions tax is imposed on excess non-concessional contributions at the rate of 47% for 2019/20, 2018/19 and 2017/18. The rate was 49% for 2016/17, 2015/16 and 2014/15, and 46.5% for earlier years (s 292-80). The tax is imposed by the Superannuation (Excess Non-concessional Contributions Tax) Act 2007. If satisfied that excess non-concessional contributions have been made for a person in a year, the Commissioner must make an assessment of the amount of the person’s excess contributions and the amount (if any) of excess non-concessional contributions tax the person must pay (¶6-600).

A member who receives an excess contributions tax assessment may apply to the Commissioner to have non-concessional contributions for a year disregarded or allocated to another year (¶6-665). A member who receives an excess non-concessional contributions determination may request that a superannuation fund be given a release authority to authorise the release of an amount. The Commissioner may give a release authority to a fund even if the member does not make such a request (¶6-640). Before 2013/14, an individual who had excess non-concessional contributions was liable to excess nonconcessional contributions tax and could not avoid liability by releasing the excess contributions. [FITR ¶269-070; SLP ¶37-290]

¶6-565 Release of excess non-concessional contributions An individual with excess non-concessional contributions for a year may be liable to excess nonconcessional contributions tax (¶6-560). For 2019/20, 2018/19 and 2017/18, the tax is imposed at the rate of 47% on the excess contributions. To avoid liability to excess non-concessional contributions tax, an individual may choose to withdraw excess non-concessional contributions made on or after 1 July 2013. This measure, implemented by the Tax and Superannuation Laws Amendment (2014 Measures No 7) Act 2015, complements the measure that allows an individual to withdraw excess concessional contributions made on or after 1 July 2013 (¶6520). Release authorities given to superannuation providers are the means by which excess contributions are withdrawn. The standardised release authority process under TAA Sch 1 Div 131 from 1 July 2018 is discussed at ¶6-640. An individual can choose to withdraw excess non-concessional contributions plus 85% of the associated earnings on the excess contributions. The full amount of the associated earnings will be taxed at the individual’s marginal tax rate, but the individual is entitled to a non-refundable tax offset equal to 15% of the associated earnings that are included in their assessable income. Excess non-concessional contributions made in 2013/14 or later years for an individual are only subject to excess non-concessional contributions tax to the extent that the individual does not make a valid request for the contributions to be withdrawn. Excess non-concessional contributions tax is not imposed where the amount released is equal to the amount of the excess contributions, but will generally be imposed where the full amount is not released from superannuation (s 292-85). Even if some of the excess contributions are not released, the Commissioner may direct under s 292-467 that the value of all of the individual’s remaining superannuation interests is nil, eg because the individual has already been paid all their superannuation benefits. This direction would mean that the individual has no excess non-concessional contributions for the year. Determination of excess non-concessional contributions If an individual’s non-concessional contributions for a financial year (the “contributions year”) exceed their non-concessional contributions cap (¶6-540), the Commissioner must make a written determination stating: • the amount of the excess • the amount of the associated earnings worked out under s 97-30, and • the “total release amount”, ie the amount of the excess contributions plus 85% of the “associated earnings amount” (TAA Sch 1 s 97-25). Associated earnings amount The associated earnings amount is intended to approximate the amount earned from the excess contributions while they were held in superannuation.

The associated earnings amount is calculated for the period that: (a) starts on the first day of the contributions year, ie the year the excess contributions were made, and (b) ends on the day the Commissioner makes the first excess non-concessional contributions determination the individual receives for the contributions year. The amount is calculated by the formula in TAA Sch 1 s 97-30, using an average of the general interest charge (GIC) rate for each of the quarters of the contributions year and compounding on a daily basis. The GIC rates are set out at ¶11-380. Request to release excess non-concessional contributions An individual who receives an excess non-concessional contributions determination can make a request for the release of an amount not exceeding the “total release amount” stated in the determination (TAA Sch 1 s 131-10). The total release amount (s 97-25) is the amount of the excess contributions plus 85% of the associated earnings amount. A request must: (a) notify the Commissioner of the total amount to be released (b) identity one or more superannuation interests and the amount to be released from each, and (c) be given to the Commissioner in the approved form within 60 days of the date of issue of the determination (TAA Sch 1 s 131-5). A request must be for the release of the total release amount stated in the determination or for a nil amount. If an individual makes a valid request, the Commissioner must issue a release authority to each superannuation provider that holds a superannuation interest identified in the request. If an individual has not made a valid request within 60 days after the excess non-concessional contributions determination is issued, the Commissioner may issue a release authority to one or more superannuation providers that hold superannuation interests for the individual (TAA Sch 1 s 131-15). A superannuation provider issued with a release authority must, within 10 days, pay to the Commissioner the lesser of: (i) the amount stated in the release authority, and (ii) the sum of the “maximum available release amounts” for each superannuation interest held by the superannuation provider for the individual (s 131-35(1)). This is basically the total amount of the superannuation lump sums that could be payable from the interest at that time (s 131-45). This means the superannuation provider must release both the excess contributions and associated earnings amounts to the maximum extent possible. Only 85% of the associated earnings amount can be released, as the superannuation provider may already have included the earnings on investments made with the excess contributions in the provider’s assessable income and been taxed on those earnings at a rate of up to 15%. Consequences of releasing excess non-concessional contributions (1) A superannuation benefit that an individual is taken to receive when an amount is paid to the Commissioner in response to a release authority is non-assessable non-exempt income for the individual (ITAA97 s 303-15). (2) Where the full amount of the excess contributions is released from superannuation, or the Commissioner determines that the value of the individual’s superannuation interests is nil, 100% of the associated earnings amount is included in the individual’s assessable income and taxed at the individual’s marginal tax rate in the year the excess contributions were made (ITAA97 s 292-20; 292-25). (3) The individual is entitled to a tax offset equal to 15% of the associated earnings amount included in their assessable income (ITAA97 s 292-30). The offset cannot be refunded, transferred or carried forward (item 20 of the table in ITAA97 s 63-10(1)).

(4) Excess non-concessional contributions tax is imposed (at the rate of 47% for 2019/20, 2018/19 and 2017/18 and at 49% for the previous three years) on excess non-concessional contributions not released from superannuation unless the Commissioner has directed under s 292-467 that the value of an individual’s superannuation interests is nil (ITAA97 s 292-85(1)(c)). Example Igor has $100,000 excess non-concessional contributions for 2017/18. Assume that: • the Commissioner makes a determination on 1 November 2018 that the associated earnings amount for the excess contributions is $12,305, and • this amount is calculated as $100,000 multiplied by the 2017/18 average GIC rate for the 489 day period from 1 July 2018 to 1 November 2018 when the Commissioner makes the determination. The total release amount is $110,459, being $100,000 excess contributions plus $10,459 (85% of the $12,305 associated earnings amount). Igor makes a valid election to release the total release amount of $110,459 by notifying the Commissioner and specifying a superannuation provider that holds an interest for him. The Commissioner issues a release authority to the superannuation provider, requiring the provider to make a payment to Igor of $110,459 from his superannuation interest. The superannuation provider pays $110,459 to Igor in compliance with the release authority. The full amount of the associated earnings ($12,305) is included in Igor’s assessable income for 2017/18 (ITAA97 s 292-25), but he is entitled to a tax offset of $1,846, being 15% of $12,305 (ITAA97 s 292-30). The $100,000 excess non-concessional contributions paid to Igor in response to the release authority is a superannuation lump sum benefit but there are no income tax consequences as it is non-assessable non-exempt income (ITAA97 s 303-17). As a result of the release of the non-concessional contributions from his superannuation interest, Igor no longer has excess nonconcessional contributions and so is not liable for excess non-concessional contributions tax.

Direction if the value of an individual’s superannuation interests is nil If the Commissioner makes an excess non-concessional contributions determination for an individual for a year and, as a result of the determination: • the individual makes one or more requests to release, or not to release, the total release amount stated in the determination, and • the Commissioner is satisfied that the value of the individual’s remaining superannuation interests is nil, eg because the individual has already been paid their superannuation benefits by the time they receive the determination the Commissioner must give a direction to the individual under s 292-467. The direction: • has the effect that the individual has no excess non-concessional contributions for the year (s 29285(1)(c)) even though not all of the excess amount has been released, but • does not prevent an amount from being included in the individual’s assessable income. Where a direction is made under s 292-467, the full associated earnings amount for the excess nonconcessional contributions calculated by the Commissioner is included in the individual’s assessable income, and the individual is entitled to a non-refundable tax offset equal to 15% of the associated earnings amount included in their assessable income (s 292-20; 292-25; 292-30). Example In the 2019/20 financial year, Pip exceeds her non-concessional contributions cap by $50,000. The Commissioner makes an excess non-concessional contributions determination stating her excess contributions amount of $50,000, an associated earnings amount of $10,000 and a total release amount of $58,500 ($50,000 plus 85% of the associated earnings amount of $10,000). Before receiving the determination, Pip was paid a superannuation lump sum benefit of her entire superannuation balance, so she makes a valid request to not release any amount from superannuation. The Commissioner is satisfied that the value of Pip’s superannuation interests is nil, and notifies her that he has made a direction to

that effect. As a result, Pip does not have an excess non-concessional contributions tax liability for 2019/20. The associated earnings amount calculated by the Commissioner is included in Pip’s assessable income for 2019/20 and taxed at her marginal tax rate. She is entitled to a non-refundable tax offset of $1,500, being equal to 15% of the amount included in her assessable income.

¶6-570 Single contribution in excess of the “fund-capped contributions” limit Before 1 July 2017, superannuation funds were not allowed to accept any “fund-capped contributions” in a year that exceeded: • if the member was aged 64 or less on 1 July of the year — three times the amount of the nonconcessional contributions cap (ie $540,000 for 2016/17, 2015/16 and 2014/15, and $450,000 for previous years), or • if the member was aged 65 but less than 75 on 1 July of the year — the non-concessional contributions cap (ie $180,000 for 2016/17, 2015/16 and 2014/15 and $150,000 for previous years) (SISR reg 7.04(3)). The rule was designed to prevent inadvertent breaches of the non-concessional contributions cap rules (¶6-540) by placing an onus on the funds not to accept amounts above the annual non-concessional cap or bring forward cap (depending on an individual’s age). The fund-capped contribution limit was repealed because changes to the non-concessional contributions cap (¶6-540) and the introduction of eligibility conditions based on an individual’s total superannuation balance (¶6-490) from 1 July 2017 meant that setting a value limit on the amount a fund could accept as a contribution was no longer practical and would place an inappropriate burden on funds. According to the explanatory statement to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017, the appropriate approach from 1 July 2017 was for individuals themselves to have primary responsibility for determining whether a non-concessional contribution made in respect of them was within their non-concessional contributions cap. Fund-capped contributions “Fund-capped contributions” was defined in former SISR reg 7.04(7) as the “member contributions” described in the definition in SISR reg 5.01(1). This refers to contributions by, or on behalf of, a member, but not including employer contributions made for the member. Fund-capped contributions did not include: (i) contributions covered by a valid and acknowledged notice under s 290-170 (¶6-380), (ii) contributions arising from structured settlements or orders for personal injuries meeting the requirements of s 292-95(1)(d) (¶6-550), (iii) contributions relating to the sale of certain small business assets meeting the requirements of s 292-100(9) (¶6-550), (iv) superannuation guarantee shortfall payments made by the Commissioner (¶12-500), (v) a payment from the Superannuation Holding Accounts Special Account (¶12-600), (vi) government co-contributions (¶6-700), (vii) a low income superannuation tax offset (¶6-770), or (viii) a contribution that was a directed termination payment (¶8-830). Return of contributions that should not have been accepted A fund that became aware that its acceptance of fund-capped contributions was in breach of reg 7.04(3) because the contributions exceeded the relevant amount for the year had to return the excess amount within 30 days of becoming aware of the breach (reg 7.04(4)). The fund did not have to return the amount if, within 30 days of receiving the amount, the fund received a valid notice (¶6-380) that the member intended to claim a deduction for the contribution. In determining whether there were excess contributions that had to be returned, superannuation funds were not required to aggregate the total of member contributions for a person either within the fund or across other funds. Rather, the rule applied on a contribution-by-contribution basis. Example

Manchu Super accepts a $200,000 contribution from 61-year-old Mariam on 1 September 2016. In the 2016/17 year, Mariam also contributes $400,000 to another fund, Ming Super. Although Mariam’s total contributions for the year exceed $540,000, which is her cap amount, neither of the funds is required to return an amount to Mariam because each fund is only required to consider the actual contribution they receive from her. If Mariam had been a member of only one fund and had contributed $200,000 and then later in the same year another $400,000, the fund would still not be required to return an amount to Mariam as neither contribution exceeds $540,000.

[SLP ¶2-982]

¶6-580 Transitional arrangements from 10 May 2006 to 30 June 2007 Special rules applied to non-concessional contributions made from 10 May 2006 to 30 June 2007 (ITTPA s 292-80 to 292-80C). Contributors had a non-concessional contributions cap of $1m for the period, and the period was treated as the 2006/07 year for the purposes of the cap. Deductible employer contributions in excess of a person’s age-based deduction limit in the 2006/07 year were included in the calculation of a person’s non-concessional contributions for the period (ITTPA s 292-80(5), (6)). A person who had non-concessional contributions in excess of $1m in the period 10 May 2006 to 6 December 2006 could apply to the Commissioner for a release authority which could be given to the superannuation provider to authorise the release from the fund of the excess contributions. The person’s non-concessional contributions for the year were reduced by the released amounts which were nonassessable non-exempt income (ITTPA s 304-15). If the excess amounts were not removed, they were included in the calculation of the person’s excess non-concessional contributions tax liability for the year. A person could not apply for the release of excessive non-concessional contributions made after 6 December 2006. If the $1m transitional cap was exceeded because of contributions made after 6 December 2006, the ATO sent the person an excess non-concessional contributions tax assessment and a release authority which the person was required to give to the fund to release an amount equal to the excess contributions tax liability. [FITR ¶269-080; SLP ¶37-300]

Assessments of Excess Contributions Tax ¶6-600 Excess non-concessional contributions tax assessments The Commissioner must make an excess non-concessional contributions tax assessment of: • the amount of a person’s excess non-concessional contributions, and • the amount (if any) of excess non-concessional contributions tax the person is liable to pay in relation to the financial year (s 292-230(1)). The Commissioner must give the person notice in writing of an assessment as soon as practicable after making the assessment (s 292-230(2)), and the validity of an assessment is not affected because any of the provisions of the Act have not been complied with (s 292-240). The Commissioner’s assessment is based on information from superannuation providers and from the person’s income tax return. The reporting obligations on superannuation funds to enable the Commissioner to make assessments are in TAA Sch 1 Div 390 (¶6-050). An assessment of excess contributions tax is made on the basis of what an individual, or their representative acting on their behalf, actually does when making the contribution, rather than what they later say they intended to do. This was reinforced by the AAT in The Taxpayer 11 ESL 09 where a person unsuccessfully argued that he should not have to pay for an innocent mistake made by his accountant who, he said, had incorrectly allocated contributions to him that were intended for another person. The AAT decision supports the ATO position that whether excess contributions have been made is a matter of

fact in the circumstances and the intent of the parties is not determinative. Under ITAA36 s 177, the production of a notice of assessment is conclusive evidence of the due making of the assessment and, except in review or appeal proceedings under TAA Pt IVC, that the amount and all particulars of the assessment are correct. General interest charge and shortfall interest charge An excess non-concessional contributions tax assessment is due and payable at the end of 21 days after the Commissioner gives the person notice of the assessment (s 292-385). If the Commissioner amends an assessment, shortfall interest charge may be payable on additional excess non-concessional contributions tax that is payable because of the amendment (TAA Sch 1 s 280-102A). Shortfall interest charge is due and payable 21 days after the day the Commissioner gives the taxpayer notice of the shortfall interest charge liability (ITAA97 s 5-10). General interest charge (¶11-380) may be imposed if a person fails to pay excess non-concessional contributions tax or shortfall interest charge by the due date (ITAA97 s 5-15). Both the general interest charge and the shortfall interest charge are deductible (s 25-5). The Commissioner has discretion to remit general interest charge in appropriate circumstances, for example, where a release authority (¶6-640) is presented to the fund by the due date but amounts are not released in time for the tax to be paid within 21 days (TAA s 8AAG). The Commissioner may also remit shortfall interest charge if it is considered to be fair and reasonable to do so (TAA Sch 1 s 280-160). Action where person is dissatisfied with an assessment A person who is dissatisfied with an excess non-concessional contributions tax assessment may object against the assessment in the manner set out in TAA Part IVC (s 292-245). This means the person: • may make an amendment request on the grounds that the assessment is factually incorrect, eg because an amount was incorrectly reported by the fund, or • may object against the assessment on the grounds that the law has been incorrectly applied by the Commissioner (¶11-500). An assessment may generally only be amended within four years from the date of the original assessment (s 292-305), but may be amended at any time to give effect to a review or appeal decision or as a result of an objection or pending an appeal or review (s 292-330). If the time to lodge an objection has passed, the person may apply to the Commissioner for an extension of time. The request for an extension of time must state fully and in detail why the objection was not lodged within the required time. After receiving the person’s request, the Commissioner must decide whether to agree to it or refuse it, and give notice of the decision. If the Commissioner refuses the request, the person may apply for review of the decision (TAA s 14ZX). Excess concessional contributions tax assessments — pre-2013/14 For 2012/13 and earlier financial years, the Commissioner was required to make an assessment of a person’s excess concessional contributions and the amount of excess concessional contributions tax which the person was liable to pay. Excess concessional contributions tax has been repealed for contributions made in 2013/14 and later financial years (¶6-520). [FITR ¶269-230; SLP ¶37-340]

Release Authorities ¶6-640 Consolidated release authority process from 1 July 2018 Generally, individuals are only entitled to withdraw amounts of superannuation held by superannuation providers if they have satisfied a condition of release (¶3-280). Conditions of release include the presentation of a release authority which authorises a fund to release superannuation amounts that may otherwise have been preserved in the fund (conditions of release 111A and 111B).

Before 1 July 2018, different types of release authorities were available if an individual had: (i) excess concessional or non-concessional contributions, (ii) a Division 293 tax liability or a debt account discharge liability (¶6-400), or (iii) an excess non-concessional contributions tax liability. There were differences in the operation of these release authorities, including: (i) the fact that either an individual or the Commissioner could provide the release authority to the superannuation provider, (ii) the time for the provider to comply, and (ii) the entity to whom the amounts were released. For discussion of the pre-1 July 2018 release authority processes, see the Australian Master Superannuation Guide 2017/18 at ¶6640 to ¶6-655. The law was amended from 1 July 2018 to simplify and consolidate the processes for the release of amounts from individuals’ superannuation interests using a release authority. The consolidated processes apply to all release authorities except for Division 293 debt account discharge liabilities (¶6-400). The common legislative framework for the release of amounts from superannuation from 1 July 2018 is in TAA Sch 1 Div 131. Release authorities issued to superannuation providers From 1 July 2018, release authorities are issued by the Commissioner directly to superannuation providers. Superannuation providers have a standard 10 business days to comply, although the Commissioner can allow further time. As a temporary measure until the release authority process has been digitised, the time for the return of release authorities for excess contributions and Div 293 liabilities has been extended from 10 to 20 business days. This does not apply to release authorities associated with the FHSS scheme (¶6-385). The release authority process will return to the legislated 10 business days when the ATO has changed the process from paper to being managed via SuperStream. Where the release of an amount is voluntary, eg the release of excess concessional contributions, individuals generally have 60 days to request that the Commissioner arrange the release of the specified amount. Where the release is mandatory, eg the release of excess non-concessional contributions, the individual is not involved in releasing amounts and the Commissioner deals with the superannuation providers directly. The ATO’s views on release authorities are set out at: www.ato.gov.au/Super/APRA-regulated-funds/Managing-member-benefits/Release-authorities/. Requesting the release of amounts from superannuation interests An individual may request the release of an amount from their superannuation interests if they are given: (a) an excess concessional or non-concessional contributions determination for the year (b) a notice of assessment of an amount of Division 293 tax payable for the income year, or (c) a FHSS determination (¶6-385) (s 131-5(1)). The request is made by the individual notifying the Commissioner of the total amount to be released, identifying the superannuation interest or interests from which that total amount is to be released and, if the individual identifies more than one superannuation interest, stating the amount to be released from each such interest (s 131-5(2)). The request must be in the approved form and be given to the Commissioner within 60 days after the Commissioner issues the relevant determination or notice or within a further period allowed by the Commissioner (s 131-5(3)). Restrictions on the total amount an individual can request to be released The total amount that an individual can request to be released is: (i) for an excess concessional contributions determination (¶6-520) — up to 85% of the contributions stated in the determination (ii) for an excess non-concessional contributions determination (¶6-565) — the total release amount

stated in the determination (being the full amount of the excess contributions and 85 per cent of associated earnings) or nil (iii) for an assessment of an amount of Division 293 tax (¶6-400) – up to the amount of the liability, or (iv) for a FHSS determination (¶6-385) — the FHSS maximum release amount stated in that determination (s 131-10). Release authority issued by the Commissioner If an individual makes a valid request, the Commissioner must issue a release authority to each superannuation provider that holds a superannuation interest identified in the request (s 131-15(1)). The Commissioner may provide a release authority to a fund without a request from the individual if: (i) the individual is liable for excess non-concessional contributions tax (ii) the individual is liable for assessed Division 293 tax that is not deferred to a debt account and has neither paid the tax nor released the amount of the tax from superannuation within 60 days of the issue of the notice, or (iii) the individual has been issued with an excess non-concessional contributions determination or a notice from the Commissioner under s 131-55 that a fund was not able to release all or part of an amount identified in a prior request relating to such a determination, and has not made a request to the Commissioner for the release of an amount 60 days after the issue of the determination or notice (s 131-15(2) to (4)).

Example Isma receives an excess non-concessional contributions determination from the Commissioner on 21 December 2019 specifying that the total release amount in respect of her excess non-concessional contributions (the amount of the excess contributions plus 85 per cent of the associated earnings) is $10,000 for the 2018/19 financial year. She also receives notice of an assessment of Division 293 tax payable, stating that she has an assessed Division 293 tax liability of $5,000 for the 2018/19 financial year. Isma has 60 days to request that the Commissioner arrange the release of either $10,000 (the total release amount for her excess contributions and associated earnings) or a nil amount. She also has 60 days to request the release of an amount from nil up to $5,000 (the amount of her assessed Division 293 tax liability). Alternatively, Isma can choose not to make a request. If Isma does not choose to request the release of any amount from her superannuation interest, the Commissioner may issue release authorities to superannuation providers holding superannuation interests for Isma to seek the release of the full amount of her excess non-concessional contributions and 85 per cent of the associated earnings, and also of the full amount of her assessed Division 293 tax.

Complying with a release authority A superannuation provider that receives a release authority must pay to the Commissioner the lesser of: (i) the amount specified in the release authority; and (ii) the sum of the “maximum available release amounts” for each superannuation interest held by the superannuation provider for the individual (s 131-35(1)). The “maximum available release amount” for a superannuation interest at a particular time is the total amount of all the superannuation lump sums that could be payable from the interest at that time (s 13145). Defined benefit interests are not included when calculating the sum of the maximum available release amounts for an individual’s superannuation interests (s 131-35(2)). A superannuation provider of defined benefit interests can choose to comply with the release authority if it is practical in the circumstances and consistent with the fund’s rules, in which case it must pay the same amount to the Commissioner as if the interest was not a defined benefit interest (s 131-40). A superannuation provider that fails to comply with s 131-35 is liable to an administrative penalty of 20 penalty points (TAA Sch 1 s 288-95(3)).

Notifying the Commissioner A superannuation provider that pays an amount under a release authority must generally notify the Commissioner of the payment within 10 business days (or an extended time) after the date the release authority is issued (s 131-50). The Commissioner must also be notified if the provider has been issued with a release authority but is not required to make the payment or the amount required to be paid is less than the amount stated in the release authority. A superannuation provider that fails to notify the Commissioner as required by s 131-50 is liable to an administrative penalty (TAA Sch 1 s 286-75(1)). The Commissioner must notify the individual if the superannuation provider has given a notice to the Commissioner under s 131-50 or has not paid the full amount stated in the release authority within the required time (s 131-55). Consequences of releasing amounts Amounts released to the Commissioner under s 131-35 because of a release authority will generally be credited against an individual’s tax liability with excess amounts refunded to the individual. Amounts released relating to a Division 293 tax liability that is deferred to a Division 293 debt account (¶6-400) are treated as a voluntary payment towards the debt account (s 131-65). Interest is payable to the individual if there is unreasonable delay in payment of a refund (s 131-70). Income tax treatment of released amounts An amount released from superannuation in response to a release authority issued under s 131-15 is non-assessable non-exempt income (s 303-15). This is where an individual has made a valid request under s 131-5 for the release of an amount relating to an excess concessional or non-concessional contributions determination, a notice of Division 293 tax liability or an FHSS determination. Where a release authority relates to an individual’s debt account discharge liability in relation to Division 293 tax (¶6-400), a superannuation benefit that the individual is taken to receive when an amount is paid in relation to such a release authority is also non-assessable non-exempt income (s 303-20). Despite s 303-20, an amount paid in excess of the taxpayer’s release entitlement as stated in the release authority may be included in the taxpayer’s assessable income (s 304-20(1))(¶6-520), The proportioning rule in s 307-125 (¶8-160) does not apply to a payment made under Div 131 (s 131-75). This means that, when releasing an amount, the superannuation provider is not required to reduce either the tax free component or the taxable component of a superannuation benefit, and does not reduce either the tax free component or the taxable component of the member’s superannuation interest at that time. These components do not need to be calculated until the provider pays a superannuation benefit that requires the calculation of the components, eg if the member rolls over the remaining superannuation interest to another complying superannuation fund (Interpretative Decision ID 2008/11).

Commissioner’s Discretion to Disregard or Reallocate Contributions ¶6-665 Determination for contributions to be disregarded or reallocated Adverse tax consequences arise for an individual for whom excess contributions are made in a financial year. In the case of concessional contributions: • excess concessional contributions made in 2013/14 or later financial years may be included in the individual’s assessable income and also be liable to excess concessional contributions charge (¶6515), or • the individual may be liable to excess concessional contributions tax if the contributions were made before 2013/14 (¶6-520). In the case of non-concessional contributions, excess non-concessional contributions tax may be

imposed (¶6-560). In order to avoid additional tax liability on excess contributions, a person can apply to the Commissioner for a determination that concessional or non-concessional contributions be either disregarded or reallocated to another year. For non-concessional contributions (and for concessional contributions made in 2012/13 and earlier financial years), application is made under s 292-465. For concessional contributions made in 2013/14 and later financial years, application is made under s 291-465. If the Commissioner makes a determination to disregard contributions, the contributions are not counted towards the relevant contributions cap for any financial year. If a determination is made to reallocate contributions to another financial year, the contributions are counted towards the relevant contributions cap for the financial year to which they are reallocated. An application for the Commissioner to make a determination can only be made once all of the contributions sought to be disregarded or reallocated have been made. If the person has received an excess contributions tax assessment or an excess concessional contributions determination for the financial year, an application must be made within 60 days after receiving the assessment or determination, or within a further period allowed by the Commissioner. As the cases below show, a taxpayer with excess contributions can find it very difficult to persuade the Commissioner to exercise discretion to disregard or reallocate contributions. As an alternative from 1 July 2013, an individual can avoid liability for excess non-concessional contributions tax by making an election to release from their superannuation any excess non-concessional contributions plus 85% of the associated earnings on those contributions (¶6-565). If a taxpayer takes this action, excess nonconcessional contributions tax is not payable, and instead the taxpayer includes the associated earnings in their assessable income (subject to a 15% tax offset). In the case of excess concessional contributions, the excess amount is included in a taxpayer’s assessable income and taxed at marginal rates and is also liable to excess concessional contributions charge (¶6-525). Criteria for determination to be allowed The Commissioner can only make a determination to disregard or reallocate an amount if he considers that: • making the determination is consistent with the object of ITAA97 Div 291 and 292, and • there are special circumstances. Exercise of discretion must be consistent with the object of the legislation The Commissioner’s discretion may only be exercised where the Commissioner considers that making the determination is consistent with the object of Div 291 and 292. The object of the two Divisions, as set out in s 291-5 and 292-5, is to ensure that the amount of concessionally taxed superannuation benefits an individual receives results from contributions that have been made gradually over the course of the individual’s life. In Rawson 2012 ATC ¶10-250, the AAT said that it is less likely to be consistent with the object of Div 292 to disregard or reallocate contributions if the excess contributions result from factors within a person’s control, such as where the person had the potential to control what contributions were made and when they were made. In Ward (2016), the Full Federal Court held the AAT erred in Ward (2015 No 2) (below) when it concluded that a determination to disregard or reallocate excess contributions would have been consistent with the object of Div 292 if it had found special circumstances. According to the court, a question of law needed to be considered — whether it could be said on the facts that the lump sum contribution by the taxpayer represented contributions made gradually over the course of the taxpayer’s lifetime. The AAT had misunderstood that legal question, and a decision could only be reached after considering “who was the legal and beneficial owner, from time to time and in what circumstances, of the funds that made up the amount of $450,000 that was the excess contribution” (at para 47). The court remitted the matter to the AAT which upheld the Commissioner’s decision not to disregard or reallocate the taxpayer’s contributions (Ward (2018)). The AAT found that the taxpayer had not

established that making a determination would be consistent with the object of Div 292. The AAT said that the Federal Court in Dowling (below) made it clear that a contribution must not only include the proceeds of superannuation savings made over the taxpayer’s life but must also be the proceeds of such savings. The taxpayers could not satisfy this test because the contributions in dispute came from contributions made over the taxpayers’ working lives as well as from the proceeds from selling their home. Commissioner must be satisfied there are “special circumstances” The Commissioner may make the determination only if he considers that there are special circumstances. “Special circumstances” is not defined in the Act, but the term has been examined by courts and tribunals in many decisions. In Beadle v Director-General of Social Security (1985) 60 ALR 225 the Federal Court defined special circumstances as those which are “unusual, uncommon or exceptional”. The court emphasised that whether there are special circumstances depends on the facts of each case, and that it is not possible to lay down precise limits or rules. In Kerr 2007 ATC 2488, the AAT said that the financial hardship suffered by a taxpayer because of his reliance on incorrect advice from a financial adviser was not unusual, uncommon or exceptional enough to constitute special circumstances. Australian courts have made it clear that special circumstances are limited to those that make the taxpayer’s case different from the ordinary or usual. Matters that the Commissioner will take into account In making a determination to disregard or reallocate contributions, the Commissioner may have regard to the following matters (Practice Statement PS LA 2008/1). (1) Whether a contribution made in the relevant year would more appropriately be allocated to another year. The Commissioner will usually only consider a contribution to be more appropriately allocated to another year “if it should have been made” in a different year, eg if the employer was required to make the contribution in a different year. This would not be the case just because the taxpayer intended for it to be made in a different year, or the contributor’s liability to make the contribution accrued in a different year (eg the employer’s July contribution related to work performed by the employee in the June quarter), or an amount was sent to the fund in one financial year and received in the next (eg sent in June and received in July). (2) Whether it was reasonably foreseeable, when the contribution was made, that the member would have excess contributions for the relevant year. What is reasonably foreseeable must be determined objectively. It does not involve what the taxpayer actually foresaw when the contribution was made, but what the taxpayer reasonably could have foreseen in their individual circumstances. The taxpayer must show, for example, that they could not reasonably have been aware of the relevant law or facts — it is not enough to simply say they were unaware of them. The Commissioner will also look at: (i) if the contribution was made by another person, the terms of any agreement between the member and the contributor as to amount and timing, and (ii) the extent to which the member had control over the making of the contribution. (3) Any other relevant matters. This may include whether the taxpayer had control over the amount or timing of the contribution. Practice Statement PS LA 2008/1 indicates that the Commissioner would not generally consider that isolated factors amount to special circumstances that make the imposition of the tax unjust, unreasonable or inappropriate. The following would not generally be considered to be special circumstances: (a) financial hardship; (b) ignorance of the law; (c) incorrect professional advice; or (d) retrospectivity of the law or an adverse effect from legislative changes. Difficulty in challenging the Commissioner’s decision

Decided cases show that it is difficult for a taxpayer to successfully challenge the Commissioner’s decision that the circumstances are not sufficiently special for a contribution to be disregarded or allocated to another year. The taxpayer in Lynton 12 ESL 20 was entitled to make non-concessional contributions of $450,000 over three years under the bring forward rule, but in the third year he over-contributed by $23,627. He argued that the financial hardship he was experiencing because of his complex family life constituted special circumstances, but the AAT disagreed, saying that the legislation contemplates that circumstances are special if they are inconsistent with a natural and foreseeable sequence of events. In Dowling, husband and wife taxpayers succeeded before the AAT (2013 ATC ¶10-295), but in a test case funded by the ATO the Federal Court set the decision aside on the grounds that the AAT “fell into error” in the way it applied s 292-465 (2014 ATC ¶20-447). The husband and wife kept separate superannuation accounts to ensure the children of their former marriages would, on the death of the parent, benefit from the parent’s individual superannuation. On advice from a Centrelink finance officer and from his superannuation fund, and with the purpose of being eligible for the age pension the following year, in 2008/09 the husband withdrew $293,858 of his superannuation tax-free and transferred it to a new account in his wife’s name. In 2010/11, the wife withdrew $240,933 from a superannuation account in another fund and re-contributed $200,000 to the same account. The $293,858 contribution for 2008/09 activated the $450,000 bring forward rule for non-concessional contributions (¶6-545), and the wife was assessed as having $43,858 excess non-concessional contributions for 2010/11 when she contributed the $200,000 ($293,858 + $200,000 − $450,000). The AAT found that there were special circumstances and that the $293,858 contribution in 2008/09 should be disregarded in considering the excess contributions tax liability for 2010/11. This was because: (a) financial advice had been obtained from two independent financial advisers; (b) neither the husband nor the wife had any real concept of excess contributions and so would not have been in a position to ask questions about the excess contributions consequences of their proposed transactions (responding to the ATO’s argument that the wife should have inquired about potential excess contributions tax consequences); and (c) the outcome of the transaction was not therefore reasonably foreseeable by a person in the wife’s position. The AAT pointed out that, unlike the husband and wife in this case, most of the precedent decisions involve employees who might be expected to develop at least some day-to-day insight from their employer about the law, its purpose and the extent to which it might apply to them. On appeal by the Commissioner, the Federal Court held that the AAT made an error of law in the way that it approached the construction and application of s 292-465. The AAT fell into error when it disregarded the 2008/09 contribution which resulted in the taxpayer not having an excess non-concessional contribution for the 2010/11 year. The court also held that the AAT mischaracterised the circumstances of the 2008/09 contribution as “special circumstances”, and that it incorrectly concluded that an exercise of the s 292-465 discretion was consistent with the object of Div 292. When the matter was remitted to the AAT, the AAT said the case did not display special circumstances and, in any event, it would not be consistent with the object of Div 292 for a taxpayer’s withdrawal, then re-contribution, of a lump sum to be disregarded or reallocated where the taxpayer’s purpose had been to gain a tax advantage for her children when she died (Dowling 2014 ATC ¶10-371). In Liwszyc, the Federal Court held that there were no special circumstances when a BPay transfer initiated on 30 June was not received, and a contribution not therefore “made”, until 1 July, because this was not outside the ordinary course of events. The taxpayer in Ward (2015 No 2) received an excess non-concessional contributions assessment of $209,250 for 2010/11 after he moved funds over a period of three years, first into a superannuation fund, then out into a bank account, then back into another superannuation fund. The initial contribution of $450,000 triggered the bring forward rule (¶6-545), which meant the later re-contribution of the same amount was in excess of his contributions cap. Coming to the conclusion “with considerable regret”, the AAT ruled that the taxpayer’s situation did not amount to special circumstances. The outcome may be “harsh and unfair” in that the taxpayer had only set out to protect his and his wife’s superannuation nest egg after a lifetime in low paid employment and had acted in good faith with professional advice, but the situation did not meet the stringent test for special circumstances. Nevertheless, the AAT said, it amounted to grossly unfair treatment at the hands of the law, with the taxpayer suffering “a penalty of

19,527 per cent of any ‘tax advantage’ (his advisors’ calculation), an outcome which cannot be regarded as conscionable”. The Full Federal Court (Ward (2016)), unanimously upheld the taxpayer’s appeal, finding that the AAT in Ward (2015 No 2) had erred in law by taking too narrow a view of what may constitute special circumstances. The error: (i) may have been caused by the AAT unnecessarily considering factors in isolation before focusing on the entirety of the circumstances; and (ii) was certainly caused by the AAT taking expressions used in other decisions out of their factual and legal context. The AAT had, for example, placed substantial reliance on what had been said in Lynton and Liwszyc (above), where the Commissioner’s decision not to exercise discretion was upheld in very different circumstances. According to the Full Federal Court, the AAT erred in proceeding on the basis that, because the imposition of the tax was the natural and foreseeable consequence of the decision of the taxpayer and his advisers, it was necessarily outside the scope of special circumstances. This misconception led to the AAT approach that there could not be special circumstances unless something unintended occurred, ie something other than the natural and foreseeable consequence of the decisions made. The court found it was open to the AAT to find there were special circumstances “if it found that the provisions operated on Mr Ward, in his individual circumstances, in an unfair or unjust way because, through a misunderstanding of an adviser by virtue of an allegedly misleading notice provided by [the superannuation fund], Mr Ward, acting honestly and carefully, accidentally breached the bring forward rule which had consequences disproportionate to the intended operation of the statute” (at para 41). The court set aside the AAT decision and remitted it to the AAT to be decided according to law. According to the AAT (Ward (2018)), special circumstances may be made out where a taxpayer relies on incorrect advice and the consequences of that incorrect advice are exceptional or extraordinary in their impact on the taxpayer. This was the case for the taxpayer where the imposition of the excess contributions tax obliterated the entirety of his superannuation savings. Nevertheless, the Tribunal -- with “considerable regret” as the strict application of the law produced a “harsh and unfair outcome” -- affirmed the Commissioner’s decision because the taxpayer had failed to establish that making the determination would be consistent with the object of Div 292. In Brady, the taxpayer had excess non-concessional contributions when contributions that he thought would be deductible were added to his non-concessional contributions because he had breached the 10% rule. The reallocation of the contribution from concessional to non-concessional, leading to a $83,417 tax liability, was not a special circumstance despite the problem being caused by the taxpayer’s innocent mistake. Infrequent taxpayer successes Taxpayers are sometimes, although not often, able to successfully argue that the Commissioner should have made a determination in their favour. The taxpayer in Hamad made monthly salary sacrifice payments and monitored his pay slips and adjusted his salary sacrifice amounts to remain within the contributions cap. The employer usually made contributions in the month following the sacrifice of salary, but for April, May and June 2009 the employer made a single contribution in July 2009. This meant that the taxpayer had 15 months of contributions made for him in 2009/10, and was liable to excess contributions tax as a result. The taxpayer’s payment summary for 2008/09 and member statements from his superannuation fund for the periods ending 30 June 2009 and 31 December 2009 could, if considered carefully, have warned him of the need to adjust his salary sacrifice payments for 2009/10. Nevertheless, the AAT decided the employer contributions received in July 2009 should be allocated to 2008/09 because there were special circumstances “in that, despite his checking his payment advices, the taxpayer was positively misled by his employer, improperly in my opinion, retaining amounts directed to superannuation and making late payments”. The ATO decision impact statement on Hamad states that it must be implied from this statement that the AAT found the taxpayer did not control the timing of the contributions and that this was a significant factor in making the circumstances special. In Longcake, the taxpayer had instructed his employer to cease paying salary sacrifice contributions to an AMP fund on 30 June 2009 and to pay salary sacrifice contributions from 1 July 2009 only to a Tasplan fund. In 2009/10, instead of following these instructions, the employer paid $24,768 to AMP and $38,964

to Tasplan, as well as SG contributions of $599 to AMP and $7,220 to Tasplan. These contributions exceeded the taxpayer’s $50,000 concessional contributions cap for 2009/10 and he was assessed as liable to pay excess contributions tax of $6,788. The AAT was satisfied that there were special circumstances and that the contributions made by the employer to AMP in July 2009 should be reallocated to the 2008/09 year. The special circumstances were that the taxpayer: (i) had deliberately rearranged his affairs to avoid excess contributions tax and genuinely believed the new arrangement would be effective (ii) made a deliberate decision to switch his contributions to Tasplan because of the commission being deducted by AMP, and entered into an agreement with his employer to that effect, and (iii) could not reasonably have foreseen that the $50,000 cap would be exceeded, had no knowledge of the emerging problem and no opportunity to correct the error. Review of the Commissioner’s decision not to make a determination Whether the AAT could review a decision of the Commissioner not to make a determination under s 292465 has been considered in a number of decisions. The AAT held in McMennemin that it did not have jurisdiction to review a decision of the Commissioner refusing to make a determination to disregard or reallocate contributions made by two taxpayers who had been assessed as liable to excess non-concessional contributions tax. The AAT rejected the taxpayers’ argument that it had jurisdiction to review the Commissioner’s refusal to make a determination, stating that the Commissioner’s discretion to make or not make a determination was not part of the assessment process (a taxpayer could only apply for a determination after the assessment was issued) but was a separate decision made outside that process. In the absence of a provision specifying that a person could object against that discrete decision, the Commissioner’s decision to refuse to make a determination was not a “reviewable objection decision” for the purposes of TAA s 14ZZ(1), and the Tribunal lacked jurisdiction to review that decision. Section 292-465 was amended in 2010 to state that: • a determination under s 292-465 may be included in a notice of assessment (s 292-465(8)), and • a person may object under s 292-465 against an excess contributions tax assessment on the ground that they are dissatisfied with a determination that they had applied for under the section (s 292465(9)(a)). The Full Federal Court in Administrative Appeals Tribunal upheld the AAT decision in McMennemin. The court found that s 292-465 was not sufficiently connected to the process of assessment of a taxpayer’s liability to excess contributions tax for it to be reviewable under TAA Pt IVC and noted that the 2010 amendments did not have retrospective effect. Later cases have considered whether a taxpayer can, since the amendments made in 2010, object against the Commissioner’s decision not to make a determination under s 292-465. The dispute in Hope was settled without deciding the jurisdiction question but the Tribunal noted that, while s 292-465(9)(a) clearly permits an objection to be made on the ground of dissatisfaction with a determination that has been made, “it is not at all clear that it allows an objection to be made when the Commissioner has not made a determination at all on the person’s application” (at para 30). In Ward (2015 No 1), the taxpayer and the Commissioner asked the Tribunal to decide, as a preliminary question, whether it had jurisdiction in relation to the taxpayer’s review application. The jurisdiction question was stated as whether the Commissioner’s decision not to make a determination was one against which the taxpayer could object under s 292-245. If it was not, then there was no objection for the Commissioner to disallow and therefore no reviewable objection decision for the Tribunal to review. The Tribunal found that, if the words of s 292-465(9)(a), that a person may object only “on the ground that you are dissatisfied with a determination that you applied for under this section”, were given their ordinary meaning, this would produce a “manifestly absurd” result. The only taxpayers entitled to object could not do so because they would not be dissatisfied with the outcome, and those who were dissatisfied would

not have a right to object despite that dissatisfaction. That would mean that the 2010 amendments, although intended to remedy the outcome in McMennemin, had no practical effect. As s 15AB of the Acts Interpretation Act 1901 allows extrinsic material to be used to determine the meaning of a provision when the ordinary meaning would otherwise lead to a manifestly absurd result, the Tribunal said it was appropriate to consider the explanatory memorandum to the Superannuation Legislation Amendment Bill 2010 that inserted s 292-465(9)(a) to ascertain the meaning. The explanatory memorandum stated that “… a person may object to an excess contributions tax assessment on the grounds that they are dissatisfied with the Commissioner’s determination or the Commissioner’s decision not to make a determination” (at 4.32). The AAT was satisfied that, by implying the words of the explanatory memorandum, s 292-465(9)(a) was given “a reasonable and realistic meaning, consistent with what Parliament clearly intended”. On this basis, a person has a right to object where a person is dissatisfied with the Commissioner’s determination or the Commissioner’s decision not to make a determination. It followed that the Commissioner could disallow the taxpayer’s objection, the decision to disallow the objection was a reviewable objection decision for the purposes of TAA s 14ZZ(1) and the Tribunal had jurisdiction to review the decision. Review and objection rights from 1 July 2017 Following the AAT decision in Ward (2015 No 1), s 292-465 was amended by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Act No 81 of 2016) to repeal s 292-465(9) and replace it with s 292-465(9) and (10) from 1 July 2017. This has the effect that an individual who is dissatisfied with: (a) a determination made by the Commissioner under s 292-465 in relation to the individual, or (b) a decision by the Commissioner not to make such a determination, may object against the determination, or the decision not to make a determination, in the manner set out in TAA Pt IVC (¶11-500). A dissatisfied individual may also object under ITAA36 s 175A against an assessment made in relation to the individual or under TAA Sch 1 s 97-35 against an excess non-concessional contributions determination made in relation to the individual. [FITR ¶269-480; SLP ¶37-340]

Refund of Contributions Made By Mistake ¶6-670 Refund of employer or member contributions made by mistake An employer or a member that makes contributions to a superannuation fund may be anxious for the contributions, or part of the contributions, to be refunded because they have been made by mistake. The circumstances in which contributions may be refunded are, however, tightly prescribed and, once a contribution has been accepted by a fund, the preservation rules apply (¶3-280) and a payment containing the contribution can generally only be made from the fund in the circumstances set out in the SIS legislation. SISA s 117, for example, states that payment can be made to an employer only if it is a reasonable payment for services rendered or is in the nature of an investment or a loan to the employer (¶3-350). Superannuation Circular No II.B provides that a trustee can return contributions to an employer without infringing s 117 if they have been paid as a result of “clerical error, computer malfunction or other mistake”. Refund of contributions made by mistake SISR reg 6.17(2) prescribes the circumstances (satisfaction of a “condition of release”) in which payments can be made from a regulated superannuation fund (¶3-280), and mistake is not one of these circumstances. Nevertheless, there have been decisions in favour of members who argued for the refund

of contributions made by mistake. The Superannuation Complaints Tribunal (SCT) considered an application for the refund of a member’s contribution in SCT Determination D06-07\129. The member argued that he had inadvertently paid $1,000 to his superannuation fund by electronic transfer instead of paying the amount as rent to his estate agent. The SCT accepted that the member did not intend to contribute the money to the fund and accepted also that the mistaken payment was not actually a “contribution” to the fund and therefore the cashing restrictions in reg 6.17 did not apply. The SCT held that, in accordance with the NSW Supreme Court decision in Personalised Transport Services (¶12-065), once it is established on the balance of probabilities that a mistake has led to an overpayment, there is a prima facie entitlement to recover the money, subject to any defences available. The employer in Personalised Transport Services had made what it believed to be compulsory superannuation guarantee contributions for workers considered to be employees. As the workers were in fact subcontractors rather than employees, superannuation contributions were not required and had been made by mistake. The Commissioner accepts that the principle of unjust enrichment and the remedy of restitution apply to the trustee of a superannuation fund that receives amounts paid by mistake, but considers that refund is only appropriate where the relevant mistake is causative of the contribution (Interpretative DecisionID 2010/104). On this basis, the Commissioner accepts the Personalised Transport Services decision because, although the company intended to contribute to the fund for the workers, it did so only because it mistakenly believed it was obliged to do so by the SGAA. This mistaken belief caused the contribution to be made. In North Adelaide Service Partnership v Retail Employees Superannuation Fund Pty Ltd [2019] SASC 5, the Court ruled that an employer was prima facie entitled to recover superannuation guarantee contributions paid by mistake in respect of exempt employees (¶12-070). Refund of the contributions was subject to any defences and time limitations yet to be determined. In SCT Determination D06-07\129, the SCT accepted that the member did not intend to contribute to their fund at all. According to the Commissioner in ID 2010/104, a payment made under a genuine mistake and which, at the time of being made, is not intended to be a contribution, may be refunded to the payer. The payment will be treated as being held on a separate trust and not held as part of the fund itself.

Interaction with Tax File Number Rules ¶6-680 Tax file numbers and superannuation contributions There are significant consequences if a member’s TFN is not quoted when contributions are made for the member to a superannuation fund, whether the contributions are made by the member personally or by someone else on behalf of the member: (1) additional tax of 32% (34% before 2017/18) is imposed on the fund’s “no-TFN contributions income”, ie contributions paid to a fund where a TFN has not been “quoted (for superannuation purposes)” — ¶6-685 (2) a fund cannot accept member contributions if a TFN has not been “quoted (for superannuation purposes)”, and some member contributions may have to be returned — ¶6-690, and (3) government co-contributions (¶6-700) and low income superannuation tax offset (¶6-770) are not payable. Example Rahul’s salary in 2019/20 is $50,000. His employer pays $4,500 superannuation contributions to Rahul’s superannuation fund and Rahul also wants to make personal contributions of $1,000 so that he can receive the government co-contribution. Rahul has not provided his TFN to his employer or to his superannuation fund. At the end of 2019/20, Rahul’s superannuation fund will pay extra tax of 32% on the employer contributions (¶6-685), on top of the standard 15% contributions tax.

Because Rahul has not provided his TFN to the fund: (i) he is not eligible for a low income superannuation tax offset (¶6-770) to compensate him for the 15% tax paid on the employer contributions (ii) his personal contributions cannot be accepted (¶6-680), and (iii) a government co-contribution is not payable (¶6-700).

When has a TFN been “quoted (for superannuation purposes)”? A person has “quoted (for superannuation purposes)” their TFN to a fund at a particular time if: • the person quotes their TFN to the fund at that time • the person is taken by the SIS or tax legislation to quote their TFN to the fund at that time, eg by quoting it to an employer that makes superannuation contributions on behalf of the person, or • the Commissioner provides the TFN to the fund at that time (s 295-615). If the ATO passes an individual’s TFN to a superannuation fund, the individual is taken to have quoted their TFN to the fund for superannuation purposes at the time it is provided by the ATO (SISA s 299SA). If an employer informs the trustee of a superannuation fund of an employee’s TFN, the employee is taken to have quoted the tax file number to the fund at the time the employer informs the trustee (SISA s 299Q). Employer obligation to pass TFN to superannuation fund Under ITAA36 s 202DHA, if a person makes a TFN declaration to an employer who makes a superannuation contribution for the person to a fund, the person is taken to have authorised the employer to inform the fund of the person’s TFN. The employer is obliged to pass the TFN to the person’s superannuation fund within 14 days of receipt of the TFN, or when making a contribution if later, or is otherwise guilty of an offence (SISA s 299C). Since 1 January 2017, a person has been able to make a TFN declaration to an employer or to the Commissioner. If the person provides their TFN to the Commissioner, ITAA36 s 202CG authorises a taxation officer to make available to the employer the information in the TFN declaration. From 1 July 2018, a TFN can also be disclosed to an employer if the person is taken to have stated their TFN in a TFN declaration (ITAA36 s 202CB(2)), ie where the declaration includes a statement that an application for a TFN is pending or that the person has a TFN but does not know what it is and has asked the Commissioner for information about the number. Whether the employer receives a person’s TFN from that person or from the Commissioner, the employer must disclose the TFN to a superannuation fund to which the employer makes superannuation contributions on behalf of the person (SISA s 299C). An employer may be liable to an administrative penalty if they incorrectly report an employee’s TFN to a superannuation fund. Liability arises if: • the employer makes a statement to a fund in the exercise of powers or the performance of functions under a taxation law, eg as required by ITAA36 s 202DHA, and • the statement is false or misleading in a “material particular” (that is, the statement is connected with a taxation or superannuation law, is relevant to a decision or power for which the statement is made, and is not trivial). The employer is not liable to a penalty if reasonable care was taken in the making of the statement (TAA Sch 1 s 284-75(4), (5)). [FITR ¶270-620]

¶6-685 Additional tax payable on no-TFN contributions income

It is not compulsory for a member to give their TFN to their superannuation fund but, if they fail to do so when concessional contributions are made, the fund may have to pay extra tax on the contributions. This is because a complying superannuation fund is liable to an additional tax on “no-TFN contributions income” that it receives (ITAA97 s 295-605). The additional tax is imposed at the rate of 32% (at 34% before 2017/18) (ITRA s 29). When added to the 15% tax already paid when the contribution was made to the fund, the no-TFN contributions income is, for 2019/20, taxed at 47%. A non-complying superannuation fund is liable to pay an additional 2% (4% before 2017/18). No-TFN contributions income No-TFN contributions income is concessional employer or personal contributions: • that are included in the assessable income of the fund, and • where, by the end of the year, the individual has not “quoted (for superannuation purposes)” (¶6-680) their TFN to the fund (s 295-610). This means that, for contributions in 2019/20, the TFN must be quoted by 30 June 2020 for the fund to avoid the additional tax. An amount is not no-TFN contributions income if both: • the contribution is made in relation to a superannuation interest that existed before 1 July 2007, and • the total contributions made for the member in relation to the superannuation interest that are included in the fund’s assessable income for the year do not exceed $1,000. Offset for tax on no-TFN contributions income if TFN is quoted within four years A superannuation fund may be entitled to a tax offset for tax on no-TFN contributions income if the member quotes their TFN within four years of the tax on the no-TFN contributions income being payable (s 295-675). Interest on overpayment may be payable by the Commissioner to a superannuation fund where a person’s quotation of a TFN results in the fund receiving a tax offset (Taxation (Interest on Overpayments and Early Payments) Act 1993, s 8ZD; 8ZE; 8ZF). Interest is only payable if the person had quoted a TFN to the employer and the employer failed to pass the TFN to the fund to which they made contributions for the person. [FITR ¶270-600 – ¶270-610]

¶6-690 Member contributions may not be accepted unless TFN is quoted Contributions made by a member may not be accepted by a fund if the member’s TFN has not been “quoted (for superannuation purposes)” (¶6-680) to the trustee of the fund (SISR reg 7.04(2)). If a fund becomes aware that it has accepted contributions in breach of reg 7.04(2), it must return the contributions within 30 days of becoming aware of the breach (reg 7.04(4)). This includes where contributions have been received for a member whose only interest is a risk insurance interest (ATO SuperUpdate, March 2010). A fund is not required to return a contribution if: • within 30 days of the fund receiving the contribution, the member’s TFN is quoted (for superannuation purposes) to the fund trustee — this does not apply if there is merely an expectation that the member will quote the TFN in the foreseeable future, or • the member’s only interest in the fund is a risk insurance interest and, by 31 December 2007, either the member’s TFN was quoted or the trustee of the fund returned the amount received to the entity or person that paid the amount, or

• the amount was a government co-contribution payment in respect of a member contribution, where the member contribution was made before 1 July 2007 (reg 7.04(4)(a)(i)). Example Lucy deposits $50,000 in a superannuation fund on 31 December 2019 as a personal contribution. On 2 January 2020, the fund becomes aware that Lucy has not provided her TFN to the fund. The fund must return the contribution to Lucy by 1 February 2020 unless her TFN is quoted to the fund trustee by this time. This is the case even if Lucy provides a valid and acknowledged notice under s 290-170 that she intends to claim a deduction for the contribution.

[SLP ¶2-982]

Government Co-Contribution ¶6-700 Government co-contribution scheme Under the government co-contribution scheme, the government may contribute towards the superannuation savings of eligible low-income earners who make undeducted personal contributions. The government co-contribution is provided by the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Co-contribution Act) and associated regulations. The co-contribution is payable for eligible individuals who make personal superannuation contributions for which a tax deduction has not been claimed. The maximum co-contribution is payable for individuals whose income is at or below the lower income threshold. A lower co-contribution is available for individuals whose income exceeds the lower income threshold but is less than the higher income threshold (¶6-720). Amount of the co-contribution The amount of the government co-contribution depends on the year in which the contributions are made. For 2019/20, eligible personal contributions are matched at the rate of 50%, with a maximum cocontribution of $500. The maximum co-contribution is payable to individuals on incomes at or below the lower income threshold of $38,564 and is reduced by 3.333 cents for each dollar of total income above $38,564. Calculations for previous years are explained at ¶18-320. Tax treatment of co-contribution The tax treatment of a co-contribution is as follows: 1. although a government co-contribution is an undeducted contribution, it is not a non-concessional contribution (s 292-90(2)), and is not included in the assessable income of the superannuation fund as taxable contributions (s 295-170) 2. if a superannuation benefit includes a government co-contribution amount, that amount is tax free for the recipient as a “contributions segment” (s 307-220), and 3. if the Commissioner pays a co-contribution amount to a person rather than to the person’s superannuation fund (¶6-760), the payment is a superannuation benefit (s 307-5) that consists entirely of a tax free component (s 307-135). Additional concession for low income earners For the years 2012/13 to 2016/17, individuals with adjusted taxable income below $37,000 may have been entitled to a low income superannuation contribution (¶6-770). From 2017/18, they may instead be entitled to a low income superannuation tax offset (¶6-770). [SLP ¶36-900ff]

¶6-720 Co-contribution eligibility requirements A government co-contribution is available to a person in 2019/20 if the following conditions are satisfied. These conditions are set out in s 6 of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Co-contribution Act). (1) Eligible personal superannuation contributions The person must make one or more eligible personal superannuation contributions during the year (s 6(1) (a)). A contribution is an “eligible personal superannuation contribution” if: (a) it is made to a complying superannuation fund or an RSA the person holds, and (b) it is made to obtain superannuation benefits for the person or, in the event of the person’s death, for a dependant of the person, and (c) it is not any of the following: • a roll-over superannuation benefit (¶8-600) • a superannuation lump sum paid from a foreign superannuation fund (¶8-370) • a directed termination payment (¶8-830) • an amount transferred from a KiwiSaver scheme (¶8-380) • an amount transferred to the fund from a superannuation scheme which is not, and never has been, an Australian or foreign superannuation fund, was not established in Australia and is not centrally managed or controlled in Australia, or • a payment from a first home savers account (FHSA) or a government FHSA contribution, and (d) it is not claimed as a deduction — the contribution is an eligible personal superannuation contribution only to the extent that the Commissioner has not allowed a deduction (Co-contribution Act s 7). Example Bob, a self-employed builder who is aged 41, makes eligible personal superannuation contributions of $25,000 in 2019/20. If the conditions for a deduction (¶6-340) are satisfied, including that Bob gives notice that he is claiming a deduction, all of the $25,000 is deductible and no amount of the contribution would qualify for the co-contribution. If Bob is not entitled to a deduction because, for example, he fails to give a valid notice of his intention to claim a deduction, he may be entitled to a co-contribution if he satisfies the conditions in s 6. Even if Bob is entitled to a deduction, he may choose to claim a deduction for only part, or no part, of the contribution, and be entitled to a co-contribution for the undeducted amount.

The definition of an eligible personal superannuation contribution implicitly excludes contributions made for another person (eg a spouse) and salary sacrifice contributions (as they are employer, not member, contributions). Because a fund may only accept a member contribution if the member’s TFN is provided (¶6-690), a member can only make eligible personal contributions and be entitled to a co-contribution if their TFN is quoted to the superannuation fund. (2) At least 10% of total income from employment or business The second condition is that 10% or more of the person’s total income for the year must be attributable to either or both of: (i) employment-related activities, and (ii) the person carrying on a business (s 6(1)(b)).

Employment or business Relevant employment-related activities are those covered by s 6(2), that is: • holding an office or appointment, performing functions or duties, engaging in work and doing acts or things, where • the activities result in the person being treated as an employee for the purposes of the SGAA (¶12060). The relevant employment-related activities for this purpose are the same as the activities stated in s 290160 for the purpose of determining whether a person is allowed a deduction for personal contributions (¶6-340). A person who derives 10% or more of their income from employment would be disqualified from claiming a deduction for their contributions. As an alternative to deriving at least 10% of income from employment-related activities, the person may derive at least 10% of their income from “carrying on a business”. The concept of “carrying on a business” was discussed by the Full Federal Court in Hance 2008 ATC ¶20-085, where a participant in a registered agricultural managed investment scheme was found to be carrying on business. A person who derives only passive income such as dividends, rent or interest is unlikely to be found to be carrying on a business unless the extent of, or systematic approach to, the activities constituted a business. A beneficiary’s share of the net income of a trust estate that carries on a business is not included in the beneficiary’s total income as income from carrying on a business for the purposes of s 6(1)(b) (Interpretative Decision ID 2007/195). This is because the beneficiaries of a trust that carries on a business are not themselves carrying on a business, even if the beneficiary is also one of the trustees of the trust (Doherty (1933) 48 CLR 1). A person who derives income only from, for example, Youth Allowance, a pension or a superannuation benefit would be unlikely to satisfy the test of deriving income from employment or business; in contrast, a person who receives an employment termination payment may satisfy the test. Total income A person’s “total income” for an income year is the sum of the person’s: (a) assessable income for the income year, and (b) reportable fringe benefits total for the year, and (c) reportable employer superannuation contributions (Co-contribution Act s 8(1)). A person’s assessable income for an income year is calculated without taking into account, from 1 July 2018, the person’s “assessable FHSS released amount”. This is basically the amount of superannuation contributions released for the person’s use in purchasing or constructing a first home (¶6-385). A reportable employer superannuation contribution (¶6-110) is most commonly an amount contributed to a superannuation fund for an employee under a salary sacrifice arrangement. As defined in TAA Sch 1 s 16-182, it is an amount contributed to a superannuation fund by an employer for the individual, to the extent that the individual has, or might reasonably be expected to have, the capacity to influence the size of the amount or the way the amount is contributed so that the individual’s assessable income is reduced. The reportable employer superannuation contribution is the amount of the contribution made by the employer for the employee that exceeds the amount that the employer is required to make under superannuation guarantee or other laws. An individual’s reportable employer superannuation contribution does not include, from 2013/14, excess concessional contributions that are included in an individual’s assessable income under s 291-15(a) (¶6515) (s 8(1A)). The inclusion of assessable income rather than taxable income in the calculation of a person’s total income means that deductions such as work related employee deductions, deductions for personal superannuation contributions and business expenses are not taken into account.

Example Ahmed earns $15,000 and is entitled to a $1,000 deduction for gifts to the Salvation Army and $350 for work related expenses. He has no reportable fringe benefits. Ahmed’s total income is $15,000.

(3) Total income is less than the higher income threshold The person’s total income for the year must be less than the higher income threshold for the year (s 6(1) (c)). For this purpose (but not for the purpose of determining whether a person satisfies the “10% or more of total income” test in s 6(1)(b)), a person’s total income is reduced by business deductions (Cocontribution Act s 8(2)). Example Micky runs a plumbing business and he has assessable income of $48,000 and business deductions of $12,000. Micky’s total income, for the purpose of calculating whether his total income is less than the higher income threshold for the year, is $36,000.

Although a person’s total income may be reduced by business deductions, this does not include deductions for personal superannuation contributions. Example Amit is a self-employed architect with assessable income of $83,000 and business deductions of $12,000 in 2019/20. He also makes superannuation contributions of $25,000 for which he claims a tax deduction for $24,000 and the other $1,000 is a nonconcessional contribution. Although Amit’s taxable income is $47,000 (ie $83,000 − $12,000 − $24,000), his total income for co-contribution purposes is $71,000 (ie $83,000 − $12,000). He is not eligible for the co-contribution as his total income exceeds the higher income threshold.

Co-contribution income thresholds The higher income threshold for 2019/20 is $53,564 and the lower income threshold is $38,564. For the thresholds for earlier years, see ¶18-320. (4) Income tax return is lodged An income tax return for the person for the income year must be lodged (s 6(1)(d)). This applies to all persons, even those who would not normally be required to lodge a return, eg those whose income is below the tax-free threshold. (5) Non-concessional contributions do not exceed their non-concessional contributions cap From 1 July 2017, a government co-contribution will only be made for a person for an income year if the person’s non-concessional contributions (¶6-550) for the year do not exceed their non-concessional contributions cap ($100,000 for 2019/20 and 2018/19) for the year (s 6(1)(da)). (6) Total superannuation balance is less than the general transfer balance cap From 1 July 2017, a government co-contribution is only allowed for a person where, immediately before the start of the financial year, their total superannuation balance (¶6-490) is less than the general transfer balance cap ($1.6m for 2019/20 and 2018/19) for the year (s 6(1)(db)). (7) Age less than 71 The person must be less than 71 years of age at the end of the income year (s 6(1)(e)). (8) Not a temporary visa holder The person: • does not hold a temporary visa under the Migration Act 1958 at any time during the income year, or • at all times that the person holds such a temporary visa during the income year, is a New Zealand

citizen or the holder of a visa prescribed for the purposes of s 20AA(2) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (s 6(1)(f)). [SLP ¶36-910]

¶6-740 Amount of government co-contribution The basic rule for working out the amount of the government co-contribution is set out in Co-contribution Act s 9 as follows. For 2019/20, the maximum co-contribution payable is $500, which is based on a 50% matching of eligible personal contributions. This is the same as it was for the previous six years. The maximum co-contribution can only be paid if: (i) the person’s total income for the year is less than the lower income threshold for the year ($38,564 for 2019/20), and (ii) the person contributes at least $1,000. An amount lower than the maximum co-contribution may be paid where these two conditions are not satisfied. Example In 2019/20, a person with total income of $39,000 makes eligible personal superannuation contributions of $2,000. As $38,000 exceeds $38,564 by $436, the maximum co-contribution that may be payable to the person is:

$500 − [$436 × .0333 = $15] = $485

For the meanings of “lower income threshold”, “higher income threshold”, and “total income”, see ¶6-720. The maximum co-contribution and threshold amounts for earlier years are set out at ¶18-320. Minimum contribution If the amount of the co-contribution for a person for an income year would be less than $20, the amount of the contribution is increased to $20 (Co-contribution Act s 11). Example An employee on a very low income is only able to contribute $15 during the year. A minimum co-contribution of $20 would be payable if the eligibility conditions are met.

Interest The amount of the co-contribution is increased by interest if the Commissioner does not pay the cocontribution in full on or before the payment date for the co-contribution (ie within 60 days of the information being lodged) (Co-contribution Act s 12). The interest forms part of the actual co-contribution and is treated for taxation purposes in the same manner. [SLP ¶36-925]

¶6-760 Payment of government co-contribution Determination that a co-contribution is payable The Commissioner must determine that a government co-contribution is payable in respect of a person for an income year if satisfied that the co-contribution is payable (Co-contribution Act s 13). In making a determination, the Commissioner must have regard to (Co-contribution Act s 14):

• the income tax return lodged for the person • information about the contributions in member contributions statements given to the Commissioner by the superannuation provider (¶6-050) • other statements given by the superannuation provider to the Commissioner • information provided in response to a request by the Commissioner. Recipients of the co-contribution The Commissioner may pay a co-contribution for a person to: • a complying superannuation fund • an RSA • the person • the person’s legal personal representative, or • the SHASA (Co-contribution Act s 15). Unless the contributor nominates a particular superannuation fund account to the ATO, the cocontribution will usually be paid into the fund where the person made the personal contributions. The SHASA (¶12-600) may be used as a last resort option where all other avenues have been reasonably pursued, but only as a holding account until the Commissioner can find a superannuation fund or RSA into which the co-contribution can be transferred. The co-contribution may be paid directly to a contributor who no longer has a superannuation fund or RSA account because of retirement and has already received all of their superannuation fund entitlements. If the contributor has died, the co-contribution may be paid directly to the deceased person’s estate. The superannuation fund or RSA provider that receives a co-contribution must credit the amount to the member’s account within 28 days of the payment being made, and must report a co-contribution payment to members on their member statements. Information gathering by the Commissioner To facilitate the payment of the government co-contribution, superannuation providers must give statements about contributions to the Commissioner (¶6-050). The Commissioner may require a member or legal personal representative to provide information to determine whether a co-contribution is payable, to attend and give evidence, or to produce certain documents (TAA Sch 1 s 353-10). Penalties It is an offence punishable by a monetary penalty to fail to provide information as required. An offence is also committed by a superannuation provider who fails to keep records for five years explaining transactions relevant to the government co-contribution scheme (Co-contribution Act s 32). If the Commissioner has reasonable grounds to believe a superannuation provider has committed an offence, an infringement notice may be served (Co-contribution Act s 33 to 39). [SLP ¶36-920, ¶36-930]

Low Income Superannuation Tax Offset ¶6-770 Low income superannuation tax offset

From 1 July 2017, an individual with adjusted taxable income below $37,000 may be entitled to a low income superannuation tax offset. The non-refundable tax offset is 15% of the person’s concessional contributions for the year, capped at $500. The purpose of the offset is to compensate low income individuals for the 15% tax on concessional contributions made on their behalf by their employer or by themselves. In the absence of the tax offset, imposition of tax at the rate of 15% could mean the low income individual was taxed at a higher rate on their contributions than if they had received the amount as salary or wages. The low income superannuation tax offset replaced the low income superannuation contribution from 1 July 2017, and was enacted in the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Act No 81 of 2016). Although called an offset by the legislation, the explanatory memorandum states that the offset “is not in fact a tax offset within the meaning of the income tax law. The name instead reflects the operation of the payment in offsetting the tax detriment that eligible low-income earners would otherwise face as a result of the flat rate of tax on concessional contributions being in excess of their effective tax rate”. The low income superannuation tax offset replaced the low income superannuation contribution which compensated low income earners from 2012/13 to 2016/17 for the 15% tax paid on their concessional contributions. Despite the name change, compensation to low income earners operates from 1 July 2017 in much the same way as before that date. Part 2A (s 12B to 12E) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Co-contribution Act) sets out the eligibility rules for the low income superannuation tax offset and the low income superannuation contribution. Both the offset and the contribution are based on 15% of the individual’s concessional contributions for the year and are capped at $500 for the year. Section 12B provides that the general administrative machinery provisions that apply to the cocontribution, eg the processes discussed at ¶6-760, also generally apply to the low income superannuation tax offset and contribution. Eligible persons A low income superannuation tax offset is payable to a person in two situations: (1) where the Commissioner determines entitlement based on an income tax return and other information available; and (2) where the Commissioner estimates that a person is entitled. 1. Determination based on income tax return and other information An individual is entitled to the low income superannuation tax offset for an income year if they satisfy the following conditions: (a) a concessional contribution is made by or for the individual (b) the individual’s adjusted taxable income does not exceed $37,000 (c) the 10% eligible income test is satisfied, that is, at least 10% of the individual’s total income for the year the contribution is made is derived from employment-related activities or from carrying on a business, and (d) the individual is not a holder of a temporary visa under the Migration Act 1958 at any time in the year, or at all times when the individual holds such a visa during the year is a New Zealand citizen or the holder of a visa prescribed for the purposes of s 20AA(2) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (s 12C(1)). 2. Determination based on the Commissioner’s estimate The Commissioner may estimate a person’s entitlement if: (a) concessional contributions are made by or for the person, and (b) 12 months after the end of the income year in which the contributions are made, the Commissioner reasonably believes that there is insufficient information to decide whether to make a determination

that the person is eligible (s 12C(2)(a), (b)). Once the estimations process has been triggered, the Commissioner may (s 12C(2)(c)) estimate that: (a) the person has adjusted taxable income that does not exceed $37,000 — this estimate is based on information or methods reasonably available to the Commissioner, and (unless the Commissioner has information to the contrary) may assume that the individual has deductions of $300 for the income year (s 12C(4)), and (b) 10% or more of the person’s total income for the income year is attributable to the person engaging in activities covered by s 6(2), ie employment-related activities — this basically requires the Commissioner to be satisfied that the person has income from employment-related activities and then to estimate that at least 10% of the person’s total income is attributable to those activities. The Commissioner’s estimate that a person satisfies the 10% eligible income test is based only on whether 10% or more of the person’s total income is attributable to employment-related activities. This differs from the test for the Commissioner making a determination based on an income tax return, where both employment-related and business income is taken into account. Another difference between the two processes is that, for the estimate process, the Commissioner is not required to determine that the individual engaged in the activities in the year the contribution is made (s 12C(5)). There is no age test for the low income superannuation tax offset (unlike the government co-contribution which has a limit of 71 years (¶6-720)). As with the government co-contribution, in working out a person’s total income for these purposes, excess concessional contributions that are included in the person’s assessable income (¶6-515) are disregarded (s 8(1A)). Concessional contributions An individual may be eligible if concessional contributions are made for them by their employer or by themselves for the year. Concessional contributions include (¶6-510): • superannuation guarantee (SG) contributions • deducted personal contributions • salary sacrifice contributions • certain allocations from reserves, and • notional taxed contributions for individuals with defined benefit interests (¶6-512). Example Santhi is a member of a public sector superannuation scheme and has a defined benefit interest. Notional taxed contributions for Santhi to fund superannuation benefits payable to him or his beneficiaries on his death are worked out using the formula in the Income Tax Assessment Regulations 1997 (¶6-512). These notional taxed contributions are counted as concessional contributions for the purpose of determining Santhi’s eligibility for the low income superannuation tax offset.

The following would not be eligible concessional contributions: • amounts transferred from foreign superannuation funds (¶8-370) • roll-over amounts (¶8-600), and • employer contributions to a non-complying superannuation fund (¶6-160). Adjusted taxable income To be eligible for the low income superannuation tax offset, an individual’s adjusted taxable income for the year must not exceed $37,000. Adjusted taxable income is, according to s 12C, worked out in accordance with Sch 3 to the A New Tax

System (Family Assistance) Act 1999 (disregarding cl 3 and 3A of that Schedule). This means it is the sum of the individual’s: • taxable income • adjusted fringe benefits total (as defined in ITAA36 s 6(1), this is the taxable value of fringe benefits provided to the individual during the FBT year) • foreign income that is not taxable in Australia • total net investment losses (as defined in ITAA97 s 995-1(1), this is the amount by which deductions attributable to financial investments and rental property exceed the gross income from financial investments and rental property) • tax free pensions and benefits (not including superannuation income stream benefits that are tax free for an individual aged at least 60), and • reportable superannuation contributions (as defined in ITAA97 s 995-1(1), this is the amount of deductible superannuation contributions made for the individual in the year by an employer or by the individual, including salary sacrifice contributions), less the child support or child maintenance expenditure for the year. From 1 July 2018, a person’s adjusted taxable income for an income year is calculated without taking into account their “assessable FHSS released amount”. This is basically the amount of superannuation contributions released for the person’s use in purchasing or constructing a first home (¶6-385). Amount of low income superannuation tax offset The maximum amount of low income superannuation tax offset for an individual for a year is $500, calculated as follows: (a) unless either para (b) or (c) applies — 15% of the concessional contributions made by or for the individual during the year (b) if the amount worked out under para (a) exceeds $500 — $500, or (c) if the amount worked out under para (a) is less than $10 — $10 (s 12E). In calculating a person’s concessional contributions for a year for the purposes of determining eligibility for the tax offset, the following are disregarded (s 12E(3)): • contributions or amounts to a constitutionally protected fund, and • the amount by which a person’s defined benefit contributions for the financial year in respect of their defined benefit interest exceed their notional taxed contributions (¶6-512). Example For 2019/20, an employer makes SG contributions of $3,150 for an employee whose adjusted taxable income for the year is less than $37,000. The low income superannuation tax offset is $472.50 ($3,150 × 15%), which is the same amount as the tax on the employer contribution when it is paid to the superannuation fund ($3,150 × 15% tax = $472.50).

Where an overpayment or underpayment occurs, the taxpayer is only able to benefit if the amount owed or recoverable is greater than $10 (s 12E(4), (5)). Administration by the ATO The Commissioner may have regard to a broad range of information when determining eligibility for the low income superannuation tax offset, including any information that is held or obtained by the Commissioner under or for the purposes of a taxation law and that the Commissioner considers is reasonably necessary to make the determination (s 14). This enables the ATO to use information it

already holds but does not authorise it to gather additional information. The Commissioner can determine eligibility from information in an individual’s income tax return or, if the individual does not lodge a return (because, eg their income is below the tax-free threshold for the year), from other information available to the ATO. This means individuals who are not required to lodge a return are not required to apply for the payment, and the ATO can make a payment if reasonably satisfied that the individual is eligible. Example Imran is a university student who earns $16,500 from part-time employment in 2019/20 and whose employer makes SG contributions of $1,485 on his behalf. If his employer has not withheld tax from Imran’s wages, Imran would not be required to lodge an income tax return because his taxable income is below the $18,200 tax free threshold for 2019/20. The ATO would receive information about Imran’s income from his employer and about superannuation contributions made on his behalf from the member contributions statement (¶6-050) lodged by his superannuation fund. If the ATO is reasonably satisfied, on the basis of that information, that Imran is eligible for the low income superannuation tax offset, it will pay $228 (15% × $1,485) to his superannuation fund.

The ATO may pay the low income superannuation tax offset to a superannuation fund, an RSA, an individual or the individual’s legal personal representative, or to a Superannuation Holding Accounts Special Account (¶12-600) consistently with the rules for the government co-contribution (s 12B). Tax consequences A low income superannuation tax offset is not included in the assessable income of the superannuation fund to which it is paid, and forms part of the tax free component when it is included in a superannuation benefit paid to the individual.

Spouse Contributions ¶6-800 Contributions to increase a spouse’s superannuation balance Two actions are available to increase the amount of superannuation available to a person’s spouse. Making contributions for a spouse A person can contribute to a superannuation fund on behalf of their spouse and be entitled to a tax offset if the spouse’s income is less than threshold amount for the year (¶6-820). This tax offset may be available even if the spouse is also making personal contributions for which they may be entitled to a tax deduction (¶6-340) or to a government co-contribution (¶6-700). Contributions splitting Contributions may also indirectly be made on behalf of a spouse under the contributions splitting rules that allow the transfer of a member’s contributions into an account for the member’s spouse (¶6-850). [FITR ¶268-490; SLP ¶36-880, ¶37-200]

¶6-820 Tax offset for spouse contributions An individual may be entitled to a tax offset for superannuation contributions made to a complying superannuation fund or RSA on behalf of their spouse (s 290-230). The contribution must be for the purpose of providing superannuation benefits for the spouse (regardless of whether the benefits are payable to the spouse’s dependants if the spouse dies before or after becoming entitled to receive the benefits). The maximum tax offset for an income year is $540, even if the individual is entitled to a tax offset for more than one spouse (s 290-235). From 2017/18, an individual may be entitled to the maximum tax offset for contributions on behalf of their spouse if their spouse’s income is less than $37,000 for the year (up from $10,800 for previous years). If

the spouse’s income exceeds $37,000, the maximum tax offset will reduce until it is reduced to nil at $40,000 (up from $13,800 for previous years). From 2017/18, an individual is not entitled to a tax offset for spouse contributions for an income year if: (a) their spouse’s non-concessional contributions (¶6-550) for the year exceed the non-concessional contributions cap for the year (¶6-540), or (b) immediately before the start of the financial year, their spouse’s total superannuation balance (¶6490) equals or exceeds the general transfer balance cap (¶6-440) for the year (s 290-230(4A)). Contributions made on behalf of a spouse are non-concessional (undeducted) contributions of the spouse (s 292-90) and, when paid by the fund to the spouse as a superannuation benefit, are paid as a tax free component on which generally no tax is payable (¶8-210). Benefits arising from contributions made to a complying superannuation fund or RSA to obtain superannuation benefits for a taxpayer’s spouse are preserved benefits. This means that, with certain exceptions, the benefits cannot be paid until the “retirement” of the spouse (if the spouse is gainfully employed), which cannot be before their preservation age, or until the spouse reaches retirement age (generally 65) (¶3-280). An amount transferred to a complying superannuation fund from a KiwiSaver scheme (¶8-380) is not eligible for a spouse contribution offset (ITAA97 s 312-10(2)). Who is entitled to an offset? An individual can claim a tax offset for superannuation contributions for a spouse only if the following conditions are satisfied (s 290-230(2)). (1) The individual made contributions on behalf of a person who was their spouse when the contributions were made. “Spouse” is defined (ITAA97 s 995-1(1)) to mean both a legal and a de facto spouse, whether of the opposite sex or the same sex. An individual is not entitled to an offset if, when they make a contribution, they are living separately and apart from their spouse on a permanent basis (s 290-230(3)). (2) Both the individual and their spouse were Australian residents when the contributions were made. (3) The total of the spouse’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions (¶6-110) for the year is less than $40,000 (or $13,800 before 2017/18). Because the spouse’s “assessable income” (not taxable income) is used to determine the offset entitlement, the spouse’s deduction claims cannot be used to keep below the offset thresholds. From 1 July 2018, a spouse’s assessable income is calculated without taking into account their “assessable FHSS released amount for the income year”. This is basically the amount of superannuation contributions released for the person’s use in purchasing or constructing a first home (¶6-385). A spouse’s reportable employer superannuation contributions do not include the amount of the spouse’s excess concessional contributions (¶6-505) for the year (s 290-235(5)). (4) The contribution is not deducted or deductible as an employer contribution (¶6-120). (5) If the contribution is to a superannuation fund, the fund is a complying superannuation fund for the year the contribution is made (s 290-230(2)). The spouse for whom contributions are made must be aged less than 65 years, or aged 65 to 69 and be gainfully employed on at least a part-time basis during the year, ie have worked at least 40 hours in a period of not more than 30 consecutive days in the year (SISR reg 7.04(1)). There are no age limit or employment tests for the contributing spouse. If a taxpayer has a spouse for only part of a year (eg the taxpayer marries during the year and was not in a de facto relationship before the marriage), only contributions made for that part of the year qualify for

the offset. The entitlement of a taxpayer who satisfies the conditions in relation to more than one spouse in a year is apportioned so that the total of the offsets available to the taxpayer is equal to the lesser of: (a) the sum of the offset amounts for each spouse, and (b) $540. A contribution for a non-member spouse to satisfy a payment split obligation, made under reg 14H of the Family Law (Superannuation) Regulations 2001 (¶14-270), does not entitle a person to an offset (s 290230(4)). With the consent of the spouse, the taxpayer may quote the spouse’s TFN (ITAA97 s 290-240). However, the taxpayer does not have to quote the spouse’s TFN to qualify for the offset. How is the offset calculated? From 2017/18, the offset is calculated in one of three ways (s 290-235). (1) Where the taxpayer has made $3,000 or less in contributions and the total of the spouse’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions is $37,000 or less ($10,800 or less before 2017/18), the offset is calculated as 18% of the contributions. (2) Where the taxpayer has made more than $3,000 in contributions and the total of the spouse’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions is $37,000 or less ($10,800 or less before 2017/18), the offset is calculated as 18% of $3,000, ie $540. (3) Where the total of the spouse’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions exceeds $37,000 ($10,800 before 2017/18), the contributions limit of $3,000 is reduced by $1 for every $1 by which the total exceeds $37,000 (or $10,800 before 2017/18). The offset is calculated as 18% of the lesser of the reduced amount and the actual contributions. The offset is zero when the total of the spouse’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions is $40,000 or higher ($13,800 or higher before 2017/18). Example Jay contributes to a complying superannuation fund for Sally, his spouse. During 2019/20, he contributes $4,000 and the total of Sally’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions is $39,500. The offset to which Jay is entitled is calculated as follows: (1) determine the difference between the total of Sally’s assessable income, reportable fringe benefits total and reportable employer superannuation contributions and $37,000, ie $39,500 − $37,000 = $2,500 (2) reduce the maximum contribution amount of $3,000 by the excess at (1), ie $3,000 − $2,500 = $500 (3) the offset is 18% of the (2) amount, ie 18% × $500 = $90.

Proposal for increase to spouse age limit The government announced in the 2019 Federal Budget that the age limit for benefiting from spouse contributions would be increased from 69 to 74 from 1 July 2020. Currently, spouses aged 70 and over cannot receive contributions made by another person on their behalf. Legislation for this proposal has not yet been introduced into parliament. [FITR ¶268-490 – ¶268-510; SLP ¶36-880]

Contributions Splitting

¶6-850 Splitting contributions with a spouse Contributions splitting allows a member of a superannuation fund with an accumulation interest to split certain contributions with their spouse. Contributions splitting is separate from, and in addition to, spouse contributions made on behalf of a spouse, for which an offset may be available (¶6-820). A member’s “spouse” (SISA s 10) includes another person who, although not legally married to the member, lives with the member on a genuine domestic basis in a relationship as a couple. This other person may be of the same sex or a different sex. Contributions are “splittable” or “unsplittable” Contributions that can be split are known as “splittable contributions” (SISR reg 6.42). Splittable contributions, generally contributions that have been taxed in the member’s fund, include: • employer contributions, including contributions resulting from the employee sacrificing salary into superannuation • personal contributions for which an income tax deduction is claimed • SG entitlements transferred to a taxpayer’s superannuation account by the ATO, and • allocated surplus contribution amounts, ie an amount that is allocated from a regulated superannuation fund surplus by a trustee to meet an employer’s liability to make contributions (SISR reg 6.41(1), (2)). A splittable contribution also includes a contribution by the Commonwealth, a state or a territory to a public sector superannuation scheme (SISR reg 6.41(5), (6)). A contribution is an unsplittable contribution if it is an undeducted personal contribution that is made after 5 April 2007 and is not included in the assessable income of the fund as a taxable contribution (SISR reg 6.41(3), (4)). Example Noni, aged 59, contributes $75,000 to a superannuation fund in 2019/20. She claims a deduction for $25,000 (her concessional contributions cap) and the other $50,000 is undeducted non-concessional contributions. The $25,000 is a taxed splittable contribution which can be split with her spouse. The $50,000 cannot be split with her spouse.

An amount that has been rolled over, transferred or allotted from a foreign superannuation fund is not a splittable contribution. Application to roll over, transfer or allot an amount of contributions A member may apply for the roll-over, transfer or allotment of the amount of splittable contributions made by or on behalf of the member in: • the last financial year that ended before the application, or • the financial year in which the application is made — but only where the member’s entire benefit is to be rolled over or transferred in that year (SISR reg 6.44(1)). This generally means that a member can only request a contributions split from 1 July for contributions made in the previous year. As an exception, where the member’s entire benefit is to be rolled over or transferred (eg where the employment of a member of an employer-sponsored fund ceases), the member may make the request in the year the contributions are made. A member’s application is invalid if (SISR reg 6.44(2)): • in the financial year in which it is made, the member has already made an application that has been

given effect to or is still being processed • it relates to benefits exceeding the “maximum splittable amount” (see “Maximum splittable amount” below), or • the member’s spouse has reached a certain age (see “Age of member’s spouse” below). The ATO form Superannuation contributions splitting application (NAT 15237-03.2006) can be used by a member to apply for contributions to be split. Maximum splittable amount A member’s application is invalid if it relates to benefits exceeding the “maximum splittable amount” of a member’s contributions for the year (SISR reg 6.44(2)(b)). The maximum splittable amount for a year is (SISR reg 6.40): • for splittable contributions that have been taxed in the member’s fund (SISR reg 6.41(1), (2)) — the lesser of: (i) 85% of the concessional contributions (ie deductible employer or member contributions) for the year; and (ii) the concessional contributions cap (¶6-505) for the year • 100% of undeducted member contributions made before 6 April 2007 (SISR reg 6.41(3), (4)), and • for contributions by the Commonwealth, a state or a territory to a public sector superannuation scheme) (SISR reg 6.41(5), (6)) — 100% of the concessional contributions cap (¶6-505) for the year. Example Nick, who is aged 48, has taxed splittable contributions of $30,000 in 2019/20. The maximum he can split with his spouse is $25,000, which is the lesser of 85% of his concessional contributions (ie 85% × $30,000 = $25,500) and the $25,000 cap for the year.

Age of member’s spouse A member’s application is invalid (SISR reg 6.44(2)(c)) if, at the time of the contribution, the member’s spouse: • is aged 65 years or more, or • is aged between the relevant preservation age and 65 years and has satisfied the “retirement” condition of release in SISR Sch 1 (¶3-280). Despite this rule, an application may be valid if it includes a statement from the receiving spouse that, at the time of the contributions, they are either between their relevant preservation age and 65 and not permanently retired, or that they are under their preservation age (SISR reg 6.44(3)). APRA states in Superannuation Circular No I.A.1 that its interpretation of “retirement” for SIS purposes does not include persons who: • are currently employed more than 10 hours per week • are not currently employed but have not yet decided that they will never again work more than 10 hours per week, or • have never been employed more than 10 hours per week. The ATO has stated that, even though the APRA interpretation is less strict than that expressed in the ATO’s Contributions Splitting Application instructions, it will administer contributions splitting in accordance with the APRA view (NTLG Superannuation Sub Committee minutes for 8 May 2006, updated as at 23 June 2006). These age-related rules prevent a member’s contributions from being split with a spouse who is allowed immediate access to the contributions.

[SLP ¶37-200]

¶6-870 Consequences of contributions splitting The splitting of a member’s contributions with their spouse has the following consequences. 1. A new superannuation benefit is created for the spouse (ITAA97 s 307-5(5), (6)). 2. The new superannuation benefit is treated as a roll-over if rolled over to another fund or if transferred to an account in the existing fund in the spouse’s name. It is not treated as a contribution to the spouse’s fund. 3. The new benefit consists entirely of a taxable component (ITAA97 s 307-140). The tax free component of the benefit is nil. 4. The taxable component consists of an element taxed in the fund if paid from a member’s account in a taxed superannuation fund. The amount of the element taxed in the fund cannot exceed the amount of the taxed splittable contributions specified in the member’s contributions splitting application. The taxable component otherwise consists of an element untaxed in the fund (ITAA97 s 307-275). The tax free and taxable components of a superannuation benefit are discussed at ¶8-160. 5. A contributions splitting amount rolled over or transferred for the benefit of a member’s spouse is deemed to be a preserved benefit until the trustee is satisfied that it is not a preserved benefit, eg on the spouse reaching retirement age and permanently retiring, reaching age 65 or becoming permanently incapacitated (¶3-280) (SISR reg 5.06(1); 6.15). 6. Concessional contributions will have been taxed when originally paid to the fund for the member and that member may be liable to penalties (¶6-515) if the concessional contributions exceed the cap for the year, even if the contributions are subsequently split with a spouse. Notice of intent to claim tax deduction A person cannot give a notice of intent to claim a tax deduction for superannuation contributions (¶6-380) if there is a contributions-splitting application in respect of the contributions and the trustee has not rejected the application (ITAA97 s 290-170(2)(d)). This prevents a tax deduction where the contributions in question have already been paid, transferred or allotted to a superannuation account of the spouse of the fund member, or the member has applied for that to occur. A contributions splitting application for this purpose is an application mentioned in ITAR reg 290-170.01. Therefore, if the member wishes to both claim a tax deduction and split some or all of a year’s contribution with their spouse, they must lodge the necessary notice to claim the deduction before requesting that the contributions be split. [FITR ¶268-460, ¶296-000; SLP ¶37-200]

7 TAXATION OF SUPERANNUATION FUNDS, ADFs AND PSTs SUPERANNUATION TAXATION Taxation of superannuation entities

¶7-000

TAXATION OF COMPLYING FUNDS Taxation of complying funds

¶7-100

Tax treatment of contributions

¶7-120

Application of CGT provisions

¶7-130

Other CGT concessions for superannuation funds

¶7-140

Deduction for superannuation fund expenses

¶7-145

Deduction for insurance premiums and cost of benefits

¶7-147

Deduction for increased death benefit payments

¶7-148

Other deductions for superannuation funds

¶7-150

Funds paying current pensions

¶7-153

Tax offsets and other concessions

¶7-155

Record-keeping, asset disposal and propagation arrangements

¶7-157

Look-through tax treatment when assets are acquired under limited recourse borrowing arrangements

¶7-160

Non-arm’s length income

¶7-170

Tax on no-TFN contributions income

¶7-200

Taxation of previously complying funds

¶7-250

TAXATION OF NON-COMPLYING FUNDS Taxation of non-complying funds

¶7-300

Contributions to non-complying funds

¶7-310

Deductions and other concessions

¶7-350

FOREIGN SUPERANNUATION FUNDS Taxation of foreign superannuation funds

¶7-400

Taxation of former foreign superannuation funds ¶7-450 GOVERNMENT AND SEMI-GOVERNMENT FUNDS

Taxation of income

¶7-500

APPROVED DEPOSIT FUNDS Taxation of complying ADFs

¶7-600

Taxation of non-complying ADFs

¶7-650

POOLED SUPERANNUATION TRUSTS Taxation of PSTs

¶7-700

GOODS AND SERVICES TAX GST regime in Australia

¶7-800

Basic GST rules

¶7-810

GST and superannuation

¶7-830

ABN and GST registration

¶7-840

Supplies to a superannuation fund

¶7-850

Supplies by a superannuation fund

¶7-860

Superannuation Taxation ¶7-000 Taxation of superannuation entities ITAA97 Division 295 sets out the special rules for the taxation of superannuation entities, replacing the provisions in ITAA36 Pt IX which applied in pre-2007/08 income years. The provisions in Div 295 apply in addition to or modify the income tax rules that apply to taxpayers generally under ITAA97 or ITAA36. Division 295 applies to the following entities regardless of whether they are established by an Australian law, by a public authority constituted by or under such a law or in some other way: • a complying superannuation fund or a non-complying superannuation fund • a complying approved deposit fund (ADF) or a non-complying ADF • a pooled superannuation trust (PST) (s 295-5(1)). The tax treatment of foreign superannuation funds (¶7-400) and public sector superannuation schemes is therefore also governed by Div 295, although constitutionally protected funds are exempt from tax (¶7500). Division 295 does not impose a tax on property of any kind belonging to a state (ITAA97 s 295-15). This is relevant to state superannuation funds or schemes. Another Commonwealth law (other than ITAA97 or ITAA36) can only exempt a superannuation entity from tax under Div 295 if it does so expressly (ITAA97 s 295-20). The taxable income of a superannuation entity is calculated as if the trustee were a taxpayer and a resident or, in the case of a foreign superannuation fund, a non-resident (¶7-100). Division 295 also provides for the taxation of the RSA business of an RSA provider that is not a life insurance company (¶10-400). The RSA business and superannuation business of a life insurance company is taxed under equivalent provisions in ITAA97 Div 320 (¶10-440). Division 295 sets out the rules on how to calculate a superannuation entity’s taxable income and identify the components of that taxable income (¶7-100) as well as how to calculate an entity’s no-TFN contributions income (¶7-200) for an income year for the purpose of applying the appropriate tax rate. Any tax determined under Div 295 is payable by the trustee of the entity. The “trustee” of a superannuation fund, ADF or PST means:

• if there is a trustee (within the ordinary meaning of that expression) of the fund or trust — the trustee, or • in any other case — the person who manages the fund or trust (ITAA97 s 995-1(1)). A complying fund or PST is an entity which satisfies the prescribed conditions in the SISA for complying superannuation funds, complying ADFs and PSTs, while a non-complying fund is an entity which fails, for whatever reason, to comply with those conditions. The SIS Act conditions for complying funds and PSTs are discussed in Chapter 2. Division 295 does not provide for the taxation of entities which do not comply with the SIS Act conditions prescribed for PSTs. Such entities are taxed under the appropriate provisions of ITAA36 or ITAA97 (eg as a trust or a managed investment trust). A complying superannuation fund, complying ADF or PST is taxed at a concessional rate of 15% on the low tax component of its taxable income. The non-arm’s length component of its taxable income (if any) is taxed at 45% in 2018/19 and 2019/20. A non-complying superannuation fund or ADF is taxed at 45% in 2018/19 and 2019/20 on all of its taxable income (Income Tax Rates Act 1986, s 29). Additional tax is payable if a superannuation fund has no-TFN contributions income in an income year (¶7-200). Complying funds and PSTs are eligible for a one-third discount on the capital gains that are included in assessable income in respect of assets acquired on or after 21 September 1999 for CGT events happening after that date. For assets acquired before that date, the entity may choose between the CGT discount or calculating its capital gains using an indexed cost base (frozen at 30 September 1999) for CGT events happening after 21 September 1999 (¶7-140). A special rule increases the assessable income of complying superannuation funds which become noncomplying, or of foreign superannuation funds which become resident, in the year in which the fund’s complying or residency status changes which effectively claws back tax concessions previously enjoyed by the fund (¶7-250, ¶7-450). Superannuation entities are generally required to lodge an income tax return with the Commissioner of Taxation each year (see Chapter 11). In addition, in each year of income, a superannuation entity that is regulated under the SISA is required to lodge an annual return with APRA (¶3-310) or, if it is an SMSF, with the ATO (¶5-500). GST The GST regime and its application to superannuation entities are discussed at ¶7-800 and following. Superannuation levies Superannuation entities are liable to pay a supervisory levy each year (¶3-900, ¶3-920). Superannuation funds and ADFs (other than SMSFs and certain other exempt funds) may be entitled to a grant of financial assistance if they have suffered losses as a result of fraudulent conduct or theft. The government imposes a financial assistance funding levy on these funds from time to time to recoup the cost of providing financial assistance (¶3-930). [SLP ¶45-010ff]

Taxation of Complying Funds ¶7-100 Taxation of complying funds A superannuation fund is taxed as a “complying superannuation fund” under ITAA97 Div 295 if it has received a notice from APRA or the Commissioner of Taxation under the SIS Act (which has not been revoked or withdrawn) stating that it is a complying superannuation fund (¶2-150). Division 295 provides for the fund’s taxable income to be determined by taking into account: • assessable contributions, including no-TFN contributions income • special exclusions or exemptions from assessable income

• special deductions for expenses and tax offset/rebates • certain modifications to the CGT provisions. Taxable income and tax payable — method statement To work out the tax payable by a superannuation fund, ADF or PST, take the steps below: Step 1: For a superannuation fund, work out the no-TFN contributions income and apply the applicable rates as set out in the Income Tax Rates Act 1986 to that income (¶7-200). Step 2: Work out the entity’s assessable income and deductions taking account of the special rules in Div 295 (these rules modify some ITAA97 provisions, include certain amounts in assessable income, and allow deductions and exempt amounts: see ¶7-130–¶7-155). Step 3: Work out the entity’s taxable income as if its trustee were an Australian resident or, in the case of a non-complying superannuation fund that is a foreign superannuation fund (¶7-400), were not an Australian resident. Step 4: Work out the low tax component and non-arm’s length component of the taxable income. Step 5: Apply the applicable rates in Income Tax Rates Act 1986 to the components, or to the taxable income of a non-complying superannuation fund or non-complying ADF (see below). Step 6: Subtract the entity’s tax offsets from the step 5 amount or, for a superannuation fund, from the sum of the fund’s step 1 and step 5 amounts (ITAA97 s 295-10(1)). For a complying fund, the low tax component of its taxable income is taxed at a concessional rate of 15%. The non-arm’s length component, if any, is taxed at 45% in 2018/19 and 2019/20 (Income Tax Rates Act 1986, s 26). A superannuation fund that makes departing Australia superannuation payments must withhold tax in respect of the payments (¶8-420). If a complying superannuation fund becomes non-complying during a year of income, the tax concessions which the fund previously enjoyed are recouped in that year of income by way of additional tax (¶7-250). If a fund’s status has not yet been determined as a complying fund in a year of income, the Commissioner can assess the fund as a complying fund on the basis that it will be given a complying fund notice under the SIS Act (ITAA97 s 295-25). If a notice is revoked, or the decision to give the notice is subsequently set aside, the notice is taken never to have been given (ITAA97 s 295-30). As a result, any assessment made on the basis of the notice can be amended. [FITR ¶270-000; SLP ¶45-100]

¶7-120 Tax treatment of contributions Contributions to a complying superannuation fund may come from various sources such as employers and their associates, members and their spouses or relatives, transfers from other superannuation funds, and payments by the Commissioner of Taxation and the Superannuation Holding Accounts Special Account (SHASA). While contributions are usually made in “cash” (including bank transfers and other equivalent), contributions made in specie (eg transfer of assets to, or creating rights in, the fund) may be accepted where permitted by the fund’s trust deed and the investment rules in the SIS Act (¶3-400 and following). Contributions tax Contributions to a superannuation fund are not normally regarded as ordinary income of the fund under the income tax law, being essentially receipts of capital. For that reason, certain contributions and payments made to a fund are specifically “assessable contributions” under ITAA97 Subdiv 295-C. This allows those contributions or payments to be included in the fund’s assessable income in the year of

income that they are received, and to be subject to tax in the hands of the fund (commonly referred to as “contributions tax”) (¶7-100). There are exceptions where contributions are not assessable, for example, where the fund has pre-1 July 1988 funding credits or the liability to tax for the contributions has been transferred to another entity (see below). Subject to certain additions and exceptions as discussed below, the three types of assessable contributions of a superannuation fund are: • contributions made by a contributor (eg an employer) on behalf of someone else (eg an employee) • contributions made on the contributor’s own behalf for which the contributor is entitled to a deduction, and • amounts transferred from a foreign superannuation fund (¶7-400) to an Australian superannuation fund (¶2-130). Expenses incurred by the fund relating to the receipt of contributions may be deductible (¶7-145). A superannuation fund is also liable to pay additional tax on any no-TFN contributions income received by it in each year (¶7-200). Concessional contributions and non-concessional contributions Superannuation contributions made to a fund for or by a person are “concessional contributions” or “nonconcessional contributions” under the excess contributions tax and charge regimes in ITAA97 Div 291 and 292. An individual (eg a fund member) is liable to pay an excess contributions charge if the concessional contributions made for or by the individual in a year exceed the concessional contributions cap for the year (¶6-500). Also, an excess non-concessional contributions tax is payable if the individual’s nonconcessional contributions in a year exceed the non-concessional contributions cap for the year (¶6-540). In addition, Division 293 tax may also be payable by high income individuals for having excess concessionally taxed contributions (¶6-400). Contributions tax — assessable contributions on behalf of a person The assessable income of a complying superannuation fund for a year of income includes the following contributions and payments received by the fund in the income year: • contributions to provide superannuation benefits for someone else, except a contribution that is a “rollover superannuation benefit” (see below) and certain contributions expressly excluded (see “Payments and contributions that are not assessable contributions” below) • payments under s 65 of the SGAA (these are ATO payments of the shortfall component of a superannuation guarantee charge to the fund: ¶12-500) • payments under s 61 or 61A of the Small Superannuation Accounts Act 1995 (these are amounts transferred to the fund from a person’s individual account in the SHASA) (s 295-160, table items 1, 3, 4). Employers are generally required to make superannuation contributions for their employees under the SGAA (¶12-000). Some employers also make additional contributions for employees under an award or contractual obligation. These contributions are assessable income of the fund, regardless of whether the employer has claimed a tax deduction for the contributions (ID 2007/205: contributions by local government council are assessable contributions, but not assessable income of the councillor). Generally, a “roll-over superannuation benefit” is a lump sum superannuation member benefit that can be paid from, and to, a complying superannuation plan, or is paid to an entity to purchase a superannuation annuity. A person may have more than one superannuation plan with a superannuation provider. A superannuation benefit may be rolled over from one superannuation plan to another plan held by the same provider. A superannuation plan may also contain more than one superannuation interest. If a superannuation interest in a plan is paid into another superannuation interest in the same plan, the

transfer is treated as a payment in determining if the transfer is a superannuation benefit or a roll-over superannuation benefit (s 307-5(8)). An SMSF used as a “vehicle” in a fraudulent enterprise to access superannuation benefits was held not to be a superannuation fund, and a payment from a superannuation fund to that vehicle was not a roll-over superannuation benefit (Brazil 2012 ATC ¶10-244). A roll-over superannuation benefit is not assessable contributions under s 295-160, but can be assessable income of a complying fund in certain circumstances (see “Assessable contributions — personal contributions and roll-over amounts” below). Payments and contributions that are not assessable contributions The following contributions or payments received by a superannuation fund are not assessable contributions: • contributions for the benefit of a spouse that are not deductible to the contributor under ITAA97 Subdiv 290-B (s 295-165: ¶6-800) • contributions made for the benefit of a person under age 18 that are not employer contributions for the person (eg child contributions) or contributions that are government co-contributions (s 295-170: ¶6700) • a payment from a first home saver account (FHSA) under former s 22 or 34 of the First Home Saver Accounts Act 2008 (these are payments by a former FHSA provider from an inactive FHSA or at the FHSA holder’s request), or a government FHSA contribution (s 295-171) (Note: the FHSA scheme ceased from 1 July 2015) • contributions made by the trustee of a life insurance company out of complying superannuation assets or segregated exempt assets, or of a complying superannuation fund, a complying ADF or a PST when the contribution was made (s 295-173) • a member spouse’s contributions to a superannuation fund for a non-member spouse in satisfaction of the non-member spouse’s entitlement to a superannuation interest in the fund under the family law (s 295-175) • a contribution made to certain public sector superannuation schemes to the extent that the trustee chooses, with the agreement of the contributor, not to be included in assessable income (s 295-180). The choice cannot exceed the amount covered by notices to the fund under ITAA97 s 307-285 (see “Contributions covered by s 307-285 notices” below) • contributions made on behalf of a person who is a temporary resident of Australia at the end of the income year to which the contribution relates (applicable to a non-complying foreign superannuation fund: s 295-185). Special rules govern the treatment of transfers of superannuation savings between Australian complying superannuation funds and New Zealand KiwiSaver schemes which ensure that transfers from KiwiSaver schemes are not assessable income of the Australian fund (see “Transfers from KiwiSaver schemes” below). Contributions covered by s 307-285 notices Trustees of complying superannuation funds that are public sector superannuation schemes (other than schemes that came into operation after 5 September 2006) can, with the consent of the contributor, elect for contributions not to be included in assessable income under s 295-180. In an income year, the choice cannot be made for an amount that exceeds the sum of amounts covered by notices given by the trustee under ITAA97 s 307-285 for superannuation benefits paid by the scheme in the income year. Also, a choice cannot be revoked or withdrawn (s 295-180(3), (4)). Making this choice effectively shifts the contributions tax liability on those contributions to the recipient of the superannuation benefit when it is paid out as a benefit by the scheme. The benefit is treated as an element untaxed in the superannuation fund and is taxed as such (¶8-240).

This choice is not available for superannuation plans which come into operation after 5 September 2006 (s 295-180(5)). Releasing excess concessional contributions by a fund Under the excess concessional contributions charge system from 2013/14, an individual taxpayer’s excess concessional contributions are included in the individual’s assessable income and are taxed at marginal tax rates. The taxpayer is entitled to a 15% non-refundable non-transferable tax offset equal to 15% of the excess concessional contributions (ITAA97 s 291-15). The taxpayer may elect to have up to 85% of excess concessional contributions released from his/her superannuation fund. An 85% limit applies as the remaining 15% represents the fund’s contributions tax liability when the contributions were received. Any amount released under an ATO release authority (up to the 85% limit) is not assessable income of the taxpayer (ITAA97 s 303-15) (¶6-515, ¶6-520). Assessable contributions — personal contributions and roll-over amounts The assessable income of a complying superannuation fund includes: • personal contributions for which the contributor has provided the fund with a valid notice of intent to claim a deduction for the contributions (these are generally contributions made by self-employed persons or persons who receive less than 10% of their income as an employee: see “Member contributions” below) • a roll-over superannuation benefit that an individual is taken to receive under s 307-15 to the extent that it consists of an element untaxed in the fund and is not an excess untaxed rollover amount for that individual (these are roll-overs from an untaxed superannuation fund, see “Assessable roll-over superannuation benefits” below) • the taxable component of a directed termination payment within the meaning of ITTPA s 82-10F (applicable up to 30 June 2012, see “No roll-over for employment termination payments” below). Member contributions A complying superannuation fund will include a member’s personal contributions in its assessable income if the member gives the fund a notice under ITAA97 s 290-170 (before the fund lodges its tax return for the year that the contributions are made) that a tax deduction will be claimed (s 295-190(2), (3)). If the notice is received after lodgment of its return, the fund will include the contributions covered by the notice as assessable contributions in the year in which the notice is given. Tax deduction for personal contributions are discussed in ¶6-300. If a member’s contributions have been included as assessable contributions by the fund before its tax return for the year is lodged for the income year in which the contribution was made, and the fund receives a later notice from the member reducing the amount covered by the earlier notice, the fund can reduce its assessable contributions for the year accordingly (ITAA97 s 295-195(1)). If the fund is notified of the reduction after it has lodged its return, the fund is entitled to a deduction in the income year in which it is notified (s 295-490(1), table item 2). Alternatively, the fund has the option to amend the tax return for the income year in which the contribution was made to exclude the reduction amount, but only if that would result in a greater reduction in tax for that year than the reduction that would occur for the income year in which the notice is received (s 295-195(3)). The exclusion is an alternative to the fund deducting the amount under item 2 of the table in s 295-490(1) (¶7-150). This alternative (which was available at the Commissioner’s discretion in pre-2007/08 years under ITAA36) is now a self-assessing provision for the fund or RSA provider. Assessable roll-over superannuation benefits The assessable income of a complying superannuation fund may include a roll-over superannuation benefit as discussed below. A person is taken to have received a roll-over superannuation benefit when the rolled over amount is paid to the recipient fund for the benefit of the person (ITAA97 s 306-10; 307-15). The roll-over benefit is not assessable income and not exempt income of the person for whom the roll-over was made (ITAA97 s

306-5). If the roll-over superannuation benefit consists wholly or partly of an amount paid from an element untaxed in the fund (ie an untaxed roll-over amount), the untaxed roll-over amount is assessable income of the recipient fund in the income year in which the roll-over occurs to the extent that it is not an “excess untaxed rollover amount” (see ¶8-620 and the example below). Also, if the untaxed roll-over amount exceeds the person’s untaxed plan cap amount for the year ($1.480m in 2018/19, $1.515m in 2019/20: see ¶8-620), the transferor (payer) fund must withhold tax at the rate of 47% on the excess untaxed rollover amount (ITAA97 s 306-15). Example In 2018/19, Simon asks XYZ Superannuation Fund (the payer fund) to roll over his interest in the fund of $1.5m (consisting wholly an untaxed element) to his SMSF. As the untaxed plan cap amount for 2018/19 is $1.480m, Simon’s untaxed roll-over amount exceeds the cap by $20,000. Payer fund — the fund must withhold tax of $9,400 (ie 47% of $20,000) before making the roll-over payment of $1,490,600. The now taxed amount of $10,600 (ie $20,000 − $9,400) is a tax free component of the rolled over amount. Payer fund — the amounts reported by the payer fund in the roll-over benefits statement to the receiving fund is $10,600 (ie $20,000 − $9,400) at the “‘Tax-free component’ label and $1.480m at the ‘Taxable component’ — element untaxed in the fund” label, making it a total of $1,490,600 (ie $1.5m less $9,400 tax withheld). SMSF 2018/19 tax return — Simon’s SMSF will report $1.480m as assessable income at the “personal contributions” label in the fund’s return.

A roll-over superannuation benefit that is a departing Australia superannuation payment (DASP) made under s 20H of the Superannuation (Unclaimed Money and Lost Members) Act 1999 is not assessable contributions of the recipient fund (s 295-190(1A)). For the payer’s DASP withholding tax obligations, see ¶8-420. No roll-over for employment termination payments Employment termination payments paid to employees cannot be rolled over to a complying superannuation fund so as to defer tax on the payments (see ¶8-830). Assessable contributions — transfers from foreign superannuation funds The following amounts transferred from a foreign superannuation fund (¶7-400) are assessable income of a transferee fund in the income year in which the transfer happens: • where the transferee is an “Australian superannuation fund” (¶2-130) — an amount transferred from a foreign superannuation fund in relation to a member of the foreign fund to the extent that the amount transferred exceeds amounts vested in the member at the time of the transfer • where the transferee is a complying superannuation fund — so much of an amount transferred from a foreign superannuation fund as specified in a choice made by a former member of the foreign fund under ITAA97 s 305-80 (ITAA97 s 295-200). The calculation of a member’s vested benefits and the choice process for including all or a part of a transferred amount (that would otherwise be assessable income of the member in Australia) as assessable contributions of the transferee Australian superannuation fund or complying fund are discussed in ¶8-370. An individual’s choice to include all or part of the “applicable fund earnings” in the assessable income of a complying superannuation fund under s 305-80 is binding and cannot be revoked or varied once it is made (ID 2012/27). The inclusion of amounts transferred from foreign superannuation funds as assessable contributions in s 295-200 also applies to amounts transferred from a scheme (for the payment of benefits in the nature of superannuation upon retirement or death) that: • is not, and never has been, an Australian superannuation fund or a foreign superannuation fund • was not established in Australia, and

• is not centrally managed or controlled in Australia (s 295-200(4)). A payment from an Individual Retirement Account (IRA) of an individual in the USA is not treated as being paid from a “foreign superannuation fund” or a payment of benefits from a scheme in the nature of superannuation upon retirement or death under ITAA97 s 305-55 for the purposes of making a choice under s 305-80 to have the amount paid to an Australian complying fund (Baker 2015 ATC ¶10-399). Transfers from KiwiSaver schemes The Arrangement between the Government of Australia and the Government of New Zealand on TransTasman Retirement Savings Portability (Arrangement) established a scheme for Australians and New Zealanders to transfer their retirement savings when they move between Australia and New Zealand, while preserving the integrity of the retirement savings systems of both countries. The tax treatment of payments under the Arrangement is provided by ITAA97 Div 312 and SISR Pt 12A (¶8-380). A “KiwiSaver scheme” has the meaning given by the KiwiSaver Act 2006 of New Zealand, and a “KiwiSaver scheme provider” means a provider within that Act (ITAA97 s 995-1(1)). The transfer of amounts from a KiwiSaver scheme that complies with the Trans-Tasman retirement savings portability requirements is to be treated as a contribution when received by an Australian superannuation fund, subject to the special provisions which apply to the transfer of these amounts. An amount transferred from a KiwiSaver scheme to an Australian complying superannuation fund is treated as a personal contribution of the person for whom the transfer is made (ITAA97 s 312-10(1)). Consequently, the contribution is not included in the assessable income of the receiving Australian superannuation fund. This means that the contribution is not subject to the tax arrangements that may apply to transfers from foreign superannuation funds under ITAA97 s 295-200 (see “Assessable contributions — transfers from foreign superannuation funds” above) and Subdiv 305-B (about transfers of benefits from foreign superannuation funds as contributions: ¶8-370) (s 312-10(1), Note 1, (2)). The contribution is also treated as a non-concessional contribution of the member and is included in the contributions segment of the member’s superannuation interest in the fund. Pre-1 July 1988 funding credits Certain employer contributions that would otherwise be assessable contributions in the hands of a complying superannuation fund are excluded from assessable income if they are made in respect of unfunded liabilities for member benefits accrued up to 30 June 1988. This exemption is available to funds that were exempt from tax up to 30 June 1988. A fund may apply for approval of a pre-1 July 1988 funding credit in accordance with SISA s 342. A superannuation fund with approved pre-1 July 1988 funding credits may choose to apply an amount of the credits (subject to limits) each year to reduce the fund’s assessable contributions relating to the unfunded liabilities (ITAA97 s 295-265). The trustees must make a choice before the fund’s tax return for the relevant year is lodged, subject to any extension of time by the Commissioner. A complying superannuation fund can also reduce the contributions otherwise included in its assessable income in anticipation of APRA confirming the amount of credits available as at 1 July 1988. However, the credits will not be considered available for the income year to the extent that the notice received differs from the amount anticipated (ITAA97 s 295-270). Transfer of assessable contributions to another entity A complying superannuation fund or a complying ADF (transferor) that has investments in the form of superannuation policies with a life assurance company or units in a PST may transfer its tax liability on assessable contributions to that entity (transferee) by written agreement between the transferor and transferee. The agreement, which is irrevocable, must be made on or before lodgment of the fund’s tax return for the year to which the agreement relates (ITAA97 s 295-260). The transferor may make one agreement only for an income year with a particular transferee. The effect of the transfer is that the relevant contributions are excluded from the transferor’s assessable income and included in the

transferee’s assessable income for the relevant year. The total amount of contributions covered by the agreements cannot exceed the total amount otherwise included as assessable contributions of the transferor for the income year. The amount covered by an agreement with a particular transferee is limited to the amount calculated by dividing the greatest equity value of the transferor’s investments in the transferee in the income year by the transferor’s low tax component tax rate for the income year. [FITR ¶270-000; SLP ¶45-140]

¶7-130 Application of CGT provisions The CGT provisions in ITAA97 Pt 3-1 and 3-3 apply to taxpayers generally for the 1998/99 and later income years, subject to transitional provisions. Broadly, under the CGT regime, any capital gains derived by a taxpayer on the happening of a CGT event to a CGT asset (eg a disposal of assets) which is acquired after 19 September 1985 are included in assessable income and subject to income tax. For CGT events happening on or after 11.45 am on 21 September 1999, special CGT concessions, such as a CGT discount or cost base indexation, may be available to complying superannuation entities (¶7-140). An overview of the key concepts of the CGT regime can be found in ITAA97 s 100-1 to 100-70. A list of all the events (“CGT events”) that can result in a capital gain or loss is set out in ITAA97 s 104-5. For each CGT event, the provisions specify: • how to calculate the amount of any gain or loss • the time of the event, which in turn determines when the gain or loss is made, and • the circumstances in which a gain or loss is disregarded for CGT purposes. The CGT provisions are modified for complying superannuation entities (see below). Additionally, there are other CGT provisions which apply specifically to superannuation entities or activities, such as ITAA97 s 118-350 which modifies the application of the general CGT provisions to disposals of a superannuation fund’s investments in PSTs, and s 118-305 which disregards a capital gain or loss when a member’s right to a superannuation interest ends on being paid a superannuation benefit. The CGT modifications and special rules for superannuation funds are discussed under the following headings in this paragraph: • Modifications for complying superannuation entities: – Modification 1 — CGT primary code rule – Modification 2 — Cost base of assets held on 30 June 1988 • Avoiding double taxation for certain funds • Roll-over relief — changes to trust deed • Roll-over relief — successor fund and other inter-fund transfers • Roll-over relief and exemptions — asset transfers between funds on marriage/relationship breakdown • Division 310 — loss transfer and roll-over relief — merging superannuation funds • Division 311 — loss transfer and roll-over relief — mandatory transfer of accrued default member accounts to MySuper products • Roll-over relief — demerger group includes a corporations sole or a complying superannuation entity • Exemption — segregated current pension assets

• Exemption — investments in PSTs, life policies • Exemption — payment of benefits in specie • Exemption — insurance policies. The CGT discount for complying superannuation funds is discussed in ¶7-140. Modifications for complying superannuation entities The CGT provisions in Pt 3-1 and 3-3 apply to a complying superannuation fund in the same way as any other taxpayer, subject to the modifications in ITAA97 s 295-85 and 295-90 (see below). The modifications do not apply to non-complying superannuation funds or non-complying ADFs. Modification 1 — CGT primary code rule The first modification is that if a CGT event happens involving a CGT asset owned by a complying superannuation fund (or a complying ADF or a PST), the provisions below do not apply to the CGT event: • ITAA97 s 6-5 (about ordinary income), 8-1 (about amounts that are deductible), and 15-15 and 25-40 (about profit-making undertakings or plans) • ITAA36 s 25A and 52 (about profit-making undertakings or schemes) (s 295-85(2)). The modifications do not apply to the CGT event if: • a capital gain or loss from the event is attributable to currency exchange rate fluctuations, or • the CGT asset is a debenture stock, bond, debenture, promissory note, certificate of entitlement, of exchange, promissory note or other security, a bank deposit or a loan (secured or not), or other loan contract (s 295-85(3)). The modifications can also apply to the CGT event if the capital gain or loss is disregarded by certain specified ITAA97 provisions (eg for cars, shares in a pooled development fund, collectables, trading stock, insurance policies, etc) (s 295-85(4)). The effect of the modifications in s 295-85 is that the CGT provisions are the primary code for determining the capital gain or capital loss arising from a CGT event happening to a CGT asset of a complying superannuation fund except for the CGT assets and transactions specified in s 295-85(3). For example, the capital gain or loss realised by a superannuation fund from its investment activities is determined under the CGT provisions, and not under the revenue provisions or as a deduction under s 8-1 (ID 2009/92: a share does not come within the meaning of “security” (see 2nd dot point above); ID 2009/110, ID 2009/111: exchange traded options; ID 2010/7: futures contracts). The s 295-85(2) modifications can apply to a venture capital limited partnership when a complying superannuation fund is a partner in the partnership such that gains flowing to the fund by reason of being a partner are taxed as capital gains (ID 2011/7). Examples of fund investment activities covered by the CGT primary code rule A “share” in a company does not come within s 295-85(3)(b) (ie assets excluded from the application of the CGT primary code rule). Accordingly, any loss realised by a complying fund on the sale of the shares is determined under the CGT provisions and cannot be claimed as a deduction under s 8-1 (Interpretative Decision ID 2009/92). Where an SMSF writes an exchange traded option (ETO) as part of a hedging strategy, the premiums receivable from that activity are not included as assessable income under either ITAA97 s 6-5 or 15-15, but will be capital proceeds of the ETO under the CGT provisions (ID 2009/110). CGT event D2 will apply on the writing of an ETO by the fund. The fund as grantor of the option will make a capital gain (or loss) of the difference between the capital proceeds (ie the premium receivable) and the cost of granting the option (eg brokerage fees) at the time the option is granted (ITAA97 s 104-40(3)). Any capital gain arising under CGT event D2 is not eligible for the CGT discount (ITAA97 s 115-25(3)). Note also the following related matters:

• where the fund has an open position at the end of the income year, the market value of that position is not deductible (ID 2006/313) • any initial or variation margin payments are not deductible (Taxation Determination TD 2006/25) • if the option is exercised, the tax consequences are set out in ITAA97 s 134-1. Conversely, where an SMSF trades ETOs, the premiums payable from that activity are not deductible under either ITAA97 s 8-1 or 25-40. This is the case regardless of the profit-making intention of the fund in buying ETOs. Instead the premiums payable will form part of the cost base of the ETO (ID 2009/111). When the fund buys an ETO, it acquires an asset (the ETO) for the amount paid for it (ie the premium) plus any additional costs such as brokerage fees and the Australian Clearing House (ACH) fee. These costs together form the cost base of the ETO (ITAA97 s 109-5). On the close out of the position, the fund makes a capital gain or loss equal to the difference between the cost base of the ETO and the amount received on its expiry or termination (ITAA97 s 104-25(3)). The s 295-85(2) modifications can apply to a venture capital limited partnership where a complying superannuation fund is a partner in the partnership, so that gains flowing to the fund by reason of being a partner are taxed as capital gains (ID 2011/7). Trading stock exemption restriction A complying superannuation fund cannot use the trading stock exception (provided by item 5 in s 29585(4)) to account for gains and losses on certain assets on revenue account. These assets (“covered assets”) are shares and non-share equity interests in a company, units in a unit trust, land (including an interest in land), or a right or option to acquire or dispose of one of the mentioned assets, except where the asset is an ITAA97 Div 230 financial arrangement or a debt interest (ITAA97 s 70-10(2); 275-105). This means that the CGT rules apply where a complying superannuation fund invests in covered assets or in a managed investment trust (MIT) which, in turn, invests in covered assets where the MIT has chosen to treat gains and losses on capital account under the capital treatment election rules. Example The Smith SMSF buys and sells a large volume of shares as part of its investment operation during a financial year. The SMSF is required to work out whether there has been a capital gain or capital loss on each share that was disposed of during the year using the usual CGT rules for complying superannuation entities. The fund does not need to consider whether the buying and selling of shares would qualify as being in the business of share trading, or whether the shares bought and sold during the income year would be trading stock.

The trading stock exemption restriction similarly applies to the complying superannuation business of a life insurance company to ensure that they are subject to the same treatment as the assets of a complying superannuation entity. Bitcoins The tax treatment of investments in bitcoins are set out in tax determinations (TD 2014/25; TD 2014/26: bitcoin is not “money”, and not “currency” or “foreign currency” for the purposes of ITAA97 Div 775, which contains the rules for recognising foreign currency gains and losses for income tax purposes; TD 2014/26: bitcoin is a CGT asset and its disposal gives rise to a CGT event that may produce a capital gain or loss; TD 2014/27: bitcoin is trading stock for the purposes of ITAA97 s 70-10(1) if it is held for the purpose of sale or exchange in the ordinary course of a business). Modification 2 — Cost base of assets held on 30 June 1988 The second modification is that any asset owned by a complying superannuation fund as at the end of 30 June 1988 (a “30 June 1988 asset”) is taken for CGT purposes to have been acquired by the fund on 30 June 1988, irrespective of their actual date of acquisition (s 295-90). The general CGT provisions therefore apply to an asset of a complying fund even though it was acquired before 20 September 1985, unlike other taxpayers where a potential CGT liability only arises in respect of assets acquired after 19 September 1985.

The cost base of each 30 June 1988 asset of a fund is the greater of the asset’s market value and cost base at the end of 30 June 1988. The reduced cost base of each 30 June 1988 asset is the lesser of the asset’s market value and its cost base at the end of 30 June 1988. This means that the cost base or reduced cost base of each 30 June 1988 asset is whichever of the cost base or the market value at 30 June 1988 yields the lower gain or loss. Where indexation applies, the cost base is indexed from 30 June 1988 (ITTPA Subdiv 295-B). Note that cost base indexation is not available for assets acquired on or after 11.45 am EST on 21 September 1999 (¶7-140). The market value of assets at 30 June 1988 is ascertained according to general valuation principles. Special rules deal with a return of capital on company shares, and with the valuation of options, rights and assets acquired under options or rights that were held at 30 June 1988 (TD 44). Funds with assets at 30 June 1988 which have difficulty in accurately identifying the cost of specific assets disposed of after that date may substitute average cost for actual cost where the asset is part of an identical group of assets held at 30 June 1988 (Taxation Ruling IT 2548). For assets acquired after that date, actual cost should be used. Avoiding double taxation for certain funds The capital gain calculated under the CGT provisions may be reduced or extinguished if the trustee of a superannuation fund disposes of an asset (and makes a notional capital gain) and the market value of the asset has been taken into account in determining the fund’s net previous income in respect of previous years of income under ITAA97 s 295-325 (ie where a complying fund becomes non-complying: ¶7-250) or 295-330 (ie where a foreign fund becomes a resident fund: ¶7-450). If the notional capital gain exceeds the amount that would have been included in assessable income as a capital gain if the asset had been disposed of for its market value at the time of calculating the fund’s net previous income in respect of previous years of income, the excess will be assessable under the CGT provisions. If the notional capital gain does not exceed that amount, no amount will be included in assessable income under the CGT provisions (s 118-20(4A)). Roll-over relief — changes to trust deed CGT roll-over relief is available for disposals of assets occurring on or after 12 January 1994 as a consequence of a complying superannuation fund amending or replacing its trust deed to enable it to comply with the SIS legislation, provided the members and assets of the fund do not change as a consequence of the disposal (s 126-130). No election is required for roll-over relief to apply. Roll-over relief — successor fund and other inter-fund transfers CGT event E1 in ITAA97 s 104-55 happens if a trust is created over a CGT asset and CGT event E2 in s 104-60 happens if a CGT asset is transferred to an existing trust. However, these events do not happen if the asset is transferred to the trust from another trust and the beneficiaries and terms of both trusts are the same (commonly referred to as the “trust cloning” exception). For the exception to CGT event E2 to apply, two conditions must be met at the time that the asset is transferred — (i) the beneficiaries and terms of both trusts were the same; (ii) the member was the sole beneficiary of the trust and was absolutely entitled to the assets (s 104-60(5)(b)). The exception is no longer relevant in the superannuation context as condition (ii) cannot be met as a fund member is not absolutely entitled against the trustee. Roll-over relief and exemptions — asset transfers between funds on marriage/relationship breakdown Spouses whose marriage or relationship has broken down can make a superannuation agreement (in the context of a financial agreement) that specifies how their entitlements in a superannuation fund (ie superannuation interests) will be divided under Pt VIIIAB and VIIIB of the Family Law Act 1975. To facilitate the splitting of superannuation interests and transfers of superannuation assets: • a capital gain or loss is disregarded where a CGT event happens in respect of a right because of a superannuation agreement or where a superannuation fund or approved deposit fund makes a payment to a non-member spouse (ITAA97 s 118-305; 118-313: ¶14-960), and

• a CGT same-asset roll-over is available under Subdiv 126-D when the assets representing the superannuation interests of a spouse are transferred from a complying superannuation fund to another fund because of the marriage or relationship breakdown (see below). When a marriage or relationship breaks down, CGT roll-over is available under Subdiv 126-D for certain transfers of CGT asset reflecting the personal interest of a spouse (but not both) in a small superannuation fund (ie a fund with fewer than five members) to another complying superannuation fund (s 126-140). The roll-over in Subdiv 126-D is discussed in detail in ¶14-980. In summary, it applies in the situations below: (1) an interest in a small superannuation fund is subject to a payment split under the Family Law Act 1975 resulting in the transfer of an asset from a small superannuation fund to another complying superannuation fund in which a non-member spouse is a member (s 126-140(1)) (2) as a result of a request from a non-member spouse under the Superannuation Industry (Supervision) Regulations 1994, the trustee of a small superannuation fund transfers an asset to another complying superannuation fund for the benefit of the non-member spouse (s 126-140(2)) (3) as a result of a marriage or relationship breakdown there is a transfer of a CGT asset that reflects the personal interest of either spouse (but not both) in a small superannuation fund to another complying superannuation fund, or (4) as a result of a court order made under s 90SM of the Family Law Act 1975 altering the property interests of, or binding some other person to effect a division of property between, parties to a de facto relationship (including same-sex relationship), or a Pt VIIIAB financial agreement under the Family Law Act 1975 between parties to a de facto relationship (including same-sex relationship) that is binding pursuant to s 90UJ of the Family Law Act 1975 (s 126-140(2A), (2B)). The roll-over is not available unless at the time of the asset transfer: • the spouses (including de facto partners) involved are separated and there is no reasonable likelihood of cohabitation being resumed, and • the transfer happened because of reasons directly connected with the breakdown of the relationship between the spouse or former spouses (s 126-140(2C)). The consequences of a Subdiv 126-D roll-over are: • a capital gain or loss made by the transferor trustee on transfer of the asset is disregarded until a later CGT event (eg a sale by the trustee who acquired it) • the first element of the asset’s cost base (or reduced cost base) in the hands of the transferee trustee is the asset’s cost base (or reduced cost base) in the hands of the transferor trustee at the time the transferee trustee acquired it, and • if the transferor trustee acquired the asset before 20 September 1985, the transferee trustee is taken to have acquired it before that day (s 126-140(3) to (5)). Division 310 — loss transfer and roll-over relief — merging superannuation funds When superannuation funds merge, the transfer of assets from one fund to another will typically trigger CGT event A1 (ITAA97 s 104-10: disposals of a CGT asset), or may trigger CGT event E2 (ITAA97 s 104-60: transferring a CGT asset to a trust). For the transferor fund, this will lead to the realisation of capital gains and/or capital losses. Following the merger (asset transfer and the transfer of members’ accounts to the transferee fund), the transferor fund will typically be wound up and its capital losses that would otherwise be available to offset present and future capital gains would be lost. Similarly, revenue losses (eg foreign exchange losses) that would otherwise be available to offset against current year income, or carried forward, are also extinguished.

Where the tax benefits of unrealised net capital losses or revenue losses have been included in the valuation of the superannuation interests of the transferor fund’s members, the merger will lead to a reduction in the value of the superannuation interests and have a negative impact on members’ benefits. To address some of the issues above, Div 310 of ITAA97 provides optional loss transfer and CGT rollover relief for merging superannuation funds in certain circumstances. The Div 310 relief applies to certain fund mergers happening between 24 December 2008 and 30 June 2011 (or, in certain cases, 30 September 2011), or between 1 October 2011 and 1 July 2020 (see Pt 3 of Sch 2 to the Tax Laws Amendment (2009 Measures No 6) Act 2010). Division 310 and its associated provisions will be repealed on 1 July 2022 (see Pt 4 and 5 of that Schedule) (ITAA97 s 310-1 Note 1 and 2). In summary: • Subdivision 310-B sets out the conditions that must exist for an entity to choose the loss transfer and the asset roll-over in respect of an arrangement to merge superannuation funds. • Subdivision 310-B specifies separately the different ways in which a complying superannuation fund or ADF may hold assets. Assets may be held directly, through a pooled superannuation trust (PST) or through a policy with a life insurance company. • Subdivision 310-C sets out the entities to which losses can be transferred, the losses that can be transferred and the effect of transferring a loss. Section 310-25 provides that losses may be transferred to one or more of the following entities (“receiving entities”): – a continuing fund for the loss relief – a PST in which the units are held by a continuing fund for the loss relief just after the completion time of the arrangement to merge the funds, and/or – a life insurance company which has issued a complying superannuation life insurance policy that is held by a continuing fund for the loss relief just after the completion time. Section 310-30 provides that the losses that may be transferred are capital losses and revenue losses realised before the merger, specifically: – net capital losses for earlier income years than the transfer year to the extent that they were not utilised before the completion time – net capital losses for the transfer year, worked out as if the transfer year ended at the completion time – tax losses for earlier income years than the transfer year to the extent that they were not utilised before the completion time, and – tax losses incurred for the transfer year, worked out as if the transfer year ended at the completion time. • Subdivision 310-D provides that superannuation funds, ADFs, PSTs and life insurance companies that meet the eligibility conditions for the loss transfer may also choose a roll-over for assets transferred from the transferring entity to the receiving entity if the additional conditions in s 310-45 are satisfied. Merging superannuation funds — roll-over and consequences A complying superannuation fund (other than an SMSF) and an ADF may choose optional loss transfer or asset roll-over, or a combination of both, where there is an arrangement to merge with complying superannuation fund with five or more members under ITAA97 Div 310 (ITAA97 s 310-10(1)).

The asset roll-over is conditional on an entity being eligible for the loss transfer, but does not depend on the entity actually choosing the loss transfer. This will permit superannuation fund mergers to occur in the following ways: • the transfer of cash only following the disposal of all the transferring entity’s assets • the transfer of other assets only, or • a combination of cash and other asset transfers. Capital losses and revenue losses realised before the merger that may be transferred are: • net capital losses for earlier income years than the transfer year to the extent that they were not utilised before the completion time • net capital losses for the transfer year, worked out as if the transfer year ended at the completion time • tax losses for earlier income years than the transfer year to the extent that they were not utilised before the completion time, and • tax losses incurred for the transfer year, worked out as if the transfer year ended at the completion time (ITAA97 s 310-30). The effect of transferring a capital loss is that the previously realised net capital loss for an income year that is not the transfer year will be taken, if it is transferred, not to have been made by the transferring entity for that earlier income year, and an amount equal to the transferred loss will be taken to have been made by the receiving entity in the transfer year (s 310-35(1)(b)(i), (ii)). This means that the receiving entity can utilise the transferred capital losses against capital gains only in the income year that the losses are transferred or in future income years. As with capital losses, an earlier year’s tax loss can be transferred to a receiving entity so that the transferring entity will be taken not to have incurred the loss for that earlier income year. For the purposes of ITAA97 s 36-15 (deduction of tax losses), an amount equal to the transferred loss will be taken to have been made by the receiving entity in the income year immediately prior to the transfer year (s 310-40(1) (b)(i), (ii)). For all other tax purposes, an amount equal to the transferred loss is taken to be incurred by the receiving entity in the transfer year (s 310-40(1)). This means that the receiving entity will be able to utilise the transferred tax losses against income only in the income year that the losses are transferred or in future income years. An entity may choose between two methods — the global asset approach or individual asset approach — for executing the roll-over regardless of the entity’s net position with respect to the transferred assets. An entity must make a choice for the form of the roll-over that is to apply to its CGT assets and revenue assets (s 310-50(1)). In respect of CGT assets, an entity can choose either the global asset approach or individual asset approach to transfer its CGT assets. However, only one method can be chosen in respect of the transferred CGT assets. Specifically, an entity cannot use the individual asset approach in relation to some of the transferred assets and the global asset approach in relation to the remaining transferred assets (s 310-50(2)). Similarly, an entity can choose either the global asset approach or individual asset approach to transfer its revenue assets. However, only one method can be chosen in respect to the transferred revenue assets. Specifically, an entity cannot use the individual asset approach in relation to some of the transferred assets and the global asset approach in relation to the remaining transferred assets (s 310-50(3)). The transferring entity may choose different forms of roll-over for its CGT assets and revenue assets. The consequences are as follows: • Consequences for CGT assets — individual asset approach. The transferring entity may disregard all capital gains or losses it realises, or it may choose to

disregard some or none of its capital gains or losses. The choice as to what gains or losses to disregard is a matter for the transferring entity (s 310-60(1), (2)). A transferring entity that chooses the individual asset approach for its CGT assets may elect to treat those assets subject to the asset roll-over as being transferred (or disposed of) to the receiving entity by treating the assets that would otherwise realise a capital gain as being transferred at their cost base, and the assets that would otherwise realise a capital loss as being transferred at their reduced cost base (s 310-60(3)). The effect of the individual asset approach is that the transferred CGT assets will have neither a capital gain nor a capital loss on their transfer. For the receiving entity, the first element of the cost base and reduced cost base of the transferred assets in its hands is taken to be equal to the cost base and the reduced cost base respectively of the asset just before its transfer (when it was still held by the transferring entity). • Consequences for revenue assets — individual asset approach. The transferring entity may disregard all revenues gains or losses it realises, or it may choose to disregard some or none of its revenue gains or losses. The choice as to what gains or losses to disregard is a matter for the transferring entity (s 310-70(1)). This approach for revenue assets will treat the transferring entity’s gross proceeds for the transfer of each revenue asset to be the amount, the deemed proceeds, it would need to have received to have no profit or loss from the transfer. This means that there is no gain or loss for the transferring entity (s 310-70(1)). The receiving entity will be taken to have paid an amount equal to the deemed proceeds for the transferring entity for each revenue asset received. Roll-over relief — demerger group includes a corporations sole or a complying superannuation entity Demerger roll-over relief provided by ITAA97 Div 125 is available to a demerger group which currently includes corporations sole or a complying superannuation entity by allowing another entity to be the head entity of such demerger groups, applicable to CGT events happening after 7.30 pm by legal time in the ACT on 11 May 2010 (ITAA97 s 125-65(2A); 125-70(1)(g)). Exemption — segregated current pension assets A capital gain or capital loss that a complying superannuation fund makes from a CGT event happening in relation to a segregated current pension asset (ie an asset supporting the payment of certain income streams from the superannuation fund: ¶7-153) is disregarded (ITAA97 s 118-320). If the fund is paying a current pension and is using the proportional method in ITAA97 s 295-390 (and not the segregated current pension asset method) to claim the income tax exemption on the income derived from assets supporting its current pension liabilities (¶7-153), a similar CGT exemption is available when a CGT event happens to the assets which are used to produce exempt income (ITAA97 s 118-12). Exemption — investments in PSTs, life policies If a complying superannuation fund invests in PSTs or life policies, special tax treatment (to prevent double taxation) applies in respect of the investment as follows: • income derived and capital gains realised by the PST or life office are not taxable to the investing fund • on disposal or redemption of units in a PST, any resulting gains are not taxable under the CGT provisions and, conversely, neither are realised losses available to offset other capital gains (s 118350; 295-85(2)). Similarly, a capital gain or capital loss that a PST fund makes from a CGT event happening in relation to a segregated exempt superannuation asset (¶7-153) is disregarded (s 118-320). Exemption — payment of benefits in specie

Where permitted by the trust deed, a complying superannuation fund can make payment of lump sum benefits (not pension benefits) to its members in specie provided the fund satisfies the SIS Act investment rules, where applicable (¶3-400). CGT event E7 happens when the fund transfers the asset(s) to the member in satisfaction of all or part of the member’s interest in the fund. The fund will derive a capital gain where the market value of the asset(s) exceeds its cost base, or a capital loss where the market value is less than the asset’s reduced cost base (ITAA97 s 104-85(1)). When CGT event E7 happens, the member (a beneficiary) may also make a capital gain, being a disposal of his/her interest in the fund (a trust). However, by virtue of ITAA97 s 118-305, any capital gain or loss made from a CGT event happening in relation to the member’s interest in the fund is disregarded. Exemption — insurance policies A capital gain or capital loss made by a trustee of a complying superannuation fund is disregarded if it arises from a CGT event happening to the trustee’s rights under a “policy of insurance on the life of an individual”, or under an annuity instrument (ITAA97 s 118-300(1), item 5). The exemption applies to insurance policies that relate to the duration of a human life. This is a narrower category than “life insurance policies” as defined in the ITAA97, which include continuous disability policies. A capital gain or capital loss is also disregarded if it arises from a CGT event relating directly to “compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally” (ITAA97 s 118-37(1)(b)). In respect of a trauma policy, Taxation Determination TD 2007/4 explains the application of insurance compensation provisions in s 118-300 and 118-37 to superannuation funds as follows: “24. The Commissioner takes the view that the expression ‘policy of insurance on the life of an individual’ is not confined to the common law meaning of that term. The expression also includes a life insurance policy (as defined in subsection 995-1(1)) to the extent it provides for a payment to be made if an event happens that results in the death of an individual. 25. There is no policy reason why the exemption in section 118-300 should exclude situations where death of the insured happens because of a particular illness. 26. This means, for example, a payment under a trauma policy may be exempt under section 118300 if it is paid in respect of the death (rather than illness) of the insured and the other conditions in the provision are satisfied. A payment under such a policy in respect of an illness will not be exempt under section 118-300, although it may be exempt under section 118-37.” Policies covering a member’s illness and injury The above situation has now been addressed by retrospective amendments applicable to CGT events in the 2005/06 and later income years which provide for a capital gain or capital loss to be disregarded if it is made when a CGT event happens to an interest in a policy of insurance for an individual’s illness or injury and it is made by the trustee of a complying superannuation entity for the income year in which the CGT event happened (ITAA97 s 118-300(1), item 7). As noted above (see “Modification 1 — CGT primary code rule”), no further tax consequence arises for the superannuation fund from the event as the CGT primary code rule applies to the capital gains or losses disregarded under the insurance exemption. [FITR ¶270-000; SLP ¶45-160]

¶7-140 Other CGT concessions for superannuation funds A complying superannuation fund, complying ADF or PST may be entitled to special CGT concessions, including: • indexation of the cost base of an asset (frozen at 30 September 1999) when calculating capital gains

• a one-third CGT discount (ie 33⅓%) on the capital gains included in assessable income • modified rules for applying capital losses. The indexation factor as at September 1999 is 68.7. The indexation factors from the September 1985 quarter to the June 2000 quarter may be found at ¶18-190. Complying superannuation funds may also be entitled to the venture capital franking tax offset which allows them to receive capital gains free of tax from investments in pooled development funds (¶7-155). A look-through income tax treatment applies to assets which are acquired and held in a holding trust for a regulated superannuation fund under certain borrowing arrangements (see ¶7-160). CGT indexation If a CGT event happens to a CGT asset that is owned by a superannuation fund for 12 months or more, indexation previously applied to the cost base of the asset when calculating the capital gain from the CGT event (¶7-130). However, for CGT events occurring on or after 11.45 am EST on 21 September 1999 (the “start time”): • indexation of the cost base is not available for an asset acquired after the start time • indexation of the cost base is frozen at 30 September 1999 (ie using the indexation factor 68.7: see above) for an asset acquired at or before the start time if the indexation option is chosen, rather than the CGT discount (see below). The denial of indexation for assets acquired after the start time means that the elements making up the asset’s cost base are fixed, with no allowance for inflation (ITAA97 s 114-1). The freezing of indexation for an asset that was owned at the start time, and disposed of on or after that time, means that the elements of the cost base are indexed only from the time the expenditure was incurred up to the end of the September 1999 quarter (ITAA97 s 960-275(2), (3)). Example The ABC Superannuation Fund (a complying fund) purchased a CGT asset in February 1999. As the asset was acquired before 21 September 1999, the fund has a choice of calculating the capital gain on the disposal of the asset using an indexed cost base (with indexation frozen at 30 September 1999) or claiming a CGT discount with no cost base indexation (see “CGT discount” below). If the fund chooses the indexation option, the indexation factor for the September 1999 quarter is used. Indexation of the cost base is available as the asset has been owned for more than 12 months.

If a complying superannuation fund owns a CGT asset at the start time and incurs further expenditure in relation to the asset after the start time, the post-21 September 1999 part of the cost base cannot be indexed (ITAA97 s 114-10(1)). Example The ABC Superannuation Fund (a complying fund) purchased an asset for $200,000 before 21 September 1999. The fund subsequently made capital improvements of $50,000 to the asset and then sold the asset. The fund may use either the frozen indexation or CGT discount option (see below) to calculate the capital gain made on the disposal of the asset. If the fund chooses the indexation option, it can index the $200,000 purchase price until 30 September 1999. The $50,000 cannot be indexed as it represents post-21 September 1999 expenditure.

For examples showing the effects of inflation on cost base indexation, see below. CGT discount After 11.45 am EST on 21 September 1999 (the “start time”), a complying superannuation fund, complying ADF or PST (a “complying entity”) that acquires a CGT asset and makes a capital gain from a CGT event happening to the asset is entitled to a one-third discount on the capital gain (if the asset was owned for at least 12 months). That is, the entity is taxed only on two-thirds of the capital gain calculated

without any indexation applying to the cost base (ITAA97 s 115-5 to 115-20). Indexation is not available for all taxpayers in respect of assets acquired after the start time (see “CGT indexation” above). If an asset was acquired at or before the start time and disposed of after that time, and the asset was owned for at least 12 months before the disposal, the entity has the option of claiming the CGT discount on the capital gain as calculated without cost base indexation or including the whole of the capital gain as calculated with the cost base of the asset indexed up to 30 September 1999 (ITAA97 s 114-5; 115-5 to 115-25). The table below summarises the CGT discount and indexation options for complying superannuation funds, complying ADFs and PSTs. The “start time” means 11.45 am EST on 21 September 1999. Status of asset and disposal time

CGT concession

Asset acquired at or before start time and CGT event happened at or before start time

Indexation is available in calculating the asset’s cost base if the asset was owned for at least 12 months. No CGT discount is available.

Asset acquired at or before start time and CGT event happens after start time

If asset is owned for at least 12 months, the fund may choose to: (1) calculate the capital gain with a cost base that includes indexation frozen at 30 September 1999, or (2) claim a one-third discount on the capital gain, as calculated with no cost base indexation. If asset is owned for less than 12 months, neither the indexation option nor CGT discount option is available.

Asset acquired after start time and CGT event happens after start time

If asset is owned for at least 12 months, the fund may claim a one-third discount on the capital gain, as calculated with no cost base indexation. If asset is owned for less than 12 months, neither the indexation option nor CGT discount option is available.

Asset acquired and CGT event happened after start time and the taxpayer is not a complying superannuation fund, complying ADF or PST

No CGT indexation or discount is available.

Examples of CGT discount and indexation calculations To ascertain whether the frozen indexation or CGT discount option is more beneficial to a fund, it is necessary to do the relevant calculations each time that a CGT asset is sold. Example 1 Assume that a complying superannuation fund acquired a CGT asset in 1987 for $50,000 and the CGT asset had a market value of $80,000 on 30 June 1988. The asset is taken to have been acquired on 30 June 1988, and the first element of the cost base is $80,000 (the greater of the cost base and market value as at 30 June 1988: ¶7-130). Situation 1: CGT asset sold on 30 June 1998 for $100,000 Assume that the CGT asset was sold for $120,000 on 30 June 1998. The calculation of the capital gain would be as follows:

Indexed cost base = $80,000 ×

June 1998 CPI  June 1988 CPI 

= $80,000 ×

 67.4  49.3 

= $109,371 Capital proceeds = $120,000 Capital gain = Capital proceeds − indexed cost base = $120,000 − $109,371 = $10,629 Situation 2: CGT asset sold on 30 June 2007 for $150,000 Assume that the CGT asset was sold for $150,000 on 30 June 2007. The calculation of the capital gain would be as follows:

Frozen indexation amount = $80,000 × = $80,000 ×

September 1999 CPI  June 1988 CPI  68.7  49.3 

= $111,480 As the asset is a pre-21 September 1999 asset, the capital gain will either be (a) or (b), as below. (a) Using the frozen indexation option

Capital proceeds − unindexed cost base = $150,000 − $111,480 = $38,520 (b) Using the CGT discount option

⅔ of realised nominal gain (capital proceeds − unindexed cost base) = ⅔ × ($150,000 − $80,000) = $46,667 In Situation 2, the superannuation fund would choose the frozen indexation option (a), which shows a smaller capital gain.

Example 2 Assume that a complying superannuation fund acquires a CGT asset for $25,000 after 21 September 1999. After holding the asset for two years, the fund sells the asset for $48,000. As the asset is a post-21 September 1999 asset, there is no indexation option and the calculation of the capital gain will be as follows (using the CGT discount):

⅔ of realised nominal gain (capital proceeds − unindexed cost base) = ⅔ × ($48,000 − $25,000) = $15,333

Example 3 Assume that a complying superannuation fund acquires a CGT asset for $5,000 in July 2018, which it sells in December 2018 for

$10,000. As the asset is a post-21 September 1999 asset, indexation is not available. Also, as the asset is not owned for at least 12 months the CGT discount is also not available. The calculation of the capital gain will be as follows:

Capital proceeds − unindexed cost base = $10,000 − $5,000 = $5,000

CGT discount — 12-month ownership requirement To qualify for the CGT discount, the taxpayer must have owned an asset for at least 12 months at the time of the CGT event happening (s 115-25(1), (2)). An “effective ownership” rule applies so that, in certain cases, a taxpayer who acquires an asset within 12 months of the CGT event happening may still be eligible for the CGT discount for any capital gain arising from the CGT event. For superannuation entities, this may arise if an asset is acquired under the same asset or replacement asset roll-over provisions. In such cases, the asset is treated as having been owned by the entity for at least 12 months if the collective period of ownership is at least 12 months (ITAA97 s 115-30). (Note that the effective ownership rule applies only for the purpose of claiming the CGT discount.) Two anti-avoidance provisions prevent taxpayers from abusing the 12-month ownership rule to take advantage of the CGT discount. In the first case, any capital gain from a CGT event happening to a CGT asset acquired by a taxpayer more than 12 months before the happening of the CGT event under an agreement entered into within that 12-month period does not qualify for the CGT discount (ITAA97 s 115-40). The operation of this provision prevents a taxpayer seeking to extend artificially the period of ownership of the asset that produces the capital gain. What constitutes an agreement is not defined, although it clearly must not be a binding contract because CGT event D1 would happen when a binding contract is entered into. The second case is where the CGT event happened to a CGT asset of the taxpayer that is a share in a company or an interest in a trust and one of the following conditions is not met. (1) The total of the cost bases of CGT assets acquired by the company or trust (the “entity”) less than 12 months before the time of the CGT event is more than 50% of the total of the cost bases of the CGT assets of the entity at that time. (2) The taxpayer has at least 10% of the equity in the entity (including any interests of associates) before the CGT event. (3) The notional net capital gain made on assets held by the entity just before the CGT event, and acquired less than 12 months before, is less than 50% of the notional net capital gain on all assets held by the entity at that time (ITAA97 s 115-45). If one of the three conditions is not met, a capital gain from the CGT event happening to the shares or units can be a discount capital gain. The tests in s 115-45 do not apply if the entity has at least 300 equity holders (ie ownership is not concentrated) (ITAA97 s 115-50). Example XYZ Superannuation Fund owns shares in ABco, which it acquired in August 1990. ABco’s only assets are units in Cee Unit Trust. In applying s 115-45, what is relevant is whether ABco has owned the units in Cee Unit Trust for 12 months. The assets that the trustee of Cee Unit Trust acquired in the preceding 12 months are immaterial.

There is “concentrated ownership” if an individual owns, or up to 20 individuals own between them, directly or indirectly, shares in the company or interests in the trust with fixed entitlements to at least 75% of the income or capital, or at least 75% of the voting rights. For this purpose, one individual, together with associates and any nominees of the individual or of the individual’s associates, are counted as one individual. The concentrated ownership test also considers whether it is reasonable to conclude that the rights attaching to any of the shares or interests can be varied or abrogated in such a way that ownership would be concentrated. For example, this would involve looking at the company’s or trust’s constituent document and any agreements under which a person had a power to acquire shares or interests (s 11550(7)). It is irrelevant whether the rights are actually varied or abrogated. Disqualifying CGT event — new asset created If a capital gain is made from a CGT event that creates a new asset, the 12-month ownership rule cannot be satisfied and the taxpayer is not eligible for the CGT discount. Examples of these CGT events are CGT event D1 (which happens when creating contractual or other rights) and CGT event F1 (which happens on granting a lease). Other disqualifying CGT events are CGT events D2, D3, E9, F2, F5, H2, J2, J5, J6 and K10 (s 115-25(3)). Capital gains from the disqualifying CGT events are not discount capital gains because the CGT asset involved in those events will only come into existence at the time of the event, so it is not possible for the asset to have been owned for at least 12 months before the event. To avoid doubt, the CGT assets to which the 12-month rule can apply in the case of CGT events D4, E8 and K6 are specified in s 115-25(2). Applying other exemptions and the CGT discount The steps for working out a taxpayer’s net capital gain are set out in ITAA97 s 102-5(1) (see below). In calculating the capital gain that is subject to the CGT discount, a complying superannuation fund may take into account any general exempting provisions relevant before offsetting any capital loss and before applying the CGT discount (Note 2 to Step 1 in s 102-5(1)). These exempting provisions require a fund to disregard the gain or loss arising from a CGT event (eg ITAA97 s 118-300 dealing with investments in life policies or ITAA97 s 118-350 dealing with investments in PSTs (see above)). Capital losses A taxpayer may choose to apply capital losses against capital gains in any order (Note 1 to Step 1 in s 102-5(1)). In most cases, the best outcome is achieved if capital losses are offset against capital gains in the following order: • to capital gains that have neither the benefit of cost base indexation nor the CGT discount (ie assets owned for less than 12 months) • to capital gains calculated with cost base indexation • to capital gains which have the benefit of the CGT discount. If a complying superannuation fund chooses to claim the frozen indexation option, capital losses will be applied against the capital gain after deducting the cost base (with indexation) from the capital proceeds. If the frozen indexation option is not chosen or not available, the capital gain is calculated by deducting the cost base (with no indexation) from the capital proceeds. Capital losses are applied against the capital gain before the CGT discount. Rule 1 — net capital losses Net capital losses from previous income years must be applied in the order that they were incurred. Subject to this rule, the fund can choose to apply any prior year net capital losses against capital gains for the income year in any order. Any prior year net capital losses will be applied against the current year capital gains before applying the

CGT discount (Step 2 in s 102-5(1)). Rule 2 — remaining capital gain If a capital gain remains after applying all available capital losses, the capital gain is either: • included in full in assessable income as a net capital gain without further reduction (if frozen indexation had applied or the CGT discount is not available), or • reduced by the appropriate CGT discount, if the CGT discount is chosen (Steps 3 to 5 in s 102-5(1)). [FITR ¶154-110, ¶270-000; SLP ¶45-180ff]

¶7-145 Deduction for superannuation fund expenses The deductibility of expenditure incurred by a superannuation fund, ADF or PST is governed by the general deduction provision in ITAA97 s 8-1 or the specific deduction provision in ITAA97 s 8-5. The ITAA97 also contains provisions which allow specified taxpayers a specific deduction (eg ITAA97 s 25-5 for tax-related expenses, see below), or the general deduction rule may be modified for superannuation entities (eg by a provision in Subdiv 295-G for insurance costs: ¶7-147). In addition, Subdiv 295-G contains provisions which specify whether certain amounts paid by superannuation entities are deductible or non-deductible (¶7-150). Deduction under s 8-1 for superannuation fund expenses The expenditure of a superannuation fund is deductible under s 8-1 to the extent that: • it has the essential character of an outgoing incurred in gaining or producing assessable income, or • it has the character of an operating or working expense of a business or is an essential part of the cost of the fund’s business operations. A loss or outgoing is not deductible under s 8-1 to the extent that it is of a capital, private or domestic nature, or is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income, or deduction is specifically prohibited by a provision of the tax Acts (s 8-1(2)). The specific deduction rule in s 8-5 is subject to any provision that may prevent or limit the deduction of the amount. Where two or more provisions allow a superannuation entity deductions in respect of the same amount, the entity can deduct only under the most appropriate provision to ensure that there is no double deduction (s 8-10). The meaning of “incurred” is discussed in Taxation Ruling TR 97/7. The expression “to the extent” in s 8-1 means that an apportionment of the deduction may be necessary in the case of undifferentiated expenditure incurred. The ATO guidelines on the general principles governing deductibility of expenditure incurred by superannuation funds, ADFs and PSTs under s 8-1 and other specific provisions are set out in Taxation Ruling TR 93/17. Additional ATO information, in particular the rules governing apportionment of expenses, where required, can be found in factsheet SMSF — deductibility of expenses (www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-technical/SMSFdeductibility-of-expenses). Common fund expenses A superannuation fund’s expenses that are ordinarily deductible under s 8-1 (subject to the possible need for apportionment) include: • administration fees • actuarial costs • accountancy and audit fees

• costs of complying with APRA’s (or other Regulators’) guidelines (unless the cost is a capital expense) • trustee fees and premiums under an indemnity insurance policy • costs in connection with the calculation and payment of benefits to members (but not the cost of the benefit itself), such as interest on money borrowed to secure temporary finance for the payment of benefits, medical costs in assessing invalidity benefit claims • investment adviser fees and costs in providing pre-retirement services to members • subscriptions for membership of professional associations (eg the Association of Superannuation Funds of Australia Limited) • other administrative costs incurred in managing the fund. Apportionment General expenses of managing a superannuation fund (such as those above) which are incurred partly in producing assessable income and partly in gaining exempt income must be apportioned (TR 93/17). The apportionment ensures that expenditure is deductible only to the extent to which it is incurred in producing assessable income (eg an expense is deductible under the general deduction provision, and the fund has both accumulation and pension members). Apportionment ensures that the expenditure is deductible only to the extent to which it is incurred in producing assessable income (but see “Cost of collecting contributions” below). The exempt income of a fund includes amounts accrued before 1 July 1988, nonreversionary bonuses (¶7-155) and exempt current pension income (¶7-153). The two generally accepted apportionment methods are set out in TR 93/17, but other methods are acceptable provided they give a fair and reasonable assessment of the extent to which the outlay relates to assessable income. Investment-related expenses The exact nature of the investment-related expenses is critical in determining deductibility; for example, commissions and ongoing management fees are ordinarily deductible, but upfront fees incurred in investing money are of a capital nature and not deductible. The Commissioner considers that a fee paid to an adviser for drawing up a new investment or financial plan is not deductible, even if some of the investor’s existing investments are included in the plan. In contrast, ongoing management fees or retainers paid to advisers, or costs of servicing and managing an investment portfolio, are deductible (Taxation Ruling IT 39; Taxation Determination TD 95/60; Interpretative Decision ID 2004/139). The cost of advice to change the mix of investments, whether by the original or a new adviser, is treated as part of the cost of managing a portfolio and is deductible, provided it does not amount to a new financial plan (TD 95/60). However, if the advice covers other matters, or relates in part to investments that do not produce assessable income, only a proportion of the fee is deductible (eg no deduction is available for management fees debited to a retiree’s allocated pension account: ID 2004/968). In addition, seminartype expenses may not be deductible if the expenditure does not have a sufficient connection with assessable income and is an investment of capital made to prepare for the future commencement of an investment business (Petrovic 2005 ATC 2169). The cost of subscriptions to share market information services and investment journals are generally deductible to the extent that they relate to the gaining or producing of interest and dividends from a share or bond portfolio and are not a capital cost of setting up the investment. The extent to which such costs are incidental and relevant to producing assessable income is one of fact depending on the particular circumstances of each case (TD 2004/1). Trust deed amendments Costs incurred by the trustee of a superannuation fund in amending the fund’s trust deed are generally not deductible, being expenses of a capital nature. An exception is where the amendments are necessitated by changes in government regulations and are made to ensure that the fund’s day-to-day operations continue to satisfy the requirements for a complying superannuation fund (IT 2672). (Note that amendment costs incurred by an employer-sponsor of a fund are deductible, regardless of whether the

amendments are necessitated by changes in government regulations.) Another exception is where the amendments make administration of the fund more efficient and do not amount to a restructuring of the fund (TR 93/17, para 23). Legal expenses Some legal expenses are covered by specific deduction provisions (eg expenses incurred in complying with income tax obligations under ITAA97 s 25-5). The deductibility of legal expenses usually depends on whether the expenses are of a capital or revenue nature (IT 2672). Borrowing expenses and LRBAs A specific deduction in ITAA97 s 25-25 allows a taxpayer to deduct expenses incurred for borrowing money to the extent that the money is used for the purposes of producing assessable income. Expenses which can generally be claimed under this specific provision include: loan establishment and valuation fees, documentation expenses, lender’s mortgage insurance, fees for property and title search, and costs for preparing and filing mortgage documents. Note, however, that superannuation funds are generally prohibited from borrowing, with limited exceptions, for example, borrowing under a limited recourse borrowing arrangement (LRBA) (¶3-410; ¶3-415). The ATO’s view is that the costs in establishing a trust for a borrowing under an LRBA are not considered to be borrowing expenses because they are incurred for establishing the arrangement through which the borrowing occurs, not for the borrowing itself. An SMSF therefore cannot claim a deduction for any legal expenses in setting up the trust under s 25-25 or claim these costs under the general deduction provision as they are capital in nature. Certain business-related capital expenses and depreciating assets Certain types of business-related capital expenditure are deductible over a five-year period (ie 20% in the income year it is incurred and in each of the next four income years) under ITAA97 s 40-880. Such expenses are generally not deductible under the general deduction provision in s 8-1, being of a capital nature. Deductible payments include capital expenditure incurred to establish a business structure, such as a company, trust or partnership, and a deduction is allowable to the extent that the business is, was or will be, carried on for a taxable purpose, broadly, for the purpose of producing assessable income. The capital expenses of setting up a superannuation fund (eg establishing a corporate trustee) do not qualify for the s 40-880 deduction as the fund is not carrying on a “business” in the usual sense, even though it is “producing” assessable income predominantly from its investments and taxable contributions. A fund can claim a deduction for the decline in value of certain depreciating assets (such as plant and equipment) over the effective life of the asset, rather than at the time the trustee incurs the expenditure, under the uniform capital allowance system in ITAA97 Div 40. A separate deduction regime under ITAA97 Div 43 applies to capital works expenditure on buildings and structural improvements. Collectables and personal use assets There are special rules governing the use, valuation, storage and insurance of an SMSF’s investments in collectables and personal use assets (called “section 62A assets”) under SISR reg 13.18AA (¶5-437). An SMSF may claim a deduction for expenses where these assets are insured and stored in accordance with reg 13.18AA. Other deduction provisions A deduction was not available under ITAA97 s 25-45 (loss by theft) for misappropriation by one of two trustees of an SMSF as the loss was not caused by the misappropriation of an employee or agent (Shail 2011 ATC ¶10-228). A complying superannuation fund can claim a deduction under ITAA36 s 70B for the full amount of a loss it incurs on the disposal or redemption of a “traditional security” (as defined in ITAA36 s 26BB) which is not a segregated current pension asset (as defined in ITAA97 s 295-385(3)) and where ITAA97 s 295-390 applies to exempt some of the income of the fund (¶7-153). The deduction for a loss on the disposal or redemption of a traditional security is limited by certain exceptions (eg s 70B(2A) denies a deduction for a loss on disposal or redemption of a traditional security made by a complying fund where the traditional security was a segregated current pension asset). As s 70B does not provide for any particular treatment

of such losses in respect of traditional securities held by funds which do not segregate their assets, these funds can claim a deduction for the full amount of the loss on the disposal or redemption of the traditional security in the year in which the disposal or redemption takes place if the s 70B conditions are satisfied and no exceptions apply to the loss. This is the case even if s 295-390 applies to exempt some of the income of the fund in that income year (ID 2014/26). Cost of collecting contributions In determining deductions under s 8-1, a contribution made to a complying superannuation fund is taken to be assessable income, whether or not it is an assessable contribution (ITAA97 s 295-95; TR 93/17). That is, the receipt of non-assessable contributions does not reduce the extent to which a fund can deduct expenditure incurred in obtaining contributions. Accordingly, losses or outgoings directly incurred by a fund in obtaining contributions do not need to be apportioned for s 8-1 purposes where they are incurred in obtaining both assessable and non-assessable contributions (including a single contribution that has both an assessable and non-assessable portion). This modification also applies to a noncomplying superannuation fund that is an Australian superannuation fund, a complying or non-complying ADF, and an RSA provider. A roll-over superannuation benefit (¶7-120) to a fund is a “contribution” for s 295-95(1) purposes. For example, the full roll-over amount is treated as if it were included in the fund’s assessable income when working out the deductible portion of an administrative fee under s 8-1. This is consistent with the policy intention underpinning s 295-95(1) that a fund can deduct losses and outgoings incurred in obtaining a roll-over superannuation benefit in its entirety (not just the assessable part) (ID 2012/47). Timing of deduction Generally, where expenditure qualifies for deduction under s 8-1, the deduction is allowable in full in the year the expenditure is incurred (TR 94/25). However, special prepayment rules affect the timing of deductions for certain types of advance payments. Generally, subject to certain exceptions (eg amounts less than $1,000, insurance amounts, certain plantation managed investment schemes expenses), the prepayment rules potentially apply where a taxpayer incurs expenditure for something to be done in whole or in part in a later income year. Where these rules apply, the deduction for the expenditure is spread (ie “apportioned”) over the period covered by those services, up to a maximum of 10 years. Tax-related expenses A superannuation fund (taxpayer) is eligible to claim a deduction for tax-related expenses to the extent it is for: • managing the taxpayer’s own tax affairs, eg fees paid to a registered tax agent for preparing an income tax return, fees paid to a solicitor or registered tax agent for tax planning advice and costs incurred in disputing an assessment • complying with an obligation imposed on the taxpayer by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity, eg the cost of supplying the ATO information and documents concerning the income tax affairs of another entity or satisfying a demand under TAA Sch 1 s 260-5 for payment of tax owed by another entity and the cost to an employer of withholding and remitting PAYG amounts • general interest charge (GIC) under TAA Pt IIA and the shortfall interest charge under TAA Sch 1 Div 280 on unpaid tax and penalty and underpayments of tax • a penalty payable under A New Tax System (Goods and Services Tax) Act 1999 Subdiv 162-D because varied GST instalments are too low, and • obtaining a valuation in accordance with s 30-212 (about gifting of property) or s 31-15 (about land subject to a conservation covenant and s 31-5 deduction) (s 25-5(1)). Certain tax-related expenditure as specified in s 25-5 is expressly not deductible. The use of the words “to the extent” in s 25-5(1) indicates that, where appropriate, the expenditure has to be apportioned between deductible and non-deductible items of tax-related expenditure. For example, capital expenditure is not

deductible (s 25-5(4)) (expenditure is not capital expenditure merely because the tax affairs concerned relate to matters of a capital nature). In addition, the use of a capital asset for a tax-related matter is treated as an income-producing use for the purposes of the section except where another provision of ITAA97 or ITAA36 specifically provides otherwise (s 25-5(5), (6)). This means that expenditure incurred in purchasing capital items for use in connection with a tax-related matter is not deductible under s 25-5(1), such as a computer to assist the taxpayer in completing a tax return (although s 25-5(5) operates to allow depreciation). In Drummond 2005 ATC 4783, the Federal Court commented that an amount paid for tax advice in relation to the establishment of a superannuation fund structure would be deductible, but that any amount expended for establishing the structure would not be for “managing the taxpayer’s tax affairs”, but would be capital expenditure (see also Harvey 2008 ATC ¶10-030). Taxpayer alerts TA 2008/3 warns about a non-arm’s length arrangement under which a taxpayer uses borrowed funds to acquire an interest, such as units, in a certain type of trust, which uses the funds to purchase incomeproducing property. The arrangement seeks to provide income tax deductions to the taxpayer for all of their interest payments and other borrowing costs. The arrangement does not provide a sufficient connection between the expenditure and the production of future income and/or capital gains, which may be distributed to other beneficiaries of the trust, who may have a lower tax rate. TA 2008/4 warns about a non-arm’s length arrangement under which a superannuation fund derives income through a direct or indirect interest in a closely-held trust. The arrangement may be of the type of trust described in TA 2008/3 (ie where an individual or another entity borrows funds to invest in a trust and seeks a tax deduction for its interest costs). The ATO considers that the arrangement outlined in TA 2008/4 above may give rise to taxation issues, including whether income derived by the fund from the trust is non-arm’s length income (¶7-170) and other taxation consequences arise for the individual or other family members as discussed in TA 2008/3.

¶7-147 Deduction for insurance premiums and cost of benefits A complying superannuation fund which provides the “death and disability benefits” as specified in ITAA97 s 295-460 can claim a deduction related to the cost of providing these benefits. The quantum of the deduction is calculated either on a premiums basis or by using a formula based on actual costs as provided by ITAA97 s 295-465. The fund may also use the deductible proportion of premiums, as specified by the regulations, for certain types of TPD insurance policies. Alternatively, the fund may choose to deduct an amount for a future liability to pay the death and disability benefits (as specified in s 295-460) using a formula based on the actual cost of providing the benefits which arise each year under ITAA97 s 295-470. A choice can be made under s 295-465(4) to claim a deduction under s 295-470 before or after the death of an insured fund member (ID 2015/17). An RSA provider can claim a deduction relating to the provision of death and disability benefits on a premiums basis (ITAA97 s 295-475). Death and disability benefits for which deductions are available The following types of benefits are specified in s 295-460: • superannuation death benefit (¶8-300) • terminal medical condition benefits (see below), applicable to benefits provided on or after 16 February 2008 • a disability superannuation benefit (with an extended meaning for the 2007/08 to the 2010/11 years, see below) • a benefit amount payable to a person under an income stream because of the person’s temporary inability to engage in gainful employment, that is payable for no longer than: (i) two years

(ii) if an approval under SISA s 62 is in force for benefits of that kind (ie under the sole purpose test: ¶3-200) and the approval specifies a longer maximum period — that longer period, or (iii) if there is no such approval in force — a longer period allowed by the Commissioner (see Taxation Determination TD 2007/3 below) (s 295-460(a), (aa), (b), (c)). A “disability superannuation benefit” (s 295-460(a)) means a superannuation benefit (¶8-130) if: • the benefit is paid to a person because he/she suffers from ill-health (whether physical or mental), and • two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he/she is reasonably qualified because of education, experience or training (ITAA97 s 995-1(1)). The term “legally qualified medical practitioners”, within the definition of “disability superannuation benefit”, is not a defined term in tax legislation. The Commissioner relies on its ordinary meaning and takes the view that legally qualified medical practitioners are persons who have general or specialist registration with the Medical Board of Australia (ID 2015/11). Medical certificates supplied by an individual in relation to a particular superannuation lump sum can satisfy the requirements of the definition of “disability superannuation benefit” (see second dot point above) in relation to later superannuation lump sums paid to the individual by the same superannuation fund (ID 2015/19). “Gainfully employed” means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment (s 995-1(1)). For ITAA97 purposes, a “superannuation income stream benefit” is taken to be a “disability superannuation benefit” if, just before 1 July 2007, the income stream from which the benefit is paid was covered by para (b) of the definition of “death or disability annuity/pension” in ITAA36 s 159SJ (ITTPA s 301-85). A superannuation lump sum can be a disability superannuation benefit even if it is not paid under the “permanent incapacity” condition of release of the SIS Regulations (ID 2009/109). A deduction is available for premiums on insurance policies where the income payments under the policy are made to members during periods of temporary incapacity which last longer than two years, provided the benefits payable under the policy comply with the SIS Act requirements. The provision of temporary disability benefits is an approved ancillary purpose under the sole purpose test in the SIS Act and such benefits may potentially be paid for a period of more than two years, but not exceeding the period of incapacity (TD 2007/3). A fund may purchase a trauma insurance policy in respect of members and still satisfy the sole purpose test in SISA s 62 if certain conditions are met (former SMSFD 2010/1). A deduction is not available under s 295-465 for premiums for a trauma policy (ID 2002/371). If a fund receives a rebate or refund of premiums paid, for which a deduction has previously been allowed, that amount is included in the fund’s assessable income for the year in which it is received (ITAA97 s 295-320, item 4) (see “Clawback for rebate or refund of premiums” below). Deduction on premiums basis The deduction for insurance premiums under s 295-465(1) is specified by the items in the subsection as follows: (1) 30% of the premium for a whole of life policy — a “whole of life policy” is an insurance policy that satisfies the following conditions: (a) the policy includes an investment component; (b) the premium is not dissected; and (c) the proceeds are payable only on death or on attaining an age of 85 years or more (2) 10% of the premium for an endowment policy — an “endowment policy” is an insurance policy that satisfies the following conditions: (a) the policy is not a whole of life policy; (b) the policy includes an investment component; (c) the premium is not dissected; and (d) the proceeds are payable only on death or on attaining an age specified in the policy

(3) 30% of that part of the premium for a non-whole of life policy that is specified in the policy as being for a distinct part of the policy, if that part would have been a whole of life policy had it been a separate policy (4) 10% of that part of the premium for a non-endowment policy that is specified in the policy as being for a distinct part of the policy, if that part would have been an endowment policy had it been a separate policy (5) that part of the premium as specified in the policy as being wholly for the liability to provide the benefits referred to in s 295-460 (6) so much of other insurance policy premiums as are attributable to provide the benefits referred to in s 295-460 (as supported by an actuary’s certificate) (s 295-465(1), items 1–6, (3)). A superannuation fund is not entitled to a deduction worked out under item (1) for a premium paid for a whole of life policy where the premium is dissected between an entry fee and the investment component of the policy (ID 2009/100). Based on an expanded meaning of permanent disability for the 2004/05 to 2010/11 income years, complying superannuation funds may deduct in full the insurance premiums for policies covering total and permanent disability (TPD) benefits for members under transitional relief rules. Similarly, self-insuring funds may claim a deduction for such TPD insurance costs. For the purpose of deducting amounts under item (6) for the 2011/12 and later income years, the regulations may specify the proportion of a premium for a specified insurance policy that may be treated as being attributable to a liability to provide the benefits in s 295-460 (see “Deductible portion of premiums under the ITAR” below). That is, if a policy held by a fund is of a type specified in the regulations, the fund may deduct the specified proportion of the premium provided certain prescribed conditions are also met. In this case, an actuary’s certificate will not be required (s 295-465(1B), (3A)). A fund can still deduct an amount under item (6) without recourse to the regulations, but will be required to obtain an actuary’s certificate in this case. A deduction can be claimed under item (6) for the remaining part of an insurance premium for which a partial deduction has been claimed under item (5) (because part of the premium is specified in the policy as being wholly for the liability to provide benefits referred to in s 295-460). For example, if part of the premium is specified in the policy as being wholly for the liability to provide superannuation death benefits (which are referred to in s 295-460), and the rest of the premium does not wholly relate to s 295-460 benefits, the rest of the premium falls under item (6) in the table. In such circumstances, if some of the remaining part of the premium is attributable to the liability to provide benefits referred to in s 295-460, the fund can claim a deduction under item 6. The fund can determine the amount of the deduction by reference to the regulations or by obtaining an actuary’s certificate (s 295-465(1A)). Self-insuring funds Superannuation funds that self-insure their liability to provide the benefits specified in s 295-460 may deduct the amount the fund could reasonably be expected to pay in an arm’s length transaction to obtain insurance to cover the liability. An actuary’s certificate must be obtained in order to claim the deduction (s 295-465(2), (3)). Self-insuring funds may determine the amount they can deduct under s 295-465(2) by using the percentages specified in the regulations. For example, where an actuary has calculated the arm’s length cost of an insurance policy which covers a broader class of benefits than is referred to in s 295-460 and the policy is of a kind specified in the regulations, the fund can apply the percentage specified in the regulations in respect of the policy to calculate the deductible amount (see “Deductible portion of premiums under the ITAR” below) (s 295-465(2A), (2B), (3)). Deductible portion of premiums under the ITAR As noted above, item 6 of the table in s 295-465(1) (see above) allows a fund to claim a deduction for so much of an insurance premium as is attributable to a liability to provide benefits referred to in s 295-460, and s 295-465(2) allows self-insuring funds to claim a deduction for so much of the amount that the fund

could reasonably expect to pay in an arm’s length transaction to obtain insurance to cover the liability to provide benefits referred to in s 295-460. For the above purposes: • s 295-465(1B) provides that the regulations may specify the proportion of a premium for a particular insurance policy that is deductible under item 6 • s 295-465(2A) allows self-insuring funds the option of determining the amount they can deduct under s 295-465(2) by using the percentages specified in the regulations. Regulation 295-465.01 of the Income Tax Assessment Regulations 1997 specifies the deductible proportion of premiums for certain types of TPD insurance policies. Superannuation funds which hold the relevant policies will have the option of claiming deductions in accordance with the regulations. Specifically, reg 295-465.01(1) provides that, for s 295-465(1B) and (2A), the proportion specified in an item in the table below in relation to the insurance policy specified in the item may be treated: • as being attributable to the complying superannuation fund’s liability to provide benefits referred to in s 295-460, and • as being the amount the fund could reasonably be expected to pay, in an arm’s length transaction, to obtain an insurance policy to cover it for its current or contingent liabilities to provide benefits referred to in s 295-460. Item

Insurance policy (the terms in the table have the meaning specified in the regulations)

Specified proportion

1

TPD any occupation

100%

2

TPD any occupation with one or more of the following inclusions: (a) activities of daily living (b) cognitive loss (c) loss of limb (d) domestic (home) duties

100%

3

TPD own occupation

67%

4

TPD own occupation with one or more of the following inclusions: (a) activities of daily living (b) cognitive loss (c) loss of limb (d) domestic (home) duties

67%

5

TPD own occupation bundled with death (life) cover

80%

6

TPD own occupation bundled with death (life) cover with one or more of the following inclusions: (a) activities of daily living (b) cognitive loss (c) loss of limb (d) domestic (home) duties

80%

The circumstances in which the deductible proportions in the above table will apply to TPD insurance policies held by superannuation funds are as follows: • an amount will be deductible in accordance with the specified percentage where the terms of the TPD policy are either more restrictive than, or have substantially the same meaning as, the definition of the same type of policy in reg 295-465.01(5)

• the additional conditions or criteria that a member is required to meet in relation to a TPD policy that would otherwise be consistent with a definition in reg 295-465.01(5) can be disregarded for the purpose of applying the relevant deductible proportion specified in the table, and • the inclusion in an insurance policy of a benefit payable to a member because the member has a terminal medical condition, will not affect the ability to use a deductible proportion specified in the table (reg 295-465.01(2), (3), (4)). The terms and expressions used in column 2 of the above table are defined in reg 295-465.01(5). Example ABC Superannuation Fund purchased “TPD own occupation” insurance on behalf of its members where the terms of the insurance policy are as restrictive as the “TPD own occupation” definition in reg 295-465.01(5). ABC Fund can deduct 67% of the premium it pays for the TPD own occupation policy.

Example Collins Superannuation Fund holds “TPD any occupation” insurance for its members where the policy includes provision for a payment to be made under the policy in the event a member of the fund: • is disabled to the extent that they cannot perform certain activities of daily living specified in the policy, or • loses the use of two limbs, the sight in both eyes, or a combination of loss of sight in an eye and the loss of use of a limb. The above features of the policy correspond to the “activities of daily living” and the “loss of limb” definitions in reg 295-465.01(5) and are as restrictive. Accordingly, Collins Fund can deduct 100% of the premium it pays for the TPD any occupation policy.

Example Dion Superannuation Fund purchased insurance that provides combined death and TPD cover for its members. The policy specifies that 40% of the premium is attributable to death cover and 60% is attributable to TPD cover. The TPD cover provided under the policy corresponds to the definition of “TPD own occupation” in reg 295-465.01(5). Dion Fund is entitled to claim a deduction for the part of the premium that relates to death cover under item 5 of the table in s 295465(1) because this part of the premium is specified in the policy as being wholly for the liability to provide benefits referred to in s 295-460 (which includes a “superannuation death benefit”). Under s 295-465(1A), a portion of the remainder of the premium may be deducted under item 6 of the table in s 295-465(1). For this purpose, the fund may claim a deduction in accordance with the table in reg 295-465.01(1). As the terms of the TPD own occupation insurance policy are as restrictive as the corresponding definition in reg 295-465.01(5), Dion Fund can deduct the proportion specified in the table of the remainder of the premium which relates to TPD cover, ie 67%.

Example Herald Superannuation Fund holds disability insurance for its members. For members who are not in the workforce, the insurance policy allows for a payment to be made only in the event a member is disabled to the extent that they are unable to perform two or more “activities of daily living” specified in the policy. The definition of “activities of daily living” in the policy corresponds to the “activities of daily living” definition in reg 295-465.01(5). The conditions to which Herald Fund’s insurance policy for members not in the workforce are subject are more restrictive than those which relate to the insurance policy (TPD any occupation insurance with “activities of daily living” and other inclusions) specified in item 2 of the table in reg 295-465.01(1). This is because the policy allows for a payment to be made on the basis of inability to perform “activities of daily living” but not on any other grounds. Consequently, by operation of reg 295-465.01(2), Herald Fund can claim a deduction for the proportion of the premium it pays for “activities of daily living” insurance in accordance with the proportion specified in item 2 of the table, ie 100%.

Deduction based on actual cost of providing benefits A complying superannuation fund that elects under s 295-465(4) not to claim deductions on the above premiums basis may claim a deduction based on the actual cost of providing the death or disability benefits which arise each year under s 295-470. The election must be made by the fund’s tax return lodgment date for the year in which the election is to apply. Once made, the election also applies for all later years unless the Commissioner allows otherwise (s 295-465(5)). An election is not required to be in

writing or lodged with the Commissioner. A choice can be made under s 295-465(4) to claim a deduction under s 295-470 before or after the death of an insured fund member (ID 2015/17). The deductible amount is the future service element of the lump sum or pension death or disability benefits during the year, as calculated using the formula in s 295-470(2). Terminal medical condition benefits A terminal medical condition (TMC) exists in relation to a person at a particular time if the following circumstances exist: • two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period (the certification period) that ends not more than 24 months (or 12 months before 1 July 2015) after the date of the certification • at least one of the registered medical practitioners is a specialist practicing in an area related to the illness or injury suffered by the person, and • for each of the certificates, the certification period has not ended (ITAR reg 303-10.01). A complying superannuation fund that provides TMC benefits to its members can claim a deduction for a specified amount that is part of a premium which is wholly for the liability to provide TMC benefits or so much of the premium as is attributable to the liability to provide TMC benefits (s 295-460(aa); 295-465(1), table items 5 and 6). The deduction applies in relation to a current or contingent liability of the fund to provide TMC benefits on or after 16 February 2008. Example ABC Superannuation Fund takes out insurance in relation to its members for death cover and terminal illness cover. The fund’s trust deed specifies that the fund has a liability to pay TMC benefits to members. The insurance premium paid by the fund is deductible under item 5 or 6 of s 295-465(1), as the premium relates partly to a liability of the fund to provide TMC benefits to members under s 295-460(aa), and partly to a liability to provide death benefits under s 295460(a).

If there is no insurance coverage, the fund can claim a deduction for an amount it could reasonably be expected to pay in an arm’s length transaction to obtain an insurance policy to cover that part of its current or contingent liabilities to provide TMC benefits (s 295-465(2)). An actuary’s certificate is required in order to apportion premiums under s 295-465(1), item 6 or the amount under s 295-465(2). Alternatively, self-insuring funds may choose to deduct an amount for a future liability to pay TMC benefits using a formula based on the actual cost of providing the benefits which arise each year (s 295-470). The taxation of TMC benefits is discussed in ¶8-260. Clawback for rebate or refund of premiums If a complying superannuation fund receives a rebate or refund of premiums for which a deduction has been allowed under s 295-465 (see “Death and disability benefits for which deductions are available” above), the amount of the rebate or refund is included in the fund’s assessable income for the year of income in which it is received (ITAA97 s 295-320, item 4). Exemption for non-reversionary bonuses Any non-reversionary bonus (ie a cash bonus) received by a complying superannuation fund on a life insurance policy is excluded from the fund’s assessable income (ITAA97 s 295-335, item 1). The exemption is to avoid double taxation as the relevant income will have already been taxed in the hands of the life insurance company (¶7-155). ATO guidelines on deductions under s 295-465(1) Taxation Ruling TR 2012/6 provides guidelines on the deductibility under s 295-465(1) of premiums paid

by a complying superannuation fund for insurance policies which provide TPD cover for members. Taxpayer alert — life insurance bonds issued by tax haven entities Taxpayer Alert TA 2009/17 dealing with life insurance bonds issued from tax haven entities warns that Australian residents investors (including SMSFs) in these types of bonds may not be eligible for concessional tax treatment such as CGT exemption and the special rules applicable to reversionary bonus paid from life insurance bonds. Specifically, the income tax and regulatory issues for superannuation funds include whether: • the fund can claim a deduction of 30% of the insurance premium under s 295-465 (see above) (or ITAA36 former s 279 in pre-2007/08 income years) • a capital gain or loss can arise under ITAA97 s 104-25 upon redemption of the bond • the CGT exemption under ITAA97 s 118-300 applies to funds that invest in these arrangements • ITAA36 s 26AH applies to include as assessable income any reversionary bonuses paid on surrender of these policies within 10 years of acquisition, and • any provision of the SIS Act has been contravened.

¶7-148 Deduction for increased death benefit payments Caution: Section 295-485 (the anti-detriment deduction provision) has been repealed in respect of death benefits from 1 July 2017. If a fund member dies on or after 1 July 2017, a tax deduction for any anti-detriment payment is not available. If a member of the fund dies before 1 July 2017, a tax deduction for any anti-detriment payment is available up to 30 June 2019. From 1 July 2019, no tax deduction is available for anti-detriment payments available even where the member died before 1 July 2017. Section 295-485 of ITAA97 allows a deduction to a complying superannuation fund (or a complying approved deposit fund) when: • it pays a superannuation lump sum because of the death of a person to the trustee of the deceased’s estate or an individual who was a spouse, former spouse or child of the deceased at the time of death or payment, and • it increases the lump sum by an amount, or does not reduce the lump sum by an amount (the tax saving amount) so that the amount of the lump sum is the amount that the fund could have paid if no tax were payable on amounts included in contributions made to the fund that were assessable income under ITAA97 Subdiv 295-C (¶7-120) and ITAA36 former s 274 (s 295-485(1); ITTPA s 295485). The deduction is available so that the death benefit amount is not reduced because of the tax on contributions. The deduction effectively compensates the fund for the tax payable on the contributions that are used to fund the increased death benefit payment. These payments are commonly called “potential detriment payments” and the provisions of s 295-485 as the anti-detriment provisions. A fund which pays this increased amount may claim the deduction (as calculated in accordance with s 295-485(3)) from its assessable income in the income year in which the superannuation lump sum death benefit is made (s 295-485(2)). If the recipient is the trustee of the deceased member’s estate, the deduction allowable is only so much of the amount (as calculated) as the Commissioner considers appropriate, having regard to the extent to which the dependants of the deceased member may reasonably be expected to benefit from the estate (s 295-485(4)). Where a lump sum payment is made to the trustee of the deceased’s estate, the amount that the fund can deduct is so much of the amount under s 295-485(3) as is appropriate having regard to the extent to which the spouse, former spouse or child of the deceased member can reasonably be expected to benefit

from the estate (s 295-485(4)). If a fund is advised by the deceased’s estate that only 50% of the lump sum paid by the fund to the estate will be paid to a spouse, former spouse or child of the deceased, the fund can increase the lump sum it pays to the estate by only 50% of the maximum possible “tax saving amount” and claim a deduction for that amount under s 295-485 (ID 2012/10). Calculating the deductible amount The amount that the fund can deduct using the formula in s 295-485(3) is calculated as: Tax saving amount/low tax component rate where the “low tax component rate” is the rate of tax imposed on the low tax component of the fund’s taxable income for the income year (ie 15%). For an alternative formula, see “ATO guidelines” below. Most trust deeds do not impose a duty on the trustee to increase death benefit payments and claim the corresponding deduction. However, even if no duty exists, trustees should consider whether they should do so under a trust power, having regard to the particular circumstances of the fund (eg the value of the deduction to the fund which may be in losses) and whether they would be acting in the best interests of members otherwise. Repeal and transitional rule The anti-detriment provisions in s 295-485 which allow superannuation funds to claim a tax deduction for a portion of the death benefits paid to eligible dependants has been repealed for lump sums that are paid in relation to a death on or after 1 July 2017. From 1 July 2019, this repeal will extend to all benefits paid after this time, regardless of whether the death was before or after 1 July 2017. ATO guidelines In guidelines issued under the predecessor provision to s 295-485 (ie ITAA36 former s 279D, which applied in pre-2007/08 years), the Commissioner accepted an alternative formula for calculating the “notional payment reduction due to contributions tax” under s 279D(2) where the actual amount could not be calculated by the paying superannuation fund (former ID 2006/290; for the ATO view for post-2007/08 years, see ID 2007/219 below). Former ID 2006/290 stated that the alternative method reflects the intention of the provision and “calculates an approximate notional payment reduction taking into account the amount of the benefit that accrued after 30 June 1988”. In ID 2007/219, the Commissioner states that he will accept an alternative method, as set out below, as a means of calculating the tax saving amount in ITAA97 s 295-485(3) where the actual amount cannot be calculated by the superannuation fund. (0.15*P)/(R − 0.15*P)*C Where: P = The number of days in component R that occur after 30 June 1988. R = The total number of days in the service period as defined in ITAA97 s 307-400 that occur after 30 June 1983. C = The taxable component of the lump sum calculated under ITAA97 s 307-125, as if no deduction under s 295-485(2) were allowed, after excluding the actual (if any) insured amount for which deductions have been claimed under ITAA97 s 295-465 or 295-470. The superannuation fund in ID 2007/219 is an accumulation fund, where the member’s benefits are the sum of contributions and investment income earned on those contributions over the period of membership, less expenses such as fees, taxes and insurance premiums. The fund is a taxed superannuation fund and there are no elements untaxed in the fund. Members may transfer superannuation benefits from other superannuation funds to the fund. The details of the benefits transferred from other superannuation funds do not include the actual effect of tax paid by that fund. The fund cannot calculate the amount of tax paid on amounts in the member’s accounts as its records do not track the effect of fund tax on individual accounts over the membership period.

The Commissioner accepts that the alternative method contained within former ID 2006/290 has been updated to take into account the amendments to the income tax legislation from 1 July 2007, and that the formula noted in ID 2007/219 (see above) calculates an approximate tax saving amount so as to give effect to the intention of s 295-485. The formula in ID 2007/219 is also appropriate in situations where the fund’s records do not track the effect of fund tax on the accounts of individual members. For example, the fund is able to calculate the amount of tax paid on the amounts in individual members’ accounts if it were to reconstruct those accounts from its records to take account of the effect of fund tax in the accounts over the membership period (ID 2010/5). In calculating the tax saving amount, a fund trustee can take into account the earnings that would have accrued if no tax had been imposed on contributions included in assessable income under ITAA97 Subdiv 295-C (¶7-120) or under ITAA36 former s 274 (ID 2008/111). Also, the trustee is not required to take into account expenses that are deductible against the assessable income of the fund (ID 2008/112). The ATO considers that the audit method should be used if the fund has the records, but, as stated in IDs, allow the formula method to be used if the records do not track the effect of fund tax on the accounts of individual members (ID 2007/219) or the fund’s records do not track the effect of fund tax on the accounts of individual members, but the fund could reconstruct those accounts from its records over the membership period (ID 2010/5). The ATO does not propose to apply this view in circumstances beyond those specified in the ATO IDs (National Tax Liaison Group (NTLG) Superannuation Technical Sub-group minutes, Issue 6.12, September 2010).

¶7-150 Other deductions for superannuation funds Certain amounts paid by superannuation entities are stated expressly to be deductible or non-deductible by ITAA97 Subdiv 295-G. Expenses relating to investments in PSTs, life policies A complying superannuation fund (or a complying ADF) may claim a deduction for expenses incurred in relation to investments in PSTs or in life insurance policies issued by life companies or in custodian trusts under such policies (ITAA97 s 295-100) (see also “Exemption for non-reversionary bonuses” below). Any profit, gain or bonus derived from the investments (which are exempt income or capital gains: see “Exemption — investments in PSTs, life policies” at ¶7-130) is treated as assessable income for the purposes of applying the deduction provisions. Investment or administration charges levied by a PST or life office are not deductible, unless they are not of a capital nature (TR 93/17 para 23(d)). However, except where deductible under s 295-465 (see “Death and disability benefits for which deductions are available” in ¶7-147), a complying superannuation fund is not entitled to a deduction for fees or charges incurred in respect of: • complying superannuation life insurance policies or exempt life insurance policies, or • units in a PST that are segregated current pension assets of the fund, ie exempt units in the PST (¶7153) (s 295-100(2)). Clawback deduction for contributions A complying superannuation fund’s assessable income may be reduced by a clawback amount in respect of assessable contributions of an earlier year of income. This arises where a member’s contributions have been included in the fund’s assessable contributions in a year of income and, after the lodgment of the fund’s income tax return, the trustees receive a notice from the member which reduces the amount of the contributions to be included in assessable contributions (see ¶7-120). In such a case, the clawback amount (ie the amount covered in the notice) may be allowable as a deduction from the fund’s assessable income in the year that the notice is received. If the fund is unable to fully utilise the deduction (eg the fund’s taxable income in that year is exceeded by the deduction or the fund would lose the benefit of franking credits), the fund has the option of amending its assessment of the fund for the year in which the contributions were included in assessable income (¶7120).

In particular, a complying superannuation fund can deduct the following: • for the income year in which contributions are received — contributions included in the fund’s assessable income (¶7-120) that are fringe benefits, as these will be taxed as fringe benefits in the hands of the contributor (ITAA97 s 295-490, item 1) • for the income year in which a notice is received — a member’s personal contributions to the extent the member has given the fund a notice to reduce the amount of the contributions (but only if the superannuation fund or RSA provider has not exercised the option in s 295-195(3)) (¶7-120) (ITAA97 s 295-490, item 2). Levies A superannuation fund which pays a financial assistance funding levy (¶3-930) is entitled to a deduction for the amount of the levy in which it is incurred (ITAA97 s 295-490, item 3). A grant of financial assistance is exempt income in the hands of the recipient fund, and any repayment of financial assistance by a fund is not an allowable deduction (ITAA97 s 295-405, item 1; 295-495, item 5). The superannuation supervisory levy (¶3-900, ¶3-920) paid by a superannuation fund is deductible as a tax-related expense (s 25-5). The late lodgment amount or late payment penalty of the levy (if any) is not deductible (ITAA97 s 26-5). Payment of benefits No deduction is allowed for superannuation benefits (eg lump sums or pensions) paid by a complying superannuation fund (ITAA97 s 295-495, item 1). [FITR ¶270-000; SLP ¶45-200ff]

¶7-153 Funds paying current pensions A complying superannuation fund is entitled to an exemption for so much of its ordinary income or statutory income as is attributable to discharge its liability in respect of superannuation income streams (eg life pensions, allocated pensions, market linked pensions or account-based pensions) at a time in respect of: • from the 2017/18 year — RP superannuation income stream benefits of the fund at that time (see “Superannuation income streams that are in the retirement phase”), or • before 2017/18 — superannuation income stream benefits that are payable by the fund at the time (ITAA97 s 295-385; 295-390; ITAR reg 995-1.01). The exemption (commonly called the “earnings tax exemption” or “exempt current pension income exemption”) does not apply to assessable contributions (¶7-120) or non-arm’s length income (¶7-170) of the fund, or income derived from segregated non-current pension assets (ITAA97 s 295-385(2); 295390(2)). Section 320-37(1)(a) of ITAA97 (in conjunction with s 320-246 and 320-247) provides an equivalent exemption for life insurance companies. The earnings tax exemption is generally not available where a fund ceases to have liabilities in respect of RP superannuation income stream benefits, except where the liabilities ceased because of the death of a member. For the 2012/13 and later income years, if a fund member who was receiving a superannuation income stream dies, the fund continues to be entitled to the earnings tax exemption in the period from the member’s death until the member’s benefits are cashed as a lump sum and/or by commencing a new superannuation income stream (subject to the benefits being cashed as soon as practicable). The exemption amount cannot be greater than it was before the member’s death (apart from the additional investment earnings since the member’s death) (see “Earnings tax exemption following a member’s death” below). The Commissioner’s guidelines on when a superannuation income stream commences and when it ceases, and consequently when a superannuation income stream is payable are set out in Taxation Ruling TR 2013/5.

The earnings tax exemption is discussed under the following headings in this paragraph: • Superannuation income streams that are in the retirement phase • Two methods of claiming exemption • SMSFs and small APRA funds — disregarded small fund assets • Assessable contributions and non-arm’s length income • Derivation of income and exempt income apportionment • Loss relating to exempt income cannot be carried forward • Actuarial certificates • ATO exercise of powers of general administration — guidelines • Earnings tax exemption following a member’s death. Superannuation income streams that are in the retirement phase The current pension income exemption provisions apply in respect of retirement phase (RP) superannuation income stream benefits of the fund at that time (ie superannuation income streams that are in the “retirement phase” at the time). In pre-2017/18 years, the exemption applied in respect of “superannuation income stream benefits that are payable at the time” (s 295-385(3)(a), (4)(a), (5); 295390(2)). A superannuation income stream is in the retirement phase at a time: • if a superannuation income stream benefit is payable from it at the time, or • if it is a deferred superannuation income stream, a superannuation income stream benefit will be payable from it at a later time and the person who will receive the benefit has satisfied a relevant condition of release in SISR Sch 1 (ie 101 (retirement), 102A (terminal medical condition), 103 (permanent incapacity), 106 (attaining age 65) (s 307-80(1), (2))). A superannuation income stream is not in the retirement phase if: • the superannuation income stream is any of the following: – a transition to retirement income stream (TRIS) (within the meaning of SISR Pt 6 or RSAR Pt 4) – a non-commutable allocated annuity or allocated pension (within the meaning of those regulations) • at or before that time, the person to whom the benefit is payable: – has not satisfied a condition of release specified in s 307-80(2)(c), or – has satisfied a condition of release specified in 101, 102A or 103 under s 307-80(2)(c)(i), (ii) or (iii) (see above), but has not notified the income stream provider of that fact (s 307-80(3)). A superannuation income stream is also not in the retirement phase in an income year if: • the superannuation income stream is specified in an ATO commutation authority under TAA Sch 1 Subdiv 136-B (about an excess transfer balance) • the income stream provider has failed to comply with the commutation authority within the 60-day period as mentioned in TAA Sch 1 s 136-80, and • the income year is the income year in which the 60-day period ended, or a later income year (s 30780(4)).

TRIS and reversionary beneficiaries A TRIS is not in the retirement phase unless a superannuation income stream benefit is currently payable from it and the recipient: • is 65 years old or older, or • has met a relevant condition of release with a nil cashing restriction and has notified the TRIS provider of that fact, or • is receiving the TRIS as a reversionary beneficiary. A TRIS is not in the retirement phase but will move into the retirement phase when the member meets one of the following conditions of release specified in s 307-80(2)(c), ie retirement, terminal medical condition, permanent incapacity or attaining age 65 (see above). The move into the retirement phase happens as soon as the member reaches age 65, or if a reversionary income stream starts to be paid to a reversionary beneficiary after the member's death. With the retirement, terminal medical condition, permanent incapacity conditions of release, the TRIS will move into the retirement phase at the time the TRIS provider is notified. A member does not need to commute and restart a TRIS for it to move into the retirement phase. A TRIS does not convert into any other form of superannuation income stream when it moves into the retirement phase. That is, it will continue to satisfy the definition of a TRIS, but will be “converted” to another kind of superannuation income stream if the TRIS has ceased and a new superannuation income stream is commenced. Essentially, once a member meets one of the specified conditions of release, the SISR restrictions particular to TRISs (the 10% maximum annual payment and commutation restrictions) fall away automatically, subject to the governing rules of the fund and/or the agreement or standards under which the TRIS is provided. Once those limitations are gone, the TRIS has the same restrictions and requirements as any other account-based superannuation income stream. A reversionary TRIS can always be paid to a reversionary beneficiary, regardless of whether the beneficiary has satisfied a condition of release, for the purpose of meeting the requirement of being an income stream in the retirement phase (s 307-80(3)(aa)). For that purpose, a TRIS paid to a reversionary beneficiary is only subject to the general retirement phase definition in s 307-80(1) (which requires that a superannuation benefit is paid). This is consistent with the treatment of other superannuation income streams which do not require the reversionary beneficiary to satisfy a condition of release. Two methods of claiming exemption There are two ways to determine the exempt amount of income derived from pension assets (commonly called “exempt current pension income” (ECPI)) depending on whether a superannuation fund’s assets are “segregated” or “unsegregated” at the time the pension starts to be paid. A fund may use either or both methods to claim the tax exemption, except for SMSFs and small APRA which must satisfy certain conditions before they can use the segregated pension method (see “SMSFs and small APRA funds — disregarded small fund assets” below) Under the “segregated current pension assets” method, the fund segregates its assets as specifically relating to its liabilities (whether contingent or not) in respect of RP superannuation income streams of the fund (s 295-385(3)(a), (4)). In this case, the exempt income is that part of the fund’s income that is derived from the segregated current pension assets. An asset of a complying superannuation fund is a segregated current pension asset at a time if: • it is invested, held in reserve or otherwise dealt with for the sole purpose of enabling the fund to discharge liabilities (contingent or not) in respect of RP superannuation income stream benefits of the fund (or before 1 July 2017, in respect of superannuation income stream benefits that are payable by the fund: see above) where the whole asset is so invested, held or dealt with (ie the relevant sole purpose), and

• the trustee of the fund obtains an actuary’s certificate before the date for lodgment of the fund’s tax return for the income year to the effect that the assets and earnings from them would provide the amount required to discharge in full those liabilities as they fall due (s 295-385(3), (4)). To meet the above requirements, this means that: • an asset cannot be partly invested, held or dealt with partly for the relevant sole purpose and partly for another purpose, and • part of an asset cannot be invested, held or dealt with for the relevant sole purpose, and another part of the asset is invested, held or dealt with for another purpose. Taxation Determination TD 2014/7 clarifies when a bank account or sub-account of a complying superannuation fund is a segregated current pension asset. Assets of certain income stream benefits may be prescribed as segregated current pension assets by regulations The assets of a fund supporting current superannuation income stream benefits that are prescribed by the regulations are also segregated current pension assets. The prescribed income stream benefits are allocated pensions, market-linked pensions or account-based pensions (s 295-385(4), (5); ITAR reg 295-385.01). However, such assets are not segregated current pension assets to the extent that the market value of the assets exceeds the account balance supporting the income stream benefit (s 295385(6)). Under the “attributable proportion” method, the exemption is based on the proportion of average value of current pension liabilities of the fund to the average value of the fund’s superannuation liabilities as determined in accordance with the formula in s 295-390(3). That calculated proportion of the fund’s income (other than income exempt under s 295-385, income derived from assets that are segregated non-current pension assets, or non-arm’s length income or assessable contributions of the fund) is exempt from tax. The “average value of current pension liabilities” is the average value of the fund’s current liabilities (contingent or not) in respect of superannuation income stream benefits that are payable by the fund in that year (other than liabilities for which segregated current pension assets are held). The “average value of superannuation liabilities” is the average value for the income year of the fund’s current and future liabilities (contingent or not) in respect of superannuation income stream benefits in respect of which contributions have, or were liable to have, been made (other than liabilities for which segregated current pension assets or segregated non-current assets are held). A superannuation fund’s “segregated non-current pension assets” are assets relating to the fund’s superannuation liabilities other than current pension liabilities (as certified by an actuary), ie assets invested or held by the fund for its non-current pension liabilities (ITAA97 s 295-395). No tax exemption is available for income derived from segregated non-current pension assets. SMSFs and small APRA funds — disregarded small fund assets SMSFs and small APRA funds cannot use the segregated current pension assets method in s 295-385 to determine their earnings tax exemption for an income year if: • at a time during the income year, there is at least one superannuation interest in the fund that is in the retirement phase, and • just before the start of the income year: – a person has a total superannuation balance that exceeds $1.6m, and – the person is the retirement phase recipient of a superannuation income stream (whether or not the fund is the superannuation income stream provider for the superannuation income stream) (s 295-385(7); 295-387). Assets of funds covered by s 295-387 are known as “disregarded small fund assets”. They cannot be

segregated current pension assets under s 295-385 or segregated non-current assets under s 295-395. This means that funds in those circumstances cannot use the segregated current pension assets method in s 295-385 for their ECPI calculation and must use the attributable proportion method in s 295-390. This is the case even if the fund's only member interests are retirement phase superannuation income streams where an actuarial certificate will enable the fund to claim a 100% pension income exemption (see “Actuarial certificates” below). Proposed changes — 2019/20 Federal Budget superannuation measures From 1 July 2020: • superannuation funds with interests in both the accumulation and retirement phases during an income year will be allowed to choose their preferred method of calculating their ECPI • the redundant requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the fund are fully in the retirement phase for all of the income year, will be removed (2019 Budget Paper No 2, p 23: www.budget.gov.au). Assessable contributions and non-arm’s length income As noted above, the income exemption under s 295-385 (segregated current pension assets method) or s 295-390 (attributable proportion method) applies only to ordinary income or statutory income derived by the fund, and not to assessable contributions or non-arm’s length income of the fund, if any. In addition, apportionment of the exempt income for the income year may be required in circumstances where the current pension ceases to be paid or payable during the year. This may arise, for example, if a current pension is fully commuted during the year or the sole pensioner of the fund dies and the fund no longer has any current pensions in payment and there is no provision for a contingent pension to commence (ID 2004/688). This is because the fund will not have a current pension liability after the commutation or death of the pensioner. Similarly, apportionment will be required where there is a partial commutation of a current pension during the year. Derivation of income and exempt income apportionment Apportionment of the ordinary income and statutory income derived by a superannuation fund paying current pensions may be required to determine the exempt income amount for a year. For tax purposes, an entity (eg a superannuation fund) “derives” income if the entity receives it, or is entitled to receive it, or it is dealt with on behalf of or as directed by that entity. TR 98/1 sets out the Commissioner’s guidelines on the two commonly used methods of tax accounting for determining when income is derived in a year of income — namely, the “receipts” or cash method and the “earnings” (or accruals) method. The general rule is that a taxpayer must adopt the method that is the most appropriate to give a substantially correct reflex of income. Whether a particular method is appropriate is generally a conclusion to be reached from all the circumstances relevant to the taxpayer and the income. In an appropriate case, therefore, the trustee of the fund must consider the issue of derivation of income, regardless of whether the income has actually been received by the fund, to determine if apportionment for exempt income purposes is appropriate. Such an issue may arise with regard to income (eg a trust distribution) which is received after commutation of the pension has taken place during the year. Loss relating to exempt income cannot be carried forward A taxpayer’s “net exempt income” for a year of income is the amount by which the total exempt income from all sources for that year of income exceeds the total of the losses and outgoings (except capital losses and outgoings) incurred in deriving that exempt income, and any taxes payable outside Australia on that exempt income (ITAA97 s 36-20(1)). This is particularly relevant for superannuation funds which have net exempt income when they are in the pension phase. The AAT has agreed with the Commissioner’s application of s 36-20(1) that an SMSF could not carry forward the excess of losses and outgoings relating to its exempt income as a carried forward tax loss to

be offset against exempt income in a future year. Although s 36-20(1) does not use the words “except losses and outgoings from previous years”, the AAT interpreted s 36-20(1) to include those words to fit within the broader scheme of Subdiv 36-A. This means that a tax loss (to the extent that it is used against net exempt income) is not available for deduction against excess assessable income, either in the current income year or by carrying it forward to a future income year (Re The Trustee for the Payne Superannuation Fund and FCT [2015] AATA 58, AAT, Ref No: 2014/0555). Actuarial certificates A superannuation fund paying a pension may be required to obtain an actuarial certificate each year in order to claim the earnings tax exemption under s 295-385 or 295-390. For guidelines on the actuarial certificate requirements, see IT 2617. If a fund uses the segregated pension assets method in s 295-385 to claim the tax exemption, an actuary’s certificate is not required if the fund is paying pensions as prescribed in the regulations and no other type of pension. The prescribed pensions are account-based pensions, allocated pensions and market linked pensions, or an amount taken to be a superannuation income stream benefit (see “Earnings tax exemption following a member’s death” below) (ITAR reg 295-385.01). An actuarial certificate covering all pensions that the fund pays is therefore required if the fund is paying a non-prescribed pension (eg a life pension), or is paying prescribed as well as non-prescribed pensions. If a fund uses the proportional (unsegregated assets) method in s 295-390, the fund will need an actuarial certificate for each year to claim a tax exemption, regardless of the type of pension being paid (s 295390(4) to (7)). Other key points are noted below. • The two ways to claim a tax exemption depend on whether the fund’s assets are segregated or unsegregated at the time the pension starts to be paid. Before paying a pension, the fund’s assets are to be revalued to their current market value. • The normal assessable income derived from assets supporting pensions are reported in the income section of the fund’s income tax return. The tax exemption is claimed by completing the exempt current pension income labels under the deductions section in the return. • A fund that has only segregated current pension assets should ignore any capital gains or losses resulting from the disposal of these assets. Also, if the fund has a capital loss from the disposal of a segregated current pension asset, this cannot be offset against any other capital gain earned by the fund. • A fund that has unsegregated current pension assets will need to factor in capital gains and losses. In this case, capital gains are normal assessable income. The fund will need to include these gains as part of the fund’s income before working out how much of the fund’s income is tax exempt using the unsegregated assets formula. Capital losses that arise if the fund has unsegregated current pension assets are not included when calculating normal assessable income. If the fund has a capital loss, it can be carried forward each year until it can be offset against an assessable capital gain. The fund’s capital gain minus any capital losses equals the net capital gain. The net capital gain is added to the fund’s normal assessable income before working out how much of the fund’s income is tax exempt for the relevant year, as per the actuarial calculation for the relevant year. • A fund that has tax losses other than capital losses will first need to offset the loss against its exempt current pension income. Any remaining tax loss can be offset against the assessable income of the fund. Once the assessable income is reduced to zero, any further losses can be carried forward to the next financial year. • Funds cannot claim a deduction for expenses relating to the income derived from assets used to support pension payment as the income from these assets is tax exempt. Where a general expense which relates to both the accumulation and pension phase of the fund is incurred, the expense must be apportioned so that only the proportion relating to the production of assessable income is claimed

as a deduction (¶7-150). However, certain specific deductions under ITAA97 can be claimed in full, eg tax-related expenses such as the supervisory levy (¶7-150) and death and disability premiums (¶7-147). ATO exercise of powers of general administration — guidelines The ATO has released guidelines on the circumstances which may warrant the exercise of the Commissioner’s powers of general administration to allow superannuation funds to continue to claim ECPI, even though the SIS Regulations minimum pension standards (see ¶3-390) have not been met (“Self-managed superannuation funds — starting and stopping a superannuation income stream (pension)”: www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsftechnical/funds--starting-and-stopping-a-pension; “APRA-regulated funds — starting and stopping a superannuation income stream (pension)”: www.ato.gov.au/super/apra-regulated-funds/in-detail/apraresources/apra-funds-starting-and-stopping-a-super-income-stream-(pension)/). Earnings tax exemption following a member’s death As discussed above, the earnings tax exemption under s 295-385 and 295-390 is available to a complying superannuation fund for so much of the income of fund as is supporting its current liabilities in respect of superannuation income stream benefits payable by the fund at the particular time. To provide certainty for deceased estates for the 2012/13 and later years, where a complying superannuation fund member was receiving a superannuation income stream immediately before his/her death and that income stream did not automatically revert to another person on the member’s death, an amount that is either paid as a superannuation death benefit lump sum using only an amount from the superannuation interest supporting the deceased’s income stream immediately before their death, or that is applied from that interest to commence a new superannuation income stream, is taken to be a superannuation income stream benefit payable by the fund for a specified period. The specified period is from the death of the member until as soon as it was practicable to pay the lump sum or commence the new superannuation income stream. This means that the superannuation fund will continue to be entitled to the earnings tax exemption in relation to such an amount during this period. The continuation of the exemption is achieved by the expanded meaning given to the meaning of “superannuation income stream benefit” for the purposes of relevant provisions (s 295-385; 295-390; 295-395; 320-246; 320-247; ITAR reg 995-1.01(2) to (5)). The amount that is taken to be a superannuation income stream benefit payable by the fund is reduced by the extent, if any, to which it is attributable to an amount or amounts, other than investment earnings, added to the superannuation interest on or after the deceased’s death. For these purposes, “investment earnings” do not include an amount paid under a policy of insurance on the life of the deceased or an amount arising from self-insurance. This is intended to ensure that the level of the exemption for the relevant period after the member’s death is no greater than it was before their death (allowing for investment earnings after the member’s death). Example 1 Paul was receiving a pension from his superannuation fund before his death on 1 September 2018. Paul’s pension did not automatically revert to another person on his death (ie it is non-reversionary) and no amount (other than investment earnings) was added on or after his death to the superannuation interest that was supporting the pension. After undertaking a claims staking process, the fund trustee determined that the entire value of Paul’s benefits in the fund would be paid to Helen (his widow) as a lump sum. On 20 December 2018, which was in the circumstances as soon as practicable after Paul’s death, a single lump sum of $100,000 was paid to Helen using only an amount from the relevant superannuation interest. For the purposes of the earnings tax exemption, the $100,000 is taken to be the amount of a superannuation income stream benefit that was payable from 1 September 2018 until 20 December 2018.

Example 2 Assume in Example 1 that the lump sum paid to Helen was $120,000 because the trustee of the fund added $20,000 to Paul’s superannuation interest to fund an anti-detriment increase of that amount (see ¶7-148). In this case, only $100,000 is taken to be the amount of a superannuation income stream benefit that was payable from 1 September 2018 until 20 December 2018 (as $20,000 of the superannuation lump sum is attributable to an amount other than investment earnings that was added to the relevant superannuation interest on or after Paul’s death).

¶7-155 Tax offsets and other concessions Some of the other main tax concessions, tax offsets/rebates and measures affecting taxpayers generally which may be relevant to eligible superannuation entities are outlined below. A detailed coverage of these concessions and measures is outside the scope of the Guide. For detailed commentary, readers may wish to refer to Wolters Kluwer tax products and services, such as the Australian Master Tax Guide or Federal Income Tax Reporter. Dividend income and franking credits The general scheme of the tax imputation system in ITAA97 is that dividends sourced from company profits are assessable to the recipients, but the recipients are entitled to credits for income tax paid by the company in earning those profits. This is to prevent the income being taxed twice, ie when it is earned by the company and when the net earnings are passed on to shareholders as dividends. A resident shareholder (eg a complying superannuation fund) is assessable on all dividends paid (to the shareholder) by a resident or non-resident company out of profits derived from any source (ITAA36 s 44(1)), other than dividends paid by a pooled development fund (PDF). Dividends paid into a resident shareholder’s foreign bank account are assessable even if currency export controls prevent the funds being transferred out of the foreign country (TD 96/13). Where a dividend derived from foreign sources is not exempt from tax in Australia, a tax credit for any relevant foreign tax is usually allowable (see below). Under the imputation system, where a franked dividend is received by a shareholder, the assessable income of the shareholder includes, in addition to the amount of the dividend, the franking credit attached to the dividend, but the shareholder is entitled to a tax offset equal to the franking credit included in assessable income. It is called an imputation system because the payment of company tax is imputed to shareholders, and shareholders who receive assessable dividends are entitled to a tax offset for the tax paid by the company on its income. Specific integrity measures ensure that the SIS operates consistently with the government’s taxation policy intentions, including: • anti-streaming rules, which are designed to ensure that franking benefits are not streamed mainly to members who would benefit to a greater degree than other members, as well as the general antiavoidance rules applicable to franking credit schemes (Electricity Supply Industry Superannuation (Qld) Ltd 2002 ATC 4888: ¶7-500) • a holding period rule and related payments rule. The holding period rule applies to shares bought on or after 1 July 1997. It requires a taxpayer to hold the shares “at risk” for at least 45 days (90 days for preference shares and not counting the day of acquisition or disposal) to be eligible for the tax offset in relation to the imputation credit. This rule prevents trading schemes from acquiring shares cum dividend, collecting shares cum the dividend and franking credits and then disposing the shares at a loss (see ID 2012/24: application of holding period rule). The holding period rule only needs to be satisfied once for each purchase of shares. The rule applies to the value of the imputation credits received in a year. Complying superannuation entities (other than an SMSF) may apply a special benchmark rule in certain circumstances as an alternative to the holding period rules. The related payments rule applies to arrangements entered into after 7.30 pm (Australian Eastern Standard Time) on 31 May 1997. It applies to funds if they make, are under an obligation to make, or are likely to make, a “related payment”. A related payment is a payment that passes on the benefit of the franked dividend to someone else. If the rule applies, and the fund does not hold the shares “at risk” for a period of 45 days (90 days for preference shares), the fund is prevented from receiving a tax offset in relation to the imputation credits. The related payments test must be satisfied for each dividend payment and distribution.

The ATO states in Taxpayer Alert TA 2018/1 (Structured arrangements that provide imputation benefits on shares acquired on a limited risk basis around ex-dividend dates) that is reviewing arrangements that are intended to provide imputation benefits to Australian taxpayers (including individuals and superannuation funds) who are not the true economic owners of the shares. The arrangements involve an Australian taxpayer with a long position in Australian shares legally acquiring, but having little or no economic exposure to, an additional parcel of the same shares and holding those shares over the ex-dividend date. They will typically involve the use of securities lending arrangements in combination with, repurchase agreements or derivative contracts (contracts), to create what is essentially a circular flow of shares. Although the Australian taxpayer has no or only nominal economic exposure to the additional parcel of shares on a stand-alone basis, the Australian taxpayer claims franking credits in respect of both the existing long position and the additional parcel of shares. That is, taxpayers are relying on an existing long shareholding to claim additional franking credits on a second parcel of shares at zero or nominal risk, such that the franking credits are generally the only return of significance that the taxpayer receives on that second parcel. The ATO states that such arrangements raise the issues of whether: • the taxpayer is a qualified person in relation to the relevant dividends on the additional parcel of shares for the purposes of ITAA36 former Pt IIIAA Div 1A, as required by ITAA97 s 207-145(1)(a) • ITAA36 s 177EA applies to these arrangements, in particular, to deny the imputation benefits received in respect of the additional parcel of shares, and • the promoter penalty laws in TAA Sch 1 Div 290 would apply to promoters of this arrangement. Distribution washing Restrictions may apply on an entity’s ability to obtain the benefits of additional franking credits received as a result of “distribution washing” (ITAA97 s 207-157). Distribution washing describes the process whereby shareholders who place a relatively high value on franking credits (such as superannuation funds, tax exempt not-for-profit entities and shareholders with low marginal tax rates) sell a membership interest on an ex-dividend basis and purchase an interest on a cum dividend basis (in the period after an interest goes ex-dividend). This enables them to receive two sets of dividends and claim two sets of franking credits, although in substance, they only ever held one parcel of interest at any point in time. Shareholders who buy ex-dividend interests and sell cum dividend interests in these arrangements are those who place a relatively low value on franking credits (such as non-residents). The process results in the transfer of value of franking credits from shareholders who should not be able to use them to those who can. The distribution washing rule in s 207-157 will apply to a franked distribution in respect of a membership interest (the washed interest) where two requirements have been met: • the washed interest must have been acquired after the member or a connected entity of the member, disposed of a substantially identical membership interest, and • a corresponding distribution must have been made to the member or a connected entity in respect of the substantially identical interest (s 207-157(1)). However, where a connected entity has disposed of the substantially identical interest, the dividend washing rule will only apply if it would be concluded that either the disposal or the acquisition took place only because at least one of the entities expected or believed that the other transaction had or would occur (s 207-157(2)). A distribution is considered to have been received as a result of distribution washing if the taxpayer has received a corresponding distribution in respect of a “substantially identical interest” (as defined in s 207157(3)) that was sold before acquiring the current interest. Whether an entity has disposed of the substantially identical interest before acquiring the washed interest is generally a matter of fact. Also, as many entities may be connected entities without having either fully unified economic interests (such as two natural persons who are related) or knowledge of one another’s activities (such as two

entities that are ultimately owned by the same entity but which have no other connection or relationship), the distribution washing rule will only apply in cases involving connected entities where it can be concluded that the acquisition (or disposal) took part at least in part because of an expectation that it was likely that the disposal (or acquisition) had taken place (or would take place). This test involves an objective assessment of what would be concluded about the actions of an entity given the particular circumstances. This assessment will need to take into account matters such as the nature of the relationship between the connected entities and the information that could be expected to be available to each entity. The effect of the distribution washing rule applying is that franked distributions which a taxpayer receives due to distribution washing will not entitle the taxpayer to a tax offset or require a taxpayer to include the amount of the franking credit in their assessable income. The rule applies automatically, and as part of the normal process of assessment. In some cases, distribution washing arrangements will constitute a scheme subject to the general antiavoidance rules under Pt IVA of the ITAA36. In these cases the Commissioner may make a determination to deny the benefit of the scheme to the relevant taxpayer and potentially apply further penalties. However, where the distribution washing rule (a specific rule) applies, the general anti-avoidance rules are excluded, as they only apply where an entity would otherwise receive a tax or imputation benefit. As a result, taxpayers (other than those who engage in schemes to obtain a benefit despite the specific rule) need not be concerned about both rules applying. For an example of dividend washing by an SMSF, see Taxation Determination TD 2014/10 which states that s 177EA of the ITAA36 can apply to a “dividend washing” scheme in a particular case after a careful weighing of all the relevant facts and surrounding circumstances of each case. The AAT has held that the introduction of s 207-157 did not mean that the existing s 177EA rules could not apply based on the facts of a case. The Commissioner could rely on ITAA36 s 169A(3) to make a valid determination under s 177EA(5)(b) as part of an objection decision-making process (Trustees of the WT & A Norman Superannuation Fund & Anor 2015 ATC ¶10-415). This case confirms that the Pt IVA determination process and anti-avoidance rule in s 177EA could apply to certain benefits arising from dividend washing transactions entered into before s 207-157 was enacted and operative. The ATO considers that the AAT’s reasoning was consistent with its view in TD 2014/10 on the law relating to “dividend washing” transactions. The commencement of s 207-157 has removed the need for the Commissioner to make determinations under s 177EA to deny imputation benefits arising under dividend washing transactions for distributions made on or after 1 July 2013 (ATO Decision Impact Statement). Refund of excess franking credits Section 67-25(1) expressly provides that tax offsets under Div 207 (ie tax offsets attached to franked distributions) or Subdiv 210-H (ie tax offsets attached to distributions franked with a venture capital credit) are subject to the refundable tax offset rules in ITAA97 Div 67. A complying superannuation fund, complying ADF or PST, is entitled to a refund of excess franking credits in each year of income where the total franking credits attached to distributions received by it exceed its tax liability, after taking into account any other tax offsets to which it is entitled. To qualify, the fund must not breach the general anti-avoidance provisions and the franking credit trading rules. Entitlement to a refund of excess franking credits applies on or after 1 July 2000 (previously unused credits were not refundable and were wasted). The refund covers franking credits attached to the following types of franked distributions: • most franked dividends received directly by the fund as a shareholder in a company, or through a trust or a partnership that is a shareholder in the company • venture capital franked dividends received by the fund from a PDF (see further below). To the extent that family trust distribution tax has been paid on a dividend (or non-share dividend) paid or credited to a superannuation fund by a company that has made an interposed entity election, the dividend is excluded from the fund’s assessable income (ITAA36 Sch 2F s 271-105). Any loss or outgoing incurred in deriving such excluded dividends is not deductible and the fund cannot claim a credit or tax offset for any franking credit attached to the whole or a portion of the exempt income.

Complying superannuation funds, ADFs or PSTs claim their excess franking credits as part of the income tax assessment process when completing the fund’s income tax return. Supporting documents must be retained by the fund. Refundable tax credits Subject to certain exceptions (see below), a general rule is that the sum of personal tax offsets (including rebates) allowable to a taxpayer is limited to the amount of income tax (excluding Medicare levy) otherwise payable by the taxpayer (ITAA97 s 4-10(3); ITAA36 s 160AD). The effect of the general rule is that, if the sum of the tax offsets exceeds the amount of income tax otherwise payable, the taxpayer is generally not entitled to a refund of the excess or to carry forward the excess to a future year. Division 63 of ITAA97 sets out the common rules for all tax offsets. Under those rules, a taxpayer who has one or more tax offsets for an income year must apply them against the taxpayer’s basic income tax liability in the order shown in the table in s 63-10. To the extent that an amount of a tax offset remains, the table sets out what happens to it (eg the entitlement may or may not be carried forward to another year, the taxpayer can or cannot get a refund, and so on). Specifically, s 63-10(1) provides that a taxpayer can get a refund of any remaining amount where the amount is a tax offset that is subject to the refundable tax offset rules (table item 40). This means that a complying superannuation fund that does not fail integrity rules (see above) will be entitled to a refund of excess franking credits even if it has no taxable income in a year of income, eg a fund in the pension phase. Funds must retain supporting documents for the above purposes. Taxpayer Alert — general anti-avoidance and regulatory issues TA 2015/1 covers arrangements where a private company with accumulated profits channels franked dividends to an SMSF instead of the company’s original shareholders. As a result, the original shareholders escape tax on the dividends and the original shareholders or individuals associated with the original shareholders benefit as members of the SMSF from franking credit refunds to the SMSF. The ATO is concerned that contrived arrangements are being entered into by individuals (typically SMSF members approaching retirement) so that dividends subsequently flow to, and are purportedly treated as exempt from income tax in, the SMSF because the relevant shares are supporting pensions. The intention is for the original shareholders of the private company and/or their associates to avoid “top-up” income tax on the dividend income, and for the SMSF to receive a refund of the unused franking credit tax offset, which is available for tax free distribution to its members. This arrangement has features of dividend stripping which could lead to the ATO cancelling any tax benefit for the transferring shareholder and/or denying the SMSF the franking credit tax offset. The ATO stated that since March 2014, it had issued private rulings on arrangements with features similar to those described in TA 2015/1 and had applied the ITAA36 Pt IVA anti-avoidance provisions to determine whether: • the franked dividends received by the SMSF may be part of a dividend stripping operation under ITAA97 s 207-145(1)(d) (see above) • the arrangement may be a scheme by way of, or in the nature of, or have substantially the effect of, dividend stripping to which ITAA36 s 177E applies • the arrangement may be a scheme to obtain imputation benefits to which ITAA36 s 177EA applies. In addition, the ATO has applied the non-arm’s length income provisions for arrangements of this type, including the views expressed in TR 2006/7 (¶7-170). The ATO further states that other compliance issues for arrangements described in TA 2015/1 may include: (i) CGT consequences, such as transfers below market value; (ii) ordinary dividend or deemed dividend consequences; (iii) superannuation regulatory issues, including non-arm’s length dealings between members or associates and the SMSF; and/or (iv) excess contributions tax consequences. Foreign income tax offset The foreign income tax offset (FITO) system replaced the former foreign tax credit (FTC) system to

provide double taxation relief for income years, statutory accounting periods and notional accounting periods starting on or after 1 July 2008. Broadly, taxpayers who have paid foreign tax on amounts included in their assessable income may claim a FITO (ITAA97 Div 770). The FITO system differs from the FTC system as below: • there is no “quarantining” rules which require separate credits (and losses) to be calculated for each of up to four classes of foreign income • the FITO is non-refundable, and the FTC rules enabling excess (unused) credits to be carried forward have been abolished, subject to transitional rules • the FITO system provides a simplified calculation method for small claims. The FITO system applies, broadly, to foreign income tax that is substantially equivalent to Australian income tax, with some exceptions (s 770-10; 770-15). For example, an amount of foreign income tax paid by a superannuation provider (superannuation fund, ADF or RSA) does not count towards the tax offset for the year if: • the tax was paid in respect of an amount included in the fund’s assessable income under table item 2 or 3 in ITAA97 s 295-320 (ie tax paid by former complying funds or former foreign funds: ¶7-250, ¶7450), and • the provider paid the tax before the start of the income year (s 770-10(4)). The offset is based on the amount of the foreign tax paid, but is generally capped to the amount of Australian income tax attributable to relevant foreign income (s 770-75; 770-80). This amount of Australian tax is calculated with various modifications and exclusions. Under the simplified calculation method, there is no need to work out the Australian tax if the foreign tax does not exceed $1,000. In such a case, the offset is available for the full amount of the foreign tax. Similarly, where the foreign tax exceeds $1,000, the taxpayer can opt to claim $1,000 as the offset. The offset is non-refundable. If the FITO exceeds the amount of tax otherwise payable for the year, the excess is lost. Transitional rules (which expired on 30 June 2014) enabled excess credits generated in the five years before the introduction of the FITO system to be carried forward, subject to various restrictions (ITTPA Subdiv 770-D). Venture capital franking distributions and tax offset Under the simplified imputation regime in ITAA97 (see above), there is a special sub-category of franking applicable only to pooled development funds (PDFs), called venture capital franking (ITAA97 Div 210). The venture capital franking rules aim to encourage superannuation funds (and other entities that deal with superannuation) to invest in PDFs. It does this by providing additional tax incentives to eligible investors, over and above the normal benefits of investing in a PDF. Complying superannuation funds (other than SMSFs) and complying ADFs and PSTs are eligible for a venture capital franking tax offset for CGT paid by a PDF on venture capital investments. The tax offset is not available if the dividend is received by the eligible shareholder through a partnership or trust, or if the dividend is part of a dividend stripping operation. To trace the CGT paid by a PDF through to its shareholders, the concept of “venture capital franked dividends” is used. To allow a tax offset for the CGT paid to be claimed by its shareholders and for the underlying income to be exempt from tax, a PDF is required to identify tax paid on venture capital gains as venture capital credits. To distribute these credits, the PDF must record and keep account of its available venture capital franking credits in a venture capital sub-account. Venture capital credits are then allocated equally to all shareholders when the PDF uses those credits to venture capital frank a dividend. To prevent a PDF from over-distributing venture capital credits, a tax is imposed on deficits in venture capital sub-accounts at the end of a franking year (the “venture capital deficit tax”). For eligible superannuation funds (and like entities) that receive a venture capital franked dividend, the dividend is exempt income. The entire distribution is exempt under ITAA36 s 124ZM, except to the extent

that the recipient fund (shareholder) elects under s 124ZM(3) to treat a part of the franked portion as assessable (in order to obtain the normal tax offset for the franking credit). Broadly, the election is available for the part of the distribution that is franked but not venture capital franked. The election may appeal to shareholders whose marginal tax rate is below the 30% company tax rate. The election is made by the shareholder disclosing the relevant part of the dividend as income in its tax return for the relevant year. Bonus on insurance policies Two types of bonuses may be payable on a life insurance policy — an annual bonus and a reversionary bonus paid on maturity, forfeiture or surrender of a life policy. Annual bonuses are assessable (ITAA97 s 15-75). In the case of a reversionary bonus received under a short-term life policy taken out after 28 August 1982, a proportion of the bonus received is included in assessable income in the first nine years of commencement of the risk under ITAA36 s 26AH(6), and any bonus received after the 10th year is tax-free. The special tax treatment provided by s 26AH(6) does not apply to a policy that is held by the trustee of a non-complying superannuation fund (s 26AH(6A)). Section 26AH also does not apply to amounts received under an eligible policy in certain circumstances, such as an amount received in consequence of the death of the insured individual or an accident, illness or other disability suffered by the insured individual, or the policy is held by the trustee of a complying superannuation fund, a complying ADF or PST, or the policy is an RSA (s 26AH(7)). Reversionary bonus rebate A rebate of tax is available under ITAA36 s 160AAB(5A) if an amount is included in a fund’s assessable income under ITAA36 s 26AH where the bonuses are received under short-term life insurance policies issued by a life office whose investment income was not tax-exempt or by a friendly society. The rebate can be offset against tax payable from any source, not just the bonus assessable under s 26AH (IT 2499). The rebate amount is 30% of the amount assessable under s 26AH, but the rebate, together with other rebate entitlements, cannot exceed the total tax otherwise payable by the taxpayer (ITAA36 s 160AD). The assessable income of a complying superannuation fund (or a complying ADF, a PST or RSA provider) does not include a non-reversionary bonus on a life insurance policy (ITAA97 s 295-335, item 1). Trust loss restrictions The trust loss and debt deduction measures in ITAA36 Sch 2F Div 266 and 267 do not apply to complying superannuation funds as they are “excepted trusts”. A superannuation fund was held to be entitled to use carry-forward losses (prior to the introduction of the provisions dealing with trust loss restrictions) despite undergoing major changes, including converting from a defined benefits to an accumulation fund, having new classes of members, and allowing unrelated employers to participate (Commercial Nominees of Australia 99 ATC 5115). Taxation of financial arrangements Division 230 of the ITAA97 provides the regime for the taxation of financial arrangements (TOFA). The TOFA rules deal with tax-timing and treatment of gains and losses from financial arrangements by: • specifying the methods under which gains and losses from a “financial arrangement” (as defined in the Division) will be brought to account for tax purposes • establishing criteria to determine how different financial arrangements (eg accruals, realisation, fair value, foreign exchange retranslation, hedging, reliance on financial reports and balancing adjustments) are assigned to, and treated under, the different tax-timing methods • removing the capital/revenue distinction for most financial arrangements by treating the gains and losses on revenue account, except where specific rules apply • including integrity rules to address value shifting and non-arm’s length dealings in relation to financial arrangements.

The TOFA rules apply to a superannuation fund only if the value of fund’s assets is $100m or more or the fund has elected to apply the TOFA rules. Once the TOFA rules apply to a fund, they continue to apply even if the value of the fund’s assets were to later fall below $100m. A practitioner article in the Wolters Kluwer Australian Super News examines the range of fund investments likely to be affected by the TOFA rules, such as term deposits, certain convertible notes and certain stapled securities. The author concluded that, ultimately, the impact of TOFA may simply be a bringing forward of certain tax liabilities in relation to the affected securities and, generally, no additional tax liability is incurred, if the timing difference is ignored (see “TOFA’s impact on superannuation fund members” by David Barrett, Head of MAStech, Macquarie Adviser Services, ASN Issue 1, 2012: ¶25).

For additional information, see the ATO TOFA guide at www.ato.gov.au/Business/Taxation-of-financialarrangements-(TOFA)/In-detail/Guide-to-the-taxation-of-financial-arrangements-(TOFA)/). [FTR ¶77-042; FITR ¶214-205–¶214-236; SLP ¶45-250]

¶7-157 Record-keeping, asset disposal and propagation arrangements The Commissioner’s views on asset identification principles and record keeping methodologies under the tax laws are contained in the rulings and determinations below. CGT Determination TD 33 (about identifying individual shares within a holding of identical shares) states that, for capital gains tax purposes, where a disposal occurs: • shares are identifiable where they are individually distinguishable, for example, by reference to share numbers or distinctive rights or obligations attached to them • it may not always be possible to identify the particular shares disposed of where they form part of a holding of identical shares • for unidentifiable shares within an identical holding, the Commissioner accepts ‘first-in first-out’ as a reasonable basis of share identification. Taxation Ruling TR 96/4 (about valuing shares acquired as revenue assets) states that: • where shares cannot be identified individually, appropriate accounting records of the acquisition and disposal of shares are considered sufficient to specifically identify shares to determine their value for taxation purposes • in the absence of appropriate accounting records, the taxpayer cannot specifically identify these shares to a particular sale for taxation purposes. Taxation Ruling TR 96/7 sets out guidelines on the applicable principles on when records are sufficiently maintained to record and explain all transactions in accordance with ITAA36 s 262A. Propagation arrangements The ATO has issued Practical Compliance Guideline PCG 2018/2 on propagation arrangements adopted by registrable superannuation entities (RSEs) that contract with custodians to provide custodial and investment administration services for the RSE’s assets. It sets out the ATO’s compliance approach to the use of propagation in selecting assets for disposal. An RSE is a regulated superannuation fund (but not an SMSF), an ADF or PST. Propagation is a term adopted by custodians to describe a tax parcel selection process. Under propagation, the tax parcel selection methodology agreed with the RSE is applied across the RSE’s asset class level holdings instead of being confined to the individual fund manager level. When assets are disposed of, the relevant parcel is selected from the propagated portfolio for each transaction, based on the parcel selection methodology agreed with the RSE. Compliance approach PCG 2018/2 explains the Commissioner’s compliance approach to propagation arrangements that satisfy the asset identification principles and record keeping methodologies described in TD 33, TR 96/4 and TR 96/7. It sets out the circumstances when the Commissioner will consider a propagation arrangement to be low risk or not. The guideline also states that anti-avoidance provisions in Pt IVA of the ITAA36 may apply to a propagation arrangement adopted by an RSE, for example, where it is part of a scheme that exhibits the following type of features: • the RSE is unsegregated for tax purposes, using the proportionate method for determining its exempt

income under ITAA97 s 295 390 (¶7-153) • it uses propagation to form a segregated current pension asset pool in accordance with s 295 385 containing an unbalanced allocation of assets with large unrealised gains • these assets are realised, resulting in gains that are exempt from income tax, and • once the assets are realised, the RSE ceases to maintain a segregated current pension asset pool which results in the unwinding of the arrangement and returning the RSE to its original unsegregated status for tax purposes. In these circumstances, the Commissioner may conclude that the scheme was entered into, and carried out, to enable the RSE to make a choice to segregate and then unwind the segregation of its current pension asset pool, resulting in the obtaining of a tax benefit in the form of omitted assessable income.

¶7-160 Look-through tax treatment when assets are acquired under limited recourse borrowing arrangements Subdivision 235-I of ITAA97 (s 235-810 to 235-845) provides income tax look-through treatment for instalment warrants and instalment receipts and other similar arrangements, and for certain limited recourse borrowing arrangements (LRBAs) entered into by regulated superannuation funds, applicable to assets that are acquired by the trustee of an instalment trust in the 2007/08 or later income years. The look-through treatment provided in Subdiv 235-I ensures that the consequences of ownership of an instalment trust asset flow to the entity that has the beneficial interest in the asset (the Investor), instead of to the trustee (s 235-810). That is, the investor stands in the shoes of the trustee for most tax purposes and that most income tax consequences associated with the underlying asset under the arrangement flow-through to the investor, and not the trustee of the instalment trust. For the exceptions where lookthrough treatment does not apply, see below. The look-through treatment continues even after the investor pays the final instalment and discharges all their obligations relating to the borrowing or the provision of credit. That is, if the asset is continued to be held in the trust, look-through treatment continues to apply. This ensures that no CGT taxing point arises on legal transfer of the asset from the trustee to the investor after final payment is made. What arrangements receive look-through tax treatment? An instalment warrant is a derivative-based investment product that involves an investor borrowing against an asset (eg a share or a unit in a unit trust) and repaying that loan in instalments over the life of the warrant. The asset is held on trust to secure the repayment of the loan, with the benefits of ownership of the asset (such as dividends and franking credits) flowing through to the investor. After the final payment is made, the investor obtains legal ownership of the asset. Instalment receipts are similar to instalment warrants, although the key difference is that there is no “borrowing”. Rather, the investor is provided with credit for the acquisition of the asset, with the payment of the purchase price being made in instalments over the life of the instalment receipt. For superannuation funds, the look-through treatment applies only where the trustee of a regulated superannuation fund acquires an asset or assets through a limited recourse borrowing arrangement (LRBA), as permitted under s 67A or former s 67(4A) (see ¶3-410) of the SISA. The general ITAA97 provisions that provide look-through treatment for instalment warrant arrangements do not apply to superannuation funds (s 235-825(1)(b); 235-830(2) and 235-840). How does the look-through tax treatment apply? Subdivision 235-I applies to the entity that has the beneficial interest in an instalment trust asset as the beneficiary of an instalment trust and the trustee of the instalment trust. A trust is an instalment trust if the trust is covered by s 235-840, and an instalment trust asset is an asset that is, or is part of, the underlying investment of an instalment trust as mentioned in s 235-840 (s 235825).

For a superannuation fund, look-through tax treatment will cover a trust if: • under an arrangement, an asset or assets (the underlying investment) is acquired by the trustee of the trust for the benefit of a trustee of a regulated superannuation fund to secure a borrowing, and • until the borrowing is repaid, the arrangement is covered by: (i) the exception in s 67A(1) of the SISA (about a fund borrowing to acquire an asset under an LRBA), or (ii) the exception in former s 67(4A) of the SISA (about a fund borrowing under an instalment warrant arrangement) (s 235-840). Look-through tax treatment for instalment trusts applies as below (s 235-820): • If an entity (the investor) has a beneficial interest in an instalment trust asset under an instalment trust, the asset is treated as being the investor’s asset (instead of being an asset of the trust). For example, a dividend in respect of the asset that is paid to the trustee is treated (except for the purposes of the PAYG withholding provisions: see “Exceptions — what tax provisions are not covered by the look-through treatment?” below) as if it had been paid directly to the investor. • An act done in relation to an instalment trust asset of an instalment trust by the trustee of the trust is treated as if the Act had been done by the investor (instead of by the trustee). For example, when a trustee disposes of the asset, any capital gain or loss is made by the investor, not by the trustee. • The investor is treated as having the instalment trust asset in the same circumstances as the investor actually has the interest in the instalment trust. The circumstances include whether the interest is held on capital account or on revenue account and whether the interest is held as a joint tenant or tenant in common. • Any consequence arising under the GST Act for the trustee of the instalment trust, as a result of anything done in relation to the instalment trust asset, is treated as if it had arisen for the investor (instead of for the trustee), even if that consequence would not have arisen had the thing been done by or to the investor. For example, if the trustee has a net input tax credit under the GST Act, the investor must apply the credit to reduce the investor’s cost base for the instalment trust asset (even if the investor is not registered or required to be registered for GST purposes). Exceptions — what tax provisions are not covered by the look-through treatment? The exceptions to the look-though tax treatment below ensure the income tax law operates appropriately to recognise the trust arrangement. Specifically, these provisions are: • Part VA of the ITAA36, which contains the TFN provisions. This ensures that TFNs can be requested without breaching the TFN offence provisions in Subdiv BA of Div 2 of Pt III of the Taxation Administration Act 1953 (TAA). • Subdivision 12-E of Sch 1 to the TAA, which deals with withholding amounts where an entity invests and has not supplied a TFN or Australian Business Number. This ensures that the instalment trust is recognised as the entity that is legally investing in the asset, rather than the investor. • Subdivision 12-F in Sch 1 to the TAA, which deals with withholding tax for dividends, interest and royalty payments made to foreign residents. Recognising the trust ensures that the trustee has the obligation to withhold tax as required. • Subdivision 12-H in Sch 1 to the TAA, which contains the managed investment trust withholding provisions. Recognising the trust ensures that the trustee has the obligation to withhold tax as required (s 235-815(2)).

¶7-170 Non-arm’s length income The non-arm’s length income rules for complying superannuation funds (and ADFs, PSTs and RSA providers) are set out in ITAA97 Div 295 Subdiv 295-H (s 295-545 to 295-555). The “non-arm’s length component” of a complying superannuation fund for an income year is the amount of the fund’s “non-arm’s length income” (see below) less any deductions to the extent that they are attributable to that income (s 295-545(2)). The “low tax component” of the fund’s taxable income is the amount of the fund’s taxable income remaining after deducting the non-arm’s length component from its total taxable income (s 295-545). Non-arm’s length income There are three main categories of non-arm’s length income: • ordinary or statutory income derived from a scheme where the parties are not dealing with each other at arm’s length and the amount is greater than what it would have been had parties been dealing at arm’s length in relation to the scheme — see “Income from non-arm’s length dealings” • private company dividends unless the amount is consistent with an arm’s length dealing — see “Private company dividends” below • income derived from a discretionary trust and income derived from a trust through holding a fixed entitlement — see “Trust distributions” below (s 295-550). Section 295-550 is the equivalent provision of ITAA36 former s 273, which applied in pre-2007/08 years. The concepts of “non-arm’s length income” and “non-arm’s length component” in the ITAA97 are equivalent to the concepts of “special income” and “special income component” in former s 273. The principles under both concepts remain substantially the same. In determining whether parties deal at “arm’s length”, consider any connection between them and any other relevant circumstance (ITAA97 s 995-1(1); AXA Asia Pacific Holdings Ltd 2010 ATC ¶20-224). Section 295-550 applies: • to a non-share equity interest in the same way as it applies to a share • to an equity holder in a company in the same way as it applies to a shareholder in the company, and • to a non-share dividend in the same way as it applies to a dividend (s 295-550(6)). Proposed changes — non-arm’s length expenses Amendments have been proposed to ITAA97 Subdiv 295-H, to be effective from 1 July 2018, to ensure that the non-arm’s length income rules for superannuation entities apply in situations where an entity incurs non-arm’s length expenses in gaining or producing the income (Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018 (Lapsed): ¶17-520). The amendments are to ensure that complying superannuation entities cannot circumvent the non-arm’s length income rules by entering into schemes involving non-arm’s length expenditure (including where expenses are not incurred). Expenses may be of a revenue or capital nature, in the same way that nonarm’s length income may be statutory or ordinary income. ATO ruling on non-arm’s length income TR 2006/7 dealing with what amounts are considered to be “special income” under ITAA36 former s 273 provides useful guidelines on the concept of non-arm’s length income. The references in the commentary below to “special income” may be read as a reference to “non-arm’s length income”. Statutory income for the purposes of s 295-550 will include franking credits and capital gains and trust distributions will cover amounts included in assessable income under ITAA36 Pt III Div 6. An amount of income either has the character of being special income or it does not. When an amount of

income is special income, the whole amount is special income. An amount of income that is characterised as special income cannot be divided between an amount that is special income and an amount that is not special income. The amount of income that is special income is not only the amount by which an amount of income is greater than the amount that might have been derived if the parties had been dealing at arm’s length; it is the whole amount of income derived (TR 2006/7, para 12). Where an SMSF enters into a limited recourse borrowing arrangement (LRBA) to acquire an incomeproducing asset (as permitted by SISA s 67A and 67B) on “uncommercial” terms (see ¶5-435), the nonarm’s length income provisions (ie s 295-550(1) for deriving income from a non-arm’s length scheme or s 295-550(5) for deriving income through a fixed entitlement in a trust where the income is derived under a non-arm’s length scheme) may potentially be triggered in a particular case. Income from non-arm’s length dealings Any income (other than dividends or trust distributions) derived by a superannuation fund from a scheme is non-arm’s length income if the parties to the scheme are not dealing at arm’s length and that income is greater than might have been expected had the parties been dealing at arm’s length in relation to the scheme (s 295-550(1)). The test of non-arm’s length income of this type is a question of fact. Section 995-1(1) provides that, in determining whether parties deal at “arm’s length”, consider any connection between them and any other relevant circumstance. A “scheme” means any arrangement or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. An “arrangement” means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. (s 995-1(1)). Meaning of “party” and “dealing” The terms “party” and “dealing” are not defined and they have their usual dictionary meaning. In this regard, the court has held that “party” bears many possible definitions; however, the most relevant definitions in the Macquarie Dictionary appear to be: “… ‘7. a person immediately concerned in some transaction or legal proceeding. 9. someone who participates in some action or affair.’ ‘Dealing’ is used as a verb, and the word ‘deal’ is relevantly defined as ‘to conduct oneself towards persons. …’ (para 79 and 80) (Allen & Anor (as trustees for Allen’s Asphalt Staff Superannuation Fund) 2010 ATC ¶20-225) (see below).” In determining whether the quantum of income derived from a scheme is greater than might have been expected to have been derived had the parties been dealing at arm’s length, the Commissioner will take into account all relevant matters, such as the commercial risks undertaken by the fund. If the income derived is greater than might have been expected, the fund will have to establish that unusual circumstances exist before the Commissioner will accept that the income is not non-arm’s length income. TR 2006/7 states that three requirements must be satisfied in order for an amount derived under an arrangement to be special income under former s 273(4) (the equivalent to s 295-550(1), but which refers to a “scheme” instead of “arrangement”): • there must be a transaction • the parties to the transaction must not have been dealing with each other at arm’s length, and • the income derived from the transaction must be greater than the income that might have been expected if the parties were dealing with each other at arm’s length. The types of transactions can include interest on loans, rent from property, profit on sale of assets, assessable capital gains and franking credits. A common example is excessive interest from a loan to an associated entity. In TR 2006/7, the Commissioner considers that parties are dealing with each other at arm’s length in

relation to a transaction if the independent minds and wills of the parties are applied to the transaction and their dealing is a matter of real bargaining. If this is not the case, the Commissioner will consider that the parties are not dealing with each other at arm’s length in relation to the transaction. If the relationship of the parties is such that one party has the ability to influence or control the other, this will suggest that the parties may not be dealing at arm’s length, but it will not be determinative (para 76, 77). Parties that are not at arm’s length can deal with each other at arm’s length in relation to a transaction and parties that are at arm’s length can deal with each other in a way that is not at arm’s length. An amount of income can only be non-arm’s length income if, in relation to the particular transaction, the parties are not dealing with each other at arm’s length. The final requirement is that the amount of income derived must be greater than the amount of income that might have been expected if the parties were dealing with each other at arm’s length in relation to the transaction. This is a question of fact and the Commissioner will take into account all relevant matters (such as the level of investment risk that the superannuation fund is exposed to) when considering this issue. If a private company dividend is non-arm’s length under s 295-550(2) and is franked, the franking credit needs to be considered under s 295-550(1). That is, the franking credit will be non-arm’s length income if it is derived from a scheme the parties to which were not dealing with each other at arm’s length and the amount of income derived is greater than the amount of income that might have been expected to have been derived if the parties had been dealing with each other at arm’s length in relation to the scheme. The example below considers the relevance of arm’s length outcomes in the acquisition of shares between related parties when considering whether franking credits derived from such dealings are non-arm’s length income. Example Steve and Mary are the only members and trustees of the Vale SMSF. They are also the directors of Enterprises Pty Ltd, a private company. Steve and Mary hold one share each in Enterprises Pty Ltd. After trading successfully, Enterprises Pty Ltd makes a profit of $1m in December 2017. At this time, Enterprises Pty Ltd also has $500,000 credit in its franking account. In January 2018, Enterprises Pty Ltd issues 99,998 shares to the Vale SMSF for 1 cent per share. The Vale SMSF pays a total of $1,000 for their shares. In April 2018, Enterprises Pty Ltd distributes all of its profits to its shareholders in proportion to their shareholding. It pays fully franked dividends at the rate of $10 a share. Enterprises Pty Ltd pays a $10 dividend each to both Steve and Mary, and pays a fully franked dividend of $999,980 to the Vale SMSF. The dividend of $999,980 and the attached franking credits will be included in the assessable income of the Vale SMSF. From the Commissioner’s point of view, the fact that the shares are acquired for considerably less than market value will be of particular relevance. The dividend, being $10 per share on shares acquired four months earlier for 1 cent per share, received by the Vale SMSF will be non-arm’s length income. Since the shares were acquired for less than market value, the parties in relation to the scheme were not dealing with each other at arm’s length. The amount of franking credits derived from the scheme was greater than the amount of franking credits that would have been derived if the parties were dealing at arm’s length. If the parties were dealing at arm’s length, the Vale SMSF would have received less shares for its outlay and would not have been entitled to as many franking credits. In this example, the Commissioner will consider that the franked dividend is non-arm’s length under s 295-550(2) and the franking credits on the dividend are non-arm’s length under s 295-550(4). Note that this example only considers the operation of s 295-550. Other tax provisions may apply to these circumstances, for example, the ITAA97 dividend stripping provisions.

TA 2008/4 describes a non-arm’s length arrangement under which a superannuation fund derives income through a direct or indirect interest in a closely-held trust or other arrangements. The ATO considers that these arrangements may give rise to taxation issues, including whether income derived by the fund from the trust is non-arm’s length income as well as other taxation consequences for the individual or other family members as discussed in TA 2008/3 (see below). Private company dividends An amount of ordinary income or statutory income is non-arm’s length income if: • it is a dividend paid by a private company, or • it is reasonably attributable to such a dividend,

unless the amount is consistent with an arm’s length dealing (s 295-550(2)). “Dividend” has the meaning given by ITAA36 s 6(1) and (4), 6BA(5) and 94L. A “private company” means a company that is not a public company for the income year. A “public company” means a company that is a public company (as defined by ITAA36 s 103A) for the income year (s 995-1(1)). The Commissioner can determine that an amount of private company dividends is consistent with an arm’s length dealing and is not non-arm’s length income having regard to the matters set out in s 295550(3), as below: • the value of the shares held by the fund in the company • the cost to the fund of the shares on which the dividends were paid • the dividend rate on those shares • whether dividends have been paid on other shares in the company, and the dividend rate • whether the company has issued shares in lieu of dividends to the fund, and the circumstances of the issue • any other relevant matters. TR 2006/7 sets out how the Commissioner would consider the matters above as well as examples (see also former ID 2001/143, ID 2002/369 and ID 2002/370, which were superseded by TR 2006/7). The Commissioner’s exercise of discretion under former s 273 is discussed in Darrelen 2010 ATC ¶20180. This is an appeal from the AAT’s decision in Case 10/2009 2009 ATC ¶1-014 where the AAT affirmed the Commissioner’s decision to treat dividends paid to a superannuation fund by a private company as special income of the fund. The Darrelen decision is generally consistent with the Commissioner’s view, as outlined in TR 2006/7. The court found (contrary to the Commissioner’s view in TR 2006/7, paras 38 and 39) that s 273(2)(c) (the “rate of the dividend paid”) does not permit consideration of the rate of return on the investment, or yield. However, the court also held that such a consideration was permissible under para (f) (“any other matters”). The Commissioner accepts the court’s view on this issue (ATO Decision Impact Statement: see Darrelen). Fund trustees may self-assess as to whether or not to treat a dividend as special income by applying the ruling to their particular circumstances. A trustee that is uncertain as to whether the Commissioner will exercise the discretion should seek clarification by requesting a private ruling. Trust distributions Trust distributions are non-arm’s length income of a complying fund if they are: • discretionary distributions, ie where the fund does not have a fixed entitlement to income from the trust, and • distributions where the fund has a fixed entitlement to income from the trust. Discretionary distributions Non-arm’s length income under this category covers income derived by a superannuation fund as a beneficiary other than because of holding a fixed entitlement to the income, ie the income derived is dependent upon the trustee of the trust exercising a discretion to distribute the income to the fund (s 295550(4)). Example A husband and wife are principals of a business that is run under a discretionary trust. The beneficiaries of the trust are the principals, other family members and a superannuation fund in which the principals are members. The trustee of both the

discretionary trust and the superannuation fund is a corporate trustee, 100% owned by the principals. This ensures that the husband or wife has effective control over the activities of both the discretionary trust and the superannuation fund. The trustee of the trust exercises its discretion to distribute an amount of trust income to the trustee of the superannuation fund in preference to the other beneficiaries who would otherwise be taxable on the income at their applicable marginal tax rates. The distributions are non-arm’s length income of the fund.

In SCCASP Holdings as trustee for the H&R Super Fund 2012 ATC ¶20-349, a family trust made a resolution to distribute a capital gain from the trust to the taxpayer superannuation fund. The Federal Court held that the taxpayer had derived income in its capacity as a beneficiary of the trust and that income was special income under ITAA36 former s 273(6) (the equivalent to s 295-550(4)). For the purposes of “income derived” under former s 273(6), the court held that the term “derived” must accommodate how a particular type of assessable income (which can form part of the net income of the trust estate) is included in the assessable income of a beneficiary. Construed in context as part of the “income derived” concept in s 273(6), “derived” must bear a meaning which accommodates how a particular type of assessable income which can form a component of the net income of the trust estate, namely a net capital gain, is included in the assessable income of a beneficiary. That inclusion occurs pursuant to ITAA36 s 97. That being so, “derived” for the purposes of s 273(6) must bear a meaning which extends to include “attributed to” or “imputed to”. Having regard to the “mischief” to which s 273(6) and (7) are directed (as described by the Full Court in Allen’s case: see below), and given that “income” is to be regarded as a reference to “assessable income”, it would make no sense to construe the word “derived” in s 273 in a way that included some types of assessable income but excluded others. The Full Federal Court dismissed the taxpayer’s appeal. The court held that the different drafting in former s 273(2) and 273(3) between a “dividend paid” and “income derived” demonstrated there was no intention in s 273(6) to limit special income to income received as a beneficiary of a trust estate. Section 273(6) was concerned with identifying the type of income included in assessable income as “special income”; it was concerned with the source of income, not receipt of income. Also, ITAA97 s 6-5(4) and 6-10(3) did not support the proposition that the word “derived” used in ITAA36 and ITAA97 supported an argument that income must actually be received (SCCASP Holdings as Trustee for the H&R Superannuation Fund 2013 ATC ¶20-390). The taxpayer has been refused special leave to appeal to the High Court. Distributions to a fund by virtue of fixed entitlement Non-arm’s length income under this category covers income derived by a superannuation fund where both of the following conditions are satisfied: (1) the fund acquired the entitlement under a “scheme” (see above), or the income was derived under a scheme, the parties to which were “not dealing with each other at arm’s length” (see above), and (2) the amount of the income is more than the amount that the fund might have been expected to derive if those parties had been dealing with each other at arm’s length (s 295-550(5)). The following example (based on the operation of ITAA36 former s 273(7) and (8), the equivalent provisions to s 295-550(4) and (5)) cover the situation where there may be distributions from a discretionary trust to a unit trust in which a superannuation fund holds a fixed entitlement. If it can be shown that the distribution derived from the arrangement is greater than what might have been expected to have been derived if the parties had been dealing with each other at arm’s length, the income is special income (non-arm’s length income) of the fund. Example A business is conducted through a partnership arrangement where the partners are the trustees of a superannuation fund. A related discretionary trust began operating the business formerly run by the partnership. No financial transactions were entered into for the transfer or purchase of, nor any lease for, plant and equipment used in the running of the business. The business income derived by the discretionary trust was distributed to a related unit trust in which the superannuation fund held 100% of the units. Such distributions were received from the unit trust over two financial years. The superannuation fund, discretionary trust and unit trust were all established on the same day. The business conducted by the discretionary trust was sold and the proceeds of the sale were brought to account in the financial statements of the partnership. On the facts, the discretionary trust’s distribution to the unit trust was higher than it would have been had the parties been dealing with each other at arm’s length, due to the fact that neither consideration nor lease payments were made by the discretionary trust for the use of the plant and equipment. Therefore, the unit trust distributions are special income of the fund (former ID 2002/672).

In Trustee for MH Ghali Superannuation Fund 2012 ATC ¶10-266, trust income derived by a superannuation fund was held to be special income as two limbs of the test in ITAA36 former s 273(7) (the equivalent provision to s 295-550(5) in pre-2007/08 years) were met. That is, a fixed entitlement or income was derived under an arrangement where the parties were not dealing with each other at arm’s length and the amount of the income derived was greater than might have been expected. In Ghali, the AAT considered that “fixed entitlement” in s 273 takes the meaning provided in ITAA36 Sch 2F s 272-5. This is contrary to, and would be less favourable to taxpayers than, the Commissioner’s existing approach set out in TR 2006/7 that a superannuation fund has a fixed entitlement to income “if the entity’s entitlement to the distribution does not depend upon the exercise of the trustee’s or any other person’s discretion” (TR 2006/7, para 102). The ATO view is that the s 272-5 test does not apply for the purposes of s 273 and 295-550. Rather the “fixed entitlement” test operates in the manner described in TR 2006/7 as noted above (ATO Decision Impact Statement; NTLG Superannuation Subcommittee meeting, March 2010). The Full Federal Court has upheld the decision that a distribution of income (a capital gain) from a fixed trust to a superannuation fund was “special income” under former s 273(7) of the ITAA36 (as it then applied in pre-2007/08 income years), see Allen & Anor (as trustees for Allen’s Asphalt Staff Superannuation Fund) 2011 ATC ¶20-277 (special leave to appeal to the High Court has been refused). Importantly, Allen’s case confirmed that words “income derived” within the meaning of former s 273(7) referred to both statutory income and income according to ordinary concepts. In that case, the court held that the fund “acquired” a fixed entitlement to income notwithstanding that it was a passive recipient of that entitlement, and that there was no justification for a narrow interpretation of “arrangement”. The steps undertaken by Mr Allen in directing the trustee of the hybrid trust, the fixed trust and the superannuation fund led to the Fund receiving both a fixed interest in the trust estate of the fixed trust and the relevant distribution of income from that trust estate. Income under a limited recourse borrowing arrangement (LRBA) on terms which are not at arm’s length The SIS Act allows regulated superannuation funds to borrow money under an LRBA under which the fund acquires an asset (eg listed shares and commercial real property) in certain circumstances (¶3-415). Superannuation funds involved in these LRBAs must be careful that adverse tax implications do not arise due to other uncommercial terms in the LRBA (eg unreasonably long loan periods, or a higher loan to asset valuation ratio) as non-arm’s length income could potentially arise under s 295-550(1) (ie deriving income from a non-arm’s length scheme) or under s 295-550(5) (ie income derived through a fixed entitlement in a trust where the income is derived under a non-arm’s length scheme). Practical Compliance Guideline PCG 2016/5 sets out “safe harbour” terms on which an SMSF trustee may structure their LRBA consistent with an arm’s length dealing (see ¶5-448). That is, the safe harbour guidelines may be applied to determine what the arm’s length terms of an LRBA would be. For income tax compliance purposes, the Commissioner accepts that an LRBA structured in accordance with the safe harbour terms in PCG 2016/5 is consistent with an arm’s length dealing and the NALI provisions do not apply purely because of the terms of the borrowing arrangement. However, it is not mandatory to use those safe harbours if the SMSF trustee can otherwise demonstrate what those arm’s length terms would have been (PCG 2016/5, para 4). ATO guidelines and example When parties to a scheme, that include a trustee of an SMSF, have entered into an LRBA on terms which are not at arm’s length, Taxation Determination TD 2016/16 states that it is necessary to consider whether the SMSF has derived more ordinary or statutory income under the scheme than it might have been expected to derive if the parties had been dealing with each other at arm’s length in relation to the scheme. Non-arm’s length income (NALI) will only arise in those cases where the answer to this question is affirmative. In answering the question above, it is necessary to identify both the steps of the relevant scheme and the parties that deal with each other under those steps of the scheme. Having identified the steps and parties to the scheme, s 295-550(1)(b) requires a determination of the amount of ordinary or statutory income

that the SMSF might have been expected to derive if the same parties to the scheme had been dealing with each other on an arm’s length basis under each identified step of the scheme. It is therefore necessary to identify what the LRBA terms may have been if the parties were dealing with each other at arm’s length (“the hypothetical borrowing arrangement”). Having identified a hypothetical borrowing arrangement between the SMSF and the lender the terms of which are on an arm’s length basis, it is then necessary to establish whether it is reasonable to conclude that the SMSF could have and would have entered into the hypothetical borrowing arrangement. Where it is reasonable to conclude that the SMSF could not have, or would not have entered into the hypothetical borrowing arrangement, the SMSF will have derived more ordinary or statutory income under the scheme than it might have been expected to derive under the scheme with the hypothetical borrowing arrangement. In this instance, the ordinary or statutory income derived under the scheme is NALI. Example (adapted from TD 2016/16) Facts: • an SMSF acquired a commercial real property from a third party at market value for $1m on 1 July 2015 under an LRBA on terms consistent with s 67A of the SISA • the lender is a related entity to the SMSF (the Lender) • a holding trust (HD) was established, and the trustee of the HD is the legal owner of the commercial real property until the borrowing is repaid • the SMSF receives rental income of $1,000 per week from the commercial real property • at the time of the purchase — the SMSF had $25,000 cash at bank but no other property, and its investment strategy specifies a diversified asset portfolio between cash, listed shares and property. The table below outlines the LRBA terms under the scheme where the parties were not acting at arm’s length (the “Current LRBA”) compared with the terms under the hypothetical borrowing arrangement (for the purposes of this example, the terms adopted are consistent with PCG 2016/5: see ¶5-448) to acquire the commercial real property:

Current LRBA

Hypothetical borrowing arrangement

Amount borrowed

$1m

$0.7m

Amount sourced from fund capital

$0

$0.3m

Interest rate

0%

Variable, 5.75% pa for the 2015/16 year

Term of the loan

25 years

15 years

Loan to Market Value ratio (LVR)

100%

70%

Security

Mortgage in favour of the Lenders is registered in respect of the asset

Mortgage in favour of the Lenders is registered in respect of the asset

Personal guarantee

No personal guarantees or other security are given to the lenders in relation to repayment of the loan

Not required

Nature and frequency of repayments

No repayment is required until the end of the term of the loan — $0 monthly repayments

Monthly repayments of both principal and interest — approximately $5,800 per month at 5.75% pa for the 2015/16 year

For the hypothetical borrowing arrangement: • an LVR of 70% required the SMSF to source $300,000 of its own funding to make the purchase • the weekly rental of $1,000 per week is not sufficient to meet the monthly repayments of both principal and interest calculated

to be approximately $5,800 per month at 5.75% pa for the 2015/16 year (repayments will change depending on the rate in later income years), and • it is assumed that the SMSF would not be in breach of any of its legislative and regulatory requirements. Based upon the facts above, it is clear that the SMSF could not and would not have entered into the arm’s length hypothetical borrowing arrangement. This conclusion is based upon the fact that: • the SMSF did not have sufficient funds available to reduce the level of borrowings to finance the purchase to a level that satisfies the 70% LVR requirement, and • the hypothetical borrowing arrangement, taking into account the weekly rental and any future capital gains, would not be earnings accretive. Because the SMSF could not have and would not have acquired the commercial real property under the hypothetical borrowing arrangement, the income that the SMSF would be expected to derive from the scheme if the parties were dealing with each other at arm’s length is nil. If the parties were dealing with each other at arm’s length in relation to the scheme the investment in the commercial real property would not occur, as no arm’s length LRBA could have been entered into. Therefore, the $1,000 per week rental income the SMSF receives is NALI.

For other examples, see former ID 2015/27 and ID 2015/28 (replacing former ID 2014/39 and ID 2014/40). These IDs were withdrawn following the issue of TD 2016/16. For the safe harbour interest rates for 2015/16 and later years, see www.ato.gov.au/rates/keysuperannuation-rates-and-thresholds/?anchor=other#other. Taxpayer alerts — distribution from interposed fixed trust and hybrid trusts TA 2003/1 warns about taxpayers establishing a fixed trust to distribute business profits to the taxpayer’s superannuation fund. TA 2008/4 deals with SMSFs deriving income from certain uncommercial trusts. Specifically, TA 2008/4 describes a non-arm’s length arrangement under which an SMSF derives income through a direct or indirect interest in a closely-held trust. The arrangement may be of the type of trust described in TA 2008/3, where an individual or another entity borrows funds to invest in a trust and seeks a tax deduction for its interest costs. [FITR ¶270-570; SLP ¶45-300]

¶7-200 Tax on no-TFN contributions income A complying superannuation fund (or a non-complying superannuation fund or an RSA provider) is liable to pay additional tax on any no-TFN contributions income that it receives in an income year (ITAA97 Subdiv 295-I s 295-605 to 295-625). In addition to the normal tax payable on assessable contributions, the no-TFN contributions income is included in the entity’s taxable income and additional tax is payable on that income at 32% for complying superannuation funds and RSA providers and at 2% for noncomplying funds. A tax offset is available for the additional tax paid if a TFN is provided within four years (ITAA97 Subdiv 295-J). Tax attributable to no-TFN contributions income and the tax offset for no-TFN contributions income are not taken into account when working out a superannuation or RSA provider’s PAYG notional tax or benchmark tax (TAA Sch 1 s 45-325(1A); 45-365(1A)). Financial institutions and life insurance companies providing RSAs are similarly subject to the no-TFN contributions tax regime (see “RSA providers” below). A superannuation fund or RSA provider cannot accept a member’s contributions if a TFN has not been quoted (¶3-220, ¶10-110). In a year of income, contributions made to a fund (or RSA provider) are no-TFN contributions income of the fund if: • the contributions are included in the fund’s assessable income under Subdiv 295-C for the income year (¶7-120) • the contributions are made to provide superannuation benefits for an individual, and • by the end of the income year, the individual has not quoted (for superannuation purposes) his/her

TFN to the fund (ITAA97 s 295-610(1)). An amount is not no-TFN contributions income if: • the contribution was made in relation to a superannuation interest or RSA of the member or RSA holder that existed before 1 July 2007, and • the total contributions made in relation to the superannuation interest or RSA for the year that are included in the fund’s assessable income do not exceed $1,000 (s 295-610(2)). Contributions that are included in a fund’s assessable income under Subdiv 295-C are discussed at ¶7120. A superannuation fund or RSA provider cannot reduce its no-TFN contributions income by transferring contributions or using pre-1 July 1988 funding credits under Subdiv 295-D as discussed in ¶7-120 (ITAA97 s 295-620). That is, an amount is still no-TFN contributions income even if, because of Subdiv 295-D, the amount of the contributions (or part of it) is no longer included in the fund’s or RSA provider’s assessable income. Quoted (for superannuation purposes) A TFN is “quoted (for superannuation purposes)” to an entity if, for the purposes of the SIS Act, RSA Act or former FHSA Act: • a person quotes his/her TFN to the entity • a person is taken by the SIS Act, the RSA Act or ITAA97 (or the former FHSA Act) to quote his/her TFN to the entity in connection with the operation or future operation of the superannuation Acts within the meaning in SISA Pt 25A or the RSA Act, or • the ATO gives notice of the person’s TFN to the entity at that time (s 295-615). If a person makes a TFN declaration to an employer who makes a superannuation contribution for the person to a fund, the person is taken to have authorised the employer to inform the fund of the person’s TFN (ITAA36 s 202DHA). An employer who fails to pass on the TFN to the fund is guilty of an offence (SISA s 299C). In addition, employers are required to pass an employee’s TFN to a superannuation fund when they make contributions on behalf of the employee if the employee has quoted their TFN to the employer. The provision of TFNs for tax and superannuation purposes is discussed further at ¶11-700 and following. No-TFN contributions income tax offset — TFN is quoted within four years A superannuation fund (or RSA provider) may be entitled to a tax offset for tax on no-TFN contributions income if a member (or RSA holder) quotes his/her TFN within four years of the tax on the no-TFN contributions income being payable (ITAA97 Subdiv 295-J s 295-675 to 295-680). If a member quotes his/her TFN to a successor fund, that fund is not entitled to a tax offset for tax payable by the original fund on no-TFN contributions income (ID 2008/161). The tax offset can only be claimed for tax paid on no-TFN contributions income of an earlier year. A provider cannot pay no-TFN contributions income tax for a contribution and claim a tax offset for that same contribution in the same income year (s 295-675(1)). In addition, the tax offset is only available if an individual quotes his/her TFN in the current year, and no-TFN contributions income tax of that individual’s contribution was payable in one of the three most recent income years (s 295-675(2)). Example A contribution was no-TFN contributions income for the 2016/17 income year. The tax offset can only be claimed in the year the individual first quotes his/her TFN up until the end of the 2019/20 income year.

The tax offset is a refundable tax offset for the purposes of ITAA97 Div 67. A note to s 295-675(2) states

that the superannuation provider or RSA provider can get a refund of the tax offset under Div 67 in certain circumstances. Interest may be payable to a superannuation fund where a person’s quotation of a TFN results in the fund receiving a tax offset (Taxation (Interest on Overpayments and Early Payments) Act 1983, Pt IIG s 8ZD; 8ZE; 8ZF). Generally, interest is payable if: • an individual has quoted their TFN to their employer before the end of an income year • the employer failed to comply with the requirements in SISA s 299C, which require employers to inform the superannuation provider to which they make contributions of the individual’s TFN before the end of the income year • due to the employer’s failure to comply with s 299C, contributions made to that superannuation provider formed part of its no-TFN contributions income • tax payable on that no-TFN contributions income counted towards the no-TFN contributions tax offset of the superannuation provider for the current year, and • the tax offset has been applied in an assessment in respect of the superannuation provider for the current year (s 8ZD). The interest is payable for a period from the day the no-TFN contributions income tax was paid or the day the tax was required to be paid (whichever is the later) until the day on which the assessment of the noTFN income tax offset is made (s 8ZE). The interest rate is the base interest rate in TAA s 8AAD (s 8ZF). Interest payable under the Taxation (Interest on Overpayments and Early Payments) Act 1983 is assessable income under ITAA97 s 15-35. RSA providers The no-TFN contributions tax and offset regime for superannuation funds as discussed above similarly applies to RSA providers (see ITAA97 Subdiv 295-I, 295-J for an RSA provider that is not an insurance company) (¶10-420, ¶10-430). An RSA provider that is an insurance company is taxed under ITAA97 Div 320 (¶10-440), rather than ITAA97 Div 295. However, ITAA97 s 320-155 expressly provides that despite ITAA97 s 295-5(4), Subdiv 295-I and 295-J apply to a life insurance company that is an RSA provider. For the purposes of the application of those Subdivisions to a life insurance company, a contribution included in the assessable income of the company under ITAA97 s 320-15(1)(l) is taken to have been included under ITAA97 Subdiv 295-C. The effect of this is that life insurance companies that are RSA providers are liable to pay tax on no-TFN contributions income under Subdiv 295-I and are also entitled to a tax offset under Subdiv 295-J in the same way as other superannuation funds or financial institution RSA providers. No PAYG on no-TFN contributions income Superannuation funds and RSA providers are not required to take account of their no-TFN contributions income when working out their PAYG instalments. Any tax attributable to no-TFN contributions income and tax offsets for no-TFN contributions income are ignored when working out the entity’s PAYG notional tax or benchmark tax (TAA Sch 1 s 45-325(1A); 45-365(1A)). This ensures that any extra tax that a superannuation fund or RSA provider has to pay or any tax offset it can claim because of no-TFN contributions income is taken into account in the entity’s income tax assessment, not PAYG instalments. Rates of tax on no-TFN contributions income The rates of tax on no-TFN contributions income are set out below (Income Tax Rates Act 1986, s 29; 35). The rates for pre-2017/18 years may be found in earlier editions of the Guide.

2017/18 and later years

Entity

Tax rate on assessable contributions

Tax rate on no-TFN contributions income

Overall tax rate on no-TFN contributions

Complying superannuation fund

15%

32%

47%

Non-complying superannuation fund

45%

2%

47%

RSA provider: – life insurance company – company (not a life insurance company)

15%

32%

47%

[FITR ¶270-600ff]

¶7-250 Taxation of previously complying funds If a complying superannuation fund in relation to one year becomes a non-complying superannuation fund in relation to the year immediately following, the fund’s assessable income in the year in which its status changed will include its ordinary income and statutory income from previous years as calculated using the formula below (ITAA97 s 295-320). This means that the tax concessions applicable to the fund when it was a complying fund are effectively recouped. asset values less undeducted contributions and contributions segment where: • “asset values” means the sum of the market values of the fund’s assets just before the start of the income year, ie the year in which the fund becomes non-complying, and • “undeducted contributions and contributions segment” means the sum of the part of the crystallised undeducted contributions that relates to the period after 30 June 1983 and the “contributions segment” (as defined in ITAA97 s 307-220 and 307-225) for current members at that time so far as they have not been, and cannot be, deducted (ITAA97 s 295-325). Generally, a fund will only lose its complying status if it ceases to be an Australian superannuation fund, or if it contravenes a regulatory provision and fails the culpability test or compliance test (¶2-140). The amount as calculated is included in the fund's assessable income for the year it is a non-complying fund and taxed at 45% in 2019/20 and 2018/19. ITAA97 s 118-20(4A) prevents double taxation under the CGT provisions on a subsequent disposal of the relevant assets by the fund. In pre-2008/09 years, a resident superannuation fund was allowed a credit for foreign tax paid in or after the current year of income on an amount worked out under s 295-325, up to the amount of Australian tax payable by the fund (ITAA36 former s 6AB(1A); 160AF(1A), (1B)). [FITR ¶270-360; SLP ¶45-740]

Taxation of Non-complying Funds ¶7-300 Taxation of non-complying funds A non-complying superannuation fund is taxed in accordance with ITAA97 Subdiv 295 (or ITAA36 Pt IX Div 4 in pre-2007/08 years). The method of calculating the fund’s no-TFN contributions income and other income that is subject to tax is set out in ITAA97 s 295-10 (¶7-100). A non-complying superannuation fund is a fund that is, at all times during the relevant year of income when it was in existence, a provident, benefit, superannuation or retirement fund, but is not a complying superannuation fund in relation to that year.

The taxable income of a non-complying fund is taxed at 45% in 2019/20 and 2018/19. If the fund has noTFN contributions income, additional tax is payable on that income at the rate of 2%. A non-complying fund may be an Australian superannuation fund (¶2-130) or a foreign superannuation fund (¶7-400). Examples of non-complying funds include: • a superannuation fund, other than an exempt public sector superannuation scheme, that does not elect to become a regulated superannuation fund under the SIS Act • a foreign superannuation fund, whether or not a regulated superannuation fund • a regulated superannuation fund that has contravened a regulatory provision and failed the culpability test or compliance test, or • a previously complying superannuation fund that has received a notice under the SIS Act stating that it is a non-complying superannuation fund (¶7-250). The taxable income of a non-complying superannuation fund is determined as if the trustee were a taxpayer and a resident or, in the case of a non-complying fund that is a foreign superannuation fund, a non-resident (ITAA97 s 295-10). A non-complying fund is not eligible for the following tax concessions available to a complying fund (as discussed at ¶7-100 and following): • tax at the lower 15% rate • special CGT rules and CGT discount (a non-complying fund is entitled to a 50% CGT discount as a trust: see below) • death or disability insurance premium deductions • potential detriment deductions • exemption of income related to current pension liabilities • ability to transfer contributions tax liability • ability to exclude “last minute” employer contributions from assessable income • ability to invest in PSTs • exemption of income accrued prior to 1 July 1988 • exemption of non-reversionary or cash bonuses on life assurance policies. ITAA97 s 115-100 does not provide a CGT discount percentage for superannuation funds that are not complying funds. Accordingly, the CGT discount for a non-complying fund is 50% under s 115-100(a)(ii), being the discount percentage that applies for a trust (former ID 2003/48). Other tax-related matters which distinguish non-complying funds from complying funds include the following: • employer contributions to a non-complying fund are not tax-deductible and are subject to FBT (¶6160) • member contributions or spouse contributions to a non-complying fund do not qualify for a tax deduction (¶6-300), tax offset (¶6-800) or government co-contributions (¶6-700) • employer contributions to a non-complying fund do not satisfy the employer’s obligations under the SG scheme (¶12-000)

• individuals with benefit entitlements in the SHASA (¶12-620) cannot transfer their entitlements to a non-complying fund. In addition, a non-complying fund cannot deduct current year and prior year losses and debt deductions if it fails to satisfy certain tests relating to ownership or control of the trust (ITAA36 Sch 2F Div 266; 267). The assessable income of a non-complying fund that was formerly a complying fund in the year of income includes its ordinary income and statutory income from previous years (¶7-250). In each year of income, a non-complying fund that is a regulated superannuation fund is still required to comply with all the prudential requirements in the SIS legislation applicable to it (¶3-010). A non-complying fund is also required to lodge an income tax return. For the PAYG and tax return requirements for superannuation funds, see Chapter 11. [FITR ¶270-000; SLP ¶45-350]

¶7-310 Contributions to non-complying funds The taxable income of a non-complying fund includes “assessable contributions” received by the fund during the year, based on whether it is an Australian superannuation fund or a foreign superannuation fund for the income year in which the contributions were made (ITAA97 s 295-160: ¶7-120). The assessable contributions of a non-complying fund that is an Australian superannuation fund include certain transfers from a foreign superannuation fund (ITAA97 s 295-200(1)). If a non-complying superannuation fund receives no-TFN contributions income, the fund is liable to pay additional tax on that income, but may be entitled to a tax offset (¶7-200). A member’s personal superannuation contributions to a non-complying fund, whether resident or nonresident, are not assessable contributions. Unlike complying superannuation funds, a non-complying fund cannot transfer its tax liability on contributions to a PST or life assurance company. An Australian superannuation fund that is a non-complying fund is allowed a deduction for the cost of collecting contributions as if all contributions made to it were included in assessable income (ITAA97 s 295-95(1): ¶7-145). A non-complying fund is entitled to a deduction for contributions that are included in the fund’s assessable income that are fringe benefits (to offset the FBT payable) (ITAA97 s 295-490, item 1). [FITR ¶270-000; SLP ¶45-380]

¶7-350 Deductions and other concessions Other deductions and tax concessions which are relevant to non-complying superannuation funds are outlined below. Deductions generally As a general rule, the deductibility of expenditure incurred by a non-complying fund is determined under ITAA97 s 8-1, unless a specific provision applies (eg ITAA97 s 25-5). TR 93/17 sets out the Commissioner’s views on the deductibility of expenditure incurred by superannuation funds and the types of expenses which are ordinarily deductible (¶7-145). Returned contributions to employer-sponsor If a non-complying superannuation fund pays an amount to an employer-sponsor who has been allowed a deduction for earlier contributions made to the fund, that amount is assessable income of the employer (ITAA97 s 290-100). Similarly, if the fund or a successor fund provides to any person a payment or benefit that reasonably represents a return of deductible employer contributions (or earnings thereon), the value of the payment or benefit is included in the recipient’s assessable income. A continuously non-complying superannuation fund (ie a fund that has never been entitled to tax

exemptions or other concessional tax treatment) is allowed a deduction for the amount paid to an employer-sponsor or another person where the amount is included in the recipient’s assessable income under s 290-100 (ITAA97 s 295-490, item 4). Capital gains A non-complying fund is liable for tax on realised capital gains in the same manner as other taxpayers. A non-complying fund is not entitled to the 33⅓% CGT discount for complying superannuation entities when calculating its capital gains (¶7-140). However, a non-complying superannuation fund, as a trust, would be entitled to a 50% CGT discount under ITAA97 s 115-100(a)(ii). Imputation system The imputation system in relation to complying superannuation funds (including the restrictions on franking credit trading: ¶7-155) applies in a similar manner to non-complying funds. Broadly, this means that a non-complying fund will have its franked distributions grossed-up by the amount of any franking credits in respect of the distributions. The fund will then be entitled to a tax offset of the amount of those credits. However, a non-complying superannuation fund (or non-complying ADF) cannot claim a refund of excess franking credits in an income year. Although non-complying funds would rarely be in a position to claim a refund of excess franking credits (as they are taxed at 45% in 2019/20 and 2018/19), this measure is aimed at funds which enter into artificial schemes so as to produce surplus franking credits. Insurance bonuses Life offices are taxed on their non-complying superannuation fund business at the company tax rate and life insurance bonuses paid to non-complying superannuation funds are included in the fund’s assessable income (s 26AH(6)). The fund may be entitled to a rebate under ITAA36 s 160AAB to compensate for the tax paid by the life insurance company (¶7-155). Payment of benefits No deduction is allowed for benefits paid by a non-complying fund (ITAA97 s 295-495, item 2). Levies Payments of the superannuation supervisory levy or financial assistance funding levy by a non-complying fund are deductible expenses (ITAA97 s 25-5; 295-490, item 3). Any late lodgment amount or late payment penalty of a supervisory levy is not deductible (ITAA97 s 26-5; 26-90). [FITR ¶270-000; SLP ¶45-390]

Foreign Superannuation Funds ¶7-400 Taxation of foreign superannuation funds A superannuation fund is a “foreign superannuation fund”: • at a time if the fund is not an Australian superannuation fund at that time, and • for an income year if the fund is not an Australian superannuation fund for the income year (ITAA97 s 995-1(1)). A foreign superannuation fund cannot be a complying superannuation fund and therefore does not enjoy the tax concessions available to complying funds as discussed in ¶7-100 and following. A special tax regime applies to a foreign superannuation fund that becomes an Australian superannuation fund during an income year (¶7-450). For discussion of the treatment of transfers from foreign superannuation funds to Australian superannuation funds and a summary table of assessable contributions in a non-complying fund that is a

foreign fund, see ¶7-120. Tax exemption and withholding tax exemption A fund is a “superannuation fund for foreign residents” at a time if: • at that time, it is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund • it was established in a foreign country • it was established, and maintained at that time, only to provide benefits for individuals who are not Australian residents, and • at that time, its central management and control is carried on outside Australia by entitles none of whom is an Australian resident (ID 2009/67: foreign retirement plan) (ITAA97 s 118-520). A fund is not a “superannuation fund for foreign residents” if: • an amount paid to the fund or set aside for the fund has been, or can be, deducted under the ITAA36 or ITAA97, or • a tax offset has been allowed or is allowable for such an amount (s 118-520(2)). The general rule is that a foreign resident that derives dividends or interest paid by an Australian resident generally has a liability to withholding tax in respect of the payment (ITAA36 s 128B). However, a withholding tax liability does not arise if the foreign resident is a superannuation fund for foreign residents which is exempt from income tax in the country in which it resides (s 128B(3)(jb)). Generally, the dividends or interest are also non-assessable non-exempt income of the superannuation fund (ITAA36 s 128D). The exemption from dividend and interest withholding tax makes it very attractive for these superannuation funds to gear their Australian equity investments using investor debt to lower their overall Australian tax on the investments. Combined with a stapled structure, this exemption can result in these superannuation funds paying little Australian tax on Australian business activities. Notably, the broad exemption from dividend and interest withholding tax puts these superannuation funds in a better financial position than other investors as: • foreign corporate entities typically pay 10% interest withholding tax on interest income, and • Australian investors pay tax on interest income at their marginal tax rates. Limitation on withholding concession from 1 July 2019 From 1 July 2019, the withholding tax exemption for superannuation funds for foreign residents under s 128B(3)(jb) will be restricted to income derived from portfolio-like investments, subject to a seven year transitional rule for assets acquired by funds on or before 27 March 2018 (s 128B(3CA) to (3CE)). CGT exemption on venture capital investments Any capital gain or capital loss made by a superannuation fund for non-residents (that is a “venture capital entity”, as defined in ITAA97 s 118-515 and 118-520) on Australian venture capital investments (“venture capital equity” as defined in ITAA97 s 118-525) which have been owned for at least 12 months is disregarded (ITAA97 Subdiv 118-G; Pooled Development Funds Act 1992, Pt 7A). To qualify, the foreign superannuation fund must: (a) be a resident of a “specified jurisdiction” and be exempt from tax in that jurisdiction; (b) be registered under Pt 7A; and (c) make an “eligible investment”. The “specified jurisdictions” are Canada, France, Germany, Japan, the United Kingdom, the United States of America and any other country prescribed by the regulations. An “eligible investment” must be in a resident investment vehicle by way of venture capital equity (eg shares in a company or units or other fixed interests in a trust) and held at risk for at least 12 months. A “resident investment vehicle” (defined in ITAA97 s 118-510) is an Australian resident company or fixed

trust whose total assets (including the new investment) are less than $50m at the time of the new investment and whose primary activity is not property development or ownership of land. [FITR ¶270-000; SLP ¶45-400]

¶7-450 Taxation of former foreign superannuation funds If a foreign superannuation fund becomes an Australian superannuation fund (¶2-130) during a year of income, its assessable income in the year it changes its status includes the amount calculated using the formula below (ITAA97 s 295-330). asset values less member contributions where: • “asset values” is the sum of the market values of the fund’s assets just before the start of the year of income, and • “member contributions” is the amount in the fund at that time representing contributions made by current members of the fund. Tax is imposed on the amount included in the fund’s assessable income for the current year by the Income Tax (Former Non-resident Superannuation Funds) Act 1994. In pre-2008/09 years, a superannuation fund is allowed a credit for foreign tax paid on an amount worked out under s 295-330, up to the amount of Australian tax payable by the fund (ITAA36 former s 6AB(1B); 160AF(1C), (1D)). [FITR ¶270-000; SLP ¶45-420]

Government and Semi-Government Funds ¶7-500 Taxation of income Superannuation funds or schemes for the benefit of employees of the Commonwealth, state and territory governments and government or semi-government authorities (ie generally referred to as public sector funds in the SIS Act) have been subject to tax since 1 July 1988 (ITAA97 s 295-5). To qualify as complying superannuation funds, public sector funds are required to satisfy the same requirements as private sector funds under the SIS legislation. However, public sector funds prescribed as an “exempt public sector superannuation scheme” (as specified in SISR Sch 1AA: ¶2-170) are exempt from regulation under the SIS Act and are, instead, subject to regulation under their respective governing Acts. The Federal Court has found that the anti-avoidance measures in ITAA36 Pt IVA applied to the streaming of franking credits by a Queensland Government master superannuation fund to a member fund (Electricity Supply Industry Superannuation (Qld) Ltd 2002 ATC 4888). State funds and constitutionally protected superannuation funds The taxation of public sector funds only applies so far as the Commonwealth’s taxing power extends. If any imposition of tax would be a tax on the property of a state (prohibited by the Constitution, s 114), that tax does not apply (ITAA97 s 295-15). The constitutional power of the Commonwealth to tax a state superannuation fund was considered by the High Court in South Australia v The Commonwealth 92 ATC 4066. The High Court found that: (1) the fund was exempt from tax on capital gains under s 114 because tax on capital gains is a tax on property, and (2) the fund was not exempt from tax on interest income. As the taxing power of the Commonwealth is limited, income derived by constitutionally protected funds is

specifically exempted from tax (ITAA97 s 50-25, item 5.3). Funds which are constitutionally protected funds are prescribed in ITAR reg 995-1.04 and Sch 4. If a complying superannuation fund for an income year ceases to be a constitutionally protected fund during the year or at the end of the previous year, the assessable income of the fund for the income year includes the sum of the roll-over superannuation benefits to the extent that they consist of the element untaxed in the fund of the taxable component that would be included in that assessable income if all contributions and earnings accumulated in the fund when the fund ceased to be a constitutionally protected fund: • had been paid out of the fund immediately before it ceased to be a constitutionally protected fund, and • were paid to the fund as roll-over superannuation benefits immediately after that time (ITAA97 s 295210). [FITR ¶270-000; SLP ¶45-430]

Approved Deposit Funds ¶7-600 Taxation of complying ADFs A complying ADF is taxed in accordance with ITAA97 Div 295 (or, in pre-2007/08 years, ITAA36 Pt IX Div 5). The taxable income of the fund is divided into a low tax component which is taxed at 15%, and a nonarm’s length component which is taxed at 45% in 2019/20 and 2018/19 (Income Tax Rates Act 1986, s 27). The taxable income of a complying ADF is determined as if the trustee were a taxpayer and a resident. The method statement for calculating the taxable income and tax payable by a complying ADF is set out in ITAA97 s 295-10 (¶7-100). For the PAYG and tax return requirements for ADFs, see Chapter 11. Fixed interest ADFs The income of an ADF that is attributable to certain deposits held in the fund at 25 May 1988 may be exempt from tax (ITTPA s 295-390). To qualify for the exemption, the fund must be a continuously complying fixed interest ADF (ie a fixed interest complying ADF from the year of income in which 1 July 1988 occurred) and must satisfy both of the following conditions. (1) At least 90% of the fund’s investment income must be in the nature of: (a) interest; (b) profits from the maturity or disposal of a security within the meaning of ITAA36 Pt IX Div 10 (eg bonds, debentures, deposits with banks or financial institutions and loans); or (c) income that is assessable under the accrual rules for deferred interest securities under ITAA36 Pt III Div 16E. (2) The fund’s assets at any time during the year of income must not consist of or include units in a PST or in complying superannuation policies (within the meaning in ITAA36 Pt III former Div 8) issued by a life assurance company or registered organisation. Eligible depositors must have been: (a) aged 55 or over at 25 May 1988; or (b) aged 50 or over at 25 May 1988 and have previously rolled over into the fund all or part of an eligible termination payment containing a concessional component, whether or not any of the concessional component itself was rolled over. In addition, the Commissioner must be satisfied that the whole benefit of the exemption is passed on to the relevant depositors. The exemption applies to income attributable to deposits of eligible depositors which were held by the fund at 25 May 1988 (including accumulated income on those deposits up to that date but not after it) and which have not subsequently been withdrawn. (Subsequent withdrawals which were redeposited by 31

August 1989 may continue to qualify.) The exemption does not apply to non-arm’s length income or amounts included in assessable income of the fund (ITAA97 Subdiv 295-C) (generally assessable contributions). Assessable contributions The assessable income of a complying ADF includes certain contributions or payments received during the year as noted below: • payments under SGAA s 65 — these are payments of the shortfall component of an SG charge by the ATO (¶12-400) (ITAA97 s 295-160, item 3) • a roll-over superannuation benefit to the extent that it consists of an element untaxed in the fund and is not an excess untaxed rollover amount for that individual (these are roll-overs from an untaxed superannuation fund: ¶7-120) (ITAA97 s 295-190(1), item 2) • the taxable component of a directed termination payment within the meaning of ITTPA s 82-10F (these are transitional termination payments rolled over to the fund: ¶7-120) (s 295-190(1), item 3). A summary table of assessable contributions is found at the end of ¶7-120. A complying ADF which has investments in a PST or life assurance company may transfer its contributions tax liability to those entities by agreement (ITAA97 s 295-260). The manner and effect of a transfer of assessable contributions by complying ADFs are the same as for complying superannuation funds (¶7-120). Non-arm’s length income The “non-arm’s length income” of a complying ADF consists of private company dividends derived directly or indirectly by the fund, income derived from non-arm’s length transactions and trust distributions other than where the ADF has a fixed entitlement to income from the trust and non-arm’s length distributions where the ADF has a fixed entitlement to income from the trust (ITAA97 s 295-550). The meaning of non-arm’s length income, which similarly applies to complying superannuation funds and PSTs, is discussed at ¶7-170. Capital gains Complying ADFs are liable for tax on capital gains realised on the disposal of assets held on or after 1 July 1988, including the entitlement to the CGT discount or frozen indexation options when calculating capital gains, in the same manner as complying superannuation funds (¶7-130). CGT roll-over relief is available for disposals of assets occurring as a consequence of a complying ADF converting to a complying superannuation fund, or where a complying ADF amends or replaces its trust deed to comply with the SIS legislation (ITAA97 s 126-130). Imputation system As with complying superannuation funds, a complying ADF which receives franked distributions will have the distributions grossed-up by franking credits attached to the distributions and is entitled to a tax offset for the full amount of franking credits, even though its basic rate of tax is only 15%. The offset may be used against tax on any income of the fund, including capital gains and assessable contributions. From 1 July 2000, a complying ADF is also entitled to claim a refund of excess franking credits (¶7-155). Exemption — investments in PSTs, life policies A complying ADF which invests in a PST or in life policies is subject to special tax treatment under ITAA97 s 118-350 in respect of the investments in the same manner as complying superannuation funds (¶7-150). The assessable income of a complying ADF does not include non-reversionary bonuses received on investments in the form of life assurance policies (ITAA97 s 295-335, item 1). However, complying ADFs may claim a deduction for expenses relating to investments in PSTs and in life assurance policies (or in custodian trusts under such policies) issued by life assurance companies, applicable to assessments for the year of income in which 1 July 1988 occurred and all later years of income (ITAA97 s 295-100).

Venture capital franking exemption and tax offset A complying ADF is exempt from tax on the dividends received from investments in PDFs and is entitled to a tax offset which effectively exempts the fund from CGT on the disposal of their eligible venture capital investments (¶7-155). Deductions The general principles governing the deductibility of expenses incurred by complying ADFs are the same as for complying superannuation funds, as discussed at ¶7-145. Trust loss deductions A complying ADF, being an excepted trust, is not subject to the trust loss or debt deduction measures under ITAA36 Sch 2F Div 266 and 267. Cost related to contributions An ADF is entitled to a deduction for costs relating to its assessable contributions income provided the normal criteria for deductible expenses are met, even in respect of contributions which are not assessable contributions (ITAA97 s 295-95(1): ¶7-145). Levies An ADF which pays a financial assistance funding levy (¶3-930) is entitled to a deduction for the amount of the levy (ITAA97 s 295-490, item 3). A grant of financial assistance is exempt income in the hands of the recipient fund, and any repayment of financial assistance by a fund is not an allowable deduction (ITAA97 s 295-405, item 1; 295-495, item 5). The supervisory levy payable by an ADF each year (¶3-900) is deductible as a tax-related expense under ITAA97 s 25-5. Any late lodgment amount or late payment penalty is not deductible (ITAA97 s 26-5). [FITR ¶270-000; SLP ¶45-450]

¶7-650 Taxation of non-complying ADFs A non-complying ADF is taxed in accordance with ITAA97 Div 295. Its taxable income is taxed at 45% in 2019/20 and 2018/19 (Income Tax Rates Act 1986, s 27(2)). The taxable income of a non-complying ADF is determined as if the trustee were a taxpayer and a resident. The method statement for calculating the taxable income and tax payable by a non-complying ADF is set out in ITAA97 s 295-10 (¶7-100). For the PAYG and tax return requirements for ADFs, see Chapter 11. Assessable contributions The assessable income of a non-complying ADF includes a roll-over superannuation benefit to the extent that it consists of an element untaxed in the fund and is not an excess untaxed rollover amount for that individual (ITAA97 s 295-190(1), item 2). These are roll-overs to the ADF from an untaxed superannuation fund (see ¶7-120 and the summary table at the end of the paragraph). Unlike a complying ADF, a non-complying ADF cannot transfer its contributions tax liability (¶7-600). Deductions and other concessions The general principles governing the deductibility of expenses incurred by non-complying ADFs are the same as for complying superannuation funds, as discussed at ¶7-145. The imputation credits system and deductions for payment of levies, as discussed at ¶7-600 in relation to complying ADFs, similarly apply to non-complying ADFs. Like a non-complying superannuation fund, a non-complying ADF cannot claim a refund of excess franking credits in a year of income (¶7-350). A non-complying ADF cannot deduct current year and prior year losses and debt deductions if it fails to satisfy certain tests relating to ownership or control of the trust (ITAA36 Sch 2F Div 266; 267). [FITR ¶270-000; SLP ¶45-460]

Pooled Superannuation Trusts ¶7-700 Taxation of PSTs A PST is taxed in accordance with ITAA97 Div 295 (or, in pre-2007/08 years, ITAA36 Pt IX Div 7) (ITAA97 s 295-5). The taxable income of a PST is made up of two components — the low tax component and the non-arm’s length component (ITAA97 s 295-545(1)). The low tax component is taxed at 15%, and the non-arm’s length component is taxed at 45% in 2019/20 and 2018/19 (Income Tax Rates Act 1986, s 27A). The non-arm’s length component for an income year is the PST’s non-arm’s length income for the year less any deductions to the extent attributable to that income, and the low tax component is the PST’s taxable income less the non-arm’s length component. Non-arm’s length income comprises of private company dividends, income derived from a scheme where the parties are not dealing at arm’s length income and certain trust distributions (¶7-170). The taxable income of a PST is determined as if the trustee were a taxpayer and a resident. The method statement for calculating the taxable income and tax payable by a PST is set out in ITAA97 s 295-10 (¶7100). For the PAYG and tax return requirements for PSTs, see Chapter 11. Capital gains Capital gains or losses for a PST are calculated in accordance with the CGT provisions, subject to the modifications provided in ITAA97 Div 295. These modifications, which also apply to complying superannuation funds and complying ADFs, are discussed at ¶7-130. A PST is also entitled to the CGT discount or frozen indexation options when calculating capital gains for CGT events which happen on or after 11.45 am EST on 21 September 1999 in the same way as complying superannuation funds. Investments by superannuation funds, ADFs A complying superannuation fund or complying ADF which invests in a PST may, with the agreement of the PST, transfer its liability on contributions to the PST. The conditions which must be met for the transfer of contributions tax liability to apply are discussed at ¶7-120 (ITAA97 s 295-260). The complying superannuation funds and complying ADFs are not themselves liable for tax on the income derived by the PST (ITAA97 s 295-105). They are also not liable for tax on capital gains on the realisation or redemption of units in the PST (see “Exemption — investments in PSTs, life policies” at ¶7130). Exemption for current pension liabilities A PST is entitled to a tax exemption on that part of its assessable income that is attributable to the current pension liabilities of a complying superannuation fund which is a unitholder. The exempt income amount is the PST’s normal assessable income for the year multiplied by the proportion of the investing fund’s unitholdings that are segregated current pension assets to the average total units in the PST (ITAA97 s 295-400). Imputation system The imputation system discussed at ¶7-155 in relation to complying superannuation funds applies in a similar manner to a PST in respect of franked distributions received. A PST also may claim a refund of excess franking credits. Deductions and other concessions The general principles governing the deductibility of expenses incurred by a PST are the same as for complying superannuation funds, as discussed at ¶7-145. The venture capital franking exemption and tax offset concessions and deductions for payment of the superannuation supervisory levies, as discussed at ¶7-600 in relation to complying ADFs, similarly apply to PSTs.

A PST, being an excepted trust, is not subject to the trust loss or debt deduction measures under ITAA36 Sch 2F Div 266 and 267. [FITR ¶270-000; SLP ¶45-470]

Goods and Services Tax ¶7-800 GST regime in Australia The goods and services tax (GST) is a broad-based consumption tax levied on most goods and services in Australia. It has applied since 1 July 2000. Despite its name, GST is not limited to “goods and services” in the normally understood sense. For example, it also applies to real estate and the creation of rights. GST is therefore a convenient but not an entirely accurate shorthand term. The GST is administered by the ATO. The governing legislation for the GST is the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and its Regulations as remade in 2019 (GST Regulations) (F2019L00417). Unless otherwise indicated, references in the commentary are to the provisions of the GST Act and its Regulations. This Guide only outlines the basic GST rules, so as to enable an understanding of the scope of the GST regime and its impact on superannuation entities and their operations. Reference should be made to the GST legislation and to other Wolters Kluwer publications (such as the Australian GST Guide and Australian Master GST Guide) for comprehensive commentary on the GST, and advice should be sought from suitably qualified professionals or the ATO, where appropriate, on GST issues affecting superannuation operations.

¶7-810 Basic GST rules Generally speaking, GST is payable on taxable supplies. It is also payable on taxable importations, but this is of relatively minor importance for superannuation purposes and is not discussed here. Taxable supply An entity makes a “taxable supply” if: • it makes the supply for consideration • the supply is made in the course or furtherance of an enterprise that it carries on • the supply is connected with Australia • it is registered (or required to be registered). However, a supply is not a taxable supply to the extent that it is GST-free or input taxed. An entity (supplier) is required to charge GST at a rate of 10% on each taxable supply made by it. The GST payable is included in the price paid by the consumer of the goods or services and the supplier must pass on the GST amount to the ATO. The GST is simply calculated as 1/11th of the price of the taxable supply. Generally, each registered supplier in a chain of production or series of transactions is entitled to claim a GST credit (input tax credit) for the amount of GST it has paid. This GST credit is then offset against any GST which the supplier has collected for the supplies made by it. The effect of this is that each supplier acts as a collection agent of the ATO and it is the end-users who ultimately bear the tax as they do not get a credit for the GST they pay. Most of the terms in the definition of “taxable supply” are defined so that their meanings are precise for the purposes of the GST legislation. For example, the term “supply” is defined to mean any form of supply whatsoever, and covers a range of specific activities, including a supply of goods or services, a provision of information or advice, a grant of real property and a financial supply (¶7-860).

The term “enterprise” is exhaustively defined to be an activity or a series of activities which are done: • in the form of a business (eg any business, profession or trade) • in the form of an adventure or concern in the nature of trade • on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property, or • by specific bodies and institutions (eg charitable or religious institutions, or government corporations). However, certain activities are specifically excluded, such as those carried out as an employee or as a private recreational pursuit, or by an individual or partnership of individuals without reasonable expectation of profit or gain, or as a member of a local governing body. A superannuation fund is a trust which is bound by the ordinary principles of trust law. The trustee is the legal entity, not the superannuation fund. The trustee cannot carry on a business unless expressly authorised to do so by the trust instrument or by statute (Kirkman v Booth). In addition, for tax and SIS compliance purposes, a superannuation fund must have as its sole purpose the provision of benefits to members on retirement or attainment of a certain age, or the provision of benefits to a member’s dependants on the member’s death. Superannuation funds, therefore, are generally prohibited from carrying on a business in the usual sense. However, for GST purposes, a superannuation fund is taken to be carrying on an enterprise. A superannuation fund (or more correctly, its trustee) can therefore be registered for GST and is subject to the GST regime. Although both superannuation funds and their trustees are “entities” for GST purposes, the ATO considers that registration should be in the name of the trustee as funds do not have the legal capacity to carry out GST obligations (Miscellaneous Taxation Ruling MT 2006/1). GST exemptions and special rules There are three types of exemptions from GST. Exemption 1: Transactions not subject to GST Transactions which are not subject to GST include: • gifts and non-business (ie private or domestic) transactions • purely overseas transactions • transactions made by entities which are not registered or required to be registered (see “GST registration” below) • transactions made before 1 July 2000. These are sometimes referred to as “out of scope” transactions. Exemption 2: GST-free transactions Some transactions are “GST-free”. If a supply is GST-free, this means that the supplier does not charge GST, but can claim input tax credits for any GST paid on business inputs associated with the supply. “Input tax credits” are credits which are used to offset the GST included in the price paid for an acquisition or importation that is used in an enterprise. An “acquisition” for GST purposes is a very broad concept. It includes: an acquisition of goods and services; a receipt of advice or information; an acceptance of a grant, transfer, assignment or surrender of a right or of real property; and an acquisition of a right to require another person to do anything or to refrain from an act, or to tolerate an act or situation. Receiving money for making a supply is not an acquisition. Exemption 3: Input taxed transactions A range of transactions are “input taxed”. If a supply is input taxed, this means that no GST is payable on

it and that the supplier cannot claim input tax credits for business inputs associated with the supply. Input taxed supplies include financial services and residential rents. Relevantly for superannuation, the term “financial supplies” covers dealings in relation to a whole range of financial services. This includes dealings in relation to a unit trust and the management of a unit trust, and dealings in relation to a superannuation fund and the management of a superannuation fund (¶7-830). As financial services are input taxed, superannuation funds normally cannot claim input tax credits for acquisitions it makes in providing those services. However, a special 75% input tax credit (“reduced input tax credit”) may be allowed for certain types of services used by financial supply providers (¶7-850). Where a supplier provides input taxed financial services together with other services that are taxable or GST-free, an apportionment of the input tax credits relating to the GST-free portion of the services will have to be made. GST registration One of the requirements of a taxable supply is that the entity providing the goods or services is registered or required to be registered for GST purposes. Importantly, an entity can charge GST or claim a GST credit only if it is registered, or required to be registered, and registered entities must lodge GST returns. Registration is compulsory for an entity whose GST turnover is $75,000 or more ($150,000 for non-profit bodies). An entity can be registered if it is carrying on a business or enterprise, or is intending to do so from a particular date. An entity is required to apply for registration within 21 days of becoming required to do so, ie within 21 days after the time when the business or enterprise it is carrying on first meets the turnover threshold test. If the entity is entitled to be registered, but not required to do so, an application to register may be made at any time. Applications for registration must be made on the approved form. GST periods Liability to GST is worked out at the end of each tax period of an entity. These periods may be monthly or quarterly, but a monthly period must be used for taxpayers: • whose GST turnover is $20m or more, or • who have a history of failing to comply with their tax obligations. For entities which use quarterly tax periods, these will normally end on 31 March, 30 June, 30 September and 31 December. Annual periods may apply where GST is paid by instalments, or where voluntarilyregistered taxpayers so elect. The GST payable and GST credits belonging to each tax period are worked out according to attribution rules, depending on the accounting basis used. For those on a cash accounting basis (usually entities with a turnover of less than $2m), GST payable and GST credits are calculated for each tax period on the basis of amounts actually received and paid out. For those on an accruals accounting basis, GST and GST credits are calculated for each tax period on the basis of the entity’s entitlement to be paid and obligation to pay. Usually, this will arise on the giving or receipt of an invoice. GST returns For a registered entity, a GST return is required to be lodged for each tax period, normally by the 21st of the following month. Electronic lodgment must be used if the GST turnover is $20m or more. GST payment The amount of GST an entity is liable to pay for each tax period is the GST for that period reduced by the GST credits for the period. If the GST credits exceed the GST, a refund will be made by the ATO. Any GST payment that is due must be made at the time of lodgment of the GST return.

[SLP ¶42-000ff]

¶7-830 GST and superannuation Transactions which come within the meaning of “financial supplies” are input taxed. This means that the provider of financial supplies cannot charge GST on the goods and services it supplies and cannot claim GST input tax credits for the GST paid on the goods and services it purchases for the purpose of providing the input taxed supply (¶7-810). The reason that there is no GST on financial services is that it is difficult to agree on the value of these services on a transaction-by-transaction basis. What are financial supplies? What constitutes a financial supply is specified entirely in the GST Regulations. For there to be a financial supply, the following must apply: (a) there must be a provision, acquisition or disposal of an interest (ie any form of property) in certain specified items for consideration (b) it must be in the course of an enterprise and be connected with Australia (c) the supplier must be registered or required to be registered, and (d) the supplier must be the owner or creator of the interest immediately before the supply. For superannuation entities, financial supplies would cover any dealing in relation to: • a unit trust, or an interest in or right to and under a unit trust, and the management of a unit trust • the creation, transfer, assignment or receipt of, or any other dealing with, an interest in or right under a superannuation fund, and the management of a superannuation fund • the provision, transfer or assignment of a life insurance policy or reinsurance relating to a life insurance policy • the supply of anything directly in connection with a financial supply made by the supplier of the financial supply • agreeing to or arranging any of the above supplies. The following are not financial supplies (and their supply would therefore be subject to GST): • provision of advice in relation to financial supplies • general insurance • the supply of legal services by a legal practitioner in the course of a professional practice • accounting services by an accountant in the course of an accounting practice • management by a registered tax agent of an entity’s taxation affairs • investment management and administration services for trusts or superannuation, pension or annuity funds • custodial services in relation to assets, documents, etc. Impact of GST on superannuation funds If a superannuation fund makes supplies for consideration, GST is potentially payable. For most funds, supplies made to members are input taxed financial services, ie the fund has to pay GST on its inputs for the supplies but does not charge GST on the supplies. The diagram and summary below show a

superannuation fund’s purchases and supplies and whether GST applies or input tax credits can be claimed.

Summary of purchases and supplies A superannuation fund can charge GST only if it is registered, or required to be registered, for GST, and can claim input tax credits only if it is registered and has a tax invoice for the expenditure. Income items No GST is payable by the fund in respect of the money received from the following transactions: • employer and member contributions • member account administration fees • member life insurance premiums • dividend income • interest income • residential property rent and proceeds from the sale of residential property • proceeds from the sale of shares or debentures • distributions of income and capital from trusts. A fund is required to pay 1/11th of the consideration received on the following transactions to the ATO as GST: • commercial property rent • proceeds from the sale of commercial property (subject to special rules for premises constructed before 1 July 2000) • salary continuance insurance premiums. Expense items GST is included in the price for the following expenses of a superannuation fund, but no input tax credit can be claimed as the transaction relates to input taxed supplies by the fund: • fees for general legal advice • fees paid for the preparation of income tax returns • supplies for fund administration purposes

• inputs on residential property — insurance premiums, repairs and maintenance costs, and estate agent management fees. GST is included in the price of the following expenses of a superannuation fund, but the fund can claim a reduced input tax credit for: • fees paid to an external administrator • actuarial fees • investment management fees and charges • fees paid to an accountant for fund administration, other than audit fees or fees for preparation of tax returns. For more examples of reduced credit acquisitions where the reduced input tax credit (generally 75% of 1/11th of the price paid) can be claimed, see ¶7-850. GST is included in the price of the following expenses of a superannuation fund, but the fund can claim full input tax credits (generally 1/11th of the price paid): • commercial property — estate agent management fees, expenses directly related to sale of property, the purchase of commercial property (subject to special rules for premises built before 1 July 2000), repairs and maintenance costs of commercial property, and insurance premiums • salary continuance insurance premiums where the cost is passed on to the member. GST is not payable in respect of the following expenses or payments by a superannuation fund and no input tax credit is available to the fund: • group life insurance premiums • APRA/ATO annual return lodgment fees (supervisory levy) • income tax payments • superannuation contributions surcharge • rates and taxes on commercial and residential property • bank fees and charges. [SLP ¶42-000ff]

¶7-840 ABN and GST registration An entity (including a superannuation fund) cannot register for GST without an ABN. However, a fund can have an ABN without registering for GST. An entity’s ABN or GST registration is different from the TFN of the entity. ABN registration The ABN is a unique identifier for an entity under the New Tax System. It is used for the entity’s dealings with the ATO and other government departments and agencies (eg APRA or ASIC) and, in the case of a superannuation fund, it replaces the use of the Superannuation Fund Number (SFN). New superannuation entities and existing superannuation funds can apply for an ABN either by completing the “Application for ABN registration for superannuation entities” form available from the ATO or online via the Australian Business Register at www.abr.gov.au. The ATO is responsible for issuing ABNs and maintaining the Australian Business Number Register. Superannuation funds with an ABN have to notify the ATO (in its capacity as the Australian Business

Number Registrar) within 28 days of any details that are no longer correct. Failure to do so is an offence under the TAA. It is not compulsory for a superannuation fund to have an ABN, unless the fund is also registering for GST. However, ABNs play a key role in the PAYG tax withholding system, eg if a fund does not have an ABN, or does not quote its ABN on invoices, the recipient of the invoice (the payer) will be required to withhold tax at the top marginal tax rate on the payment. Also, if a superannuation fund does not quote an ABN (or TFN) on its investments, it may be subject to withholding tax being imposed on the earnings from those investments. Supplies that are wholly input taxed supplies will not be subject to PAYG withholding even if no ABN was provided, as tax withholding under the TFN rules will already apply. GST registration A superannuation fund is specifically included in the definition of “entity” in the GST Act (s 184-1). A superannuation fund (or more correctly, its trustee or manager) must register for GST if its “GST turnover” is $75,000 or more (¶7-810). The turnover test is based on the fund’s current GST turnover and projected GST turnover. At any particular time, current GST turnover is measured over the 12-month period ending at the end of the current month and projected GST turnover is measured over the 12-month period starting at the beginning of the current month (s 188-10). What is included in turnover? Turnover does not include input taxed supplies or supplies not made for consideration. It also does not include supplies made or likely to be made by way of transfer of capital assets, or as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of the enterprise. These are basically one-off activities and are not transactions in the course of an enterprise. Thus, the proceeds from the sale of a capital asset will not normally count as turnover. Note, however, that if a fund is already GST-registered, a sale of property can be a taxable supply and subject to GST. A superannuation fund’s main activities in receiving contributions, investing funds and paying benefits to members mean that the turnover for superannuation funds will usually only be a small amount. Fund contributions (ie the creation of a right or interest under a superannuation fund) are input taxed as financial supplies and not counted as part of a fund’s turnover, and supplies to members that are incidental to this financial supply are also input taxed and not counted. Most investments undertaken by superannuation funds involve input taxed financial supplies, normally with another party being the provider of the financial supplies. An exception is where the fund’s asset is commercial real estate which it leases for consideration. In such a case, any rent received forms part of the turnover for GST registration purposes and, for a registered fund, is subject to GST. Transactions which count as a superannuation fund’s turnover for GST registration purposes include the supply of salary continuance insurance cover to members, GST-free supplies made by the fund (eg rent received under leases which benefit from the transitional provisions) or interest from overseas investments. The table below lists common transactions which do or do not count as turnover. Transactions not counted

Transactions counted

Administration fees charged to members

Fees charged to members for salary continuance insurance

Fees charged to members for provision of life insurance or death and total and permanent disability insurance

Income from lease of commercial property directly owned by fund

Rents received on residential property Receipts from the transfer of capital assets (eg sale of commercial property, shares)

¶7-850 Supplies to a superannuation fund Many goods and services provided to superannuation funds will be subject to GST, including those supplied by contractors, consultants and other professional suppliers, such as administration services. Superannuation funds also purchase input taxed financial supplies, such as certain services provided by banks, certain investment services and life and investment insurance products. The treatment of these services as input taxed supplies is determined by the nature of the service or supply. Very few supplies to superannuation funds will be GST-free. Examples could include GST-free food purchased by the fund, or salary or wages paid to fund employees. The responsibility for paying GST to the ATO falls on the supplier of the goods or services who needs to establish, in each case, whether GST applies and, if so, the amount of GST payable. Reduced input tax credits As financial services are input taxed, superannuation funds would not normally charge GST on their supplies nor can they claim input tax credits on the inputs for making the supplies. However, a special 75% input tax credit (“reduced input tax credit”) is allowed for certain types of services used by superannuation funds (and other financial service providers, such as banks). The rationale for reduced input tax credits is to remove the bias between insourcing and outsourcing the relevant services, as a bias may arise because GST can apply to services supplied by independent contractors but not by employees. The test appears to be based on whether the service is one that could reasonably be performed in-house by the entity making the input taxed financial supplies, and whether the service is intrinsic to the financial supply. However, the eligible services for reduced input tax credits are specified in s 70-5.02 of the GST Regulations, rather than by reference to the tests. Where the eligible services are used by a superannuation fund for making financial supplies, this is regarded as a creditable purpose entitling the fund to a reduced input tax credit, calculated as 75% of the credit that would otherwise have been available (s 70-10; 70-15). Where the acquisition is only partly for making financial supplies, the 75% credit applies only to the financial component and the normal rules apply to the balance (s 70-20). Example A superannuation fund acquires eligible services for $11,000 which are used wholly in making financial supplies. It can claim a reduced input tax credit of $750, calculated as follows:

75% ×

 1  × $11,000  11 

If, in the above case, the eligible services are used 40% for making financial supplies and 60% in making taxable supplies, it can claim an input tax credit of $900, calculated as follows:

 1  × [60%+(40%×75%)] ×   11  $11,000

Certain supplies purchased by a “recognised trust scheme”, which includes approved deposit funds, pooled superannuation trusts, public sector superannuation schemes and regulated superannuation funds, are subject to reduced input tax credits at the rate of 55%, not 75% (GST Regulations s 70-5.02, item 32; 70-5.03). Examples of reduced credit acquisitions Acquisitions made by a superannuation fund that may be eligible for reduced input tax credit (“reduced credit acquisitions”) are listed in s 70-5.02 of the GST Regulations, such as items 9 and 10 (Securities transactions and registry services), item 17 (Debt collection services), item 29 (Trustee and custodial services), item 23 (Funds management services) and item 24 (Fund administration). Professional services supplied to superannuation funds

Professional services, including information and advice, in relation to a financial supply are not financial supplies (GST Regulations s 40-5.12, item 3). GST Regulations Sch 3 cl 1 provides the following examples of professional services supplied to an entity that are not financial supplies: • advice by a legal practitioner in the course of professional practice • advice by an accountant in the course of professional practice • taxation advice, including preparation of tax returns • actuarial advice, and • rating services for securitisation vehicles. Accordingly, a GST-registered supplier of professional services to a superannuation fund, and generic services to those given as examples, must generally charge GST on the supply. RCTI for supply of a defined commission or fee Goods and Services Tax: Recipient Created Tax Invoice Determination (No 23) 2016 for Administrators of a Superannuation Scheme allows an administrator of a superannuation scheme who is a recipient of a taxable supply of a defined commission and/or fee-based service to issue RCTIs for the supply if the administrator determines the value of the taxable supply (www.legislation.gov.au/Details/F2016L00181). An administrator of a superannuation scheme that is a recipient of a taxable supply of a defined commission and/or fee-based service can therefore issue an RCTI to the supplier provided the requirements of the determination are satisfied. As the administrator has the information to establish the value of the supply, issuing RCTIs for such supplies will simplify payment and invoicing processes.

¶7-860 Supplies by a superannuation fund A financial supply by a superannuation fund is an input taxed supply. The fund cannot charge GST for making the supply and cannot claim input tax credits on its inputs for making the supply. The provision, acquisition or disposal of an interest in or under a superannuation fund or superannuation scheme (or ADF or RSA), or in or under an annuity or allocated pension, is a financial supply (GST Regulations s 40-5.09). Accordingly, no GST is payable by the fund in respect of capital and related fees paid by members or employer-sponsors as consideration for the right or interest of the member in the fund or scheme. In addition to the creation of rights or interest for contributions received, superannuation funds normally provide other supplies. The GST status of some of these supplies is discussed below. Life insurance cover In addition to the normal superannuation entitlements, the most common member benefit provided by many superannuation funds is life insurance cover (death benefits), usually as part of the fund design. The fund may provide the insurance cover as a principal whether the risks are reinsured or not, or it may arrange for the cover to be provided by a life insurance company. Some funds also provide total and permanent disability (TPD) insurance cover on a compulsory or optional basis for a specified fee or premium. The provision of life insurance is an input taxed financial supply. A life policy, as defined in the Life Insurance Act 1995, includes a contract of insurance that provides for payment of money on the death of a person, an investment account or investment-linked contract or a continuous disability policy (ie a contract of more than three years’ duration) (Life Insurance Act s 9(1); 9A). This means that the supply of life and qualifying TPD insurance products by a superannuation fund to its members is not a taxable supply for GST purposes. Similarly, if the fund takes out such cover with an insurance company, no GST is payable on that supply. The provision of death benefits by a fund would thus have the same effect as the creation of a right in or under a superannuation scheme.

Salary continuance insurance If a superannuation fund provides its members with salary continuance insurance cover (other than continuous disability policies), the cover is treated like any other risk insurance product and is a taxable supply that is subject to GST. If the fund acts as a principal in providing such insurance cover, the GST payable to the ATO will be 1/11th of the premium that it charges its members. This is subject to the fund being registered for GST. The benefit provided must also be regarded as insurance rather than a benefit that is integral to or incidental to a creation of a right in or under the superannuation scheme (see below). If the fund is acting merely as an agent, the insurance company providing the cover will have the GST liability. Funds which have a group insurance arrangement with a life company may have to pay a GST inclusive price for such cover, but will be entitled to claim input tax credits to offset the fund’s GST liability for supplying salary continuance insurance to members. Incidental financial supplies If a superannuation fund supplies goods or services directly in connection with a financial supply, those supplies are incidental financial supplies (GST Regulations s 40-5.10). For GST purposes, the incidental supplies are treated in the same way as the financial supply. An example of an incidental financial supply would be a superannuation fund charging members a fee for a copy of the trust deed or other fund records. In the case of the provision of other goods and supplies to members for which no charge is made (such as member statements, annual reports and information booklets), no GST arises as there is no consideration involved and s 40-5.10 of the GST Regulations would not be relevant. Exports by superannuation funds It is unlikely that superannuation funds will have any exports in the traditional sense. However, where a superannuation fund receives interest or other revenue from non-residents on its overseas investments, this may potentially be regarded as GST-free financial services revenue. Direct holdings of commercial property A common investment of a superannuation fund is direct holdings of real estate, such as freehold, strata title or leasehold property. If a fund owns commercial property and leases it to another party, the lease is treated as the supply of commercial property. The fund must charge GST and pay 1/11th of the lease payments received (the consideration for the supply) to the ATO as GST. For leases entered into before 1 July 2000, the transitional rule in s 13 of A New Tax System (Goods and Services Tax Transition) Act 1999 (the Transition Act) may apply so that all supplies under the lease are GST-free until 30 June 2005 (MTAA Superannuation Fund (RG Casey Building) Property Pty Limited 2011 ATC ¶10-213: supplies made pursuant to the lease were not subject to s 13 and after 1 March 2001 were subject to GST). If a fund sells an interest in commercial property, GST applies to the sale. The amount of the GST will depend on whether the fund uses the margin scheme method or the general method. Under the margin scheme method (for property that is owned by the fund on 1 July 2000), the GST payable is generally 1/11th of the difference between the 1 July 2000 value and the sale price of the property. To use the margin scheme method, the fund must have a valuation certificate stating the 1 July 2000 value and must agree with the purchaser that the margin method is being used. Special rules apply where a fund owned a commercial property interest on 1 July 2000 but did not register, or was not required to register, for GST until a later date. If a fund purchases an interest in property on or after 1 July 2000 from a GST-registered person who has used the margin method (as well as in certain other situations), the fund may use the margin scheme method when the property is subsequently sold. In this case, the GST payable is generally 1/11th of the difference between the fund’s purchase price and selling price. In certain circumstances, special rules apply to supplies made under post-8 December 2008 contracts. Under the general method, GST payable is 1/11th of the sale price. A GST-registered purchaser will be

able to claim input tax credits for the GST paid on the purchase price and the GST inclusive price would not be a concern. However, if the purchaser is input taxed or otherwise unable to access input tax credits, the margin method would be more attractive to the purchaser. If a superannuation fund is registered for GST, full input tax credits can be claimed on the GST component of supplies purchased by the fund that directly relate to the commercial property (such as repairs and maintenance, additions, agents’ commission and legal fees). Holdings of residential property The supply of residential property is an input taxed supply, unless it is the initial supply of new “residential premises” (eg a new home) in which case it is subject to GST (s 40-65). No GST is payable on residential rents received, and no input tax credits can be claimed on any GST paid on goods and services used in connection with the supply of the residential property.

8 SUPERANNUATION BENEFITS • TERMINATION PAYMENTS SUPERANNUATION BENEFITS AND TERMINATION PAYMENTS Taxation of superannuation benefits and termination payments

¶8-000

SUPERANNUATION BENEFITS Overview of taxation of superannuation benefits

¶8-100

What is a superannuation benefit?

¶8-130

Superannuation income stream benefits

¶8-150

Components of a superannuation benefit — the tax free and taxable components

¶8-155

Proportioning rule for calculating the components

¶8-160

Value of a superannuation interest

¶8-165

Tax free component

¶8-170

Disability superannuation benefits

¶8-172

Tax free component of a superannuation lump sum with an element untaxed in the fund

¶8-174

Taxable component — made up of an element taxed in the fund or an element untaxed in the fund or both

¶8-180

SUPERANNUATION MEMBER BENEFITS Tax treatment of superannuation benefits

¶8-200

Taxation of member benefits — element taxed in the fund

¶8-210

Superannuation income stream benefit in excess of defined benefit income cap

¶8-220

Taxation of member benefits — element untaxed in the fund

¶8-240

Tax offset on excess defined benefit income may be limited

¶8-250

Lump sum payments to members with a terminal medical condition

¶8-260

SUPERANNUATION DEATH BENEFITS Payment of superannuation death benefits

¶8-300

Death benefits dependant

¶8-310

Taxation of death benefits to dependant

¶8-320

Taxation of death benefits to non-dependant

¶8-330

Death benefits paid to trustee of deceased estate

¶8-340

NON-COMPLYING SUPERANNUATION FUND PAYMENTS Benefits from Australian non-complying superannuation funds

¶8-350

Benefits from foreign superannuation funds

¶8-370

TRANS-TASMAN RETIREMENT SAVINGS TRANSFERS Transfer of retirement savings between Australia and New Zealand

¶8-380

PAYMENTS TO FORMER TEMPORARY RESIDENTS Departing Australia superannuation payments

¶8-400

Taxation of departing Australia superannuation payment

¶8-420

BENEFITS IN BREACH OF RULES Benefits paid in breach of payment rules

¶8-500

Benefits paid in breach of legislative requirements

¶8-510

Excess payment from release authority

¶8-520

ROLL-OVERS Roll-over superannuation benefits

¶8-600

Consequences if a roll-over superannuation benefit is paid ¶8-620 Transfer of benefit to successor fund on merger of funds

¶8-630

TERMINATION PAYMENTS FROM AN EMPLOYER Tax treatment of termination payments from an employer

¶8-800

Employment termination payments

¶8-810

Life benefit termination payments

¶8-820

Taxation of life benefit termination payments of high income earners

¶8-825

Transitional termination payments

¶8-830

Death benefit termination payments

¶8-840

Invalidity payments

¶8-850

Payment attributable to pre-July 83 service

¶8-860

Early retirement scheme payments

¶8-870

Genuine redundancy payments

¶8-880

Unused annual leave payments

¶8-890

Unused long service leave payments

¶8-900

Foreign termination payments

¶8-910

Superannuation Benefits and Termination Payments

¶8-000 Taxation of superannuation benefits and termination payments This chapter discusses: (1) the taxation treatment of superannuation benefits received by a superannuation fund member or by a person after the death of a member, and (2) the taxation of termination payments received by an employee from an employer or by another person after the employee’s death. The law on the taxation of superannuation and termination payments has, since 1 July 2007, been contained in the ITAA97. Before 1 July 2007, ITAA36 Pt III Div 2 Subdiv AA provided for the taxation of “superannuation, termination of employment and kindred payments”. The most important category of payments covered by Subdiv AA was “eligible termination payments”. This term encompassed lump sum payments from superannuation funds and lump sum payments from employers in consequence of termination of employment. Despite the significant differences between these two types of payments, they were taxed under the same regime. Under “simplified superannuation” reforms, eligible termination payments were replaced from 1 July 2007 by: (1) superannuation lump sum benefits and superannuation income stream benefits (ITAA97 Pt 3-30), and (2) employment termination payments (ITAA97 Pt 2-40).

Superannuation Benefits ¶8-100 Overview of taxation of superannuation benefits Simplified superannuation reforms were introduced on 1 July 2007, partly in reaction to the complexity of the pre-1 July 2007 system where a superannuation benefit could comprise up to eight components, each subject to a different taxation arrangement. Superannuation benefits were subject to reasonable benefit limits (RBLs) that put a ceiling on the amount of concessionally-taxed superannuation a person could receive. To remove some of the complexity, RBLs were abolished from 1 July 2007 and the taxation of superannuation benefits — whether lump sums or income streams — was significantly changed from what it was previously. This is particularly the case for a person aged at least 60 who is now generally entitled to receive superannuation benefits tax-free. The taxation of a benefit received by a person aged under 60 partly reflects the previous regime, with “caps” replacing “low rate thresholds” and RBLs. Tax treatment of superannuation benefits There is generally no limit to the amount of superannuation benefit an individual can receive, although contributions caps (¶6-500) limit the amount of concessionally-taxed contributions that can be made for an individual in a year. This may indirectly affect the amount of benefit received by the individual. The transfer balance cap rules (¶6-420) also limit the amount of superannuation benefit that an individual aged over 60 can take in the form of an income stream. The taxation of a superannuation benefit is affected by the form of the benefit (lump sum or income stream), the source of the benefit (whether from a taxed or an untaxed source), the size of the benefit and the age of the recipient. The general rules on the tax treatment of a superannuation benefit are as follows: • whether taken as a lump sum or an income stream, a superannuation benefit may comprise a tax free component and a taxable component, with complicated rules being applied to divide a benefit into the two components (¶8-155) • the tax treatment of the taxable component of a superannuation benefit depends on the age of the

recipient, whether the benefit is paid as a lump sum or an income stream, and the amount of the benefit (¶8-200) • superannuation benefits, whether in the form of a lump sum or an income stream, paid to persons aged 60 and over are generally tax-free where those benefits derive from contributions that have been taxed in the fund (¶8-210) • a superannuation benefit containing an amount that has not been subject to tax in the fund (eg an amount paid from a public sector scheme) is subject to tax, but a recipient aged 60 or over is taxed at a lower rate than recipients who are aged below 60 (¶8-240), and • a lump sum death benefit paid to a dependant is tax-free, and a superannuation income stream death benefit to a dependant is generally tax-free if either the deceased or the dependant is aged at least 60 (¶8-300). Rules in specific cases As well as the general rules on the taxation of superannuation benefits, specific tax treatment is applied to: • income stream benefits to individuals aged 60 or over from certain defined benefit income streams (¶8-220 and ¶8-250) • payments from an Australian non-complying superannuation fund (¶8-350) • benefits from certain foreign superannuation funds (¶8-370) • superannuation transferred between Australia and New Zealand (¶8-380) • payments to former temporary residents who have left Australia (¶8-400) • benefits that are paid in breach of payment rules or legislative requirements (¶8-500), and • roll-over superannuation benefits (¶8-600). [FITR ¶268-000; SLP ¶38-000]

¶8-130 What is a superannuation benefit? A superannuation benefit is a payment described in the table in s 307-5(1) as being a superannuation member benefit or a superannuation death benefit. The following payments are specified in the table: 1. Superannuation fund payment (item 1): a payment to a person from a superannuation fund — this is a superannuation member benefit if paid to a member (¶8-200) or a superannuation death benefit if paid to another person because of the death of a member (¶8-300) 2. RSA payment (item 2): a payment from an RSA (¶10-030) to the RSA holder or to another person after the RSA holder’s death 3. Approved deposit fund payment (item 3): a payment from an approved deposit fund (¶2-320) to a depositor or to another person after the death of the depositor 4. Small superannuation account payment (item 4): a payment to a person under the Small Superannuation Accounts Act 1995 or to the legal representative of a person (¶12-620) 5. Unclaimed money payment (item 5): certain payments (and interest on those payments) under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶3-380, ¶8-400) 6. Superannuation co-contribution benefit payment (item 6): a payment to a person under the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 or to the person’s

legal personal representative (¶6-760) 7. Superannuation guarantee payment (item 7): a payment under the Superannuation Guarantee (Administration) Act 1992 to a person who is 65 years or more or has retired because of incapacity or invalidity, or to the legal personal representative of such a person (¶12-500) 8. Superannuation annuity payment (item 8): a payment to the annuitant from a superannuation annuity or arising from the commutation of a superannuation annuity, or a payment to another person after the death of the annuitant. A superannuation annuity is defined in Income Tax Assessment Regulations 1997 (ITAR) reg 995-1.01 as basically an income stream that is issued by a life insurance company or registered organisation and that meets the annuity standards in the SIS regulations or, from 1 July 2017, a deferred superannuation income stream that is taken to be an annuity for the purposes of the SIS legislation (¶3-390). A payment from a superannuation fund at a member’s request to another superannuation fund is a superannuation benefit for the member because, under the constructive receipt rule in s 307-15 (see below), the member is treated as having received the payment although it is actually made to another superannuation fund. The superannuation benefit is taxed as a roll-over superannuation benefit (¶8-600). The transfer of an amount from one superannuation interest in a superannuation plan to another superannuation interest in the same plan is treated as a “payment” in determining whether the transfer of the amount is a superannuation benefit or a roll-over superannuation benefit (s 307-5(8)). The application of a deceased member’s benefits in a regulated superannuation fund to commence a superannuation income stream from that fund for a dependant beneficiary (in accordance with SISR reg 6.21) is not a “transfer of an amount” between superannuation interests in the fund and therefore does not constitute a superannuation benefit (Taxation Determination TD 2013/10). Payments that are not superannuation benefits Certain payments are specifically stated not to be superannuation benefits (s 307-10): • an amount payable to a person under an income stream because the person is temporarily unable to engage in gainful employment (these amounts are taxable at marginal rates as they replace regular income) • a benefit to which ITAA36 s 26AF(1) or 26AFA(1) applies — these are benefits received from, or in connection with, funds that came within ITAA36 former s 23(ja), 23FB or 23F • amounts that a trustee is required by the Bankruptcy Act 1966 to pay out of a superannuation fund, eg superannuation contributions made with the intention to defeat creditors (¶15-350) • payments resulting from the commutation of a pension payable from a superannuation fund and wholly applied to pay a superannuation contributions surcharge liability, and • pensions or annuities paid from a foreign superannuation fund (¶8-150). “Constructive receipt” of a superannuation benefit For the purpose of determining whether a payment is a superannuation benefit and whether it is made to, or received by, a person, the constructive receipt rule in s 307-15 has the effect that a payment is treated as made to, or received by, a person if it is made for their benefit, or paid to another person at their direction or request. This would cover, for example, a direction by a member that a payment be rolled over from their original superannuation fund to another superannuation fund. The constructive receipt rule was applied in Brazil 2012 ATC ¶10-244 (¶8-510) where the AAT held that $18,000 withdrawn from an employer-sponsored fund was not, as the taxpayer had argued, rolled over within the superannuation system when it was paid to a self managed superannuation fund, because the receiving fund was a sham. The payment should instead be treated as having been made to another person (the SMSF) at the direction or request of the taxpayer and, under the constructive receipt rule, was effectively a payment to the taxpayer himself and should be taxed as such.

The application of the constructive receipt rule in other cases (¶8-510) has meant taxpayers were assessable on amounts that they did not actually receive but which were dealt with on their behalf, often at the behest of fraudulent promoters. Superannuation member benefit or superannuation death benefit A superannuation benefit can be either: • a superannuation member benefit (¶8-200) paid, for example, to a fund member, an RSA holder or an annuitant (as described in column 2 of the table in s 307-5(1), or • a superannuation death benefit (¶8-300) paid to another person because of the death of a fund member (as described in column 3 of the table in s 307-5(1)). Superannuation lump sums and superannuation income stream benefits A superannuation benefit can be paid as either a superannuation lump sum or as a superannuation income stream benefit. A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit (s 307-65). Superannuation income stream benefits are discussed at ¶8-150. Whether a superannuation benefit is a superannuation lump sum or a superannuation income stream is significant because there are different tax consequences where the member receiving the benefit is aged under 60. In that case, a superannuation lump sum may be tax free up to the low rate cap amount to the extent it is a taxable component. A superannuation income stream benefit is generally taxed at the recipient’s marginal tax rate less a 15% tax offset (¶8-210). From 1 July 2017, a lump sum payment arising from a partial commutation of a superannuation income stream is a superannuation lump sum (s 307-65(2)), other than for the purposes of the earnings tax exemption in Subdiv 295-F (¶7-153). This means that, for recipients who have reached preservation age (¶8-210) but are under 60 years of age, lump sum payments arising from a partial commutation of a superannuation income stream may benefit from access to tax-free amounts up to the low rate cap. The fund is, however, excluded from claiming the earnings tax exemption to the extent that its assets are no longer held “solely” to discharge liabilities in respect of superannuation income stream benefits. Before 1 July 2017, a person who had reached preservation age but was under 60 years of age could commence a transition to retirement income stream and elect to not treat the payment as a superannuation income stream benefit (making the payment a superannuation lump sum). Such an election is not possible from 1 July 2017 (¶8-150). The Financial System Final Report (Treasury, November 2014) highlighted the difficulty retirees have in deciding whether to take their superannuation savings as a lump sum or as an income stream benefit. It recommended that superannuation trustees be required to pre-select a comprehensive income product for members’ retirement. The income product would commence on the member’s instruction, or the member could choose to take their benefits in another way. The income product would have minimum features determined by the government, including a regular and stable income stream, longevity risk management and flexibility, be low cost and include a cooling-off period. The government released the Retirement Income Covenant Position Paper on 17 May 2018 outlining the proposed principles underpinning a retirement income covenant and inviting submissions on the proposals. Payment under a release authority An amount paid in response to a release authority issued under TAA Sch 1 s 131-15 (¶6-640) is a superannuation benefit but is generally non-assessable non-exempt income (s 303-15). This covers the release of amounts relating to: (a) excess concessional contributions (¶6-520) or excess non-concessional contributions (¶6-565) (b) liability to Division 293 tax (¶6-400), or (c) a First Home Super Saver (FHSS) determination (¶6-385).

A payment under a release authority used to pay debt account discharge liability (¶6-400) relating to Division 293 is non-assessable non-exempt income (s 303-20) except to the extent that it exceeds the amount that the member is entitled to receive under the release authority (s 304-20) (¶8-520). Contributions-splitting benefit and family law payment If a contributions-splitting superannuation benefit (¶6-850) or a family law superannuation payment (¶14700) is paid to a person because another person (the original person) is a member of a superannuation fund or an annuitant under a superannuation annuity, the person to whom the payment is made is treated as a member of the fund or an annuitant, and the original person is not treated as a member or annuitant (s 307-5(5) to (7)). This means that the payment is a superannuation benefit for the recipient and not for the original person. [FITR ¶296-000; SLP ¶38-050]

¶8-150 Superannuation income stream benefits A “superannuation income stream benefit” is a payment from a superannuation interest that supports a superannuation income stream (s 307-70; definition of “superannuation income stream benefit” in ITAR reg 995-1.01(2)(a)). This meaning of “superannuation income stream benefit” is subject to exceptions, and a different meaning applies (ITAR reg 995-1.01(2) to (5)) for the purposes of the exempt current pension income provisions (¶7-153). Each periodic (including annual) payment made as part of a series of periodic payments over an identifiable period of time from a superannuation interest that supports a superannuation income stream is a superannuation income stream benefit. This is the case unless an election under ITAR reg 995-1.03 has been made for that payment not to be treated as a superannuation income stream benefit. The Commissioner’s view is that a liability to make a single payment each year for a number of years could satisfy the definition of an income stream, but a single payment for one year only would not (Taxation Ruling TR 2013/5). The phrase “income stream” in the definition of “superannuation income stream” requires that a series of periodic payments can be identified that relate to each other and that are made to the member over time. That series of periodic payments is a superannuation income stream if the pension rules and minimum payment standards in SISR reg 1.05, 1.06 and 1.06A (¶3-390) are met, and it is these periodic payments that are superannuation income stream benefits. Superannuation income stream “Superannuation income stream” (ITAR reg 995-1.01(1)) means: (a) an income stream that is taken to be: • an annuity for the purposes of the SIS Act in accordance with SISR reg 1.05(1) • a pension for the purposes of the SIS Act in accordance with SISR reg 1.06(1), or • a pension for the purposes of the RSA Act in accordance with RSAR reg 1.07, or (b) an income stream that is an annuity or pension within the meaning of the SIS Act and that commenced before 20 September 2007, ie an annuity or pension coming within SISR reg 1.05(1A) or reg 1.06(1A)), or (c) from 1 July 2017, a deferred superannuation income stream (¶6-425) that is taken to be an annuity or pension because it meets the standards of SIS reg 1.06A(2) (¶6-480), or (d) for the purposes of the earnings tax exemption (¶7-153), rights to the extent they are covered by reg 995-1.01(3). The meanings of an annuity or pension for the purposes of SIS Act and a pension for the purposes of the RSA Act are discussed at ¶3-390.

This definition of a superannuation income stream in s 307-70 and ITAR reg 995-1.01(1) captures all income stream payments from superannuation entities that are made in line with the payment standards applying from 1 July 2007, including, from 1 July 2017, from deferred superannuation income streams. It also captures income streams which commenced to be paid before 20 September 2007 and which were a pension or annuity within the definition in SISA s 10 at that time. The definition also, according to Interpretative DecisionID 2014/5, covers amounts paid by a trustee of a superannuation fund to a fund member where the amounts are attributable to an account balance of the member and the trustee has agreed to protect part of the member’s account balance for an agreed period of time to ensure that it does not fall below a predetermined amount. Cessation of superannuation income stream if minimum payment standards are not met Generally, periodic payments are a superannuation income stream only if the “minimum payment standards” (¶3-390) are met in an income year. A failure to make the minimum payment would technically mean that the income stream is not a pension for SIS Act purposes and not a superannuation income stream benefit for tax purposes. The pension would not then qualify for concessional tax treatment as a superannuation income stream benefit, eg tax exemption for persons aged 60 or older (¶8-210). The Commissioner’s view, as expressed in Taxation Ruling TR 2013/5, is that, if the minimum payment standards are not met in an income year: • the superannuation income stream is taken to have ceased at the start of the income year and the trustee cannot claim the earnings tax exemption (¶7-153) for the year, and • the trustee is taken, for both income tax and SIS purposes, not to have paid a superannuation income stream benefit at any time during the income year and any payments are superannuation lump sums. If the minimum payment standards are met in a later income year, this would result in the commencement of a new superannuation income stream. Example Chris is a member of a self managed superannuation fund and has commenced a superannuation income stream (an accountbased pension). Although the minimum annual payments were made to Chris during 2017/18 and 2018/19, during 2019/20 the trustee makes a single payment to Chris of only half the minimum annual payment. As this amount is less than the minimum required to satisfy the minimum payment standards, the superannuation income stream ceases for tax purposes at the beginning of 2019/20 and the payment is instead treated as a superannuation lump sum. This is the case even if Chris remains entitled to receive a payment in future years from the superannuation fund in relation to the pension under the terms of the superannuation trust deed, or under general trust law.

Commissioner may treat a superannuation income stream as continuing Despite Taxation Ruling TR 2013/5, the Commissioner may treat a superannuation income stream as continuing even if it does not meet the minimum payment standards. The conditions that must be satisfied are set out in two ATO documents — Self-managed super funds — starting and stopping a superannuation income stream (pension) and APRA-regulated funds — starting and stopping a superannuation income stream (pension). The consequence is that, despite a breach of the minimum payment standards, a fund can treat a superannuation income stream as continuing if all of the following conditions are satisfied: (a) the trustee’s failure to pay the minimum pension amount was caused by: (i) an honest mistake that resulted in an underpayment not exceeding 1/12th of the minimum payment; or (ii) a matter outside the control of the trustee (b) the entitlement to an exemption on current pension income would have continued but for the minimum payment standards being breached (c) as soon as practicable after becoming aware of the breach, the trustee makes a catch-up payment in the following (current) income year (or treats a payment made in the current year as having been made in the prior year)

(d) if the trustee had made the catch-up payment in the prior income year, the minimum payment standards would have been met, and (e) the trustee treats the catch-up payment, for all other purposes, as if it were made in the prior income year. If all of these conditions are satisfied, a trustee can generally self-assess that the superannuation income stream continues. A trustee who has previously been granted the concession when the minimum payment standards were breached must, however, apply to the ATO for the concession to apply. Significance of when a superannuation income stream commences and ceases The time when a superannuation income stream commences or ceases must be determined because it is central to the correct identification of the tax free and taxable components (¶8-155) of benefits paid from a superannuation interest. This is because: • the proportioning rule (¶8-160) applies differently depending on whether a superannuation lump sum is paid from an interest that supports a superannuation income stream or that has never supported a superannuation income stream, and • the separate interest rule in ITAR reg 307-200.05 (¶8-165) provides that, once a superannuation income stream commences, an amount that supports the superannuation income stream is always to be treated as a separate superannuation interest. When a superannuation income stream commences A superannuation income stream commences on the “commencement day”, that is, the first day of the period to which the first payment of the pension or annuity relates (SISR reg 1.03(1)). The commencement day must be determined by reference to the superannuation fund rules and the SIS Regulations. It cannot be before all of the capital which is to support the income stream has been added by way of contribution or roll-over to the relevant superannuation interest from which it is to be paid (Taxation Ruling TR 2013/5). The commencement day may be before the due date of the first payment, depending on the rules which govern the superannuation income stream, but it cannot precede the date of the member’s request or application. If a fund does not have a formal application process, the member must still request that a superannuation income stream commences and agree to its terms and conditions, and the commencement day cannot precede such a request. The commencement of a superannuation income stream is discussed further at ¶8-160. When a superannuation income stream ceases Once a superannuation income stream commences, a superannuation income stream benefit is payable until the superannuation income stream ceases. The Commissioner’s view (Taxation Ruling TR 2013/5) is that a superannuation income stream ceases: • when there is no longer a member who is entitled (or a dependant beneficiary of a member who is automatically entitled) to be paid a superannuation income stream benefit from a superannuation interest that supports the superannuation income stream • if the pension rules and minimum payment standards in SISR reg 1.06(1) and (9A) (¶3-390) are not met in the income year (although the superannuation income stream may be treated as continuing if certain conditions are satisfied — see above under “Cessation of superannuation income stream if minimum payment standards are not met”) • when the capital supporting the income stream is reduced to nil and the member’s right to have any other amounts applied to their superannuation interest (other than by contribution or roll-over) has been exhausted • if there is a valid request from a member (or a dependant beneficiary) to fully (not merely partially) commute their income stream benefit entitlements to a lump sum — the payment to the member or

dependant beneficiary following the full commutation is a superannuation lump sum and the superannuation income stream ceases before the time the lump sum payment is made, or • if the member in receipt of the superannuation income stream dies. Death of a member in receipt of a superannuation income stream A superannuation income stream ceases as soon as a member in receipt of the superannuation income stream dies, except where a dependant beneficiary is automatically entitled, under the superannuation fund’s deed or the rules of the superannuation income stream, to receive an income stream on the death of the member (Taxation Ruling TR 2013/5). If a dependant beneficiary of the deceased member is automatically entitled to receive the income stream upon the member’s death, the superannuation income stream continues. According to TR 2013/5, a superannuation income stream is “automatically” transferred to a dependant beneficiary on the death of a member if the governing rules of the superannuation fund, or other rules governing the superannuation income stream, specify that this will occur. The rules must specify both the person to whom the benefit will become payable and that it will be paid in the form of a superannuation income stream. The rules may also specify a class of person, eg a spouse, to whom the benefit will become payable. There may be an automatic entitlement to an income stream on the death of a member if, for example, a valid binding death benefit nomination in place at the time of the death entitles a dependant beneficiary to receive a superannuation income stream. The nomination must be binding on the trustee, in respect of both the beneficiary who will receive the benefit and the form of the benefit. If a trustee has discretion under the fund rules about who is to be paid or the payment method, the ATO considers that the superannuation income stream ceases on the member’s death even if the trustee decides to pay a superannuation income stream to the dependant beneficiary. A superannuation income stream cannot be transferred to a non-dependant beneficiary on the death of a member. Instead, the superannuation income stream ceases and any remaining entitlement can only be paid as a superannuation lump sum. Although TR 2013/5 applied generally from 1 July 2007, compliance action in respect of a superannuation income stream that ceases on the death of a member was only taken for years from 2012/13 onwards. Election for payment not to be treated as superannuation income stream benefit From 1 July 2017, the recipient of a superannuation income stream cannot elect to treat the income stream as a superannuation lump sum. Before 1 July 2017, a person to whom a payment was made from an interest supporting a superannuation income stream could elect that the payment was not a superannuation income stream benefit (ITAR former reg 995-1.03). If such an election was made, the payment was then a superannuation lump sum. This was because s 307-65 defines a superannuation lump sum as a superannuation benefit that is not a superannuation income stream benefit. For the election to be effective: • it had to be made before the payment was made, and • the superannuation income stream product had to allow for variation of the amount of payments in a year in circumstances other than the indexation of the benefit, the application of the family law splitting rules, the commutation of the benefit or the payment of excess contributions tax. Regulation 995-1.03 was repealed effective from 1 July 2017 (Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017) and an election under former reg 995-1.03 is not allowed from that date. This means individuals are no longer able to treat income stream benefits as lump sums, and thereby access tax-free amounts up to the low rate cap. The ATO’s views on the removal of the election are set out in Guidance Note GN 2017/14. Lump sum arising from partial commutation of a superannuation income stream

Taxation Ruling TR 2013/5 states that a payment made as a result of a partial commutation of a superannuation income stream is a superannuation lump sum only if, before the payment is made, the member elects for that payment to not be treated as a superannuation income stream benefit. Despite this view, the Commissioner accepted that, where an election is not made before a partial commutation payment is made, a partial commutation made before 31 July 2013 was a superannuation lump sum payment unless the person treated the payment as a superannuation income stream benefit. Section 307-65(2) makes it clear that, from 1 July 2017, a lump sum payment arising from a partial commutation of a superannuation income stream is a superannuation lump sum, other than for the purposes of the earnings tax exemption under s 295-385 (¶7-153). Transition to retirement income streams Before reg 995-1.03 was repealed from 1 July 2017, the ATO considered that in certain circumstances the regulation allowed a member to elect to treat a transition to retirement income stream payment as a superannuation lump sum for income tax purposes. A transition to retirement arrangement allows a member to gain access to their retirement savings while they are still in the workforce. A working member who has reached their preservation age (¶8-210) but is still under 65 years can withdraw some of their superannuation money each financial year and place it in an income stream account to supplement their income from working. When transition to retirement arrangements were introduced in July 2005, the aim was to allow workers to ease into retirement by reducing their working hours and consequently their income from work. Their reduced income could be supplemented by the withdrawal of some of their superannuation money as an income stream. A transition to retirement income stream is an account-based income stream that meets the standards of SISR reg 1.05(11A) or 1.06(9A). The total amount of payments in any year is limited to no more than 10% of the account balance at the start of each year, and a minimum amount (generally 4% of the account balance if the member is under 65) must be paid. A transition to retirement income stream may only be commuted in limited circumstances (¶3-390). Income stream amounts received by a member who is aged 60 or over are tax-free if they are paid from a taxed source. If the member is between preservation age and 60 years, the taxable component of the income stream amount is included in assessable income and a tax offset (15% of the taxable component) reduces the tax liability (¶8-210). If a member elected to treat a transition to retirement income stream payment as a superannuation lump sum for income tax purposes, this would generally result in less tax being payable for a taxpayer aged 56 to 59. The taxable component of the lump sum would be tax-free for a taxpayer aged at least 60, and for taxpayers between preservation age and 60 years would be taxed at 0% up to the low cap amount or at 15% plus Medicare levy on the amount above the low rate cap (¶8-210). Regulation 995-1.03 was repealed effective from 1 July 2017 (Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017) and an election under reg 995-1.03 is not allowed from that date. Individuals are no longer able to treat transition to retirement income stream benefits as superannuation lump sums, and thereby access tax-free amounts up to the low rate cap. Annuities or pensions that are not superannuation income stream benefits Before 1 July 2007, ITAA36 s 27H included in assessable income both annuities and superannuation pensions. From 1 July 2007, s 27H only applies to annuities and pensions that are not superannuation income stream benefits, eg where the pension rules and minimum payment standards (¶3-390) have not been met or where the pension is foreign-sourced. Under s 27H, the assessable income of an annuitant or pensioner includes the amount of their annuity or pension for the year, minus the “deductible amount” of the annuity or pension, which generally represents its undeducted purchase price. Generally, for the purposes of calculating the undeducted purchase price: (a) the purchase price of a foreign pension is the contributions made to a foreign superannuation fund to obtain the pension; and (b) the purchase price of a purchased annuity is the non-deductible payments made to purchase the annuity.

The amount of an annuity or pension that is included in assessable income under s 27H is taxed at the taxpayer’s ordinary tax rates. In the case of a foreign pension, tax paid in the source country may give rise to a foreign income tax offset, which is limited to the amount of tax that would otherwise be payable on the pension in Australia. If there is a double tax agreement between Australia and the country that is the source of the foreign pension, the Pensions and Annuities article in the agreement usually (but not always) allocates the right to tax the pension to the country of residence of the recipient. Cap on pension from a tax-free account from 1 July 2017 From 1 July 2017, there is a cap ($1.6m for 2017/18, 2018/19 and 2019/20) on the total amount of superannuation savings that a member can transfer to a tax-free retirement account (the “earnings tax exemption”: ¶7-153) from which the member is paid a pension. A member receiving a pension from a retirement account with a balance in excess of the cap is required to transfer the excess into an accumulation account where the earnings would be taxed at 15% or withdraw the excess amount from superannuation. A member who fails to act when the cap is exceeded may be subject to penalties (¶6-420). Special treatment applies to members of certain defined benefit schemes that have commutation restrictions. This has the effect that 50% of a member’s pension amounts over $100,000 per annum may be taxed at their marginal tax rate, or the tax offset on the excess amount may be reduced (¶8-210 and ¶8-240). [FITR ¶296-000; SLP ¶38-060]

¶8-155 Components of a superannuation benefit — the tax free and taxable components A superannuation benefit (¶8-130) may comprise two components: • the tax free component, and • the taxable component (s 307-120(1)). The components of a benefit are generally worked out under the proportioning rule in s 307-125 (¶8-160). The proportioning rule can only be applied after ascertaining the value of the superannuation interest out of which the benefit is paid — this is discussed at ¶8-165. Specific rules apply to work out the components in the following cases. 1. A superannuation guarantee payment (¶12-500) consists entirely of a taxable component (s 307130). 2. A superannuation co-contribution benefit payment (¶6-760) consists entirely of a tax free component (s 307-135). 3. A contributions-splitting superannuation benefit (¶6-850) consists entirely of a taxable component (s 307-140). 4. For certain unclaimed money payments, in the case of a payment by the Commissioner of a superannuation benefit received from a superannuation provider under s 17(2), (2AB) or (2AC), 20H(2), (2AA), (2A) or (3) or 24G(2), (3A) or (3B) of the Superannuation (Unclaimed Money and Lost Members) Act 1999, or by a state or territory authority of a benefit received from a state or territory public sector superannuation scheme as mentioned in s 18(5) of that Act (¶8-400), the tax free component is the total of the tax free components of the superannuation benefits paid to the Commissioner or to the state or territory authority, and included in the payment. The tax free component is nil if the amount was paid to the Commissioner by a state or territory public sector superannuation scheme or authority and the Commissioner does not have sufficient information to work out the tax free component. The taxable component is so much of the

superannuation benefit as is not the tax free component (s 307-142). Interest paid from 1 July 2013 in respect of lost member accounts (¶3-380) is a tax free component. Payments of interest on the unclaimed money of former temporary residents are a taxable component of a superannuation benefit and subject to withholding tax (¶8-420). 5. An amount transferred from a New Zealand KiwiSaver scheme may comprise a tax free component to the extent that it contains a New Zealand-sourced amount or the tax free component of an Australian-sourced amount (¶8-380). The components of a superannuation benefit, as ascertained under the proportioning rule, may be modified: • for disability superannuation benefits — see ¶8-172, and • for a superannuation lump sum with an element untaxed in the fund — ¶8-174. [FITR ¶296-000; SLP ¶38-070]

¶8-160 Proportioning rule for calculating the components The tax free component and the taxable component of a superannuation benefit are calculated under the proportioning rule by: (1) determining the proportions of the “value of the superannuation interest” (basically, the member’s account balance) that the tax free and taxable components represent, then (2) applying those proportions to the benefit itself (s 307-125(1)). The “value of a superannuation interest” is discussed at ¶8-165. When a superannuation benefit is paid, it is taken to include the tax free component (¶8-170) and the taxable component (¶8-180) in the proportions that reflect the proportions such components make up of the value of the superannuation interest out of which the benefit is paid (s 307-125(2)). Example Ali is paid a lump sum of $20,000. Just before the benefit is paid, the value of Ali’s superannuation interest was $80,000, of which $20,000 was the tax free component and $60,000 was the taxable component (ie 1/4th tax-free and 3/4th taxable). The components of the lump sum paid to Ali are in the same proportions as the value of the superannuation interest out of which it is paid — $5,000 is a tax free component and $15,000 a taxable component (ie 1/4th tax-free and 3/4th taxable).

The proportioning rule is designed to remove an individual’s capacity to reduce their potential tax liability by manipulating the tax components of their superannuation benefits. To this end, the rule prevents members from choosing which components they withdraw when they take a superannuation benefit. Example In the absence of s 307-125(2), a person aged under 60 who is being paid a superannuation benefit may choose to take only the tax free component and to leave the taxable component in the fund. When the person reaches age 60, the taxable component could also be taken from the fund tax free as long as it is paid from an element taxed in the fund (¶8-210). The effect of s 307-125(2) is that, regardless of when the person receives the benefit, the tax free and taxable components of the benefit are in the same proportions as those components are in the person’s superannuation interest out of which the benefit is paid.

Alternative method for determining the tax free and taxable components The proportioning rule in s 307-125 does not apply if the regulations or a determination by the Commissioner specify an alternative method or the Commissioner consents in writing to the use of another method (s 307-125(4)).

An alternative method for determining the tax free and taxable components of certain superannuation benefits applies from 4 June 2013. This alternative method, in ITAR reg 307-125.02, applies where: • a person was receiving a superannuation income stream from a superannuation interest immediately before their death • the superannuation income stream did not automatically revert to another person on the deceased’s death • no amounts other than investment earnings or an amount to fund an anti-detriment increase have been added to the relevant superannuation interest on or after the deceased’s death, and • after the deceased’s death, a superannuation death benefit lump sum is paid, and/or a new superannuation income stream is commenced, using only an amount from the relevant superannuation interest. Under the alternative proportioning method, where the superannuation death benefit lump sum or the superannuation benefit paid from the new superannuation income stream is not to any extent attributable to an anti-detriment increase or an insurance-related amount paid or arising on or after the deceased’s death, the benefit has the same proportion of tax free and taxable components as the superannuation income stream benefits that were paid to the deceased. The same rule applies where the benefit paid after the death is to any extent attributable to an anti-detriment increase or an insurance-related amount paid or arising on or after the deceased’s death, except that the anti-detriment increase and the insurance-related amount are included in the taxable component of the benefit. For this purpose, “investment earnings” includes an amount paid under a policy of insurance on the life of the insured or an amount arising from self-insurance, and an “anti-detriment increase” means any increase to a benefit which resulted in the fund that paid the benefit being entitled to a deduction (ITAR reg 307-125.02(3)) (¶7-148). Example Prior to his death, Angus was receiving a superannuation income stream from a superannuation interest which comprised a tax free component of 10% of the value and a taxable component of 90% of the value. The income stream did not automatically revert to anyone on the death of Angus, but the trustee of the fund determined that the entire superannuation interest out of which the income stream was being paid to Angus would be paid as a single lump sum death benefit to Sean. As long as the fund does not increase the lump sum death benefit by an anti-detriment increase amount and the benefit is not to any extent attributable to an insurance-related amount paid or arising after the death of Angus, the lump sum benefit paid to Sean comprises a tax free component (10%) and a taxable component (90%). If the fund does increase the lump sum death benefit by an anti-detriment increase amount or the benefit is to any extent attributable to an insurance-related amount paid or arising after the death of Angus, the anti-detriment increase or insurance-related amount is included in the taxable component. The remainder of the benefit paid to Sean consists of a tax free component (10%) and a taxable component (90%).

Modifications to the proportioning rule The proportioning rule is modified where a taxpayer receives: • a disability superannuation benefit (¶8-172), or • a superannuation lump sum with an element untaxed in the fund (¶8-174). The effect of these modifications may be to increase the tax free component of the benefit. A superannuation benefit that is an unclaimed money payment or a small superannuation account payment is treated as a superannuation benefit paid from a superannuation interest and the amount of the benefit is the value of that superannuation interest just before the benefit is paid (s 307-125(6)). Where a member of the Military Superannuation and Benefits Scheme who is under preservation age receives a member benefit that comprises an amount that accrued before 1 July 1999, the member can choose (subject to certain limits) the proportions of the amount that are the taxable and tax free

components (ITAR reg 307-125.01). If a superannuation fund allocates an amount from its reserve to members of the fund, the consequences for the calculation of the tax components for a superannuation interest depend on whether the allocation is made to an accumulation interest or to an interest supporting an income stream: • an allocation to an accumulation interest is always part of the taxable component of the interest • an allocation to an interest supporting an income stream does not affect the respective proportions of the tax free and taxable components of the superannuation income stream established at its commencement, regardless of the mechanism used to determine the allocated amount (NTLG Superannuation Technical Sub-group minutes, 8 September 2009). This means that the proportions of the tax free and taxable components when the income stream commenced continue after the allocation from the reserve. When are the proportions determined? The value of a superannuation interest and the amount of each of the components are determined at the following times: (a) if the benefit is a superannuation income stream benefit — when the relevant superannuation income stream commenced (s 307-125(3)(a)) (b) if the benefit is a superannuation lump sum — just before the benefit is paid (s 307-125(3)(b)) (c) despite (a) and (b), if the benefit arises from the commutation of a superannuation income stream: (i) when the relevant superannuation income stream commenced (unless (ii) applies), or (ii) if, from 1 July 2017, the superannuation income stream is a “deferred superannuation income stream” that had not commenced before the commutation happened — just before the commutation happened (s 307-125(3)(c)), and (d) despite (a) and (b), if the benefit is an “involuntary roll-over superannuation benefit” (see below) paid from a superannuation interest and that interest was supporting a superannuation income stream immediately before that benefit was paid — when that superannuation income stream commenced (s 307-125(3)(d)). A “deferred superannuation income stream” is defined in SISR reg 1.03(1) as a benefit supported by a superannuation interest if the contract or rules for the provision of the benefit provides for payments to start more than 12 months after the superannuation interest is acquired and to be made at least annually afterwards. Commencement of a superannuation income stream benefit For a superannuation income stream benefit, the proportions are generally set when the benefit commences (s 307-125(3)(a)) and those proportions remain for the life of the benefit. This is the case even if the balance of the pension rises or falls, or the member takes a lump sum from the pension or the member dies and a lump sum death benefit is paid. Example If, when a superannuation income stream benefit commences, it consists entirely of undeducted contributions, the tax free component is 100% of the benefit. The proportions of 100% tax-free and 0% taxable remain for the life of the income stream benefit, even if the balance rises because of earnings.

The Commissioner’s views on when a superannuation income stream benefit commences are set out in Taxation Ruling TR 2013/5. The “commencement day” for a superannuation income stream benefit is the first day of the period to which the first payment relates. This day is determined by reference to the superannuation fund rules and other documentation applying to the relevant superannuation income stream, eg the product disclosure statement that may be issued to members by the fund.

If the rules of a superannuation fund provide that a superannuation income stream becomes immediately payable on the occurrence of a particular event, the commencement day for the superannuation income stream is the day on which that event occurs and not before. The commencement day for a superannuation income stream may occur before the due date of the first payment depending on the terms and conditions upon which the superannuation income stream is payable, but cannot precede the date of the application by the member or dependant beneficiary. According to Taxation Ruling TR 2013/5, the commencement day cannot be before: • the day a member or dependant beneficiary becomes entitled to the income stream under the governing rules, eg after a cooling-off period, or • the day all amounts that are to form the capital of the income stream are paid into the superannuation interest — this is consistent with the explicit requirement in SISR reg 1.06(1)(a)(ii), which states that the rules of a superannuation fund must not allow for the capital supporting a pension to be added to by way of contribution or roll-over after the pension has commenced. Pension rolled back into accumulation phase and new pension later commences Various circumstances, including falling investment returns, may prompt a fund member to commute their pension in full and roll back the balance of their pension account to the accumulation phase within the fund. This decision may be made to avoid drawing down any more superannuation and to allow the fund to avoid realising large losses (although the fund would lose the earnings tax exemption (¶7-153) on the assets formerly used to support the payment of the pension). If the member later commences a new pension using the same superannuation entitlements, the trustee would have to decide how to calculate the tax free and taxable proportions of the new pension. This issue arose at the NTLG Superannuation Technical Sub-group meeting in December 2010, where two options were put forward: (i) the trustee must completely recalculate the tax free and taxable components at the start of the new pension without regard to the proportions that were applied to the original pension, and (ii) the trustee must go back to the tax free and taxable components that were calculated at the commencement of the original pension and these proportions must be taken into account when determining the proportions for the new pension. The ATO’s initial response, as expressed at the meeting, was that the trustee must recalculate, in accordance with s 307-125, the tax free and taxable components of any new benefit subsequently paid from the fund. This requirement arises because the full commutation of the original pension changes the member’s superannuation interest in the fund from one that was supporting a superannuation income stream to a new accumulation interest. The following example illustrates the ATO view. Example A member of an SMSF commenced an account-based pension on 1 July 2014 with the full amount of his accumulated superannuation savings. The opening pension account balance was $100,000, and the tax free and taxable component percentages were each 50%. The member commuted his pension on 30 June 2015 and rolled the pension account balance back to the accumulation phase within the fund. The account balance at this time had fallen to $60,000 because of pension payments of $20,000 and negative investment returns of $20,000 during 2014/15. As per s 307-125(3)(c), the tax free component of the $60,000 lump sum is $30,000 and the taxable component is also $30,000. If the member decided to commence a new pension in a later year with the full amount of his accumulation interest, the balance would be $80,000, comprising the $60,000 lump sum from the commutation of the original pension and $20,000 positive investment returns. Just before the new pension commenced, the tax free component percentage of the accumulation interest would be 37.5% ($30,000/$80,000) and the taxable component percentage of the interest would be 62.5% (100% − 37.5%). This would give the new pension a tax free component percentage of 37.5% and a taxable component percentage of 62.5%.

Payments made under release authorities From 1 July 2018, the proportioning rule in s 307-125 does not apply to payments made under the standardised release authority rules in TAA Sch 1 Div 131 (s 131-75). This means the proportioning rule

does not apply to: • amounts of excess concessional contributions (¶6-520) or of excess non-concessional contributions (¶6-565) that are released from superannuation • amounts released from superannuation to pay assessed Division 293 tax (¶6-400), or • amounts released from superannuation under the First Home Super Saver scheme (¶6-385). The release authority rules are discussed at ¶6-640. Proportioning rule for involuntary roll-over superannuation benefits Where an individual’s superannuation benefits are transferred from one superannuation plan to another without their request or consent, the individual may be disadvantaged by the application of the proportioning rule. The disadvantage arises from the fact that, if the individual’s benefit is paid from a superannuation interest not supporting an income stream, the tax free component of the interest is limited to the value of the interest at the time the transfer is made. Where the value of the interest was less than the sum of the contributions and crystallised segments of the interest in the original plan (because the plan had incurred investment losses after the individual had made personal contributions to the plan), an individual could not recoup this difference in tax free component in the new plan. By contrast, if the individual had remained in the original plan, they could recoup this difference through an increase in the value of their interest from future plan earnings. The amount of tax free component of the interest could then be greater when a benefit is later paid from the plan. To overcome this disadvantage, where an individual’s benefits in a superannuation plan are involuntarily transferred to a new superannuation plan, the proportioning rule applies so that the individual remains in the same taxation position as if the transfer had not occurred. These changes apply to an “involuntary roll-over superannuation benefit” paid on or after 1 July 2015. An involuntary roll-over superannuation benefit is defined in ITAA97 s 306-12 as covering three circumstances where an individual’s superannuation interest is transferred between superannuation plans without the individual’s consent. These are: 1. a payment transferring a superannuation interest of a member of a superannuation fund, a depositor with an ADF or a holder of an RSA to a “successor fund” (other than a self managed superannuation fund) without the consent of the member, depositor or holder 2. a transfer of an accrued default amount (¶9-130) of a member of a complying superannuation fund to a MySuper product in another complying superannuation fund as a result of an election under SISA s 29SAA(1)(b) or 388, where the transfer happens between 1 July 2015 and 1 July 2017, or 3. a payment of consideration for the issue to a person of a beneficial interest in an eligible rollover fund under SISA s 243. A “successor fund”, in relation to the transfer of a superannuation interest of a member, depositor or RSA holder, means another fund or RSA where: • that other fund or RSA confers on the member, depositor or holder equivalent rights to the rights they had under the first fund or RSA, and • the conferral of those equivalent rights was agreed, before the transfer, between the superannuation providers of the first fund and the other fund (ITAA97 s 995-1(1)). From 1 July 2015, the restriction that the amount of the crystallised and contributions segments of an individual’s superannuation interest is limited to the overall value of their superannuation interest at a particular time was removed, and the proportioning rule applies as follows. 1. When an involuntary roll-over superannuation benefit for a superannuation interest not supporting an income stream is paid to a new superannuation plan, the contributions segment in the new plan

includes an amount equal to the sum of the contributions and crystallised segments of the interest in the original plan immediately before the roll-over (s 307-220(2)(a)(ia) and (ib) and (5)). The effect is that the contributions segment of the new interest in the new plan is not limited by the value of the old interest in the original plan immediately before the involuntary roll-over occurred. Where investment losses in the original plan are effectively recovered in the new plan, any tax free component otherwise lost through the involuntary roll-over may be able to be recouped on a later benefit payment from the new plan. Example Since 2 February 2010, Sangita has made personal contributions of $350,000 from her after-tax earnings to Pride Super. She has not commenced an income stream. On 1 July 2019, Sangita’s superannuation interest in Pride Super has a contributions segment of $350,000 and a crystallised segment of zero. Pride Super merges with Cupid Super on 1 July 2019 and the trustees agree that Cupid Super will provide members with equivalent rights to those they had in Pride Super. At 1 July 2019, Sangita’s interest in Pride Super is only $320,000. On 11 August 2019, Sangita decides to retire and to withdraw all her superannuation benefits from Cupid Super. By that date, the value of her superannuation interest has risen to $340,000. No contributions have been made to Cupid Super for Sangita since 1 July 2019. Under the law from 1 July 2015, Sangita’s contributions segment in Cupid Super is $350,000, ie the sum of the contributions segment and the crystallised segment of her interest in Pride Super immediately before the merger. The tax free component of Sangita’s benefit payment is therefore the full amount of the benefit payment, being $340,000. Under the pre-1 July 2015 law, Sangita’s contributions segment in Cupid Super would have been limited to the value of the tax free component of the roll-over benefit paid from Pride Super into Cupid Super, being $320,000. Sangita’s retirement benefit payment would have consisted of a $320,000 tax free component and a $20,000 taxable component.

2. When an involuntary roll-over superannuation benefit is paid from a superannuation interest in the original plan that was supporting an income stream that began to be paid on or after 1 July 2007, the proportions of the tax free and taxable components of the income stream commenced in the new plan are the same as the income stream in the original plan (s 307-125(3)(d)). 3. When an involuntary roll-over superannuation benefit is paid from a superannuation interest in the original plan that was supporting an income stream that began to be paid before 1 July 2007, the income stream commenced in the new plan is treated in the same way as the income stream in the original plan was treated (ITTPA s 307-125; 307-127). Successor fund transfers The ATO view on the calculation of the tax free and taxable components when a benefit is transferred to a successor fund on the merger of complying superannuation funds is discussed at ¶8-630. Superannuation income streams that commenced before 1 July 2007 Special rules in the Income Tax (Transitional Provisions) Act 1997 (ITTPA) s 307-125 mean that the tax free component of a superannuation income stream that commenced before 1 July 2007 may be based on the pre-1 July 2007 “deductible amount” as calculated under ITAA36 s 27H rather than as calculated under the proportioning rule (¶8-170). These rules may apply also where an involuntary roll-over superannuation benefit covered by ITAA97 s 306-12(a) is paid from a superannuation interest that was supporting an income stream that began to be paid before 1 July 2007 (ITTPA s 307-127). [FITR ¶296-000; SLP ¶38-070]

¶8-165 Value of a superannuation interest The “value of a superannuation interest” is the value determined by a method specified in the regulations or, if there is no such value, the total amount of all superannuation lump sums that could be payable from the interest at that time (s 307-205(1)). There are two steps in determining the value of a superannuation interest: • working out what the “superannuation interest” is, and

• working out what the “value of the superannuation interest” is. Step 1. The superannuation interest A “superannuation interest” means an interest in a superannuation fund, an ADF or superannuation annuity, or an RSA (ITAA97 s 995-1(1)). The Commissioner considers that, when read in context, this definition generally refers to the rights of persons who have proprietary interests in trusts, interests under a trust that confer no proprietary interest in the assets of the trust, purely contractual rights (eg to a right to an annuity) and statutory rights to superannuation benefits. Accordingly, “interest in” a fund refers to a distinct claim of any kind against a fund, whether it be proprietary in character or not (ATO fact sheet How many superannuation interests does a member of a superannuation fund have in their fund?). Generally, a member’s superannuation interest would be their account balance, but regulations modify this general principle by creating special rules for what constitutes a superannuation interest. A superannuation interest may, in the circumstances specified in the Income Tax Assessment Regulations 1997 (ITAR), be treated as two or more superannuation interests, or two or more superannuation interests may be treated as one superannuation interest (s 307-200). Regulations made for the purposes of s 307-200 have the following effect. • Every amount, benefit or entitlement held in a self managed superannuation fund for a member comprises one single superannuation interest (ITAR reg 307-200.02). • In some circumstances, a superannuation interest in a public sector superannuation scheme may be treated as two or more superannuation interests (ITAR reg 307-200.03). • From 1 July 2017, if a superannuation income stream: (i) is payable, or (ii) will be payable, and it is a deferred superannuation income stream covered by para (c) of the definition of superannuation income stream in reg 995-1.01(1), an amount that supports the superannuation income stream is always to be treated as a separate superannuation interest (ITAR reg 307-200.05). Before 1 July 2017, former reg 307-200.05 stated that, where, on commencement of a superannuation income stream, an amount held within the fund supported a superannuation income stream, that amount was treated as a separate superannuation interest. Any other amounts that are held in the fund on behalf of the same contributor which do not support a superannuation income stream would be treated as another superannuation interest. The Commissioner’s view in Taxation Ruling TR 2013/5 is that the operation of reg 307-200.05 is directed at ensuring that a separate superannuation interest is identified at the time a superannuation income stream commences. The regulation does not by its terms deem the amount supporting the superannuation income stream to be the superannuation income stream. Nor does it deem all payments from the interest, including those made after the superannuation income stream ceases, to be superannuation income stream benefits. Commissioner’s views on the effect of the regulations for superannuation funds The Commissioner’s views on the effect of the regulations for superannuation funds (but not for ADFs, RSAs or superannuation annuities) are set out in the ATO fact sheet How many superannuation interests does a member of a superannuation fund have in their fund? as follows. • Superannuation funds generally. An amount that supports a superannuation income stream (¶8-150) that is commenced from a superannuation fund other than an SMSF or a public sector superannuation scheme is treated as a separate interest from immediately after the income stream commences (ie once its tax free and taxable component proportions have been determined). With multiple income streams commenced from the same fund, each income stream gives rise to a separate interest.

In other cases, it is a question of fact whether a member’s various amounts, benefits and entitlements in a fund constitute one or several interests. If a member has separate accounts in a fund, the Commissioner accepts that an account constitutes a separate interest so long as, viewed as an objective matter, the account reflects a claim that is separate and distinct from other claims of that kind that the member has against the fund. This would be the case if the member has bought separate “products” under a separately documented process whereby the member acquires distinct sets of legal rights against the trustee. In contrast, merely purporting to divide a member’s entitlements into separate accounts as a bookkeeping exercise without any such objective basis does not establish that there are separate interests. • Self managed superannuation funds. An amount that supports a superannuation income stream that is commenced from an SMSF is treated as a separate interest from immediately after the income stream commences, ie once its tax free component and taxable component proportions have been determined. In the case of multiple income streams commenced from the same SMSF, each income stream gives rise to a separate interest from the interest to which each other income stream gives rise. Except for that case, a member of an SMSF always has just one interest in the SMSF. • Public sector schemes. Although the same principles generally apply for public sector schemes as for superannuation funds, they may be varied because the source of the rights and obligations of scheme members is the legislation establishing the scheme rather than a trust deed or a contract. An objective basis for discerning separate interests in the one scheme is likely therefore to be found in the relevant legislation rather than in any equitable or contractual relationship between trustee and member. Regulation 307-200.03 provides one extra rule. If a benefit is partly sourced from contributions to the scheme and earnings on those contributions and partly from some other source, the member’s interest is separated into two interests: one consists of the contributions to the scheme and the earnings on those contributions, and other consists of the remainder of the interest. For this purpose, the “contributions and earnings” are reduced by the amount specified in any notice given under s 307-285 for the benefit (¶8-180). The ATO fact sheet also states that the operation of the anti-avoidance provisions of ITAA36 Pt IVA in relation to a scheme of this kind would not have direct consequences for a fund trustee unless the trustee obtained some tax benefit from the scheme. However, a person who markets or otherwise encourages the growth of a tax avoidance scheme in return for consideration may be penalised separately. Step 2. Value of the superannuation interest Unless regulations specify otherwise, the value of a superannuation interest is the total amount of all superannuation lump sums that could be payable from the superannuation interest at that time (s 307205). Regulations made for the purpose of s 307-205 specify as follows. • The value of a superannuation interest must be calculated by the method in ITAR reg 307-205.01 when determining the pre-July 83 amount of the crystallised segment (¶8-170) of a tax free component. The method applies for both accumulation and defined benefit interests. The method to be used to calculate the value of the pre-July 83 amount for a defined benefit is set out in reg 307-205.01(2). The method assigns a value to a member’s superannuation interest based on the retirement benefit that would have been payable had the member been eligible to retire immediately before 1 July 2007 and had elected to do so. The method for calculating the value of accumulation interests for the purposes of calculating the preJuly 83 amount is set out in reg 307-205.01(3). • The method for determining the value of a superannuation interest at a particular time allows interests which support an income stream to be valued for the purposes of the proportioning rule (ITAR reg 307-205.02). The value of the superannuation income streams to which the regulation applies is calculated using the factors in ITAR Sch 1B. Income streams are excluded from the valuation methodology where the benefits are directly related on an ongoing basis to an ascertainable amount in the member’s account, eg an allocated pension. Purchased income streams are also excluded

from the valuation methodology. A purchased income stream would include lifetime and life expectancy pensions which are commenced by rolling over an identifiable lump sum to purchase the pension — these would typically be valued just before the superannuation income stream commences. The value of an interest that supports a purchased pension is the identifiable lump sum amount or the amount available in the member’s account (ITAR reg 307-205.02A). Generally, the value of an interest supporting a defined benefit pension in a public sector superannuation scheme is determined by the practice used by the fund immediately before 28 June 2007 (ITAR reg 307-205.02B). If there is no such practice, eg where a new fund comes into existence on or after 1 July 2007, the pension is valued using the valuation methodology in reg 307205.02(2). • From 1 July 2017, the value of an individual’s superannuation interest that supports a “deferred superannuation income stream” (SISR reg 1.03(1)) that is covered by para (c) of the definition of superannuation income stream in reg 995-1.01(1) is calculated under ITAR reg 307-205.02C. This covers a deferred superannuation income stream that meets the standards of SISR reg 1.06A(2) and is not a pooled investment pension or a pooled investment annuity. A “pooled investment pension” is defined, and the value of an interest in a pooled investment pension is explained, in ITAR reg 307-205.02D(3). A “pooled investment annuity” is defined, and the value of an interest in a pooled investment annuity, is explained in ITAR reg 307-205.02E. Defined benefit interests: valuation factors A defined benefit interest is generally a specified amount a member is entitled to receive at a particular time for a specified period. A superannuation fund must value a defined benefit interest: • to calculate the pre-July 83 amount of a crystallised segment (¶8-170) for a member in the accumulation phase where there is an element taxed in the fund • when starting to pay a superannuation income stream from 1 July 2007, or • when a trigger event occurs in respect of an income stream for which a payment was made before 1 July 2007 (see “Superannuation income streams that commenced before 1 July 2007”: ¶8-170). The valuation factors, based on certain assumptions, are set out in three tables taken from ITAR Sch 1B. The tables contain: • the income stream valuation factors for indexed and non-indexed superannuation income streams payable for the life of a member (Table 1) or for a fixed term (Table 2), and • the lump sum valuation factors used to value any future lump sums payable from a superannuation income stream, other than a lump sum from the commutation of the income stream (Table 3). The Commissioner’s views on valuing defined benefit interests are set out at www.ato.gov.au/super/apraregulated-funds/in-detail/apra-resources/fact-sheets/determining-the-defined-benefit-super-interest-valuefor-calculating-the-pre-july-1983-amount-at-30-june-2007/?page=4#Step_1. [FITR ¶296-000; SLP ¶38-070]

¶8-170 Tax free component The tax free component of a superannuation interest is so much of the value of the interest as consists of (s 307-210(1)): • the “contributions segment” of the interest, and • the “crystallised segment” of the interest.

The taxable component of a superannuation interest (¶8-180) is the value of the interest less the tax free component (s 307-215). The tax free component of a disability superannuation benefit is discussed at ¶8-172, and the tax free component of a superannuation lump sum with an element untaxed in the fund at ¶8-174. Contributions segment The “contributions segment” (s 307-220(1)) generally consists of all contributions made from 1 July 2007 that have not been and will not be included in the assessable income of the fund (¶7-120). As well as undeducted member contributions, the contributions segment includes: • undeducted contributions that an individual makes for a spouse (s 295-165) • government co-contributions and contributions made for a child by an individual who is not the child’s employer (s 295-170) • a low income superannuation tax offset, or a low income superannuation contribution before 1 July 2017 (¶6-770) — this inclusion in the contributions segment results from s 12B of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 which states that a law of the Commonwealth applies in relation to a low income superannuation tax offset or contribution in the same way as it applies in relation to a government co-contribution • pre-1 July 2015 payments from FHSAs and government FHSA contributions (s 295-171) • certain contributions by a fund trustee (s 295-173) • payments by a member spouse for the benefit of a non-member spouse in satisfaction of the nonmember spouse’s entitlement under family law (s 295-175), and • contributions for a temporary resident to a foreign superannuation fund (s 295-185). Exclusion of certain amounts from the contributions segment A number of contributions that would otherwise be included in a superannuation provider’s assessable income are excluded from the contributions segment (s 307-220(2)(b)). These include contributions that are excluded due to the operation of s 295-180 (where a public sector superannuation scheme chooses to exclude contributions) and of Subdiv 295-D (eg on the transfer of liability to another investment vehicle or on the application of pre-1 July 1988 funding credits). The taxable component of a roll-over superannuation benefit (¶8-600) is excluded from the contributions segment (s 307-220(2)(a)(i)), although the excess untaxed roll-over amount of the roll-over superannuation benefit (¶8-620) is treated as part of the tax free component of the benefit instead of the taxable component (s 307-220(3)). A roll-over superannuation benefit that is a departing Australia superannuation benefit made under s 20H of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶8-400) is included in the contributions segment of the superannuation interest (s 307-220(4)) as none of the payment has been or will be included in the assessable income of the fund. This ensures that the payment, which is subject to withholding tax (¶8-420), does not attract more tax when paid as a superannuation benefit. The contributions segment of an “involuntary roll-over superannuation benefit” is calculated according to s 307-220(2)(a)(ia) and (ib) and (5) (¶8-160). Crystallised segment The “crystallised segment” of a superannuation interest (s 307-225) is calculated by assuming that an eligible termination payment representing the full value of the superannuation interest was paid just before 1 July 2007. The crystallised segment of the superannuation interest is the total amount of the following components of that eligible termination payment: • the concessional component — before 1 July 2007, 5% of the concessional component was included in assessable income and taxed at marginal rates

• the post-June 1994 invalidity component — this was tax-free before 1 July 2007 • the undeducted contributions component — this was tax-free before 1 July 2007 • the CGT exempt component — this was tax-free before 1 July 2007, and • the pre-July 83 component — before 1 July 2007, 5% of the pre-July 83 component was included in assessable income and taxed at marginal rates. For the purposes of s 307-225, these terms have the same meaning as in ITAA36 former s 27A(1). The meaning of those terms and the way they would be calculated assuming an eligible termination payment were paid out just before 1 July 2007 are discussed in Chapter 8 of the Wolters Kluwer 2006/07 Australian Master Superannuation Guide. The value of these components is set, or crystallised, on 30 June 2007 based on the amount of the interest attributable to that component on that date. Any of the components that become part of the crystallised segment are tax free when received as part of a superannuation benefit paid from 1 July 2007. This is the case even for the part of the crystallised segment that represents the concessional component or the pre-July 83 component (ie 5% of the component) which would have been taxable before 1 July 2007. Superannuation providers had until 30 June 2008 to calculate the crystallised segment for all affected superannuation interests and were subject to an administrative penalty if they failed to do so (TAA Sch 1 s 288-105). Calculation of tax free component As shown in the following example, the tax free component of a superannuation interest is so much of the value of the interest as consists of the contributions segment and the crystallised segment (s 307-210(1)). Example Sienna is paid a superannuation lump sum benefit on 14 August 2019. The value of Sienna’s pre-July 83 component at 1 July 2007 was $45,000. She made undeducted contributions of $50,000 before 1 July 2007 and of $2,000 from 1 July 2007. The tax free component of the superannuation benefit that Sienna receives on 14 August 2019 is made up of: • the contributions segment comprising the $2,000 undeducted contributions made from 1 July 2007, and • the crystallised segment as calculated at 30 June 2007 — this is made up of: (a) $50,000 undeducted contributions made before 1 July 2007, and (b) the $45,000 pre-July 83 component.

If a superannuation benefit is paid from the superannuation interest: (a) the crystallised segment of the interest is reduced (but not below zero) by the amount of the tax free component of the benefit, and (b) if any of that amount remains, the contributions segment of the interest is reduced (but not below zero) by that remaining amount (s 307-210(2)). This has the effect of reducing the interest’s tax free component by the amount of the benefit’s tax free component. Superannuation income streams that commenced before 1 July 2007 Despite the rule in s 307-125(2) that a superannuation benefit is taken to include the tax free component and the taxable component in the proportions that reflect the proportions such components make up of the value of the superannuation interest (¶8-160), recipients of superannuation income streams from which at least one superannuation income stream benefit was paid before 1 July 2007 retain their “deductible amount” of the superannuation income stream unless a trigger event occurs (ITTPA s 307-

125). However, as the tax treatment of superannuation income stream benefits moved from an annual basis to a per payment basis from 1 July 2007, the pre-1 July 2007 annual deductible amount had to be converted to a per benefit figure. This was achieved by apportioning the annual deductible amount across each superannuation income stream according to the value of each superannuation income stream received in the income year. The portion of the deductible amount applying to a particular superannuation income stream is the tax free component for that benefit. The “deductible amount”, as calculated under ITAA36 s 27H, is generally the “unused undeducted purchase price”, within the meaning of para (a) of the definition of that term in ITAA36 s 27A(1). In most cases, this is the amount of the undeducted contributions included in the superannuation benefit. Example Lyell is aged 56 and is receiving a superannuation pension which commenced before 1 July 2007. He receives monthly superannuation income stream benefits of $3,000 and his annual deductible amount is $8,000. The tax free component of the monthly benefit is worked out as follows. 1. Calculate as a percentage the proportion of the monthly benefit to the annual benefit:

$3,000 =8%  $3,000 × 12 months  2. Multiply the annual deductible amount by the above percentage: $8,000 × 8% = $640 The tax free component of the monthly benefit is $640. The taxable component is $2,360 (ie $3,000 − $640).

Trigger event The pre-1 July 2007 deductible amount is not retained if one or more of the trigger events in ITTPA s 307125(3) occurs. These trigger events may arise if: (a) the superannuation income steam has been wholly or partly commuted (b) the holder of the superannuation interest has died (c) the holder of the superannuation interest is aged at least 60 on 1 July 2007, or (d) the holder of the superannuation interest turns 60. Once a trigger event occurs, the tax free component is calculated in either of two ways (ITTPA s 307125(6), (6A)): • where at least one superannuation income stream benefit was paid from the superannuation income stream before 1 July 1994 or the superannuation income stream was purchased after 1 July 1994 with the roll-over of a commutation of a pension that commenced before 1 July 1994 — the tax free component is the unused undeducted purchase price (within the meaning of para (a) of the definition of that term in ITAA36 s 27A(1) and disregarding para (b) and (c) of that definition), reduced by the tax free components of any benefits paid from the superannuation income stream after 30 June 2007, or • in other cases, the tax free component is equal to the sum of: (a) the unused undeducted purchase price (within the meaning of para (a) of the definition of that term in ITAA36 s 27A(1) and disregarding para (b) and (c) of that definition), reduced by the tax free components of any benefits paid from the superannuation income stream after 30 June 2007; and (b) the pre-July 83 component (within the meaning of s 27A just before 1 July 2007) of the payment. [FITR ¶296-000; SLP ¶38-080]

¶8-172 Disability superannuation benefits

Special rules apply for calculating the tax free component of a disability superannuation benefit. These rules have the effect that a disability superannuation benefit has a higher tax free component than would ordinarily be the case for a superannuation benefit that is not related to the taxpayer’s disability. Meaning of a “disability superannuation benefit” A “disability superannuation benefit” means a superannuation benefit: (a) that is paid to a person because they suffer from physical or mental ill-health, and (b) where two “legally qualified medical practitioners” have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training (ITAA97 s 995-1(1)). “Legally qualified medical practitioners” is not defined, but the Commissioner relies on its ordinary meaning, ie persons who have general or specialist registration with the Medical Board of Australia (Interpretative DecisionID 2015/11). “Gainfully employed” means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment (ITAA97 s 995-1(1)). A medical certificate supplied by an individual in relation to a particular superannuation lump sum can satisfy the requirements of (b) above in relation to later superannuation lump sums paid to the individual by the same superannuation fund provided: (i) the superannuation lump sums are paid over a short period of time; and (ii) there is no evidence to suggest to the trustee that the person’s circumstances have changed in some relevant way (Interpretative DecisionID 2015/19). A superannuation lump sum can be a disability superannuation benefit even if it is not paid to the member under the permanent incapacity condition of release (¶3-280). It is a question of fact whether a superannuation benefit is paid because of a member’s ill-health, and satisfaction of a particular condition of release is a relevant, but not decisive, fact to consider (Interpretative DecisionID 2009/109). Calculation of the tax free component Where a taxpayer receives a disability superannuation benefit, the proportioning rule in s 307-125 (¶8160) is modified so that the tax free component of the benefit is increased for potential service benefits that are lost because of the disability (s 307-145). This reflects the period when the member could have expected to be gainfully employed if the disability had not occurred. The tax free component of a disability superannuation benefit is the sum of s 307-145(2) and (3): (i) the tax free component of the benefit worked out under the proportioning rule (¶8-160), and (ii) the amount worked out by applying the following formula: Amount of benefit

×

Days to retirement  Service days + days to retirement 

where: “days to retirement” is the number of days from when the person stopped being capable of being gainfully employed to their last retirement day (ie the day their employment would have terminated under their contract or the day they would turn 65: s 995-1(1)), and “service days” is the number of days in the “service period” for the lump sum. Any days that are included in both “days to retirement” and “service days” are to be counted only once. The service period for a superannuation lump sum paid from a superannuation fund includes: (a) the period of membership, if some or all of the lump sum accrued during the taxpayer’s membership, and (b) each period of employment to which the lump sum relates, if some or all of the lump sum accrued during the taxpayer’s employment (s 307-400(1)).

The service period for a later superannuation lump sum also includes each day that is in the service period for an earlier lump sum if some or all of the later lump sum is attributable, directly or indirectly, to some or all of the earlier lump sum through the payment of roll-over superannuation benefits (s 307400(2)). The tax free component cannot exceed the amount of the benefit. The balance of the superannuation benefit is the taxable component (s 307-145(4)). Example When Vivek is forced to retire on 1 October 2019, he receives a disability superannuation benefit of $200,000. The number of days from 1 October 2019 to his last retirement day is 860 and the number of days in the service period for the lump sum is 3,900. The tax free component of the benefit under the proportioning rule is $42,000. The tax free component of the disability superannuation benefit, after the modification by s 307-145, is the sum of $42,000 and the amount worked out as follows:

$200,000 ×

860 days  3,900 days + 860 days 

=

$36,134

The tax free component of the disability superannuation benefit is $78,134 (ie $42,000 + $36,134). The $121,866 balance of the benefit (ie $200,000 − $78,134) is the taxable component.

[FITR ¶296-000; SLP ¶38-080]

¶8-174 Tax free component of a superannuation lump sum with an element untaxed in the fund The calculation of the tax free component is modified for superannuation lump sums that have not been subject to contributions or earnings tax in the fund, ie they contain an element untaxed in the fund (s 307150). The modification only applies to the superannuation lump sum to the extent that it is attributable to a superannuation interest that existed just before 1 July 2007. The modification means that: • the tax free component of the benefit is increased by the amount that is the lesser of: (i) the amount worked out under the formula in s 307-150(4), and (ii) the amount of the element untaxed in the fund (ignoring the effect of s 307-150), and • the element untaxed in the fund is reduced by the amount by which the tax free component is increased. The formula in s 307-150(4) is as follows: Original tax free component and × untaxed element

Number of days in the service period for the lump sum that occurred before 1 July 1983  Number of days in the service period    for the lump sum 

If the superannuation benefit is in part attributable to a crystallised pre-July 83 amount, in working out the tax free component of the benefit (apart from this section) for the purposes of the formula, the amount of the benefit that is attributable to the crystallised segment of the superannuation interest from which the benefit is paid is disregarded. Example Bessie has a superannuation interest of $100,000 on 30 June 2007 and a service period of 39 years, six years of which reflect preJuly 83 service. Bessie’s superannuation interest comprises a tax free component of $15,000, an element taxed in the fund of $10,000 and an element untaxed in the fund of $75,000.

The tax-free amount of Bessie’s superannuation interest is calculated as at 30 June 2007 under the pre-1 July 2007 legislative formula, disregarding the value of the element untaxed in the fund:

($15,000 + $10,000) ×

6 years =  39 years 

$3,846

As a result, the crystallised segment (s 307-225) of the tax free component of Bessie’s superannuation interest is increased by $3,846 and the element taxed in the fund is decreased by $3,846. This means that at 30 June 2007 the tax free component is $18.846 and the element taxed in the fund is $6,154. Bessie subsequently makes a non-concessional contribution of $20,000 and receives a superannuation lump sum of her entire interest of $120,000. The lump sum initially comprises a tax free component of $38,846 (ie $18,846 as crystallised at 30 June 2007 plus the $20,000 non-concessional contribution), an element taxed in the fund of $6,154 and an element untaxed in the fund of $75,000. The pre-July 83 amount for this lump sum is calculated by disregarding any element taxed in the fund, any crystallised segment of the tax free component and any part of the tax free component used in the earlier crystallisation. The calculation is as follows:

($18,846 + $75,000) ×

6 years =  39 years 

$14,438

¶8-180 Taxable component — made up of an element taxed in the fund or an element untaxed in the fund or both The taxable component of a superannuation benefit consists of an element taxed in the fund or an element untaxed in the fund, or both (s 307-275(1)). Element taxed in the fund The taxable component of a superannuation benefit consists wholly of an element taxed in the fund unless the legislation provides otherwise (s 307-275(2)). Element untaxed in the fund The taxable component of a superannuation benefit is stated by the legislation to consist of an element untaxed in the fund in the following cases. 1. The taxable component of small superannuation account payments (¶12-620) and superannuation guarantee payments (¶12-500) consists wholly of an element untaxed in the fund (s 307-275(3)) because the payments are made directly from the ATO and have not been subject to tax in the fund. 2. The taxable component of superannuation benefits paid from a constitutionally protected fund (¶7500) generally consists wholly of an element untaxed in the fund (s 307-280(1)). The exception is if the benefit is a superannuation lump sum and is attributable to one or more roll-over superannuation benefits (¶8-600) that consist of an element taxed in the fund, in which case the taxable component of the benefit has an element taxed in the fund equal to the total of those elements taxed in the fund (s 307-280(2)). The taxable component of a superannuation income stream benefit consists wholly of an element untaxed in the fund if it is paid from a fund that was a constitutionally protected fund on the first day of the period to which the superannuation income stream related (s 307-280(3)). 3. The taxable component of a superannuation benefit from a public sector superannuation scheme consists of an element untaxed in the fund if the trustee gives the member written notice specifying an amount as an element untaxed in the fund and the superannuation scheme came into operation before 6 September 2006. In that case, the element untaxed in the fund is the amount specified in the notice (s 307-285). 4. The taxable component of a superannuation benefit paid from a public sector superannuation scheme that is not a constitutionally protected fund consists wholly of an element untaxed in the fund if the benefit is not sourced to any extent from contributions or earnings on contributions (s 307295(2)). If the benefit is partly sourced from contributions or earnings on contributions, the element taxed in the fund and the element untaxed in the fund are calculated by the method statement in s

307-295(3), which takes into account the extent to which the benefit is sourced from contributions or earnings on contributions. Where a superannuation benefit is paid from a public sector superannuation scheme that is not a constitutionally protected fund, regulations may specify the extent to which the taxable component consists of an element untaxed in the fund. The amount specified must not be less than the amount that would, in the absence of the regulations, be the element untaxed in the fund (s 307-297). 5. If the superannuation benefit is a payment of an unclaimed money amount by the Commissioner under s 17(2), 20H(2), (2AA), (2A) or (3) or 24G(2) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶8-400), the element taxed in the fund of the taxable component is the total of the elements taxed in the fund of the taxable component of the unclaimed amounts paid to the Commissioner by the superannuation provider (to the extent they are included in the Commissioner’s payment) (s 307-300). The relevant unclaimed money payments are set out in a table in s 307300(3). The element untaxed in the fund of the taxable component is so much (if any) of the taxable component as is not the element taxed in the fund. Untaxed element of death benefit superannuation lump sums may be increased for insurance premium deductions If a superannuation provider has claimed, or will claim, a tax deduction for insurance premiums paid for liability for future death benefits for its members (¶7-148), the element untaxed in the fund of a death benefit superannuation lump sum in relation to which a deduction is claimed is increased to broadly reflect the insurance component of the benefit (s 307-290). This is because the deductibility of the insurance premiums effectively results in no tax having been paid on this component of the death benefit. As s 307-290 applies where a deduction for the insurance premiums “has been, or is to be, claimed”, a deduction need not be claimed for every year that is linked to the member’s superannuation interest, nor in relation to the particular year in which the death benefit is payable. Rather, the ordinary meaning of the words will be satisfied if a deduction has been, or is to be, claimed in relation to the benefit in any year of income (Interpretative DecisionID 2010/76). The element taxed in the fund of the death benefit is calculated in two steps. Step 1. Work out the amount under the following formula in s 307-290(3): Amount of superannuation lump sum

×

Service days  Service days + Days to retirement 

where: (a) days to retirement is the number of days from the date of death to the deceased’s last retirement day; and (b) service days is the number of days in the service period (s 307-400) for the lump sum. Step 2. Reduce that amount (but not below zero) by the tax free component of the superannuation lump sum (s 307-290(2)). The element untaxed in the fund is the amount of the taxable component that is not the element taxed in the fund (s 307-290(4)). Example A complying superannuation fund claims a tax deduction for premiums for death insurance for its members. When a member without dependants dies, the fund pays a $200,000 death benefit to the brother of the deceased (a non-dependant). At the date of death, the deceased had 2,300 service days and there were 11,000 days from the date of his death to his last retirement day. There is no tax free component of the benefit. The element taxed in the fund of the $200,000 benefit is:

$200,000

×

2,300 days  2,300 days + 11,000 days 

=

$34,586

The element untaxed in the fund is: $200,000 − $34,586 = $165,414. Tax payable (including Medicare levy) on the death benefit paid to the non-dependant would be as follows (¶8-330):

$34,586 × 17%

=

$5,880

$165,414 × 32%

=

 $52,932

Total tax payable

=

$58,812

[FITR ¶296-000; SLP ¶38-090]

Superannuation Member Benefits ¶8-200 Tax treatment of superannuation benefits A superannuation benefit (¶8-130) is a “superannuation member benefit” if it is paid to a person because they are a fund member. Superannuation member benefits are set out in column 2 of the table in s 307-5. The tax treatment of superannuation member benefits is set out in ITAA97 Div 301 and varies according to: • the age of the recipient • whether the benefit is a superannuation lump sum or a superannuation income stream • whether the benefit contains a tax free component, and • whether the taxable component of the benefit includes an element taxed in the fund or an element untaxed in the fund. Division 301 applies to the following benefits and payments (s 301-5): • superannuation member benefits paid from a “complying superannuation plan”, which is defined in s 995-1(1) as: (a) a complying superannuation fund (b) a public sector superannuation scheme that is a regulated superannuation fund or an exempt public sector superannuation scheme within the meaning of SISA s 10 (c) a complying approved deposit fund, or (d) an RSA • superannuation guarantee payments under SGAA s 65A, 66 or 66A to a person who retires because of incapacity, invalidity or a terminal medical condition (¶12-500) • small superannuation account payments to a person under the Small Superannuation Accounts Act 1995 (¶12-620) • payments of unclaimed money under the Superannuation (Unclaimed Money and Lost Members) Act 1999 otherwise than because of another person’s death (¶3-380) • superannuation co-contribution benefit payments (¶6-700) to a person under s 15(1)(c) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003, and • superannuation annuity payments, defined in s 307-5 as a payment to an annuitant from a superannuation annuity or arising from the commutation of a superannuation annuity. Superannuation benefits paid from superannuation plans that are not complying superannuation plans, eg from a non-complying superannuation fund or a foreign superannuation fund, are discussed at ¶8-350.

Receipt of a benefit Generally, to be assessable on a superannuation benefit, a person must “receive” the benefit. The ordinary concept of receipt of a benefit is extended by the constructive receipt rule in s 307-15 which states that, in determining whether a person receives a benefit, a payment is treated as having been received by the person if it is made: • for the person’s benefit, or • to another person or to an entity at the person’s direction or request, eg if the person directs that a payment be rolled over from their original superannuation fund to another superannuation fund (¶8600). An unclaimed money payment that a person is taken to receive under s 307-15 because it is paid to the Commissioner or to a state or territory authority in accordance with the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶3-380) is non-assessable non-exempt income (s 306-20). If the payment is a departing Australia superannuation payment (¶8-400), the person will be liable to withholding tax on the payment. Payments under a release authority From 1 July 2018, the process for the release of amounts from superannuation using a release authority given by the Commissioner is set out in TAA Sch 1 Div 131. The release authority rules relate to amounts of excess concessional and non-concessional contributions, amounts to pay assessed Division 293 tax and amounts released under the FHSS scheme (¶6-640), If an individual makes a request for the release of an amount and the Commissioner gives a release authority to a superannuation fund, the payment by the fund of the released amount to the Commissioner entitles the individual to a credit equal to the released amount. As the payment is applied for the individual’s benefit, it is treated by the constructive receipt rule in s 307-15 as being made to the individual. The released amount is generally non-assessable non-exempt income (s 303-15). Despite the payment being a superannuation benefit, the proportioning rule does not apply (¶8-160) and the amount is not assessed under Div 301. Before 1 July 2018, there were different types of release authorities according to what was being released from the fund. In all cases, the amount paid under the release authority was a superannuation benefit and was non-assessable non-exempt income as long as it did not exceed the amount authorized to be released. Application of CGT No CGT is imposed on a payment from a superannuation fund, ADF or RSA where the payment results from the disposal of: (a) a right to an allowance, annuity or capital amount, or (b) a right to an asset (ITAA97 s 118-305; 118-310). Example An employee retires from employment and receives a lump sum payment from her superannuation fund. Although the receipt of the payment terminates her right to receive the payment and might ordinarily have CGT consequences (ITAA97 s 104-25), there are no CGT consequences for the employee.

This exemption is not available if the disposal of rights is by a non-member who had previously paid to acquire the rights. A non-member who purchases the rights to a superannuation payment and later disposes of them for a profit may be liable to CGT. A legal personal representative of a deceased member would not be liable to CGT on disposal of rights to a superannuation payment because the legal personal representative would not be said to have paid to acquire the rights.

There are no CGT consequences if a taxpayer purchases a right to receive an allocated pension from a superannuation fund and, on subsequent withdrawal from the fund, receives an amount less than what was originally invested. A capital loss is not available for offset against capital gains as s 118-305 specifically provides that a capital gain or capital loss is disregarded if it is made from a CGT event happening in relation to a right to an allowance, annuity or capital amount payable out of a superannuation fund. Special CGT rules apply if a superannuation interest is split on marriage breakdown (¶14-960, ¶14-980). Interaction with bankruptcy laws The potential application of the Bankruptcy Act 1966 may need to be considered when a superannuation benefit is payable. This may cause the superannuation interests of a superannuation fund member who becomes bankrupt to be distributed to the bankrupt’s creditors rather than being received as a superannuation benefit by the member or, in the case of the member’s death, by a beneficiary of the member’s estate. The interaction of bankruptcy and superannuation is discussed at ¶15-300. [FITR ¶290-000; SLP ¶38-150]

¶8-210 Taxation of member benefits — element taxed in the fund A superannuation benefit may comprise two components: the tax free component and the taxable component (¶8-155). The taxable component may contain an element taxed in the fund and an element untaxed in the fund (¶8-180). The rules that apply to superannuation benefits paid from an element taxed in the fund depend on the age of the recipient, whether the benefit is paid as a lump sum or as an income stream, and the amount of the benefit. The following table summarises the taxation of a superannuation member benefit paid in 2019/20 from an element taxed in the fund. In all cases, the tax free component is non-assessable non-exempt income.

2019/20 tax on member benefit — element taxed in the fund Age

Lump sum

Income stream

Age 60 and over

Tax-free (non-assessable nonexempt income)

Generally tax-free (non-assessable non-exempt income)

Preservation age to age 59

0% up to low rate cap amount of Marginal tax rates and tax offset of $210,000 15% of the taxable component Amount above $210,000 is subject to tax up to maximum rate of 15%

Below preservation age

Subject to tax up to maximum rate of 20%

Marginal tax rates and no tax offset Disability superannuation income stream receives a 15% tax offset

Note 1: Preservation age depends on date of birth (see table below). Note 2: Medicare levy, calculated as 2% of taxable income, is added where appropriate. Note 3: Tax liability could be reduced by offsets such as the low income superannuation tax offset (¶6770) or the seniors and pensioners tax offset, and by credits such as franking credit refunds. Note 4: The low rate cap amount was $205,000 for 2018/19. Note 5: In accordance with ITAA97 s 960-285, the low rate cap amount is indexed in line with AWOTE in increments of $5,000 (rounded downwards). Preservation age

A person’s preservation age depends on the birth date of the person as set out in the table below (SISR reg 6.01(2)). Date of birth

Preservation age

Before 1 July 1960

55

1 July 1960 to 30 June 1961

56

1 July 1961 to 30 June 1962

57

1 July 1962 to 30 June 1963

58

1 July 1963 to 30 June 1964

59

After 30 June 1964

60

1. Member aged 60 or over As a general rule, if the member is 60 years or over when they receive a superannuation member benefit from an element taxed in the fund, all of the benefit is tax-free (s 301-10). This applies to both superannuation lump sums and superannuation income stream benefits. Example Vahid is aged 61 when he receives a lump sum superannuation benefit of $430,000 from his superannuation fund on 1 September 2019. The benefit is sourced from contributions and earnings on contributions and is paid from an element taxed in the fund. No tax is payable on the benefit.

Tax is, however, payable if the benefit includes an element untaxed in the fund (¶8-240). As an exception to the general rule, from 1 July 2017 excess defined benefit income from “capped defined benefit income streams” may be included in assessable income rather than being tax-free (see ¶8-220). 2. Member aged over preservation age and under 60 years No tax is payable on the tax free component of a superannuation benefit (¶8-170), whether a lump sum or an income stream, paid to a member who has reached their preservation age and who is below age 60 (s 301-15). The taxation of the taxable component (¶8-180) depends on whether the benefit is paid as a lump sum or as an income stream. Superannuation lump sum benefit The taxable component of a superannuation lump sum benefit is assessable income and is taxed as follows: • up to the low rate cap amount ($210,000 for 2019/20: s 307-345), an offset ensures that the tax rate on the element taxed in the fund does not exceed 0%, and • any amount in excess of the low rate cap amount is subject to tax up to a maximum rate of 15% (plus Medicare levy if appropriate) (s 301-20). Example In 2019/20, Alexis, aged 56, receives two superannuation lump sum benefits from two different superannuation plans: • the first is made up of a $40,000 tax free component and a $80,000 taxable component paid from an element taxed in the fund • the second is made up of a $250,000 tax free component and a $330,000 taxable component paid from an element taxed in the fund. Alexis pays tax as follows on the two superannuation benefits received in the year: • no tax is payable on the $290,000 tax free component

• no tax is payable on the amount of the element taxed in the fund up to the $210,000 low rate cap amount, and • tax is payable, up to a maximum of 15% plus 2% Medicare levy, on $200,000, which is the remaining amount of the element taxed in the fund.

The low rate cap amount is a lifetime limit and is reduced by any amount previously applied to the low rate threshold. If a member receives one or more superannuation member benefits that are superannuation lump sums in an income year, the low rate cap amount is reduced for the next income year by the total of the amounts that: (i) are included in the member’s assessable income for the first year in respect of those lump sums; and (ii) are counted towards the member’s entitlement to a tax offset under s 301-20 or 301-105(4) for the first year (s 307-345(2)). At the start of each income year, the low rate cap amount is increased by the amount by which the index amount for that income year exceeds the index amount for the previous income year (s 307-345(3)). Subdivision 960-M shows how to index amounts. Indexation is in line with AWOTE, in increments of $5,000 (rounded downwards). Example Smilla, who is aged 58, received a superannuation lump sum benefit in 2018/19 with a taxable component of $90,000. The low rate cap for 2018/19 was $205,000 and no tax was payable on the $90,000 taxable component received by Smilla because it was below the cap for the year. In 2019/20, Smilla receives a superannuation lump sum benefit with a taxable component of $135,000. Smilla’s low rate cap for 2019/20 is $120,000, calculated as $210,000 (the low rate cap amount for 2019/20) minus the $90,000 applied to the cap in the previous year. The $135,000 taxable component received in 2019/20 is taxed as follows: • no tax is payable on the amount up to Smilla’s $120,000 low rate cap, and • tax is payable up to a maximum of 15% plus 2% Medicare levy on the $15,000 excess over her low rate cap.

Superannuation income stream benefit The taxable component of a superannuation income stream benefit is assessable income, but the member is entitled to a tax offset equal to 15% of the taxable component (s 301-25). Example In 2019/20, Roland, who is aged 58, receives a superannuation income stream benefit of $64,000. The tax free component of the benefit is $14,000 and the taxable component is $50,000. Roland’s tax liability is calculated as follows. 1. The $50,000 taxable component is included in Roland’s assessable income and tax is calculated at ordinary rates. Assuming Roland has no other assessable income for 2019/20, the tax on $50,000 (ignoring Medicare levy) is $7,797. 2. Roland is entitled to a tax offset equal to 15% of the $50,000 taxable component (ie an offset of $7,500). The amount of tax payable by Roland ($7,797) is reduced by $7,500 (ignoring any other tax offsets to which he is entitled). 3. Roland’s tax liability on the $50,000 benefit (before Medicare levy is added) is $297. 4. When Medicare levy of $1,000 (2% of Roland’s $50,000 taxable income) is added, Roland has a tax liability of $1,297.

The tax treatment differs if the taxable component contains an element untaxed in the fund (¶8-240). 3. Member below preservation age No tax is payable on the tax free component of a benefit, whether a lump sum or an income stream, paid to a member under preservation age (s 301-30). The taxation of the taxable component depends on whether the benefit is paid as a lump sum or as an income stream. Superannuation lump sum benefit The taxable component of a lump sum is assessable income, with the member entitled to a tax offset so

that the tax payable on the element taxed in the fund of the lump sum is not greater than 20% (s 301-35). Example On 1 December 2019, Jon, who is aged 52, receives a superannuation lump sum paid from an element taxed in the fund. The taxable component of the lump sum is $110,000 and the tax free component is $45,000. The superannuation lump sum is taxed as follows: • the $45,000 tax free component is non-assessable non-exempt income • the $110,000 taxable component is included in Jon’s assessable income and taxed at ordinary rates, but a tax offset ensures that the rate of tax does not exceed 20%.

Superannuation income stream benefit The taxable component of a superannuation income stream benefit is taxed at marginal tax rates with no tax offset. If the benefit is also a disability superannuation benefit (¶8-170), the person may be entitled to an offset equal to 15% of the taxable component (s 301-40). Calculation of tax payable on the taxable component The method of calculating the tax payable on the taxable component of an eligible termination payment (under the pre-1 July 2007 law) where the taxpayer also had prior year losses and tax deductions was considered in Boyn 2012 ATC ¶10-276 (¶8-820) and the reasoning applies similarly to the taxable component of a superannuation benefit. The taxpayer argued that the prior year losses and deductions should be applied first against the income that was taxed at the higher rate (ie that did not benefit from the tax offset), but the Commissioner argued that the losses should be applied first against the income that benefited from the tax offset. There was a significant difference in the tax liability depending on which method applied. The AAT agreed with the taxpayer, on the basis that, although the offset provisions in Income Tax Rates Act 1986 (ITRA) Sch 7 were “almost largely incomprehensible”, they should be applied to produce the most favourable allocations of deductions. The Federal Court upheld the Commissioner’s appeal and ruled that the losses and deductions should first be applied against the income that could benefit from the tax offset and only against the income taxed at the higher rate to the extent that they had not already been absorbed (Boyn 2013 ATC ¶20-378). Lump sum that is less than $200 A lump sum superannuation member benefit that is less than $200 is tax free if the value of the superannuation interest from which the benefit is paid is nil just after the benefit is paid (s 301-225(1)). This means that all of the member’s superannuation interest must be taken as a benefit and no amount retained in the fund. A lump sum superannuation member benefit of less than $200 is also tax free if it is paid to the person under s 24G(2) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 and relates to an amount paid to the Commissioner by a fund out of a lost member account (¶3-380) (s 301-225(2)). The tax-free treatment given by s 301-225 does not extend to a departing Australia superannuation benefit that is less than $200. Such a benefit is subject to withholding tax (¶8-420).

¶8-220 Superannuation income stream benefit in excess of defined benefit income cap From 1 July 2017, excess defined benefit income from “capped defined benefit income streams” may be included in the assessable income of a member who is 60 years or over. This is a departure from the general rule that, for a member who is aged at least 60 years, a superannuation member benefit is tax free if it is paid from an element taxed in the fund (¶8-210). Effect of exceeding the defined benefit income cap From 1 July 2017, an individual is liable to tax on a superannuation income stream benefit if two conditions apply.

(1) Individual receives defined benefit income. In a financial year, the individual receives one or more taxed-source superannuation income stream benefits that are “defined benefit income” and to which s 301-10 or s 302-65 applies (s 303-2(1)(a)). Section 301-10 applies where a superannuation member benefit (¶8-210) is paid to an individual who is aged 60 years or over, and s 302-65 applies where a superannuation death benefit (¶8-320) is paid to a death benefits dependant and either or both the recipient of the benefit is aged 60 years or over or the deceased died aged 60 or over. (2) Individual’s defined benefit income cap is exceeded. The sum of those benefits, other than any elements untaxed in the fund of those benefits, exceeds the individual’s “defined benefit income cap” (s 303-2(1)(b)), where: (a) defined benefit income is a superannuation income stream benefit that is paid from a “capped defined benefit income stream” (s 303-2(2)) (b) capped defined benefit income streams (¶6-480) are certain non-commutable superannuation income streams, defined in s 294-130 to mean: (i) certain lifetime pensions regardless of when they started; (ii) certain lifetime annuities, life expectancy pensions and annuities, and certain market linked annuities and pensions existing on 30 June 2017; and (iii) an income stream prescribed in the regulations, and (c) defined benefit income cap means generally the general transfer balance cap (¶6-440) for the financial year ($1.6m for 2019/20, 2018/19 and 2017/18) divided by 16 (ITAA97 s 303-4(1)). The defined benefit income cap is generally $100,000 for 2019/20, 2018/19 and 2017/18 and will be indexed in line with the transfer balance cap in later years. An individual has a reduced defined benefit income cap if they: (i) first become entitled to concessional tax treatment for defined benefit income part-way through a financial year, eg because they turn 60 during the year or commence an income stream part-way through the year, or (ii) are also entitled to other defined benefit income that is not subject to concessional tax treatment, eg because they receive death benefits (s 303-4(2) and (3)). The calculation of the reduced defined benefit income cap takes account of the proportion of the financial year to which the individual is entitled to concessional tax treatment because of being aged at least 60 when they receive a member benefit from a taxed source (¶8-210). Example Zach commences to receive a capped defined benefit income stream on 1 July 2019 when he is aged 59. He turns 60 on 1 January 2020. The income stream paid to Zach during the period 1 July 2019 to 31 December 2019 when he is aged 59 is taxed according to the general rules (¶8-210), but the tax treatment changes from the day he turns 60. Zach has a reduced defined benefit income cap for 2019/20 because he is not entitled to concessional tax treatment for the full financial year but becomes entitled part-way through the year when he turns 60 on 1 January 2020. Zach’s reduced defined benefit income cap is worked out as (s 303-4(2)):

$100,000 ×

181 (ie one day plus the number of days that Zach is over 60 years) 365 (ie the total number of days in the year)

= $100,000 = × 181/365 $49,589

Consequences for taxed source benefits Generally, superannuation income stream benefits paid to individuals aged 60 or over from a taxed source are non-assessable non-exempt income (¶8-210). Taxed source death benefits paid to an individual aged 60 or over, or where the deceased was 60 or over, are also generally non-assessable non-exempt income (¶8-320), as is the tax free component of a defined benefit income payment.

The effect of s 303-2, which applies from 1 July 2017, is that, to the extent the sum of an individual’s taxed source and tax-free defined benefit income from a capped defined benefit income stream for a financial year exceeds $100,000 (or exceeds the individual’s reduced defined benefit income cap), 50% of the excess is included in their assessable income and taxed at marginal rates. Example In the 2019/20 financial year, Ollie, aged 61, receives a capped defined benefit income stream of $130,000 from his funded defined benefit scheme, and he has no other income. His defined benefit income cap is $100,000. Ollie’s defined benefit income exceeds the income cap by $30,000, and $15,000 (50% of the $30,000 excess) is included in his assessable income and taxed at marginal rates.

Defined benefit superannuation income streams that are not subject to commutation restrictions and are not capped defined benefit income streams, eg account-based pensions, are subject to the transfer balance cap rules (¶6-420) from 1 July 2017. This means the amount of an individual’s transfer balance that exceeds the $1.6m transfer balance cap must be commuted and moved to an accumulation account or paid out. The income tax consequences for an individual who receives excess defined benefit income from an untaxed source are discussed at ¶8-250. Law Companion Ruling LCR 2016/10 provides detailed examples on the tax treatment of capped defined benefit income streams. [FITR ¶290-000; SLP ¶38-160]

¶8-240 Taxation of member benefits — element untaxed in the fund The taxation of a benefit that contains an element untaxed in the fund (¶8-180) depends on the age of the recipient, whether the benefit is paid as a lump sum or as an income stream, and the amount of the benefit. The following table summarises the taxation of a superannuation member benefit paid in 2019/20 from an element untaxed in the fund. In all cases, the tax free component (¶8-170) is non-assessable non-exempt income.

2019/20 tax on member benefit — element untaxed in the fund Age Age 60 and over

Lump sum

Income stream

Subject to tax up to a maximum of Generally, marginal tax rates and 15% on amount up to untaxed plan offset equal to 10% of element cap amount of $1.515m. untaxed in the fund Top marginal rate applies to amount above $1.515m.

Preservation age to age 59

Subject to tax up to a maximum of 15% on amount up to low rate cap amount of $210,000.

Marginal tax rates and no tax offset

Subject to tax up to a maximum of 30% on amount above $210,000 up to untaxed plan cap amount of $1.515m. Top marginal rate applies to amount above $1.515m. Below preservation age

Subject to tax up to a maximum of 30% up to untaxed plan cap

Marginal tax rates and no tax offset

amount of $1.515m. Top marginal rate applies to amount above $1.515m. Note 1: Preservation age depends on the date of birth (¶3-280). Note 2: Medicare levy, calculated as 2% of taxable income, is added where appropriate. Note 3: Tax liability could be reduced by offsets such as the low income superannuation tax offset (¶6770) or the seniors and pensioners tax offset, and by credits such as franking credit refunds. Note 4: The low rate cap amount was $205,000 for 2018/19. Note 5: The untaxed plan cap amount was $1.480m for 2018/19. Note 6: In accordance with ITAA97 s 960-285, the low rate cap amount and the untaxed plan cap amount are indexed in line with AWOTE in increments of $5,000 (rounded downwards). 1. Member aged 60 or above Where a person aged 60 or above receives a superannuation benefit with a taxable component that contains an element untaxed in the fund, the tax treatment depends on whether the benefit is a lump sum or an income stream. Superannuation lump sum benefit If superannuation benefit is paid as a lump sum, the taxable component is taxed as follows (s 301-95): • the element untaxed in the fund is assessable income • a tax offset ensures that the tax the person is liable to pay on the element untaxed in the fund is not greater than 15% (plus Medicare levy) up to the untaxed plan cap amount ($1.515m for 2019/20: s 307-350) • the part of the element untaxed in the fund that exceeds the untaxed plan cap amount is taxed at the top marginal rate of 45% plus Medicare levy. Example Jenny is aged 60 when she receives a superannuation lump sum benefit of $500,000 in September 2019. The lump sum includes an element untaxed in the fund of $330,000, an element taxed in the fund of $70,000 and a tax free component of $100,000. The superannuation lump sum benefit is taxed as follows: • the $70,000 element taxed in the fund is tax-free (¶8-210) • the $100,000 tax free component is tax-free, and • the $330,000 element untaxed in the fund is taxed at her marginal tax rates up to a maximum of 15% plus Medicare levy.

Superannuation income stream benefit As a general rule, where a person aged 60 or above receives a superannuation income stream benefit: • the element untaxed in the fund is assessable income and subject to marginal tax rates, and • the person is also entitled to a tax offset equal to 10% of the element untaxed in the fund (s 301-100). Example Lev receives a superannuation income stream benefit of $56,000 which commenced before 1 July 2007. The benefit has a deductible (tax-free) amount of $6,000 for contributions made from Lev’s post-tax income (¶8-160) and the remainder is a taxable component from an element untaxed in the fund. Lev continues to receive the deductible amount of $6,000 as the tax free component. He is assessed on the remaining $50,000 at ordinary rates, but receives a tax offset of 10% of $50,000. Lev’s tax liability is calculated as follows.

1. The $50,000 taxable component is included in Lev’s assessable income and tax is calculated at ordinary rates. Assuming that Lev has no other assessable income for 2019/20, the tax on $50,000 is $7,797. 2. Lev is entitled to a tax offset of 10% of the $50,000 element untaxed in the fund (ie $5,000). The amount of tax payable by Lev ($7,797) is reduced by $5,000. 3. Lev’s tax liability on the $50,000 benefit is $2,797 (ignoring any other tax offsets to which he may be entitled). 4. Medicare levy of $1,000 ($50,000 x 2%) has to be added.

From 1 July 2017, the tax offset for defined benefit superannuation income stream benefits may be reduced (¶8-250). 2. Member aged over preservation age and below 60 Superannuation lump sum Where a person who is below age 60 and has reached their preservation age (¶3-280) receives a superannuation lump sum benefit, the element untaxed in the fund is assessable income and is subject to the following rates of tax (s 301-105): • up to a maximum of 15% for amounts up to the low rate cap amount ($210,000 for 2019/20: s 307345) • up to a maximum of 30% for amounts in excess of the low rate cap amount and up to the untaxed plan cap amount ($1.515m for 2019/20: s 307-350), and • the top marginal rate for amounts above the untaxed plan cap amount. Medicare levy (2% of taxable income) may be added. The low rate cap amount is reduced if the person is also entitled to a tax offset to reduce their tax liability to 0% on an element taxed in the fund (¶8-210) (s 301-105(6)). Superannuation income stream benefit Where a person who has reached their preservation age and is below age 60 commences receiving a superannuation income stream benefit, the element untaxed in the fund is assessable income and marginal tax rates apply (s 301-110). There is no tax offset to reduce the tax liability. 3. Member aged under preservation age Superannuation lump sum A superannuation lump sum benefit paid to a person who is below their preservation age (¶3-280) is subject to tax at the following rates (s 301-115): • the element untaxed in the fund forms part of the person’s assessable income • a tax offset on the element untaxed in the fund up to the untaxed plan cap amount ($1.515m in 2019/20: s 307-350) ensures that the maximum tax rate that can apply to this amount is 30%, and • the top marginal rate applies to any amount above $1.515m. Medicare levy (2% of taxable income) may be added. A separate untaxed plan cap amount applies for each superannuation plan that pays a member a lump sum benefit that includes an element untaxed in the fund. Superannuation income stream benefit If the member receives a superannuation income stream benefit that includes an element untaxed in the fund, this is taxed at marginal tax rates, with no tax offset (s 301-120). Untaxed plan cap amount may be increased or reduced At the start of each income year, the untaxed plan cap amount for a superannuation plan is increased by the amount by which the index amount for that income year exceeds the index amount for the previous

income year (s 307-350(3)). Subdivision 960-M shows how to index amounts. Indexation applies in increments of $5,000 (rounded downwards). If, at a particular time, a person receives one or more lump sum superannuation member benefits that include an element untaxed in the fund, the person’s untaxed plan cap amount is reduced just after that time: (i) by the total of the elements untaxed in the fund of the relevant superannuation member benefits, if the total of the elements untaxed in the fund falls short of the member’s untaxed plan cap amount at that time, or (ii) to nil in other cases (s 307-350(1A), (2)).

¶8-250 Tax offset on excess defined benefit income may be limited As a general rule from 1 July 2017, for a member who is aged at least 60 years, a superannuation income stream benefit is included in assessable income if it is paid from an element untaxed in the fund but a 10% tax offset reduces the tax liability (s 301-100) (¶8-240). As a departure from the general rule, the tax offset may be limited where the individual receives excess defined benefit income from “capped defined benefit income streams”. The 10% tax offset for superannuation income stream benefits received by an individual aged 60 or over from an element untaxed in the fund is limited if two conditions apply. (1) Individual receives defined benefit income. In a financial year, the individual receives one or more superannuation income stream benefits that are “defined benefit income” and in relation to which the individual may be entitled to tax offsets under s 301-100 or s 302-85. This is where the recipient of a superannuation member benefit with an untaxed element is aged 60 years or over or, in the case of a superannuation death benefit, either the recipient of the benefit or the deceased is aged 60 years or over. (2) Individual’s defined benefit income cap is exceeded. The sum of the superannuation income stream benefits received by the individual during the financial year that are defined benefit income, and to which s 301-10, 301-100, 302-65 or s 302-85 applies, exceeds the individual’s “defined benefit income cap” (ITAA97 s 303-3(1)), where: (a) defined benefit income is a superannuation income stream benefit that is paid from a “capped defined benefit income stream” (s 303-2(2)) (b) capped defined benefit income streams (¶6-480) are certain non-commutable superannuation income streams. defined in s 294-130 to mean: (i) certain lifetime pensions regardless of when they started; (ii) certain lifetime annuities, life expectancy pensions and annuities, and a certain market linked annuities and pensions existing on 30 June 2017; and (iii) an income stream prescribed in the regulations, and (c) defined benefit income cap means, in most cases, the general transfer balance cap (¶6-440) for the financial year ($1.6m for 2019/20) divided by 16 (ITAA97 s 303-4(1)). The defined benefit income cap is generally $100,000 for 2019/20. An individual has a reduced defined benefit income cap if they: (i) first become entitled to concessional tax treatment for defined benefit income part-way through a financial year, eg because they turn 60 during the year or commence an income stream part-way through the year, or (ii) are also entitled to other defined benefit income that is not subject to concessional tax treatment, eg because they receive death benefits (s 303-4(2) and (3)). Consequences for untaxed source benefits Generally, superannuation income stream benefits paid to individuals from an untaxed source are assessable income subject to a 10% tax offset if the recipient of the benefit is aged 60 or over or, in the

case of a death benefit, either the recipient or the deceased was aged 60 or over (s 301-100 and 302-85). The effect of s 303-3 is that excess untaxed source defined benefit income is not entitled to the tax offset and is assessable at the individual’s full marginal rate. The excess untaxed source defined benefit income is worked out by applying the individual’s untaxed defined benefit income stream payments to any amount remaining in their defined benefit income cap after having applied taxed source and tax free component defined benefit income. Example In 2019/20, Olya, aged 63, receives a non-commutable pension of $120,000, all of it coming from her unfunded defined benefit scheme. The $120,000 pension is included in Olya’s assessable income (s 301-100) and she is entitled to a 10% tax offset for $100,000 of the pension. She is not eligible for an offset for the $20,000 that exceeds her defined benefit income cap.

Example In 2019/20, Hugo, aged 67, receives a $150,000 defined benefit income stream benefit, made up of $80,000 from an untaxed source and $50,000 from a taxed source, and $20,000 is a tax-free amount. The combined taxed source and tax-free amount of $70,000 is counted towards Hugo’s $100,000 defined benefit income cap, as well as $30,000 of Hugo’s untaxed source income. The remaining $50,000 of untaxed source income is denied a tax offset. Hugo’s tax offset under s 301-100 is limited to $3,000 (10% of the $30,000 counted towards the defined benefit income cap).

Defined benefit superannuation income streams that are not subject to commutation restrictions and are not capped defined benefit income streams, eg account-based pensions, are subject to the transfer balance cap rules (¶6-420) from 1 July 2017. This means the amount of an individual’s transfer balance that exceeds the $1.6m transfer balance cap must be commuted and moved to an accumulation account or paid out. The income tax consequences for an individual who receives excess defined benefit income from a taxed source are discussed at ¶8-220. Law Companion Ruling LCR 2016/10 provides detailed examples on the tax treatment of capped defined benefit income streams. [FITR ¶290-000; SLP ¶38-170]

¶8-260 Lump sum payments to members with a terminal medical condition A lump sum paid from a complying superannuation fund to a member who has a terminal medical condition is tax-free because it is non-assessable non-exempt income (s 303-10). For the payment to be tax-free, the person must have a terminal medical condition at the time the payment is received or within 90 days after the payment is received. Similar treatment applies if the lump sum is a superannuation guarantee payment, a small superannuation account payment, an unclaimed money payment, a government co-contribution payment or a superannuation annuity payment (¶8-130). For these purposes, a person has a terminal medical condition at a particular time if: • two medical practitioners have certified that the person suffers from an illness or injury that is likely to result in the death of the person within 24 months (12 months before 1 July 2015), and • at least one of the medical practitioners is a specialist practising in an area related to the illness or injury (SISR reg 6.01A, definition of “terminal medical condition”; ITAR reg 303-10.01). A superannuation lump sum payment to a person with a terminal medical condition must be “cashed” (that is, paid in cash or in specie) and cannot be rolled over to a superannuation fund (s 306-10; ITAR reg 306-10.01). [FITR ¶292-000]

Superannuation Death Benefits ¶8-300 Payment of superannuation death benefits Taxation of superannuation death benefits Division 302 sets out the taxation arrangements that apply to the payment of superannuation death benefits. The tax treatment depends on: • whether the recipient is a dependant or non-dependant of the deceased, and • whether the amount is paid as a lump sum or as an income stream. The meaning of “death benefits dependant” is discussed at ¶8-310. The taxation of superannuation death benefits is discussed in the following paragraphs: • if paid to a death benefits dependant — at ¶8-320 • if paid to a non-dependant — at ¶8-330, and • if paid to the trustee of a deceased estate — at ¶8-340. Superannuation death benefits A superannuation benefit is a “superannuation death benefit” if it is paid to a person after another person’s death, eg a payment from a superannuation fund because the deceased person was a fund member. Superannuation death benefits are set out in column 3 of the table in s 307-5(1) as follows: • a payment to a person from a superannuation fund, RSA or ADF, after another person’s death, because the other person was a fund member, holder of an RSA or depositor • a small superannuation account payment (¶12-620) to the legal personal representative of a deceased person • an unclaimed money payment (¶3-380) to a person because of another person’s death • a superannuation co-contribution benefit payment (¶6-760) to the legal personal representative of a deceased person • a payment under the Superannuation Guarantee (Administration) Act 1992 (¶12-500) to the legal personal representative of a deceased person, and • a payment to a person from a superannuation annuity or arising from the commutation of a superannuation annuity, after the death of the annuitant. A superannuation annuity is defined in ITAR reg 995-1.01 as basically a superannuation income stream purchased from a life insurance company or from a similar provider. Payment as a lump sum or an income stream Generally, a member’s benefits must be cashed as soon as practicable after the member dies (SISR reg 6.21(1)). Unless the entitled recipient is a dependant of the member, the benefits must be cashed in a single lump sum, or as an interim lump sum and a final lump sum (reg 6.21(2)(a)). The benefits may, instead of being cashed, be rolled over as soon as practicable for immediate cashing (reg 6.21(3)). Journal entries are insufficient to satisfy the requirement that death benefits are paid or cashed. According to the ATO, if the benefits of a deceased member of an SMSF are to be paid as a lump sum to their spouse, the benefits will not be considered “cashed” for the purposes of reg 6.21 if they are simply debited from the deceased member’s account and credited to the account of the spouse by way of journal entry in the fund’s accounts. Such a debiting and crediting does not constitute a “payment”, and therefore

a “cashing”. For the benefits to be considered “cashed” as a lump sum to the spouse, the benefits must actually be “paid” by being “cashed” to the spouse, as required by reg 6.17 (Interpretative DecisionID 2015/23). The transfer of publicly listed shares and money by journal entry from a deceased member’s account in an SMSF to the account of another member who is a dependant of the deceased member would not be payment of a death benefit for the purposes of s 307-5(1). If the entitled recipient is a dependant of the member (¶8-310), the benefits may be received as an income stream, ie cashed as one or more pensions or by the purchase of one or more annuities (reg 6.21(2)(b)). If a superannuation income stream provider is not allowed to pay a deceased’s superannuation interest as a death benefit income stream, the amount must be cashed out of the superannuation system as a death benefit lump sum as soon as practicable. A death benefit lump sum may be rolled over from 1 July 2017 (¶8-600) if the beneficiary is a dependant eligible to receive a death benefit income stream. From 1 July 2017, reg 6.21(2)(b), which allows a death benefit to be paid to a dependant of the deceased as an income stream benefit, requires the superannuation income stream that supports the payment of a death benefit to be in the “retirement phase” (¶6-420). In most cases, a superannuation income stream is in the retirement phase when a superannuation income stream benefit is payable from it. This aligns the death benefit provisions with the transfer balance cap rules that apply from 1 July 2017 and ensures that any death benefit income stream paid to an individual is within their transfer balance cap ($1.6m for 2019/20: ¶6-440). If a death benefit income stream exceeds the beneficiary’s transfer balance cap, the superannuation income stream provider would be required to commute the excess amount and pay it as a death benefit lump sum. A death benefit income stream would cease to be in the retirement phase if the superannuation income stream provider is required to commute an amount (¶6-455) but fails to do so. A death benefit may be paid as a pension or annuity to a child of a deceased member, but the benefit must be cashed as a lump sum by the earlier of: (a) the day the pension or annuity is commuted, or the term of the annuity or pension expires (unless the benefit is rolled over to commence a new annuity or pension); and (b) the day the child reaches 25 years. A child who has a disability may be exempted from the requirement to cash the benefit as a lump sum (reg 6.21(2A), (2B)). Commutation of superannuation death benefit income stream Before 1 July 2017, a superannuation benefit arising from the commutation of a superannuation income stream that would be a superannuation death benefit apart from s 307-5(3) was a superannuation member benefit (and not a superannuation death benefit) if: (a) the benefit was paid after the latest of: (i) six months after the death of the deceased person (ii) three months after the grant of probate of the deceased’s will or letters of administration of the deceased’s estate (iii) if the payment was delayed by legal action about entitlement to the benefit, six months after the legal action ceased, and (iv) if the payment was delayed because of reasonable delays in processing the benefit, six months after the processing was completed, and (b) the Commissioner had not made a decision about the benefit under s 307-5(3A) (s 307-5(3)). Section 307-5(3A) allowed the Commissioner to make a decision in writing that a superannuation benefit was not a superannuation member benefit if: (a) the payment of the benefit was delayed because of legal action about entitlement to the benefit and the benefit was paid more than six months after the legal action ceased; or (b) the payment of the benefit was delayed because of reasonable delays in the process of identifying and making initial contact with potential recipients of the benefit and the benefit was paid more than six months after that processing was completed. In making a decision, the Commissioner was required to have regard to whether action was taken to try to pay the benefit earlier, whether there

were any factors beyond the control of the payer or the recipient that prevented earlier payment, and the circumstances of the recipient (s 307-5(3B)). The effect of s 307-5(3) was that a superannuation death benefit could be turned into a superannuation member benefit (¶8-200) for tax purposes. Where the beneficiary of the death benefit was a spouse and the amount was paid to a complying superannuation fund, the commuted amount came within the definition of a roll-over superannuation benefit and was non-assessable non-exempt income for the beneficiary at that time (¶8-600). Subsections 307-5(3), (3A) and (3B) were repealed from 1 July 2017 by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016. They were no longer necessary because the definition of a roll-over superannuation benefit in s 306-10 had been amended to allow a superannuation death benefit lump sum to be rolled over from that date (¶8-600). Death benefit payment for a dependant may be increased If a complying superannuation fund pays a lump sum superannuation death benefit to the trustee of the deceased’s estate or to an individual who was a spouse, former spouse or child of the deceased at the time of death or payment, the fund can increase the lump sum by an amount so that the superannuation death benefit is the amount that the fund could have paid if 15% tax had not been payable on the contributions when they were made to the fund. Before the repeal of s 295-485, the fund was allowed a deduction (an “anti-detriment deduction”) to compensate it for the tax payable on the contributions that were used to fund the increased death benefit payment (¶7-148). Section 295-485 was repealed by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 because not all funds and insurers were willing or able to increase benefits payable because of death and therefore the anti-detriment deduction had been inconsistently claimed by entities that paid lump sum death benefits. The repeal applies: (i) in relation to lump sums that are paid because of the death of a member where that member dies on or after 1 July 2017; and (ii) from 1 July 2019, to all benefits paid after that time, regardless of when the member died. This ensures that delays in the payment of a lump sum in the first two years after the repeal do not result in differences in income tax treatment. Interaction with bankruptcy laws The potential application of the Bankruptcy Act 1966 may need to be considered when a superannuation death benefit is payable, and this is illustrated in two recent cases. In Cunningham (Trustee) v Gapes (Bankrupt) [2017] FCA 787, a superannuation death benefit paid first to the deceased estate and then to the spouse of a bankrupt was found to vest in the bankruptcy trustee and to be divisible among the bankrupt’s creditors. In contrast, in Morris v Morris [2016] FCA 846, superannuation death benefits paid by a superannuation fund trustee directly to the bankrupt spouse of the deceased were protected from the bankrupt’s creditors. The interaction of bankruptcy and superannuation is discussed at ¶15-300. [FITR ¶291-000; SLP ¶38-260]

¶8-310 Death benefits dependant The term “dependant” has two meanings in the context of superannuation death benefits: (i) the meaning for superannuation purposes, which determines who a death benefit can be paid to, and (ii) the meaning for taxation purposes, which determines how the death benefit is taxed. The key difference is that a child of any age can be a dependant of the deceased for superannuation purposes (SISA s 10(1)), but only a child under the age of 18 can be a dependant for taxation purposes, unless the child is financially dependent on, or in an interdependency relationship with, the deceased (ITAA97 s 302-195(1)). A superannuation fund can only directly pay a superannuation death benefit to a person who is a dependant as defined for superannuation purposes. A non-dependant can only receive a superannuation death benefit indirectly through the deceased’s estate.

A superannuation death benefit is not subject to tax if it is paid to a dependant of the deceased, but is taxable if received by a non-dependant (¶8-320). For tax purposes, a “death benefits dependant” of a person who has died is: (a) the deceased person’s “spouse” or “former spouse” (see below) (b) the deceased person’s “child” (see below) aged less than 18 (c) any person with whom the deceased person had an “interdependency relationship” (see below) just before he or she died, or (d) any person who was “financially dependent” (see below) on the deceased just before he or she died (s 302-195(1)). Spouse The “spouse” of a deceased person means not only a person to whom the deceased person was legally married, but extends to: • a person who, although not legally married to the person, lived with that person on a genuine domestic basis in a relationship as a couple, and • a person (whether of the same sex or of a different sex) with whom the deceased person was in a relationship that is registered under a state or territory law prescribed for the purposes of s 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section (SISA s 10(1)). For the purposes of s 10(1), the following laws and relationships are prescribed: (a) a registered domestic relationship as defined in s 3 of the Relationships Act 2008 (Vic) (b) a significant relationship as defined in s 4 of the Relationships Act 2003 (Tas) (c) a civil union as defined in s 6(1) of the Civil Unions Act 2012 (ACT) and a relationship as a couple between two adults who meet the eligibility criteria mentioned in s 6 of the Civil Partnerships Act 2008 (ACT) for entry into a civil partnership (d) a registered relationship as defined in s 4 of the Relationships Register Act 2010 (NSW) (e) a relationship between two adults who satisfy the criteria for entry into a civil partnership as defined in the Civil Partnerships Act 2011 (Qld), and (f) a relationship as a couple between two adults who meet the eligibility criteria in s 5 of the Relationships Register Act 2016 (SA). Former spouse A death benefits dependant of a person who has died includes the deceased person’s former spouse (s 302-195(1)(a)) which means an individual who was the spouse of the deceased sometime in the past. This includes an individual who was a spouse of the deceased in a same-sex relationship even if the relationship ended before 1 July 2008, that is, before the definition of spouse was amended to include same-sex couples (Interpretative DecisionID 2011/83). Child A death benefits dependant of a person who has died includes the deceased person’s child aged less than 18 (s 302-195(1)(b)). A “child” of a deceased person includes: • an adopted child, a stepchild or an ex-nuptial child of the person

• a child of the person’s spouse, and • a child of the person within the meaning of the Family Law Act 1975 (s 995-1(1)). Under the Family Law Act 1975, “child” has not only its ordinary meaning, but also includes: (a) a person born to a woman as a result of an artificial conception procedure while the woman was married to, or the de facto partner of, another person of the same or opposite sex; and (b) a person who is a child of a person because of a state or territory court order giving effect to a surrogacy agreement. The Family Law Act definition is the same as the definition of “child” in relation to a person in SISA s 10(1). The term “stepchild” is not defined in the SIS legislation. According to the Macquarie Dictionary, a stepchild is “a child of a husband or wife by a former union”. At common law, a child ceases to be a stepchild of a step-parent when the relationship between the child’s natural parent and the step-parent ends, that is, on the death of the natural parent or the divorce of the natural parent from the step-parent (Re Burt [1988] 1 Qd R 23). Consistent with this approach, the Commissioner’s view is that the relationship of stepchild to step-parent is severed when the marriage between the natural parent and the step-parent ends (Interpretative DecisionID 2011/77). If a consistent approach were adopted for the meaning of “stepchild” in the context of a death benefits dependant, a child would also at that time cease to be a death benefits dependant of the step-parent, unless the child was in an interdependency relationship with the deceased. Same-sex relationships The definitions of “spouse” and “child” mean that a person in a same-sex relationship and a child of a person in a same-sex relationship are, for superannuation purposes, treated the same from 1 July 2008 as other spouses and children. The definition of a death benefits dependant before 1 July 2008 (ie before it extended to same-sex relationships) meant that a member of a same-sex couple who received their deceased partner’s superannuation death benefit was only taxed concessionally (ie as a death benefits dependant) if the person satisfied the criteria for an interdependency relationship with the deceased member or was financially dependent on the deceased member. The person could not otherwise receive the deceased member’s benefits as a reversionary pension and would be taxed as a non-dependant on lump sum death benefit payments. Interdependency relationship Two persons have an interdependency relationship if all of the following criteria are met: • they have a close personal relationship • they live together • one or each of them provides the other with financial support, and • one or each of them provides the other with domestic support and personal care (s 302-200(1)). Two persons may also have an interdependency relationship if they have a close personal relationship and the only reason they fail to satisfy all the conditions in s 302-200(1) is that either or both of them suffer from a physical, intellectual or psychiatric disability, or they are temporarily living apart because, for example, one is overseas or in gaol (s 302-200(2); ITAR reg 302-200.02). A father and son were found not to have an interdependency relationship in Williams v IS Industry Fund Pty Ltd 18 ESL 09 because they did not “live together”. Although there was a close personal relationship and the son had been staying with his father during two weeks leave from work, he had intended to return to his own home at the end of the leave. This did not happen because he was diagnosed with a serious illness that led to his hospitalisation and death. The Full Federal Court found that the established pattern of the son’s working and living arrangements, and his intention to resume that pattern when the holiday ended, showed that the father and son were not “living together”.

Two persons would not have an interdependency relationship if one of them provides domestic support and personal care to the other under an employment contract or a contract for services, or on behalf of another person or organisation such as a government agency, a body corporate or a benevolent or charitable organisation (reg 302-200.02(5)). Matters to be taken into account Matters that are to be taken into account (where relevant) in determining whether two people have an interdependency relationship are prescribed in ITAR reg 302-200.01. These matters are: • the duration of the relationship • whether or not a sexual relationship exists • the ownership, use and acquisition of property • the degree of mutual commitment to a shared life • the care and support of children • the reputation and public aspects of the relationship • the degree of emotional support • the extent to which the relationship is one of mere convenience • any evidence suggesting that the parties intend the relationship to be permanent, and • the existence of a statutory declaration signed by one of the persons to the effect that the person is (or was) in an interdependency relationship with the other person. If a terminally ill parent was being cared for at the time of death by their child who was aged over 18 years and the parent provided financial support in return for the care, the child and parent would satisfy the interdependency relationship requirements because they had a close relationship, they lived together, the parent provided financial support for the child and the child was providing significant care for the parent (Interpretative DecisionID 2014/22). The parents of an adult son who was a pilot and died in a motorbike accident were found not to be in an interdependency relationship with the son. Although the son lived at home almost all the time up to the time of his death, the AAT did not accept that there was a “close personal relationship” or that the parents and son provided each other with “personal care” (Case 2/2016 2016 ATC ¶1-080). The relationship of a sister and her deceased brother was found not to be an interdependency relationship in Friar v Brown [2015] FCA 135. The sister lived with her husband and the brother sometimes lived in the same house. She argued that she and her brother had “a close personal relationship” throughout their lives because of the bond that developed from growing up in a household with mentally unstable and drug dependent parents. According to the Federal Court, the sister had not adduced sufficient evidence to prove that an interdependency relationship existed. Financially dependent on the deceased The circumstances in which a person is “financially dependent” were explored in Malek 99 ATC 2294, the court there stating that: • the financial contribution by the deceased must be examined to determine whether it is “necessary and relied on” to maintain the person’s normal standard of living, and • the financial contribution does not necessarily have to be more than 50% before it can be said that there is substantial support by the deceased. In Malek, the mother of the deceased demonstrated that the financial support from her son had been necessary and relied on because, although she received a disability pension, he took responsibility for

mortgage payments, maintenance and other living expenses. The deceased in Faull [1999] NSWSC 2294 had, at the time of his death, been living with his mother for 10 years and had been paying her board of $30 a week. Although his mother also had a weekly salary of $760, the court held that she was financially dependent on the deceased because his payments augmented her income. It was irrelevant that she did not need the extra money received. In Noel v Cook & Anor 04 ESL 08, the Federal Court said that dependency is not determined merely by considering the circumstances at the date of death, but that past events and future probabilities should also be taken into account. The deceased had paid his long-term friend board and expenses before being admitted to hospital where he stayed for several months before his death. The court confirmed the friend was a dependant of the deceased. A child over the age of 18 years was said to be a dependant of the deceased parent in Interpretative DecisionID 2002/481. The child lived with the deceased and received Youth Allowance. However, as the Youth Allowance was calculated at the lower “at home” rate, as opposed to the higher “independent” rate, the child could be deemed to be substantially financially dependent. A similar decision on similar facts is contained in Interpretative DecisionID 2014/6. In Interpretative DecisionID 2014/22, a child over 18 years was financially dependent on their terminally ill parent who they were caring for and who provided their only financial support during the period. Payment after deceased “died in the line of duty” Lump sum superannuation death benefits paid to non-dependants are treated the same as death benefits to dependants where the deceased died in the line of duty as a member of the defence force, as a police officer or as a protective service officer within the meaning of the Australian Federal Police Act 1979 (s 302-195(2)). The circumstances in which a person “died in the line of duty” are set out in ITAR reg 302195, and the circumstances in which a person is taken not to have died in the line of duty are set out in ITAR reg 302-195A. [FITR ¶291-000; SLP ¶38-260]

¶8-320 Taxation of death benefits to dependant Superannuation lump sum death benefits A superannuation lump sum death benefit paid to a “dependant” (¶8-310) of the deceased is tax free (s 302-60). This is the case whether the lump sum is paid from an element taxed in the fund or an element untaxed in the fund. For this purpose, “superannuation lump sum death benefit” includes a superannuation income stream payment to a deceased estate from an exempt public sector superannuation scheme (Interpretative DecisionID 2014/2). Although the rules of the scheme may treat the regular payments as a superannuation income stream benefit, the payments are not an “income stream” because, to be a “superannuation income stream” they must be made in compliance with the SIS Act and SIS Regulations (¶8-150), which they are not because the SIS legislation does not govern an exempt public sector superannuation scheme (¶2-170). Each superannuation income stream payment from the scheme is therefore a superannuation lump sum death benefit rather than a superannuation income stream benefit. If payments from an exempt public sector superannuation scheme are made under an order of the Family Court to the trustee of a deceased estate, the superannuation death benefit is income of the trustee of the deceased estate and is taken to be income to which no beneficiary is presently entitled (ITAA97 s 30210(3)). This means that the trustee is subject to tax on the benefit (¶8-340) with each payment taxed to the trustee as a superannuation lump sum. Where a death benefit is paid in the form of an annuity or pension to a child of a deceased member, it must be cashed as a lump sum no later than when the child reaches 25 years, unless the child has a permanent disability (SISR reg 6.21(2B)). A superannuation lump sum received by a person in these circumstances is tax free. Section 303-5 states that a superannuation lump sum received by a person is tax free if:

• it arises from the commutation of a superannuation income stream • the person is under 25 when they receive the lump sum, or the commutation takes place because they turn 25, or they are permanently disabled when they receive the lump sum, and • the person has received one or more superannuation income stream benefits from the superannuation income stream before the commutation because of the death of a person of whom the person was a death benefits dependant. Superannuation income stream death benefit paid from an element taxed in the fund The taxation of superannuation income stream death benefits paid to a dependant from an element taxed in the fund (¶8-180) depends on the age of the dependant and the deceased person. Dependant or deceased aged at least 60 years A superannuation income stream death benefit paid to a dependant from an element taxed in the fund is generally tax-free if: (a) the dependant is aged at least 60 years when they receive the benefit, or (b) the deceased was aged at least 60 years when they died (s 302-65). Despite s 302-65, from 1 July 2017 an individual may be liable to tax if they receive a superannuation income stream benefit from a “non-commutable superannuation income stream” (¶6-480). Liability to tax arises if: (1) in a financial year, an individual receives one or more superannuation income stream benefits that are “defined benefit income”, the individual is a dependant of the deceased and either the dependant or the deceased is aged 60 years or over, and (2) the sum of those benefits, other than any elements untaxed in the fund of those benefits, exceeds the individual’s “defined benefit income cap” (s 303-2(1)), where: (a) defined benefit income is a superannuation income stream benefit that is paid from a “capped defined benefit income stream” (s 303-2(2)), defined in s 294-130 as certain non-commutable superannuation income streams (¶6-480), and (b) defined benefit income cap means generally the general transfer balance cap (¶6-440) for the financial year ($1.6m for 2019/20) divided by 16 (s 303-4(1)). The defined benefit income cap is generally $100,000 for 2019/20, but an individual has a reduced defined benefit income cap if they: (i) first become entitled to concessional tax treatment for defined benefit income part-way through a financial year, eg because they turn 60 during the year or commence an income stream part-way through the year, or (ii) are also entitled to other defined benefit income that is not subject to concessional tax treatment (s 303-4(2) and (3)). The effect of s 303-2 is that, to the extent that an individual’s relevant defined benefit income for 2019/20 exceeds $100,000, 50% of the excess is included in their assessable income and taxed at marginal rates. Both the dependant and the deceased aged under 60 A superannuation income stream death benefit is taxed as follows where both the dependant and the deceased are under age 60 at the time of the death: • the tax free component (¶8-170) of the income stream is tax free (s 302-70) • the taxable component (¶8-180) is assessable income, but the dependant is entitled to a tax offset equal to 15% of the taxable component (s 302-75), and

• when the recipient turns 60, the income stream is tax free. Example Bron was financially dependent on her brother Bill. When Bill died on 1 July 2019 at the age of 58, a superannuation income stream death benefit commenced to be paid to Bron who was aged 56. In 2019/20, Bron receives $23,000 from the superannuation fund as a result of Bill’s death. The $23,000 is made up of $8,000 tax free component and $15,000 taxable component. The $23,000 superannuation income stream death benefit is taxed as follows: • $8,000 is non-assessable non-exempt income • $15,000 is included in Bron’s assessable income and taxed at her ordinary rates, and • Bron is entitled to a $2,250 tax offset (15% of the $15,000 taxable component). This offset can reduce Bron’s tax liability (including her tax liability on other income) to nil, but any excess offset would not be refundable. If Bron is still receiving a superannuation income stream death benefit when she reaches age 60, the income stream would generally be tax free.

Superannuation income stream death benefit paid from element untaxed in the fund Where a superannuation income stream death benefit paid to a dependant includes an element untaxed in the fund (¶8-180), the taxation of the element untaxed in the fund depends on the age of the deceased: (i) if either the deceased or the dependant was aged at least 60, the dependant is entitled to an offset of 10% of the element untaxed in the fund (s 302-85), or (ii) if neither the deceased nor the dependant was at least 60, the element untaxed in the fund is included in the dependant’s assessable income and taxed at ordinary rates (s 302-90). Despite the general rule in s 302-85 that an offset of 10% of the element untaxed in the fund is available if either the deceased or the dependant was aged at least 60, the 10% tax offset may be limited from 1 July 2017. This will be the case if: (1) in a financial year, the individual receives one or more superannuation income stream benefits that are “defined benefit income”, the individual is a dependant of a deceased and either the dependant or the deceased is aged 60 years or over (2) the sum of those benefits, other than any tax-free amounts and any elements taxed in the fund of those benefits, exceeds the individual’s “defined benefit income cap” (s 303-3), where: (a) defined benefit income is a superannuation income stream benefit that is paid from a “capped defined benefit income stream” (s 303-2(2)), defined in s 294-130 as certain non-commutable superannuation income streams (¶6-480), and (b) defined benefit income cap means generally the general transfer balance cap (¶6-440) for the financial year ($1.6m for 2019/20) divided by 16 (s 303-4(1)). The defined benefit income cap is generally $100,000 for 2019/20, but an individual has a reduced defined benefit income cap if they: (i) first become entitled to concessional tax treatment for defined benefit income part-way through a financial year, eg because they turn 60 during the year or commence an income stream part-way through the year, or (ii) are also entitled to other defined benefit income that is not subject to concessional tax treatment (s 303-4(2) and (3)). The effect is that excess untaxed source defined benefit income is not entitled to the 10% tax offset and is assessable at the individual’s full marginal rate. The excess untaxed source defined benefit income is worked out by applying the individual’s untaxed defined benefit income stream payments to any amount remaining in their defined benefit income cap after having applied taxed source and tax free component defined benefit income.

General rules on the taxation of death benefit payments to dependants The general rules on the taxation of death benefit payments to dependants may be summarised as follows.

Death benefit payments to dependants

Age of deceased

Type of death benefit

Age of recipient

Tax treatment

Any age

Lump sum

Any age

Tax-free

Aged 60 and over

Income stream

Any age

Element taxed in the fund is generally tax-free. Element untaxed in the fund is generally taxed at marginal rates with offset of 10% of the element untaxed in the fund

Below age 60

Income stream

Above age 60

Element taxed in the fund is tax-free. Element untaxed in the fund is taxed at marginal rates with offset of 10% of the element untaxed in the fund

Below age 60

Income stream

Below age 60

Element taxed in the fund is taxed at marginal rates with offset equal to 15% of the amount. Element untaxed in the fund is taxed at marginal rates

Medicare levy (2% of taxable income) is added where appropriate. [FITR ¶291-000; SLP ¶38-270]

¶8-330 Taxation of death benefits to non-dependant From 1 July 2007, a superannuation death benefit can only be paid to a non-dependant as a lump sum. A person who is not a dependant (¶8-320) of the deceased cannot receive a superannuation income stream death benefit (SISR reg 6.21(2A)). A person for whom a death benefit income stream commenced before 1 July 2007 is taxed in the same way as dependants (¶8-320). For 2019/20, a superannuation death benefit paid to a non-dependant is taxed as follows: • no tax is payable on the tax free component (s 302-140) (¶8-170), and • the taxable component (¶8-180) is included in assessable income, with a tax offset to ensure that: – the rate of tax on the element taxed in the fund does not exceed 15%, and – the rate of tax on the element untaxed in the fund does not exceed 30% (s 302-145). Medicare levy (2% of taxable income) is added where appropriate. The following table summarises the tax treatment of death benefit payments to non-dependants.

Death benefit payments to non-dependants

Age of deceased

Type of death benefit

Age of recipient

Taxation treatment

Any age

Lump sum

Any age

Element taxed in the fund taxed up to a maximum rate of 15%.

Element untaxed in the fund taxed up to a maximum rate of 30%

Any age

Income stream

Any age

Cannot be paid as an income stream. Income streams that commenced before 1 July 2007 are taxed as if received by a dependant

Medicare levy (2% of taxable income) is added where appropriate. Tax withheld from death benefit In Fyffe & Anor v Fyffe 2002 ATC 4443, the Victorian Supreme Court held that the trustee of a deceased estate had correctly withheld tax from a death benefit payment. Two adult children of the deceased had brought proceedings against the estate of the deceased for an order that provision be made for their maintenance and support. The only asset of the deceased was an interest of $750,000 in a superannuation fund. The trustee of the estate agreed to pay $147,500 in settlement of the claim, but $31,712 was withheld from the $147,500 and remitted to the ATO as tax payable on a death benefit. The adult children sought a court order that they be paid $31,712 on the basis that the trustee had agreed to pay them the full $147,500. The court held that the distribution from the superannuation fund was a death benefit payment which was taxable because the adult children were not dependants of the deceased at the date of death. It followed that the trustee was liable to pay tax on the $147,500 and there was no basis for finding that the trustee was not justified in making the payment to the ATO. [FITR ¶291-000; SLP ¶38-280]

¶8-340 Death benefits paid to trustee of deceased estate Where the trustee of a deceased estate receives a superannuation death benefit in their capacity as a trustee: • the benefit is treated as if it were paid to a death benefits dependant of the deceased (¶8-320) to the extent that one or more beneficiaries of the estate who were death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit, and • the benefit is treated as if it were paid to a non-dependant of the deceased (¶8-330) to the extent that one or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit. In either case, the benefit is taken to be income to which no beneficiary is presently entitled (s 302-10), and the trustee is liable to pay tax on the benefit on behalf of the beneficiary at the appropriate rate. If an ultimate beneficiary is a death benefits dependant of the deceased, no tax will be payable on the benefit. If an ultimate beneficiary is a non-dependant of the deceased, the trustee will pay tax at the rates set out at ¶8-330. The trustee is required to withhold the appropriate amount of tax from the benefit and remit it to the ATO (¶11-350). If the ultimate beneficiaries include both dependants and non-dependants, the apportionment of the benefit will depend on the type of trust. If it is a fixed trust, calculating the portion for each beneficiary should not be difficult. If it is a discretionary trust, the beneficiaries can only be ascertained after the trustee has made a decision about the allocation. [FITR ¶291-000; SLP ¶38-260]

Non-complying Superannuation Fund Payments ¶8-350 Benefits from Australian non-complying superannuation funds A superannuation benefit may be from a non-complying superannuation fund because: • the fund is an Australian superannuation fund for the income year in which the benefit is paid but the

fund had received a notice that it is a non-complying superannuation fund (¶2-100), or • the fund is a foreign superannuation fund (see ¶8-370). A superannuation fund is an “Australian superannuation fund” (s 295-95(2)) at a time, and for the income year in which that time occurs, if: • it was established in Australia, or any asset of the fund is situated in Australia at that time • at that time, the central management and control of the fund is ordinarily in Australia, even if temporarily outside Australia for a period of not more than two years, and • at that time, either the fund had no active member (as defined in s 295-95(3)) or at least 50% of the total market value of the fund’s assets attributable to superannuation interests held by active members, or the sum of the amounts that would be payable for active members if they voluntarily ceased to be members, is attributable to superannuation interests held by active members who are Australian residents. The Commissioner’s interpretation of the meaning of “Australian superannuation fund” in s 295-95(2) and, in particular, the central management and control test, are set out in Taxation Ruling TR 2008/9 (¶2-130). Superannuation benefit may be exempt income A non-complying superannuation fund is not entitled to the various tax concessions that are available to a complying fund. In particular, its taxable income is taxed at 45% for 2019/20 (in contrast to 15% for complying superannuation funds) and contributions are not deductible (¶7-300). Complementing this tax treatment, a superannuation benefit received from an Australian non-complying superannuation fund is exempt income if: • the fund has never been a complying superannuation fund or last stopped being a complying superannuation fund for the income year in which 1 July 1995 occurred or a later income year, and • the fund has never been a foreign superannuation fund or last stopped being a foreign superannuation fund for the income year in which 1 July 1995 occurred or a later income year (s 3055). [FITR ¶294-000; SLP ¶39-050]

¶8-370 Benefits from foreign superannuation funds The tax treatment of lump sums received from certain foreign superannuation funds is set out in ITAA97 Subdiv 305-B (s 305-55 to 305-80), which applies to a superannuation lump sum received: • from a foreign superannuation fund which is a non-complying superannuation fund and has been since 1 July 1988 or since it came into existence if that was later, or • from a superannuation scheme that is not, and never has been, an Australian superannuation fund or a foreign superannuation fund, and was not established in Australia, and is not centrally managed or controlled in Australia (s 305-55(1)). The same rules apply to a payment, other than a pension payment, “from a scheme for the payment of benefits in the nature of superannuation upon retirement or death” where the scheme: (i) is not, and never has been, an Australian superannuation fund or a foreign superannuation fund; (ii) was not established in Australia; and (iii) is not centrally managed or controlled in Australia (s 305-55(2)). A foreign superannuation fund is a fund that is not an Australian superannuation fund (¶8-350). According to the AAT in Baker 2015 ATC ¶10-399, a US Individual Retirement Account (IRA) was not a foreign superannuation fund for these purposes because it did not qualify as a superannuation fund within SISA s 10. This was fundamentally because money could be withdrawn from an IRA at any time prior to

any retirement event at the complete discretion of the account holder, in contrast to the SIS Act rule that benefits could generally only be withdrawn when a condition of release was satisfied. The AAT also ruled that the potential flexibility of withdrawals meant the IRA did not qualify as a scheme for the payment of benefits in the nature of superannuation upon retirement or death. Tax treatment depends on when the benefit is received The tax treatment of a superannuation lump sum received by a resident taxpayer from a foreign superannuation fund depends on whether the taxpayer receives it: • within six months after their Australian residency commences or foreign employment ends, or • later than six months after their Australian residency commences or foreign employment ends. A taxpayer who is a foreign resident is not assessable in Australia on a superannuation benefit from a foreign superannuation fund. Payment received within six months of becoming a resident A superannuation lump sum from a foreign superannuation fund is non-assessable non-exempt income if (s 305-60): (1) it is received by the person within six months after the person became an Australian resident, and (2) it relates only to a period: (i) when the person was not an Australian resident; or (ii) starting after the person became an Australian resident and ending before the payment is received, and (3) it does not exceed the amount in the fund that was vested in the person when they received the payment. If the person receives the lump sum later than six months after becoming an Australian resident, or the lump sum exceeds the vested amount, the payment is taxed under s 305-70 (see “Payments received more than six months after becoming a resident” below). A superannuation lump sum is also non-assessable non-exempt income if (s 305-65): (1) it is received by a person in consequence of: (i) the termination of the person’s employment as an employee, or as the holder of an office, in a foreign country; or (ii) the termination of the person’s engagement on qualifying service on an approved project (within the meaning of ITAA36 s 23AF) in relation to a foreign country (2) it relates only to the period of that employment, etc (3) the person was an Australian resident during the period of the employment (4) the person receives the lump sum within six months after the termination (5) the lump sum is not exempt from taxation under the law of the foreign country, and (6) the foreign earnings from the employment, engagement, etc, are exempt from income tax under ITAA36 s 23AF or 23AG as appropriate. If the person receives the lump sum later than six months after becoming an Australian resident, the payment is taxed under s 305-70 (see “Payments received more than six months after becoming a resident” below). Payments received more than six months after becoming a resident If a superannuation lump sum from a foreign superannuation fund is received more than six months after the taxpayer’s Australian residency commences or foreign employment ends, the general rule is that the person receiving the benefit must include in their assessable income so much of the lump sum as equals the “applicable fund earnings” (see below) (s 305-70(2)). The exception is if the person chooses to pay the lump sum to a complying superannuation fund. In that

case, the applicable fund earnings is included in the assessable income of the fund but not in the assessable income of the person who has made the choice (see “Choice to include in assessable income of complying superannuation fund” below). The remainder of the lump sum (ie the amount that was vested in the person when they received the payment) is not assessable income and not exempt income (s 305-70(3)). Any part of the lump sum that is paid into another foreign superannuation fund is not assessable income and not exempt income (s 305-70(4)). The person’s applicable fund earnings in relation to a later lump sum payment out of the other foreign superannuation fund may include an amount (“previously exempt fund earnings”) attributable to the lump sum. Applicable fund earnings A person’s applicable fund earnings are, in general, the earnings that have accrued to the person in the foreign superannuation fund since the person became an Australian resident. If the person was an Australian resident at all times during the period to which the lump sum relates, the applicable fund earnings amount is worked out as follows (s 305-75(2)): (i) calculate the amount that was vested in the person when the lump sum was paid (without any deduction for foreign tax) (ii) subtract from that amount the part of the lump sum that is attributable to contributions for the person and to amounts transferred into the fund from another foreign superannuation fund, and (iii) add any previously exempt fund earnings (ie amounts that would have been included in a person’s assessable income at an earlier time under s 305-70 except that they were paid into another foreign superannuation fund). If the person became an Australian resident after the start of the period to which the lump sum relates but before receiving the lump sum, the applicable fund earnings amount is worked out as follows (s 30575(3)): (i) calculate the amount that was vested in the person when the lump sum was paid (without any deduction for foreign tax) (ii) subtract the total of the amount that was vested in the person just before the day the person first became an Australian resident during the period, and the part of the lump sum attributable to contributions for the person and to amounts transferred into the fund from another foreign superannuation fun (iii) multiply the resulting amount by the proportion of the total days during the period when the person was an Australian resident — “the period” for this purpose commences on the date, during the period to which the lump sum relates, on which the member first became an Australian resident and ceases when the foreign superannuation lump sum is paid (Interpretative DecisionID 2009/124), and (iv) add any previously exempt fund earnings (ie amounts that would have been included in a person’s assessable income at an earlier time under s 305-70 except that they were paid into another foreign superannuation fund). Applicable fund earnings are calculated by translating foreign currency into Australian currency according to the rule described in the table in ITAA97 s 960-50(6). This means each “amount” in a foreign currency that is an element in the calculation of applicable fund earnings must be translated at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum (Interpretative DecisionID 2015/7). Although s 305-75(4) states how s 305-75 applies if the relevant superannuation lump sum is not the first lump sum paid from a foreign superannuation fund, nothing explains how s 305-75 applies if the amount vested in the person can be taken in more than one form, such as a combination of superannuation lump sum and annuity. It is the Commissioner’s view that, where a person is paid a superannuation lump sum that represents only a part of the amount vested in them at the time of payment and an annuity may be

paid subsequently from the fund, the proportionate approach is not used to work out the applicable fund earnings (Interpretative DecisionID 2012/48). On the other hand, where, at the same time, a person is paid a superannuation lump sum and commences an annuity from a foreign superannuation fund, the applicable fund earnings in relation to the lump sum are calculated by taking the proportionate approach to the amounts referred to in s 305-75(3) (Interpretative DecisionID 2012/49). Choice to include in assessable income of complying superannuation fund A person may choose to have a superannuation lump sum from a foreign superannuation fund paid to a complying superannuation fund rather than being paid directly to the person. In such a case, the person may choose for all or part of the applicable fund earnings worked out under s 305-75 (but not exceeding the amount of the lump sum) to be included in the assessable income of the fund (s 305-80(2)). The amount specified in the choice, which does not include any amount that was vested in the person at the time of the transfer, is included in the assessable income of the complying superannuation fund under s 295-200 (¶7-120). The person is then only assessable on any part of the applicable fund earnings that are not included in the assessable income of the fund (s 305-70(2)). A choice can only be made if all of the lump sum from the foreign superannuation fund is paid into the complying superannuation fund and, immediately after that time, the person no longer has a superannuation interest in the foreign superannuation fund (s 305-80(1)). A person who does not transfer their entire interest in the foreign superannuation fund to a complying superannuation fund may not elect to treat any of the applicable fund earnings as being the assessable income of the fund to which the lump sum is paid. The Commissioner’s view is that a taxpayer’s choice to include applicable fund earnings in the assessable income of a complying superannuation fund is binding and cannot be revoked or varied once it is made (Interpretative DecisionID 2012/27). Consequences of lump sum payments to complying superannuation funds If amounts are included in a fund’s assessable income because of a choice made under s 305-80: • the amounts are specifically excluded from being concessional contributions (¶6-510) by s 292-25(2) (c)(i), and • the amounts are also not non-concessional contributions (¶6-550) because they continue to be assessable income of the fund. Amounts transferred that are not assessable income of the fund (ie any part of a transferred lump sum that is not applicable fund earnings) are non-concessional contributions, so care should be taken not to exceed the non-concessional contributions cap (¶6-540). Example More than six months after Gerald became a resident, he is entitled to $10,000 from a US superannuation fund. If Gerald tells the fund in December 2019 to pay the benefit directly to him, he will pay Australian tax on part of it (basically, on the increase in the benefit since he became a resident) at his marginal tax rates for the year. If, for example, $1,000 of the $10,000 accrued since Gerald became a resident, and if his taxable income for 2019/20 exceeds $180,000, he would pay tax on the $1,000 at 47% (which includes 2% Medicare levy). If instead Gerald tells the US superannuation fund to transfer the benefit directly to an Australian complying superannuation fund, then generally the amount of the benefit that is the increased amount since he became a resident (that is, $1,000) is included in the assessable income of the fund (s 305-80) and taxed at 15%. The $9,000 balance is not included in the assessable income of the fund. If Gerald keeps the benefit in the fund until he reaches age 60, all of the benefit plus any earnings on the benefit during his membership will be tax free for him. The $1,000 that is included in the assessable income of the fund is neither a concessional nor a non-concessional contribution for Gerald. The $9,000 that is not included in the assessable income of the fund is treated as a non-concessional contribution.

Because transfers from foreign superannuation funds are member contributions, the “fund-capped contributions” rules may, before 2017/18, have prevented a fund from accepting a single contribution from a foreign superannuation fund that was greater than the fund-capped contribution limit for the member

(¶6-570). These rules do not apply from 2017/18. Income streams from foreign superannuation funds If a resident taxpayer receives an income stream from a foreign superannuation fund, the whole of the income stream, minus any tax-free amount (¶8-170), is included in assessable income and taxed at marginal rates (ITAA36 s 27H). [FITR ¶294-000; SLP ¶39-052]

Trans-Tasman Retirement Savings Transfers ¶8-380 Transfer of retirement savings between Australia and New Zealand The trans-Tasman retirement savings portability scheme, which commenced on 1 July 2013, allows the transfer of retirement savings between APRA-regulated complying superannuation funds and New Zealand KiwiSaver schemes. Before 1 July 2013, Australians and New Zealanders living in Australia could not take their superannuation benefits with them when they permanently left Australia unless they satisfied a condition of release such as reaching preservation age. The Australia–New Zealand agreement on trans-Tasman retirement savings, which was signed on 16 July 2009, allows benefits to be moved more freely and removes a barrier to labour mobility between the two countries. Under the agreement, individuals who hold an interest in an Australian superannuation fund can transfer their superannuation benefits to a New Zealand KiwiSaver scheme when they move to New Zealand, and reciprocal rules apply for transfers to Australia from New Zealand. ITAA97 Div 312 (s 312-1 to 312-15) and SISR Pt 12A (reg 12A.01 to 12A.12) implement the Australia– New Zealand agreement. Division 312 provides that individuals may transfer their retirement savings between a New Zealand KiwiSaver scheme and an Australian complying superannuation fund. Transferred retirement savings must be separately identifiable in the account established in the host country and are generally subject to the rules of the host country. NZ-sourced superannuation transferred to Australia An amount in a KiwiSaver scheme (as defined in the KiwiSaver Act 2006) may be transferred to an APRA-regulated complying superannuation fund (this does not include a self managed superannuation fund which is regulated by the ATO). The amount is not included in the assessable income of the receiving complying superannuation fund, is non-assessable non-exempt income of the member and is not subject to capital gains tax. The transferred amount is not subject to the tax arrangements applicable to amounts transferred from foreign superannuation funds (¶8-370). An amount transferred from a KiwiSaver scheme is a non-concessional contribution for the member and subject to the non-concessional contributions cap arrangements. Generally, this means that any contributions that exceed the non-concessional contributions cap (ie for 2019/20, $100,000 or, in some cases, $300,000 spread over three years) are subject to the rules that apply to excess non-concessional contributions (¶6-540). An amount is not counted against the non-concessional contributions cap if the trustee of the complying superannuation fund is informed by the KiwiSaver scheme provider or by the member that the amount is an “Australian-sourced amount” or a “returning New Zealand-sourced amount”. These are amounts that have already been counted towards the cap, eg amounts that were first contributed to an Australian superannuation fund and were later transferred to a KiwiSaver scheme. Although a transferred amount is treated as a personal contribution, it is not deductible, does not entitle the member to a spouse contribution offset (¶6-820), and is not an eligible personal contribution for the purposes of determining entitlement to a government co-contribution (¶6-720). A transferred amount may be included in the contributions segment of the member’s superannuation interest in the Australian superannuation fund, and form part of the tax free component (¶8-170) of the member’s interest when a benefit is later paid. This only applies to so much of the transferred amount that

the KiwiSaver scheme provider or the member informs the complying superannuation fund is a New Zealand-sourced amount or the tax free component of an Australian-sourced amount. Otherwise, the transferred amount is included in the taxable component of the member’s benefit. New Zealand-sourced savings transferred to the Australian superannuation fund will generally be subject to Australian taxation rates and superannuation rules, except that the New Zealand-sourced savings: (i) will not be available to the member until the member reaches the KiwiSaver retirement age of 65 years (ii) cannot be used to purchase a first home while the savings are held in an Australian superannuation fund (iii) can only be held in an APRA-regulated fund and cannot be transferred to a self managed superannuation fund (iv) cannot be transferred to a third country, and (v) cannot be used to commence a transition to retirement pension. Australian-sourced superannuation transferred to New Zealand A superannuation benefit paid to a KiwiSaver scheme from an APRA-regulated complying superannuation fund is non-assessable non-exempt income of the member. The Australian-sourced savings transferred to a KiwiSaver account will generally be subject to New Zealand taxation rates and superannuation rules, except that the Australian-sourced savings: (i) will be available to the member on retirement at or after age 60 (ii) may not be used to purchase a first home while the savings are held in the KiwiSaver account, and (iii) cannot be transferred to a third country. The trustee of the complying superannuation fund that pays a superannuation benefit to a KiwiSaver scheme provider must provide a statement to the KiwiSaver scheme provider within seven days, and to the member within 30 days, giving information about the payment.

Payments to Former Temporary Residents ¶8-400 Departing Australia superannuation payments Special taxation arrangements apply to superannuation benefits payable to former temporary residents after they leave Australia. The superannuation benefit is called a “departing Australia superannuation payment”. A departing Australia superannuation payment is a superannuation lump sum that is paid in either of the two situations set out in s 301-170. (1) Payment by a superannuation fund to a former temporary resident Under s 301-170(1), a departing Australia superannuation payment is a superannuation lump sum that: (1) is paid to a person who has departed Australia, and (2) is paid by a superannuation entity in accordance with the SIS Regulations, RSA Regulations, equivalent rules of an exempt public sector scheme or under the Small Superannuation Accounts Act 1995. A departing Australia superannuation payment can only be received by a former temporary resident: • who has left Australia

• who is not an Australian or New Zealand citizen or a permanent resident, and • whose visa has expired (SISR reg 6.20A(1); 6.20B(1); 6.24A(1)). A “temporary resident” (s 995-1(1)) is a person who holds a temporary visa granted under the Migration Act 1958 and who is not an Australian resident (or the spouse of an Australian resident) within the meaning of the Social Security Act 1991. Retirement or reaching preservation age is not a condition of release (¶3-280) that allows superannuation benefits to be paid to temporary residents. Temporary residents must generally leave Australia before they can take their superannuation, even if they have retired from the workforce or have reached preservation age. The only other conditions of release applicable to temporary residents are (SISR reg 6.01B): (a) death; (b) a terminal medical condition; (c) permanent or temporary incapacity; (d) the superannuation provider being given a release authority (¶6-640) by the member or the Commissioner; and (e) the person having moved permanently to New Zealand and nominated a KiwiSaver scheme (¶8-380) to receive their superannuation. A former temporary resident seeking to be paid their superannuation entitlements may lodge a departing Australia superannuation payment claim with their fund (SISR reg 6.20A, 6.20B and 6.24A). As an alternative to claiming from the superannuation fund, a member may claim their benefit via the ATO’s DASP online application system. DASP online is a free service which includes online verification of the member’s immigration status. The process for a former temporary resident to claim their superannuation entitlements is explained at: www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-paying-tax/Super-information-for-temporaryresidents-departing-Australia/. The ATO says that, if a superannuation fund makes a departing Australia superannuation payment to a former temporary resident and subsequently receives further contributions from the employer, the fund can pay this amount without requiring the former temporary resident to make another claim. To avoid having to make multiple payments, the fund should contact the employer when the original claim is received to see if the employer is willing to pay outstanding contributions before the next quarterly SG due date. If the employer is unable to pay early, the fund could leave the member account open until the next SG due date to allow the employer’s final contributions to be received. A departing Australia superannuation payment is non-assessable non-exempt income but is liable to final withholding tax (¶8-420). The member receives the amount of the withdrawal benefit minus the withholding tax, and has no further income tax liability on the benefit. If a former temporary resident does not claim their superannuation benefit from the fund, the benefit will generally be transferred to the ATO after the member has been departed for more than six months. (2) Payment by the Commissioner to a former temporary resident A superannuation lump sum is a departing Australia superannuation payment if it is paid by the Commissioner under s 20H(2), (2AA), (2A) or (3) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLM Act) (s 301-170(2) to (4)). The Commissioner is required by s 20H to pay an amount in respect of a person if the following circumstances apply. 1. Notification to the fund The ATO has given a superannuation provider a notice under s 20C of the SUMLMA. The ATO must give the superannuation provider a notice if it is satisfied that: • a person who used to be a temporary resident has a superannuation interest in the fund, and • at least six months have passed since the person ceased to hold the visa and left Australia. The ATO will use information provided by the Department of Immigration and Citizenship to identify

superannuation funds that hold benefits for departed temporary residents, and will send superannuation funds a notice (Temporary resident notification) listing members of the funds where it has been at least six months since both: (a) the member departed Australia; and (b) the member’s temporary visa was cancelled or expired. Benefits relating to certain members will not be affected by this process. They include: • New Zealand citizens • current temporary or permanent visa holders • holders of “Investor Retirement” or “Retirement” visas (subclasses 405 and 410), and • persons who have made a valid application for a permanent visa yet to be determined. 2. Fund statement and payment The fund: • gives the ATO a statement about the superannuation interest held for the member (including tax file number, the amount of the benefit and taxation components), and • pays to the ATO the amount that would have been payable to the member if the member had requested the payment. Certain amounts are not required to be transferred to the ATO, including: (a) where the fund has received a request from the member for payment prior to the transfer; and (b) amounts out of which superannuation income stream benefits are being paid to the member. These statement and payment requirements must generally be met by the fund by the next “scheduled statement day”. The scheduled statement days are 31 October and 30 April. If a notice is given to a fund less than 28 days before the next scheduled statement day, the statement and payment is not due until the following scheduled statement day. A fund that makes a statement to the ATO that is false or misleading may be liable to an administrative penalty (¶6-050). 3. Amount is payable for the person Where, in respect of amounts paid by a fund to the ATO, the Commissioner is satisfied that there is an amount payable for a person, the amount must be paid by the Commissioner as a single lump sum in one of three ways (s 20H(2), (3)): • to the person — a former temporary resident may request payment from the ATO at any time, and the payment, net of withholding tax (¶8-420), is non-assessable non-exempt income • to the person’s legal personal representative if the person has died (or to the person’s death beneficiaries if the superannuation provider would have been required to pay the person’s superannuation to the death beneficiaries had the amount not been paid to the ATO), or • to a superannuation fund as a roll-over superannuation benefit (¶8-600) — the ATO can only pay the amount as a roll-over superannuation benefit if it is to a single complying superannuation fund nominated by the person and the ATO is satisfied that the person is an Australian or New Zealand citizen, or the holder of a permanent visa or a prescribed visa. This basically means that, after the person has left Australia and their temporary visa has expired, the person has returned to Australia on a permanent basis. Amount paid by the ATO A payment made by the ATO to a former temporary resident, or to another person after the death of the former temporary resident, is non-assessable non-exempt income (s 301-175), but is liable to withholding tax. The amount that is paid by the ATO is the amount of the member’s superannuation entitlement minus the withholding tax (¶8-420) A payment that is made to a superannuation fund as a roll-over superannuation benefit is non-assessable

non-exempt income at that time except to the extent there is an excess untaxed roll-over amount. The amount of tax on an excess untaxed roll-over amount is discussed at ¶8-620. From 1 July 2013, the Commissioner is required to pay interest on all superannuation money held for former temporary residents (s 20H(2AA)). The interest is subject to withholding tax (¶8-420). Before 1 July 2013, the superannuation amount held by the ATO for a former temporary resident did not generally earn interest, the exception being if the amount was subsequently transferred to a complying superannuation fund for a member who had become an Australian or New Zealand citizen or who held a permanent resident visa (s 20H(2A)). Transfer of superannuation benefits between Australia and New Zealand The treatment of superannuation benefits when Australians relocate to New Zealand or New Zealanders relocate to Australia is discussed at ¶8-380. [FITR ¶290-000; SLP ¶40-182]

¶8-420 Taxation of departing Australia superannuation payment A former temporary resident who receives a departing Australia superannuation payment (¶8-400) is liable to final withholding tax on the payment (s 301-175), but is not otherwise assessable on the payment. Withholding tax on departing Australia superannuation payments From 2017/18, withholding tax is imposed by the Superannuation (Departing Australia Superannuation Payments Tax) Act 2007 at the following rates: • on the tax free component — 0% • on the element taxed in the fund — 35%, and • on the element untaxed in the fund — 45%. Higher rates apply from 1 July 2017 to payments to former “working holiday makers” (see below). For the years 2014/15 to 2016/17, withholding tax was imposed at the following rates: • on the tax free component — 0% • on the element taxed in the fund — 38%, and • on the element untaxed in the fund — 47%. Example On 1 August 2019, a former temporary resident applies to a superannuation fund to be paid a departing Australia superannuation payment. The member’s superannuation benefit is $200,000, made up of the following components: • tax free component (comprising the member’s undeducted contributions) — $25,000 • element taxed in the fund — $17,000 • element untaxed in the fund — nil. Before paying the benefit to the member, the superannuation fund must withhold the following tax and remit it to the ATO: • nil tax on the $25,000 tax-free amount, and • $5,950 tax (ie 35% × $17,000) on the $17,000 element taxed in the fund.

A fund must withhold the appropriate amount of tax before making a departing Australia superannuation payment (TAA Sch 1 s 12-305; 12-310) and must report the payment to the ATO on its annual withholding payment summary (TAA Sch 1 s 16-153). A payment summary must be provided to the recipient and to the ATO within 14 days of the payment being made (TAA Sch 1 s 16-166).

If the fund is forced to pay a penalty for failing to withhold tax, it may recover the penalty from the taxpayer (TAA Sch 1 s 16-195(a)). If the departing Australia superannuation payment is made by the ATO under s 20H of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶8-400), the amount that is paid is the amount that remains after withholding under the Superannuation (Departing Australia Superannuation Payments Tax) Act 2007 at the appropriate rates as set out above. Because the withholding tax rates are higher than the rates that apply when superannuation benefits are normally paid (¶8-210, ¶8-240), a taxpayer who is able to satisfy a condition of release (¶3-280) and to receive their superannuation benefit before departing Australia would have a lower tax liability than if the benefit is later paid as a departing Australia superannuation payment. Payments to former working holiday makers From 1 July 2017, the rate of tax on departing Australia superannuation payments to former “working holiday makers” is 65% for both the element taxed in the fund and the element untaxed in the fund. An individual is a working holiday maker at a particular time if they hold a Subclass 417 (Working Holiday) visa or a Subclass 462 (Work and Holiday) visa or a related bridging visa (Income Tax Rates Act 1986, s 3A). Before 1 July 2017, payments to former working holiday makers were taxed at the rates shown above for former temporary residents generally. Payments under $200 Although a member benefit that is less than $200 may be tax-free under s 301-225 (¶8-210), this is not the case for a departing Australia superannuation payment because s 301-225 is specifically made nonapplicable to ITAA97 Subdiv 301-D, which defines and states the tax treatment of departing Australia superannuation payments. Superannuation funds must withhold tax from all departing Australia superannuation payments at the appropriate rate, including those that are less than $200. [FITR ¶290-000; SLP ¶40-185]

Benefits in Breach of Rules ¶8-500 Benefits paid in breach of payment rules Specific taxation rules in ITAA97 Div 304, rather than the general rules in ITAA97 Div 301 or 302, apply: (a) when a benefit is paid in breach of legislative requirements (¶8-510), and (b) when a fund pays an amount in excess of the amount set out in a release authority for paying debt account discharge liability relating to Division 293 tax (¶8-520). The purpose of Div 304 is to override the concessional tax treatment that might otherwise apply under Div 301 and 302 (¶8-200, ¶8-300).

¶8-510 Benefits paid in breach of legislative requirements A superannuation benefit is included in the assessable income of a member and taxed at the member’s marginal tax rates (rather than at concessional tax rates) if: (a) the member received the benefit from a complying superannuation fund, complying ADF or an RSA (or a fund or ADF that was previously complying), or the benefit is attributable to the assets of a complying superannuation fund, complying ADF or an RSA (or a fund or ADF that was previously complying), and (b) when the benefit was paid: (i) the fund was not being maintained in compliance with the sole purpose test in SISA s 62 (¶3200), or

(ii) the benefit was paid otherwise than in accordance with relevant payment standards prescribed under SISA s 31(1) and 32(1) (¶3-286) or under the RSA Act (s 304-10). Examples Section 304-10 might apply if: (a) a member receives a payment without satisfying a condition of release such as retirement or reaching preservation age (b) the fund has not been maintained for the sole purpose of providing superannuation benefits to members, or (c) a transition to retirement pension breaches the maximum annual pension payment limit of 10% of the account balance at the start of the income year.

The effect of s 304-10 is that amounts of superannuation that are illegally released are included in a person’s assessable income and taxed at the person’s marginal tax rate. Example When Fran and Gerald, who are aged 51 and 53 respectively, each receive a $30,000 superannuation benefit in September 2019 without satisfying a condition of release, the benefits are included in their assessable income under s 304-10. Fran has other income in 2019/20 of $123,000, so her superannuation benefit is taxed at the rate of 37%. Gerald has no other income in 2019/20, so $18,200 of his superannuation benefit is tax free and $11,800 is taxed at 19%.

Commissioner’s discretion for an amount not to be included in assessable income Amounts do not have to be included in a member’s assessable income under Div 304 to the extent that the Commissioner is satisfied that it would be unreasonable for them to be included having regard to: (a) the nature of the fund, and (b) any other matters that the Commissioner considers relevant (s 304-10(4)). The meaning of ”unreasonable” in the context of s 304-10(4) was discussed by Senior Member Walsh in Mason 2012 ATC ¶10-237 (at para 31) as follows. 1. It may be “unreasonable” to include a superannuation benefit paid in breach of the legislative requirements in a persons’ assessable income where: (i) this would be in addition to other taxation consequences which flow from the breach, eg, a superannuation fund no longer gets the benefit of an exemption or becomes non-compliant for the relevant tax year; and/or (ii) the benefit arose in circumstances beyond the effective control of the recipient. 2. It would not be “unreasonable” to include a superannuation benefit in a person’s assessable income merely because the taxation consequence prescribed by parliament is difficult for the taxpayer to meet or is regarded by the taxpayer as undesirable. If this were so, the important deterrent effect of section 304-10 of the ITAA 1997 would be undermined... The AAT has, in a number of cases, upheld the Commissioner’s decision not to exercise the discretion given by s 304-10, with the result that the relevant amounts were included in the taxpayers’ assessable income and taxed at their marginal tax rates. In Brazil 2012 ATC ¶10-244, an individual withdrew $18,000 from his Master Trust and deposited it into the Western Eagle Superfund which was controlled by a promoter who then paid the taxpayer $12,225 and said that the remainder had been paid in tax and fees. The Commissioner included the whole $18,000 in the individual’s assessable income under s 304-10, and imposed a 25% administrative penalty, on the basis that: (a) although the individual contended there had been a “roll-over” of the $18,000 from the Master Trust to the Western Eagle Superfund, this was not the case as Western Eagle Superfund was not a “superannuation fund” as defined in SISA s 10(1) (¶2-120) — this was because the “Fund” records

simply showed money in and out of a bank account, no contributions were made to it or investments made by it, there were no trust deed or membership rules, no income tax or regulatory return had been lodged, and it had not received a notice of compliance, and (b) because the payment was not a roll-over to a complying fund or a transfer to another fund, it was a superannuation benefit paid from the Master Trust to the individual without the individual meeting a condition of release. The AAT upheld the Commissioner’s decision not to exercise discretion to exclude any of the $18,000 from the individual’s assessable income. According to the AAT, although the individual was not directly involved in the fraudulent enterprise conducted by others to facilitate the illegal early release of superannuation benefits, he should have suspected that the money was not paid to a bona fide superannuation fund and should have asked questions about the scheme. The circumstances of the case also meant that no remission of the penalty was warranted. The AAT also upheld the Commissioner’s decision not to exercise the discretion given to him by s 304-10 in the following cases: • Sinclair 2012 ATC ¶10-275 and Vuong [2014] AAT 402, where amounts were illegally withdrawn from superannuation funds and deposited, minus a significant proportion retained by a fraudulent promoter as fees, into a sham fund controlled by the promoter • Smith 2011 ATC ¶10-197, where the taxpayer and her husband withdrew money from her SMSF to support their business when it ran into financial difficulties and returned the money to the fund when the business returned to viability • Mason 2012 ATC ¶10-237, where the taxpayer, who was a trustee and member of an SMSF, withdrew an amount to lend to a business associate • Peach [2012] AATA 781, where amounts were withdrawn from the taxpayer’s SMSF to finance a home business and for living expenses when he lost his employment, and • Xiu Xu 2013 ATC ¶10-342, where 90% of the taxpayer’s assets in her SMSF was withdrawn to complete the purchase of a home when she was made redundant. In contrast, in Wainwright [2019] AATA 333, the AAT said the Commissioner should have exercised discretion to exclude a superannuation benefit from assessable income. Basically, a superannuation benefit arose for a farmer couple when financial difficulties made it impossible for them to repay $700,000 which had been advanced to them so they could rationalise their farm assets. Reasons given by the AAT were that: (i) the transaction was a legitimate arm’s length, documented transaction entered into after the couple received professional advice, (ii) there was no intention to deceive or cheat, (iii) the benefit received resulted from facts that occurred after the legitimate transaction had been entered into and resulted from events principally beyond the couple’s control, (iv) the financial advice received was less than optimal, and (v) other consequences flowed to the couple in that they were disqualified from being trustees of the fund. Penalties for promoters of illegal early release schemes Under SISA s 68B(1), a person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with payment standards prescribed in the SIS Regulations. Section 68B applies to actions that take place on or after 18 March 2014. According to the explanatory memorandum to the Tax and Superannuation Laws Amendment (2014 Measures No 1) Act 2014 which introduced s 68B, the rationale for this law is that promoters of illegal early release schemes had exploited vulnerable people by encouraging them to apply to roll over their superannuation to a purported SMSF that had been set up for the purpose of receiving such transfers. The promoters took commissions of up to 50% of the member’s superannuation and sometimes used identity data for other criminal purposes or stole the entire balance. Unless the promoter was a trustee of a regulated superannuation fund, the Commissioner had only limited powers to pursue penalties, and

promoters were principally dealt with by ASIC which could take action against them for providing unlicensed financial advice. For the purposes of s 68B, “promote” is defined widely to include entering into a scheme, inducing another person to enter into a scheme, carrying out a scheme and facilitating entry into, or the carrying out of, a scheme (s 68B(3)). According to the explanatory memorandum, the fact that a person received consideration indicated that they may have promoted a scheme, but it was not a necessary element to establish. A person contravenes s 68B if a scheme is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards. The Commissioner may seek civil and criminal penalties if a scheme is likely to result, but has not actually resulted, in such a payment being made. The payment standards, prescribed in SISR Pt 6, impose restrictions on when and in what form a person can access their superannuation benefits (¶3-286). Civil and criminal penalties Because s 68B is a civil penalty provision, both civil and criminal penalties may be imposed for breach of the section. A fine not exceeding 2,000 penalty units may be imposed (SISA s 196(3)), and five times this penalty may be imposed on a body corporate. As set out in s 4AA of the Crimes Act 1914, a penalty unit is $210 from 1 July 2017. A person may be imprisoned for up to five years (SISA s 202(1)) if they contravene s 68B either: (i) dishonestly, and intending to gain, whether directly or indirectly, an advantage for that or any other person; or (ii) intending to deceive or defraud someone. In Pavihi [2018] FCA 1603, the Federal Court granted the Commissioner an interim injunction to restrain an alleged promoter of an illegal early release scheme from being involved in the establishment of SMSFs. The court said there was a “reasonably strong prima facie case that the respondent has promoted SMSF schemes with the object of having payments made from funds otherwise than in accordance with payment standards” (para 26). There was an arguable case that the consequences of promotion of the schemes to vulnerable individuals included a risk that they would be exposed to taxation liabilities as a result of drawing down funds for impermissible purposes and the potential inability to restore those funds. The interim injunction was granted pending a final order relating to the application for civil penalties.

¶8-520 Excess payment from release authority Where an individual becomes liable to pay their debt account discharge liability in relation to Division 293 tax, the Commissioner must issue them with a release authority to allow money to be released from a superannuation fund to pay the liability (¶6-400). The release authority must state the amount of the release entitlement, ie the amount of the individual’s debt account discharge liability. A superannuation benefit that an individual receives (or is taken to receive), paid in relation to such a release authority issued to them, is non-assessable non-exempt income (s 303-20). Despite s 303-20, an amount paid in relation to the release authority is included in the taxpayer’s assessable income to the extent that it exceeds the amount of the release entitlement reduced by the amount of any superannuation benefit that has already been treated as non-assessable non-exempt income in relation to that release entitlement (s 304-20). [FITR ¶293-000; SLP ¶39-040]

Roll-overs ¶8-600 Roll-over superannuation benefits From 1 July 2017, a roll-over superannuation benefit is a superannuation member benefit or a superannuation death benefit that:

(a) is paid as a lump sum (b) is not a superannuation benefit of a kind specified in the regulations (c) is paid from a complying superannuation fund or is an unclaimed money payment or arises from the commutation of a superannuation annuity, and (d) is paid to a complying superannuation plan or to an entity to purchase a superannuation annuity (s 306-10). Two types of superannuation benefit are specified in ITAR reg 306-10.01 as not being a roll-over superannuation benefit: • a superannuation death benefit (¶8-300), unless it is paid on or after 1 July 2017: (i) to a person who is a dependant of the deceased, or (ii) to a child of the deceased who is less than 18 years of age, is financially dependent on the member and less than 25 years of age, or has a disability — the eligible recipients are the persons covered by SISR reg 6.21(2A) and RSAR reg 4.24(3A), and • a superannuation lump sum benefit paid to a person with a terminal medical condition (¶8-260). Examples of roll-over superannuation benefits The following are examples of roll-over superannuation benefits: • when a member in the contributions phase chooses to have all or part of their superannuation interest rolled over to another fund • a roll-over to a superannuation plan from which an income stream will be paid, when moving from an accumulation phase to a pension phase • lump sums rolled over when a member who has satisfied a condition of release decides to move their benefits to another provider • benefits transferred between a member’s account with one fund and that of their spouse in another fund after acceptance of an application for contributions splitting or under a family law obligation, and • transfers of a member’s benefit from a complying superannuation fund to a successor fund under a merger of funds in circumstances where all or some of the members of the original fund become members of the successor fund (¶8-630). If a person’s entitlement under Div 2AA (Financial claims scheme for account-holders with insolvent ADIs) of Pt II of the Banking Act 1959 is met by a payment being made to an RSA held by the person, the payment is a roll-over superannuation benefit (s 306-25). The commencement of an account-based pension by a member of a complying superannuation fund is not a roll-over superannuation benefit (Interpretative DecisionID 2009/125). Payment of all or part of a deceased member’s benefits in a regulated superannuation fund to another regulated superannuation fund to immediately cash those benefits to a beneficiary of the deceased person is not a roll-over superannuation benefit (Taxation Determination TD 2013/11). Before 1 July 2017 Before 1 July 2017, a superannuation death benefit was only a roll-over superannuation benefit if it arose from the commutation of a superannuation income stream paid to a person because of the death of their spouse. A payment by a complying superannuation fund to another complying superannuation fund of a superannuation lump sum arising from the full commutation of a superannuation income stream paid to a beneficiary of a deceased member was a roll-over superannuation benefit if: (i) the beneficiary was the spouse of the deceased at the time of death

(ii) the lump sum was paid after the latest of the times set out in s 307-5(3)(c), and (iii) the Commissioner had not made a decision (s 307-5(3A) and (3B)) that the lump sum was not a superannuation member benefit (¶8-300). Sections 307-5(3), (3A) and (3B) were repealed from 1 July 2017 because death benefits are, from that date, included in the meaning of a roll-over superannuation benefit and the sections are no longer necessary. The Commissioner’s views on the payment before 1 July 2017 of superannuation lump sums arising from the commutation of a superannuation income stream were set out in Taxation Determination TD 2013/13 (withdrawn on 13 March 2019 because it was no longer current). Payment made to a member before being on-paid to another fund The taxpayer unsuccessfully argued in Player that a payment of $355,000 from her personal superannuation fund was received by her in the capacity of trustee (and not beneficially in her personal capacity) before being on-paid to another superannuation fund and that it was therefore a roll-over superannuation benefit. In Player 2011 ATC ¶10-171, the AAT upheld the Commissioner’s assessment of the amount as an eligible termination payment (ETP) under ITAA36 former s 27A, that was received as part of a re-contribution strategy which inadvertently breached the transitional non-concessional contributions cap (¶6-580). The Federal Court dismissed the taxpayer’s appeal (Player 2011 ATC ¶20271) and held that the amount paid to the taxpayer’s new superannuation fund was not a roll-over superannuation benefit. According to the court, it had been open to the AAT to conclude that the taxpayer had received the amount “both legally and beneficially”, as evidenced by the taxpayer’s treatment of the payment as an ETP in her filings with the Commissioner (although the court noted that a taxpayer’s characterisation of a receipt should not be taken as conclusive of its true character but merely as evidence of how the taxpayer viewed its character). Despite finding against the taxpayer, both the AAT and the court questioned the Commissioner’s contention that, to be a roll-over superannuation benefit, an amount must be paid directly by one complying superannuation plan to another plan. The court noted that where, for example, a fund paid money into a solicitor’s trust account, with a direction that the amount be on-paid to another fund, s 30610 could be said to be satisfied even though there was not a direct payment from one fund to the other. Transferring fund must provide a roll-over superannuation benefit statement Superannuation funds must generally, within seven days of paying an individual’s roll-over superannuation benefit, provide to the receiving fund a roll-over superannuation benefit statement containing particulars as to the superannuation interest and the individual. The fund must also give a copy to the member within 30 days of making the payment (TAA Sch 1 s 390-10). An administrative penalty may be imposed if a statement is not provided on time to the receiving fund (TAA Sch 1 s 286-75) or if it contains a false or misleading statement (TAA Sch 1 s 284-75) (¶6-050). [FITR ¶295-000; SLP ¶39-055]

¶8-620 Consequences if a roll-over superannuation benefit is paid Although a person is taken to receive a roll-over superannuation benefit when it is paid into a complying superannuation plan or is used to purchase a superannuation annuity on their behalf (s 307-15), the benefit is, subject to one exception, non-assessable non-exempt income for the person at that time (s 306-5). The person is generally only assessable on the amount if it later forms part of a taxable superannuation benefit. An unclaimed money payment (¶3-280) that a person is taken to receive under s 307-15 when it is paid by a superannuation fund to the Commissioner or a state or territory authority in accordance with the Superannuation (Unclaimed Money and Lost Members) Act 1999 is non-assessable non-exempt income (s 306-20). A roll-over superannuation benefit is included in the assessable income of the receiving superannuation fund, but only to the extent that the benefit consists of an element untaxed in the fund and is not an excess untaxed roll-over amount for the person (item 2 in the table in s 295-190(1)).

Excess untaxed roll-over amount Although a roll-over superannuation benefit is not generally taxable for a person, there is an exception where it consists wholly or partly of an amount paid from an element untaxed in the fund (an untaxed rollover amount). In such a case: • the untaxed roll-over amount is tax free up to the person’s untaxed plan cap amount, which is $1.515m for 2019/20 ($1.480m for 2018/19) (s 307-350), and • any amount in excess of the person’s untaxed plan cap amount (the excess untaxed roll-over amount) is subject to tax (s 306-15) imposed by the Superannuation (Excess Untaxed Roll-over Amounts Tax) Act 2007 at the rate of 47% for 2019/20 (the same as for 2018/19). This tax is levied on the person on whose behalf the roll-over is made and must be withheld by the originating superannuation fund (TAA Sch 1 s 12-312; 12-313). Tax is not imposed if the roll-over superannuation benefit is simply transferred from one superannuation interest in a superannuation plan to another superannuation interest in the same plan (s 306-15(1A)).

¶8-630 Transfer of benefit to successor fund on merger of funds Where the trustee of a fund transfers a member’s benefit to a successor fund pursuant to a merger of complying funds in circumstances where all or some of the members of the original fund become members of the successor fund, the payment of the benefit is, according to the ATO, a roll-over superannuation benefit (ATO Superannuation Technical minutes, December 2012). The ATO said it would take a prospective approach to implementing its view about successor fund transfers between complying superannuation funds and that the view would be implemented from 1 July 2013. A “successor fund”, in relation to the transfer of a superannuation interest of a member, depositor or RSA holder, means another superannuation fund, approved deposit fund or RSA where: • that other fund or RSA confers on the member, depositor or holder equivalent rights to the rights they had under the first fund or RSA, and • the conferral of those equivalent rights was agreed, before the transfer, between the superannuation providers of the first fund and the other fund (s 995-1(1)). Various consequences were stated to follow from the view expressed by the ATO: 1. the trustee of the original fund must calculate the tax free and taxable component (¶8-155) of the benefit as at immediately before the transfer 2. for accumulation members, the tax free component of the roll-over superannuation benefit forms the contributions segment (¶8-170) of the member’s interest in the successor fund 3. any superannuation income stream (¶8-150) payable to a member by the original fund ceases immediately before the transfer 4. if a new superannuation income stream is immediately started by the successor fund for a member (using only the value — just before the transfer — of the superannuation interest in the original fund that supported a superannuation income stream paid to the member from the original fund), the superannuation income stream benefits paid in respect of that new superannuation income stream have the same proportion of tax free and taxable components as the superannuation income stream benefits paid to the member from the original fund 5. the trustee of the original fund must provide a roll-over benefit statement (¶8-600) to the trustee of the successor fund for each roll-over superannuation benefit, and 6. the roll-over superannuation benefit is non-assessable non-exempt income for the member, and may be assessable income of the successor fund (¶7-120).

Concessional treatment for pre-1 July 2013 transactions For pre-1 July 2013 transactions, the ATO view would be implemented as follows. • The transferring fund was not required to provide a roll-over benefit statement to the successor fund for each roll-over superannuation benefit resulting from a merger. • The successor fund could treat the contributions segment of a member’s accumulation interest in the successor fund as being equal to the sum of the crystallised segment and contributions segment of the member’s interest in the original fund just before the transfer. • If a member’s interest in the original fund was a superannuation interest supporting a superannuation income stream and a new superannuation income stream was to be immediately commenced from the successor fund (using only the value — just before the transfer — of the original income stream interest), the successor fund could treat the interest supporting the new superannuation income stream as having the same proportion of tax free component as the original income stream interest had. The ATO extended this concessional compliance treatment until 1 July 2015. Involuntary roll-over superannuation benefits from 1 July 2015 Specific rules apply from 1 July 2015 where a successor fund transfer is an “involuntary roll-over superannuation benefits”, ie when a member’s benefit is transferred from one fund to another without the member’s request or consent (s 306-12). The purpose of the rules is to ensure members are not disadvantaged where their benefits are involuntarily rolled over between superannuation plans. From 1 July 2015, the proportioning rule, which is used to determine the tax free and taxable components of a superannuation interest, applies in such a way that the individual remains in the same taxation position if their superannuation interest is involuntarily rolled over to another superannuation plan as they would have been if their benefits had remained in the original fund (¶8-160). In general, for involuntary roll-over superannuation benefits: • where an individual’s superannuation interest was not supporting an income stream, the new superannuation plan will recognise the value of the individual’s contribution segment and crystallised segment in the original plan immediately before the involuntary transfer, and • income stream benefits will be paid from the new superannuation plan in the same proportion of tax free and taxable components as they were from the original plan. Roll-over benefit statements are not required for involuntary roll-over superannuation benefits. The affected individuals will still receive information on the transfer in accordance with disclosure obligations under the Corporations Regulations 2001, and can also request information on the roll-over from their original plan (TAA Sch 1 s 390-15).

Termination Payments from an Employer ¶8-800 Tax treatment of termination payments from an employer Termination payments from an employer are taxed under ITAA97 Pt 2-40 which is made up of three Divisions. • Division 80 sets out general rules that apply throughout Pt 2-40 — the rules are about holding an office, the termination of employment, the transfer of property, and payments for a person’s benefit or at their direction or request. • Division 82 explains how employment termination payments — whether paid during an employee’s life or after the death of the employee — are treated for tax purposes. • Division 83 sets out the tax treatment of other payments that are made in consequence of the

termination of employment, eg redundancy payments. Termination payments covered by Pt 2-40 The various termination payments covered by Pt 2-40 are discussed in the following paragraphs: • Employment termination payments: ¶8-810 • Life benefit termination payments: ¶8-820 • Transitional termination payments: ¶8-830 • Death benefit termination payments: ¶8-840 • Invalidity payments: ¶8-850 • Payment attributable to pre-July 83 service: ¶8-860 • Early retirement scheme payments: ¶8-870 • Genuine redundancy payments: ¶8-880 • Unused annual leave payments: ¶8-890 • Unused long service leave payments: ¶8-900, and • Foreign termination payments: ¶8-910. Administrative obligations An employment termination payment must generally be paid to the employee and not rolled into a superannuation fund. A transitional termination payment paid before 1 July 2012 (¶8-830) was an exception to this rule. An employer has certain administrative obligations when a payment is made, such as to withhold tax, to give a payment summary to the employee and to keep records. These obligations are discussed in Chapter 11. [FITR ¶130-100, ¶130-200, ¶130-400]

¶8-810 Employment termination payments An employment termination is taxed at rates that are lower than if the employee received the payment as ordinary income. To be an employment termination payment, a payment must satisfy the following conditions in ITAA97 s 82-130: • it must be received by a person: – in consequence of the termination of that person’s employment, or – after another person’s death, in consequence of the termination of that other person’s employment • it must be received no later than 12 months after the termination (unless it is exempted from this 12month rule — see “Payment must be received within 12 months” below), and • it must not be a payment mentioned in s 82-135 as not being an employment termination payment. There are two types of employment termination payment: • a “life benefit termination payment” is received by a person in consequence of the termination of that person’s employment (¶8-820), and

• a “death benefit termination payment” is received by a person after another person’s death in consequence of the termination of that other person’s employment (¶8-840). Payment received “in consequence of termination of employment” A payment is only an employment termination payment if it is received in consequence of the termination of employment. The Commissioner’s view, expressed in Taxation Ruling TR 2003/13, is that a payment must “follow on as an effect or result of” a termination and that, although there must be a causal connection between the termination and the payment, the termination need not be the dominant cause of the payment. According to the ruling, the greater the length of time between the termination and the payment the less likely it is that there is a causal connection between the termination and the payment. However, length of time will not be determinative when there is a presently existing right to payment of the amount at the time of termination, eg if, at the time of termination, the taxpayer has the right to commute a pension to a lump sum at a later date. In Forrest 2010 ATC ¶20-163, the Full Federal Court held that the taxpayer, a retiring CEO and director of a company, was assessable on a $3.5m donation by the company to a charitable trust. The taxpayer resigned from the company in 2001 when he and his family, who were minority shareholders, lost control. Under an agreement with the majority shareholders, the company was required to make a $3.5m donation to a charitable trust to be established by the taxpayer. The court held that the donation was made in consequence of the termination of the taxpayer’s employment because it would not have been made but for the taxpayer’s resignation. The donation was therefore an eligible termination payment for the purposes of ITAA36 s 27A and the taxpayer was liable to tax on the donation. The court rejected the taxpayer’s argument that the donation resulted from the need to resolve the battle for control of the company rather than from the termination of the taxpayer’s employment. In Purvis 2013 ATC ¶10-296, a pilot unsuccessfully argued that a lump sum payment made under a “loss of licence insurance scheme” when he lost his pilot’s licence for medical reasons was not assessable because it was received for the loss of his licence rather than in consequence of the termination of his employment. The AAT held the payments was assessable as an employment termination payment because: (a) the agreements under which the payment was made contemplated that a pilot’s employment would be terminated when a pilot’s licence was cancelled; and (b) the payment was therefore related to, or followed from, the termination of the pilot’s employment. On appeal, the Federal Court upheld the decision and reasoning of the AAT (Purvis [2015] FCA 246). This case was one of three matters heard together because the issues were relevantly the same. The other matters were Bond 2015 ATC ¶20-499 and Kentish [2015] FCA 247. Payment must be received within 12 months To be an employment termination payment, a payment must be received no later than 12 months after the termination of the person’s employment. This requirement addresses the issue in some pre-1 July 2007 cases where the timing of the payment was crucial in determining whether it was “in consequence of” the termination. In Seabright 99 ATC 2011, for example, a lump sum payment was made 10 years after the termination of the taxpayer’s employment. The court decided that the 10-year gap between the termination and commutation to a lump sum of a pension arising from the termination did not prevent the payment from being an eligible termination payment. A payment that fails the 12-month rule and is not exempted from doing so is assessable income taxed at ordinary tax rates (s 83-295). The 12-month rule does not have to be satisfied if the payment is a genuine redundancy payment (¶8870) or an early retirement scheme payment (¶8-880) (s 82-130(4)). The rule also does not apply if the Commissioner determines in writing that the time between the termination and the payment is reasonable having regard to: (i) the circumstances of the employment termination (including any dispute relating to the termination), the payment and the person making the payment, and (ii) any other relevant circumstances.

The Commissioner’s determination may apply to a class of payments or a class of recipients of payments (s 82-130(5) to (8)). A payment made after 28 March 2018 and more than 12 months after the termination may be an employment termination payment if: • legal action related to the individual’s entitlement to the payment or the amount of the payment was commenced within 12 months of the termination, or • the payment was made by a liquidator, receiver or trustee in bankruptcy of an entity that was otherwise liable to make the payment, and the liquidator, receiver or trustee was appointed within 12 months of the termination (Income Tax Employment Termination Payments (12 month rule) Determination 2018). The determination is substantially the same as a 2007 determination which it replaced. A payment from a redundancy trust that is received more than 12 months after termination of a person’s employment qualifies as an employment termination payment if: (i) application for the payment is lodged with the trustee within 12 months of the person becoming entitled to the payment, and (ii) payment is made as soon as practicable and no later than two years after the termination (Income Tax Employment Termination Payments Redundancy Trusts (12 month rule) Determination 2019. Amounts that are not employment termination payments Certain amounts are specifically stated not to be employment termination payments (s 82-135). These amounts are: (a) a superannuation benefit (ie a lump sum or income stream from a superannuation fund) (b) pension or annuity payments (c) unused annual leave payments (d) unused long service leave payments (e) the tax-free part of a genuine redundancy payment or early retirement scheme payment (the part of the payment that is not the tax-free part is an employment termination payment if s 82-130 applies) (f) certain foreign termination payments (¶8-910) (g) an advance or loan on terms and conditions that would apply if the parties were dealing at arm’s length (h) a deemed dividend under ITAA36 s 109(1)(d), eg excessive payments to shareholders, directors and associates (i) a capital payment in respect of personal injury so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on the person’s capacity to derive income from personal exertion (see below) (j) a capital payment in respect of a legally enforceable contract in restraint of trade so far as the payment is reasonable having regard to the nature and extent of the restraint (k) an amount received in commutation of a pension and wholly applied to pay a superannuation contributions surcharge liability, and (l) an amount included in assessable income under the employee share scheme rules in ITAA97 Div 83A. Capital payment for, or in respect of, personal injury A “capital payment for, or in respect of, personal injury” to a taxpayer is excluded from being an

employment termination payment to the extent that the payment “is reasonable having regard to the nature of the personal injury” and its likely effect on the taxpayer’s capacity to derive income from personal exertion (s 82-135(i)). The High Court said in Scully (2000) 201 CLR 148 that, to come within this exemption, a payment must be shown to be “calculated by reference to the nature and extent of the injury or likely loss”. The taxpayer in Scully failed to win the exemption because a payment for injury was calculated according to a formula in a superannuation trust deed rather than being based on the nature and extent of the injury suffered. In Case 7/2010 2010 ATC ¶1-026, the taxpayer received $395,000 from his former employer in settlement of a claim that he had been subjected to bullying and harassment that brought on a stress disorder. The AAT rejected the taxpayer’s argument that all or part of the payment was a “capital payment for, or in respect of, personal injury” and therefore excluded from being an employment termination payment under s 82-135(i). This was because the settlement payment was a single, undissected lump sum and, even if the taxpayer had suffered pain and suffering, it was not possible to say that any part of the lump sum was paid for that reason. The taxpayer also failed in Luke 2011 ATC ¶10-216 when he argued that an ex gratia payment was exempt because it was related to mental and physical injury arising from being bullied and intimidated at a tertiary college where he worked as a casual lecturer. The AAT accepted that the taxpayer had been adversely affected by what he perceived to be unreasonable harassment and discrimination in his employment, but said that “personal injury” means physical injury and mental illness and does not extend to emotional hurt. The AAT added that, even if there was personal injury, the taxpayer had not established that the payment was made “in respect of” that injury. In Scully, the High Court had observed that “in respect of” personal injury is principally concerned with payments such as for loss of earnings following personal injury, and the AAT said that there was no evidence in this taxpayer’s case that the payment was compensation for likely loss of income producing capacity. In Purvis 2013 ATC ¶10-296, an alternative argument by pilots who received lump sum payments under a “loss of licence insurance scheme” when they lost their pilots’ licences for medical reasons was that the payments were capital payments in respect of personal injury within s 82-135(i). The AAT dismissed this argument because: (a) it had not been shown that the pilots’ capacity to obtain other employment was taken into account in determining the payments; and (b) there was therefore no basis for concluding that the amount was reasonable having regard to the likely effect of the personal injury on the pilots’ capacity to derive income. On appeal, the Federal Court upheld the decision and reasoning of the AAT (Purvis [2015] FCA 246). In these cases, the payments received by the former employees were taxed as employment termination payments. [FITR ¶130-225, ¶130-230, ¶130-245; SLP ¶39-062, ¶39-063]

¶8-820 Life benefit termination payments A life benefit termination payment is an employment termination payment (¶8-810) received by a person in consequence of the termination of that person’s employment (s 82-130(1)(a)(i)). “Employment” includes the holding of an office (s 80-5). The “termination” of employment includes retirement from employment (s 80-10). The meaning of “in consequence of the termination” of a person’s employment is discussed at ¶8-810. Taxation of a life benefit termination payment A life benefit termination payment may be made up of two components: • the tax free component, and • the taxable component. A tax offset is allowed on the taxable component, with the extent of a person’s entitlement to the offset depending on the person’s age and on the total amount of such payments received in the same year or in consequence of the same termination.

From 1 July 2012, eligibility for the tax offset is dependent on the taxpayer’s taxable income for the year, which means that high income earners may lose the benefit of the offset on part of their income (¶8-825). 1. Tax free component The tax free component of a life benefit termination payment is so much of the payment as consists of: (i) the invalidity segment of the payment, and (ii) the pre-July 83 segment of the payment (s 82-140). The invalidity segment is the portion of the payment that compensates the taxpayer for being forced to leave work early because of invalidity. Invalidity payments are discussed at ¶8-850. As discussed at ¶8-860, the pre-July 83 segment is the portion of the payment that is attributable to the taxpayer’s service period before 1 July 1983. The tax free component is not assessable income and not exempt income (s 82-10(1)). 2. Taxable component The taxable component of a life benefit termination payment is the amount in excess of the tax free component (s 82-145). The taxable component is assessable income but the recipient is entitled to a tax offset that puts a ceiling on the tax rate that may apply to all or part of the termination payment (s 82-10(2) to (4)). The application of the tax offset means that the taxable component may be divided into two parts: • if the taxpayer has reached preservation age (¶8-210) by the last day of the year — the amount of the taxable component up to the “ETP cap amount” (s 82-160) is taxed at ordinary tax rates but up to a maximum of 15%, and the remainder of the taxable component (the “employment termination remainder”) is taxed at the top marginal rate, and • if the taxpayer is below preservation age on the last day of the year the amount of the taxable component up to the “ETP cap amount” is taxed at ordinary rates but up to a maximum of 30%, and the remainder of the taxable component is taxed at the top marginal rate (ITRA Sch 7 cl 1(aa)). Medicare levy (2% of taxable income) is added where appropriate but the tax offset mechanism ensures that the income tax rate applying to the payment does not exceed the relevant maximum tax rate (15% or 30% as appropriate). The availability of the tax offset to cap the tax rate to 15% or 30% as appropriate is subject to the rules in s 82-10(4) to (8) that have the effect that the offset is only applied to amounts that take a taxpayer’s taxable income to $180,000 (¶8-825). The general rules for the taxation of the taxable component for 2019/20 are summarised in the following table. These general rules only apply to the amount of a life benefit termination payment that brings the taxpayer’s taxable income for the year to no more than $180,000 (¶8-825). 2019/20 taxation of taxable component Age

Amount

Taxpayer has reached preservation age (¶3-280) by the last day of the year

Amount up to the ETP cap amount Up to a maximum of 15% ($210,000 for 2019/20) Amount in excess of the ETP cap amount

Taxpayer is below preservation age

Tax

Top marginal rate (45%)

Amount up to the ETP cap amount Up to a maximum of 30% ($210,000 for 2019/20) Amount in excess of the ETP cap amount

Top marginal rate (45%)

Note 1: Medicare levy (2% of taxable income) is added where appropriate, but the tax offset ensures that the income tax rate applying to a payment does not exceed the relevant maximum tax rate (15% or 30% as appropriate). Note 2: The ETP cap amount was $205,000 for 2018/19. The ETP cap amount is indexed annually according to the method in Subdiv 960-M, but indexation applies in multiples of $5,000 and does not therefore necessarily increase the ETP cap amount from year to year (s 960-285). The ETP cap amount for a particular year is reduced for each life benefit termination payment already received in that income year or received for the same termination either in that or an earlier year (s 8210(4)). Calculation of tax payable on the taxable component The calculation of tax payable on the taxable component of an employment termination payment where the taxpayer also has tax deductions was considered in Boyn 2012 ATC ¶10-276. In July 2009, the taxpayer received an employment termination payment comprising a taxable component of $250,880 and a tax free component of $144,120. The taxable component was divided into: (i) the ETP cap amount ($150,000 for 2009/10), the tax on which would be capped at 15%; and (ii) the employment termination remainder of $100,880 ($250,880 − $150,000), which would be taxed at 45%. The taxpayer also had other income of $5,167 and deductions (including prior year losses) of $180,733. The taxpayer applied the deductions first against the employment termination remainder (reducing it to nil), and the $79,853 unused amount of the deductions was then set against the ETP cap amount (reducing it to $70,147). The tax liability on this was $8,512.05 (ie $70,147 at 15% tax, minus spouse tax offset of $1,501 and medical expenses offset of $509). The Commissioner disagreed with this calculation method, and applied the deductions first against the ETP cap amount, with only the excess deductions being applied against the employment termination remainder. This produced a tax liability of $31,891. The AAT disagreed with the Commissioner because, while the rating provisions in ITRA Sch 7 were “confusingly drafted” and “almost largely incomprehensible”, his approach led to a “perverse outcome” which did not seem to be supported by the legislation. In particular, the Commissioner’s mode of calculation would largely erode the benefit of the 15% maximum tax rate applicable to the ETP cap amount, since deductions would be set against that amount leaving a larger amount to be taxed at 45%. This was not, the AAT believed, the legislative intention and, while it was not clear what the legislation did, the Commissioner should, in accordance with his normal administrative practices, allow the most favourable allocation of deductions, as stated in the taxpayer’s calculations. The Federal Court upheld the Commissioner’s appeal, ruling that the deductions should only be applied to reduce the employment termination remainder to the extent that they were not first absorbed against the ETP cap amount. There was no lack of clarity in the relevant provisions, the court said, and no obligation on the Commissioner to allocate deductions in the manner most favourable to the taxpayer. [FITR ¶130-300; SLP ¶39-064]

¶8-825 Taxation of life benefit termination payments of high income earners The tax treatment of life benefit termination payments received by high income earners changed from 1 July 2012. Under the pre-1 July 2012 rules, a tax offset ensured that life benefit termination payments were taxed up to a maximum rate of 15% for individuals over preservation age (¶8-210) and up to 30% for those under preservation age, up to an indexed cap amount (¶8-820). The change in the tax treatment was intended to overcome the inequity arising from the significant benefit given to high income earners from the operation of the tax offset. High income earners were twice as likely as low income earners to receive life benefit termination payments and generally received payments that were considerably larger, and it was high income earners therefore who overwhelmingly benefited from the concessional tax treatment resulting from the tax offset.

To overcome this inequity, from 1 July 2012, only the part of a life benefit termination payment that takes a person’s annual taxable income (including the termination payment) to no more than $180,000 (not indexed) is eligible for the tax offset (s 82-10(4) to (8)). The amount of a person’s termination payment that, when added to their other income, brings the person’s taxable income above the $180,000 income cap is not eligible for the tax offset. This “employment termination remainder” amount (ITRA s 3(1)) is taxed at 45% (ITRA para 1(ab) in Pt I of Sch 7 for residents; para 1(ab) in Pt II of Sch 7 for non-residents). Medicare levy (2% of taxable income) is also payable. Payments that are not liable to the higher tax from 1 July 2012 The rules do not apply to: • death benefit termination payments (¶8-840) • foreign termination payments (¶8-910), or • unused leave payments (¶8-890, ¶8-900). The rules also do not apply to a person who: (1) receives a genuine redundancy payment (¶8-880) (or who would have but for age or retirement restrictions on genuine redundancy payments) (2) receives an invalidity payment when they lose their job (¶8-850), or (3) receives a payment that: (i) is paid in connection with a genuine dispute; (ii) is principally compensation for personal injury, unfair dismissal, harassment, discrimination or another matter prescribed by the regulations; and (iii) exceeds the amount that could reasonably be expected to be received if the employment was terminated voluntarily. These excluded payments continue to be taxed under the general rules as described at ¶8-820. Taxation of life benefit termination payments under the post-30 June 2012 rules Where a life benefit termination payment comes within the post-30 June 2012 rules: • eligibility for the tax offset is dependent on the person’s total taxable income (including the termination payment) in the year • only the part of the taxable component of the payment that, when added last to a person’s other taxable income, is equal to or below $180,000 can benefit from the tax offset and be taxed at the concessional tax rates, ie at a maximum of 15% or 30% according to the age of the recipient (¶8820), and • any amount of the taxable component of the termination payment that takes a person’s total taxable income over $180,000 is taxed at marginal rates (currently 45% for taxable income over $180,000). Medicare levy (2% of taxable income) is also payable. The tax free component is not affected in any case. Example 1 Imran, who is aged 41, has salary of $83,000 and a net capital gain of $33,000 in 2019/20. He also receives a life benefit termination payment of $95,000 on 31 January 2020. The tax on the life benefit termination payment is calculated as follows. 1. Only the amount of the life benefit termination payment that, when added to Imran’s other income, brings his taxable income to $180,000 is eligible for the tax offset. As Imran’s other income is $116,000, only $64,000 of the termination payment can benefit from the tax offset and, as he is below preservation age, the $64,000 is taxed at 30%. 2. The other $31,000 of the life benefit termination payment is liable to tax at the top marginal rate (45%) plus Medicare levy.

Example 2 On 31 December 2019, Lucy, who is aged 49, receives a genuine redundancy payment of $80,000. $35,000 of the redundancy payment is a tax-free amount (¶8-880) and the $45,000 balance is the taxable component of an employment termination payment. Lucy’s other income for 2019/20 is $135,000, made up of $58,000 from employment and a $77,000 net capital gain. Because Lucy’s taxable income for 2019/20 does not exceed $180,000, the tax offset applies to the whole of the taxable component of the employment termination payment. This means that, because Lucy is below preservation age, a maximum rate of 30% (plus Medicare levy) applies.

¶8-830 Transitional termination payments The taxation of life benefit termination payments (¶8-820) from 2007/08 is less generous than the taxation of eligible termination payments in previous years. To discourage employees from terminating employment before 1 July 2007 to benefit from tax concessions that were available before, but not after, that date, transitional rules in ITTPA Div 82 were introduced. The transitional rules applied where a person was entitled to a “transitional termination payment”. A transitional termination payment cannot be received after 30 June 2012. Conditions to be satisfied A transitional termination payment is defined in ITTPA s 82-10 as a life benefit termination payment (¶8820): • received on or after 1 July 2007 and before 1 July 2012 • received under an entitlement provided for under a written contract, a law of the Commonwealth, state or territory, an instrument under such a law, a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 or an AWA within the meaning of that Act, and • where the contract, law or agreement was in force just before 10 May 2006 and specifies the amount of the payment, or a way to work out a specific amount of the payment. Taxation of a transitional termination payment A transitional termination payment received in 2011/12, other than one rolled over to a superannuation fund (a “directed termination payment”: ITTPA s 82-10G), was taxed as follows. If the employee had reached preservation age: (a) no tax was payable on the tax free component (ie the invalidity and pre-July 83 components) (b) the amount up to the lower cap amount of $165,000 in 2011/12 was taxed but the tax rate could not exceed 15% (c) the amount in excess of $165,000 and not in excess of the upper cap amount ($1m) was taxed but the tax rate could not exceed 30%, and (d) the top marginal rate (45%) applied to the amount in excess of $1m (ITTPA s 82-10A; 82-10B; 8210D). If the recipient had not reached preservation age, the maximum tax rate that could apply to amounts up to the $1m upper cap amount was 30%, and the top marginal rate applied to the amount in excess of that amount (ITTPA s 82-10C; 82-10D). Directed termination payments An employer that proposed to pay a transitional termination payment was required to give the employee a choice between receiving the payment in cash and directing the payment to a complying superannuation plan or to purchase a superannuation annuity (ITTPA s 82-10E). The employee could direct the employer to pay all or part of the termination payment to a complying

superannuation plan or to purchase a superannuation annuity (ITTPA s 82-10F). In the absence of this direction, the payment had to be made direct to the employee. Although no tax was payable on a directed termination payment (ITTPA s 82-10G), the employee might later be taxed on a benefit received from the plan to which the directed termination payment was made. The excess amount of a directed termination payment (generally the amount in excess of $1m) was included in the employee’s concessional contributions (¶6-510). Private ruling about transitional termination payment set aside In Perfrement 2011 ATC ¶10-179, the AAT set aside a private ruling by the Commissioner and determined that a redundancy payment received by the taxpayer was a transitional termination payment. The case involved an employee who, following his redundancy from the oil industry in September 2008, had asked his employer to roll his termination payment into his superannuation fund rather than pay it to him in cash. The employer refused, on the ground that the employee’s entitlement to the payment was based on the employer’s redundancy policy published in July 2008, and not on an entitlement that was in force before 10 May 2006. A private ruling by the Commissioner confirmed that the payment was not a transitional termination payment. The AAT ruled that the payment was a transitional termination payment that could be rolled into the employee’s superannuation fund because the redundancy policy published in July 2008 did not create a new contract, vary the existing contract in place before 10 May 2006 or alter the method of calculating the employee’s entitlement. Rather, it was merely advice to employees about the effect of changes to tax laws. [FITR ¶130-230, ¶130-330, ¶130-340; SLP ¶39-074]

¶8-840 Death benefit termination payments A death benefit termination payment is an employment termination payment received by a person after another person’s death in consequence of termination of the other person’s employment (s 82-130(1)(a) (ii)). As with other employment termination payments, it must be received no later than 12 months after the termination unless the Commissioner determines that a longer period is appropriate (¶8-810). Taxation of death benefit termination payments Part of a death benefit termination payment may be tax free (the tax free component) and a tax offset may be allowed on the remaining part of the payment (the taxable component). The extent of a person’s entitlement to the offset depends on whether the recipient was a death benefits dependant of the deceased and on the total amount of payments received by the person in consequence of the termination. The meaning of “death benefits dependant” is discussed at ¶8-310. Tax free component Regardless of the relationship the recipient of the death benefit had with the deceased, the tax free component of the payment is not assessable income and not exempt income (s 82-65(1); 82-70(1)). The tax free component (s 82-140) is so much of the payment as consists of: • the invalidity segment of the payment (¶8-850), and • the pre-July 83 segment of the payment (¶8-860). Taxable component The taxable component is the amount of the payment less the tax free component (s 82-145). The tax treatment of the taxable component depends on whether the recipient is a death benefits dependant. (1) Recipient is a death benefits dependant of the deceased If a death benefits dependant receives a death benefit termination payment in 2019/20, the amount of the taxable component up to the ETP cap amount is tax-free, and the amount in excess of the ETP cap amount is taxed at the top marginal rate (s 82-65(2)).

The ETP cap amount is $210,000 for 2019/20 ($205,000 for 2018/19). The ETP cap amount is reduced by the amount of any death benefit termination payment already received in consequence of the same termination, whether in that or an earlier income year (s 82-65(4)). The ETP cap amount is not reduced because of the receipt of a life benefit termination payment in the same year. (2) Recipient is a non-dependant If a non-dependant receives a death benefits payment in 2019/20, the amount of the taxable component up to the ETP cap amount ($210,000 for 2019/20) is included in assessable income and an offset ensures that the tax rate does not exceed 30%. The amount in excess of the ETP cap amount is taxed at the top marginal rate (s 82-70). The ETP cap amount is reduced by the amount of any death benefit termination payment already received in consequence of the same termination, whether in that or an earlier income year (s 82-70(5)). The ETP cap amount is not reduced because of the receipt of a life benefit termination payment (¶8-820) in the same year. (3) Recipient is trustee of deceased estate Death benefit payments relating to beneficiaries of a trust estate are taxed in the hands of the trustee in the same way as if they were paid directly to the beneficiary (s 82-75). The proportion of a payment paid to a trustee for the benefit of a death benefit dependant is taxed in the hands of the trustee at the rates that would have applied if it were paid directly to the beneficiary. A corresponding rule applies to the proportion of a payment paid to a trustee for the benefit of a non-dependant. Whether the ultimate beneficiary of the death benefit paid to the trustee is a dependant or a nondependant of the deceased, the payment is taken to be income to which no beneficiary is presently entitled. This means that, under Div 6 of ITAA36, it is the trustee who is liable to pay tax but the beneficiaries have no liability. [FITR ¶130-310; SLP ¶39-070]

¶8-850 Invalidity payments An invalidity payment is one of the two segments of an employment termination payment that make up the tax free component (s 82-140). The other segment is the payment attributable to pre-July 83 service (¶8-860). An employment termination payment includes an “invalidity segment” if it satisfies all of the following conditions (s 82-150(1)). 1. The payment is made to a person because they stop being “gainfully employed” (that is, employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment: definition of “gainfully employed”, s 995-1(1)). 2. The person stopped being gainfully employed because they suffered from ill-health, whether physical or mental. 3. The gainful employment stopped before the person’s “last retirement day”. If an individual’s employment or office would have terminated when they reached a particular age or completed a particular period of service, the person’s last retirement day is the day they would reach the age or complete the period of service. In any other case, the last retirement day of a person is the day the person would turn 65 (definition of “last retirement day”, s 995-1(1)). 4. Two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training. Certification by medical practitioners In Pitcher 2005 ATC 4813, the issue arose as to when certification by medical practitioners had to be provided. The AAT had held in Pitcher 2004 ATC 2042 that a lump sum received in redemption of weekly

compensation entitlements could not be an exempt invalidity payment because the medical reports were made two and four years after employment had been terminated and at a time when the taxpayer was again employed. The Federal Court accepted the taxpayer’s argument that the AAT erred in determining that the section (ITAA36 former s 27G(b)) required the medical certificates to be issued before, or at least concurrently with, the termination of employment. Rather, the court considered that the certificates must be issued when the payment had to be characterised as an invalidity payment (that is, at the time of the Commissioner’s assessment in this case), not when the termination payment was made. The court remitted the matter to the AAT to determine whether the redemption payment was an exempt invalidity payment, but expressed doubt as to whether, in the circumstances, the two medical certificates satisfied the requirements that the taxpayer is “unable ever to be employed in a capacity for which the taxpayer is reasonably qualified because of education, training or experience”. Amount of the invalidity segment The amount of the invalidity segment is worked out by applying the following formula: Amount of employment termination payment

×

Days to retirement  Employment days + days to retirement 

where: days to retirement is the number of days from the termination day to the last retirement day, and employment days is the number of days of employment to which the payment relates, ie the employment that is terminated because of the person’s ill-health (s 82-150(2)). Example When Jim’s employment is terminated because of invalidity on 31 July 2019, he receives a $100,000 employment termination payment from his employer. He had commenced employment with the employer on 20 August 1981 and his last retirement date was to have been on his 65th birthday on 15 July 2021. He has 13,859 employment days (ie from 20 August 1981 to 31 July 2019). The number of days to retirement is 715 (ie 1 August 2019 to 15 July 2021). The amount of the invalidity payment is calculated as:

$100,000 ×

715 =$4,906  13,859 +715 

The tax treatment of the $100,000 payment is as follows: • $4,906 is a tax free component and is non-assessable non-exempt income, and • the $95,094 balance is divided into the tax-free pre-July 83 segment (ie the part of the payment that is attributable to service from 20 August 1981 to 30 June 1983) and the taxable component (¶8-860).

[FITR ¶130-360; SLP ¶39-066]

¶8-860 Payment attributable to pre-July 83 service A “pre-July 83 segment” is one of the two segments of an employment termination payment that make up the tax free component (s 82-140). The other segment is an invalidity payment (¶8-850). An employment termination payment includes a pre-July 83 segment if any of the employment to which the payment relates occurred before 1 July 1983 (s 82-155(1)). Calculation of the pre-July 83 segment The amount of the pre-July 83 segment is worked out as follows (s 82-155(2)): Step 1: Subtract the invalidity segment (¶8-850) from the employment termination payment. Step 2: Multiply the amount at step 1 by the fraction: Number of days of employment to which the payment relates that occurred before 1 July 1983

Total number of days of employment to which the payment relates

Example When Chrystalo’s employment is terminated on 31 December 2019, his employer pays him an employment termination payment of $100,000, $30,000 of which is an invalidity segment. Chrystalo commenced employment with the employer on 1 January 1980. The number of days of employment to which the $100,000 payment relates that occurred before 1 July 1983 (ie 1 January 1980 to 30 June 1983) is 1,277. The total number of days of employment to which the payment relates (ie 1 January 1980 to 31 December 2019) is 14,619. The amount of the pre-July 83 segment is calculated as:

Step 1: $100,000 − $30,000=$70,000 Step 2: $70,000 × 1,277/14,619=$6,115 The $6,115 pre-July 83 segment and the $30,000 invalidity segment form the tax free component of the employment termination payment and are non-assessable non-exempt income. The balance of the payment ($100,000 − $36,115 = $63,885) is taxed as the taxable component of the employment termination payment (¶8-820).

[FITR ¶130-370; SLP ¶39-068]

¶8-870 Early retirement scheme payments An early retirement scheme payment is so much of a payment received by an employee who retires under an early retirement scheme as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of their employment at that time of the retirement (s 83-180). Part of the payment is tax free and the amount that exceeds the tax-free part is taxed as an employment termination payment (¶8-810). What is an early retirement scheme? A scheme is an early retirement scheme if it satisfies the following conditions. 1. The scheme must apply to all the employer’s employees who comprise such a class of employees as the Commissioner approves may participate in the scheme. 2. The employer’s purpose in implementing the scheme is to rationalise or reorganise the employer’s operations by making any changes to the employer’s operations, or the nature of the work force, that the Commissioner approves. 3. The Commissioner approves the scheme before it is implemented. The Commissioner can also treat a scheme as an early retirement scheme where special circumstances exist, eg where a scheme is implemented before approval due to a delay in processing an approval application or is implemented without approval because the employer did not realise the tax implications. Conditions for concessional tax treatment A payment under an early retirement scheme is taxed concessionally if it meets all of the following conditions. • The payment relates to a termination occurring before the earlier of: – the date, before the normal retirement age of 65 years, when the employee would necessarily have had to retire because of attaining a particular age or completing a particular period of service, or – in any other case, the employee’s 65th birthday. • If the employer and the taxpayer are not dealing at arm’s length, the payment does not exceed the amount that could reasonably be expected to have been paid if the parties were dealing with each other at arm’s length.

• At the time of the termination there is no agreement in force between the taxpayer and the employer, or between the employer and another person, to employ the taxpayer after that time. A payment to a retiring academic in Case 5/2000 2000 ATC 159 was not made under the university’s approved early retirement scheme because: (a) the taxpayer’s age made him ineligible (b) no mention was made of the scheme in negotiations leading to the retirement, and (c) the payment exceeded the maximum amount payable under the scheme. An early retirement scheme payment does not include: • any amount paid to an employee in lieu of superannuation benefits to which the employee may have become entitled at the termination time or at a later time, or • a payment mentioned in s 82-135 (apart from s 82-135(e) which provides that the tax-free part of an early retirement payment is not an employment termination payment). Taxation of early retirement scheme payment An early retirement scheme payment is composed of a tax-free amount and an assessable amount (s 83170). The tax-free amount is non-assessable non-exempt income. The tax-free amount is worked out by a formula comprising a “base amount” and a “service amount” which are set for each year. Under the formula, the tax-free amount is calculated as: Base amount + [service amount × years of service] where, for 2019/20, base amount means $10,638 and service amount means $5,320. These amounts were $10,399 and $5,200 respectively for 2018/19. The assessable amount, which is the amount in excess of the tax-free amount, is an employment termination payment if it satisfies the conditions in s 82-130 (¶8-810). Example On 1 October 2019, Santhi’s employment is terminated at age 57 under an approved early retirement scheme and he receives $210,000 severance payment. Santhi has been working for his employer since 1 July 1982. The number of whole years to which the severance payment relates is 36 years from 1 July 1982 to 1 October 2019. The service period in relation to the payment is 1/36 pre-July 83 and 35/36 post-June 83 (for simplicity, the apportionment in this example is done in years, rather than in days as strictly required). Santhi’s tax is calculated as follows: (1) The tax-free amount of the payment is:

$10,638 + [$5,320 × 36] = $202,158 (2) The balance of $7,842 ($210,000 − $202,158) must be taken in cash and is taxed as an employment termination payment (¶8-810). (3) The $7,842 employment termination payment is made up of the following components: • a pre-July 83 segment (¶8-860) of $218 (ie $7,842 × 1/36) which is tax free, and • a taxable component of $7,624 (ie $7,842 − $218) which is included in Santhi’s assessable income but with the tax rate capped at 15% (¶8-820).

Proposed change to concessional tax treatment condition The government has announced that the age-based condition for eligibility for concessional tax treatment, generally before 65 years of age, will be aligned to the age pension qualifying age for payments made from 1 July 2019. This proposal is contained in a draft Bill released on 5 July 2019 — the Treasury Laws

Amendment (2019 Measures No 2) Bill 2019: Genuine redundancy payments — aligning access to the tax-free component with the Age Pension age. [FITR ¶130-525, ¶130-560, ¶130-565, ¶130-575; SLP ¶39-080]

¶8-880 Genuine redundancy payments A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee’s position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of their employment at the time of the dismissal (s 83-175). Part of the payment is tax free and the amount that exceeds the tax-free part is taxed as an employment termination payment (¶8-810). Concessional treatment is not given to that part (“the forgone benefit part”) of a payment made in lieu of superannuation benefits to which the taxpayer may have become entitled at the termination time or at a later time. The Commissioner’s guidelines on the calculation of the forgone benefit part are discussed in Taxation Ruling IT 2620. Conditions for concessional tax treatment A payment will qualify for concessional tax treatment as a genuine redundancy payment if it is made in consequence of the dismissal of the taxpayer from employment because of genuine redundancy. In addition: • the time of termination or dismissal is before the taxpayer’s 65th birthday or their normal specified date of termination • the amount is not greater than that payable if the parties had been dealing at arm’s length • at the termination time, there is not an agreement between the taxpayer and the employer, or between the employer and another person, to later employ the taxpayer. A genuine redundancy payment does not include a payment mentioned in s 82-135 (apart from s 82135(e) which provides that the tax-free part of a genuine redundancy payment is not an employment termination payment). Dismissal from employment because of genuine redundancy “Dismissal” carries with it the concept of the involuntary (on the employee’s part) termination of employment, ie the termination will ordinarily be initiated by the employer. However, the fact that an employee who is dismissed volunteers to accept a redundancy package offered by the employer does not mean it is not a dismissal as long as the decision to terminate the employment is ultimately that of the employer. Dismissal also includes a “constructive dismissal”, eg where an employer places an employee in a position in which the employee has little option but to resign. Where the directors of a company decide to make all employees redundant because external circumstances beyond the control of the company mean that there is no longer any work for the employees to perform, a payment to an employee who is also a director may be a genuine redundancy payment. In Long 2007 ATC 2155, the taxpayer was a director and also employed as a manager. Even though she was, as a director, involved in the decision to terminate her own employment, she was “dismissed” because the decision was forced on the company by circumstances outside its control. The fact that the company and the taxpayer were not dealing at arm’s length was not significant because the amount she received did not exceed the amount that could reasonably be expected to be paid to an arm’s length employee with over five years’ service and with management responsibility. A former part-time director of a credit union was found not to have received a genuine redundancy payment in Coker 2010 ATC ¶10-136 because he was too old (76 years when he received the payment) and was not an employee. In Case 12/98 98 ATC 183, a taxpayer with more than 40 years’ service received a payment under a

“voluntary staff separation program” operated by the employer. The ATO argued that the taxpayer had not been made redundant as the program applied to employees who could not cope with change, not because the position he held was no longer required. It was held that the employee was effectively forced into retirement, and the payment was a bona fide redundancy payment. A termination payment received by the taxpayer in CZRS [2015] AATA 40 was held by the AAT to follow from a performance management process that made adverse findings about her competence. The payment was an eligible termination payment and not a redundancy payment. In Marriott 2004 ATC 2191, the taxpayer’s employment was terminated under an ATO reorganisation arrangement, with the relevant clause of the arrangement referring to an employee’s services no longer being able to be utilised. The AAT was satisfied that this wording was specifically intended to facilitate the taxpayer being paid a package. The termination resulted from a course of action initiated and directed by the taxpayer and was not therefore a “dismissal”. It followed that the payment was not made to him in consequence of his dismissal and was not a bona fide redundancy payment. In another case involving the ATO as employer, the court held that a termination payment was not a genuine redundancy payment because the cause of the payment was the ATO no longer wanting the job done by that particular employee, as opposed to the ATO no longer wanting the job done by any employee (Weeks 2012 ATC ¶20-315; upheld by the Full Federal Court at Weeks 2013 ATC ¶20-366). “Redundancy” refers to the situation where an employer no longer requires employees to carry out work of a particular kind or work of a particular kind at the same location. Redundancy generally arises where the dismissal is not caused by anything peculiar to the employee. It will therefore not extend to the dismissal of an employee for personal or disciplinary reasons or because the employee has been inefficient (Hollows 94 ATC 2032). In Dibb 2004 ATC 4555, a substantial payment received by a taxpayer from his former employer in settlement of proceedings for unfair dismissal was held to be made up partly of a redundancy payment. The Full Federal Court considered that the taxpayer’s dismissal was attributable to redundancy because the employer had re-allocated duties and had dismissed the employee after considering that the employee was not suitable to perform any available job existing after the re-allocation. There was no job for which the taxpayer’s skills qualified him and he was surplus to his employer’s personnel needs. In the view of the court, it is the dismissal, not the payment, which must be attributable to redundancy. If the dismissal/redundancy relationship is established then, subject to exceptions, any amount of the payment in excess of that payable upon voluntary termination will be a bona fide redundancy payment. An agreement to employ a taxpayer after the termination would prevent a payment from being a genuine redundancy payment. This is so whether the agreement is between the taxpayer and the employer or between the employer and another person, eg if the employer agrees, at the time of termination: • to re-employ the taxpayer on a casual basis, or • to contract with a consulting company established by the taxpayer and under the contract the taxpayer will be employed by the consulting company to supply the taxpayer’s services as a contractor to the employer. The Commissioner’s views on the requirements to be satisfied before a payment qualifies as a genuine redundancy payment are set out in Taxation Ruling TR 2009/2. Taxation of genuine redundancy payment A genuine redundancy payment is composed of a tax-free amount and an assessable amount (s 83-170). The tax-free amount is worked out by a formula comprising a “base amount” and a “service amount” which are set for each year. Under the formula, the tax-free amount is calculated as: Base amount + [service amount × years of service] where, for 2019/20, base amount means $10,638 and service amount means $5,320. These amounts were $10,399 and $5,200 respectively for 2018/19. The tax-free amount is non-assessable non-exempt income.

The assessable amount, which is the amount in excess of the tax-free amount, is an employment termination payment if it satisfies the conditions in s 82-130 (¶8-810). Example On 11 September 2019, Harry is dismissed at the age of 45 and receives a genuine redundancy payment of $147,000. He has been working for his employer for 23 years. Harry’s tax is calculated as follows: (1) The tax-free amount of the payment is:

$10,638 + [$5,320 × 23] = $132,998 (2) The $14,002 balance is taxed as an employment termination payment, with the tax rate capped at 30% (¶8-820).

Proposed change to concessional tax treatment condition The government has announced that the age-based condition for eligibility for concessional tax treatment, generally before 65 years of age, will be aligned to the age pension qualifying age for payments made from 1 July 2019. This proposal is contained in a draft Bill released on 5 July 2019 — the Treasury Laws Amendment (2019 Measures No 2) Bill 2019: Genuine redundancy payments — aligning access to the tax-free component with the Age Pension age. [FITR ¶130-525, ¶130-530, ¶130-535, ¶130-545; SLP ¶39-082]

¶8-890 Unused annual leave payments An unused annual leave payment to an employee that comes within s 83-10 is assessable income. Unused annual leave payments made on the death of an employee to the deceased’s beneficiaries or to the trustee of the deceased’s estate are exempt from tax (ITAA36 s 101A(2)). “Annual leave” means any leave described as (or similar to) annual leave, recreation leave or annual holidays to which a taxpayer is entitled by law, award or contract. It also covers leave made available to a taxpayer as a privilege, rather than as an entitlement, where the availability of the leave is determined by reference to similar criteria. This extension is designed to cover cases of office holders who may have no actual entitlement to take annual leave but are allowed the privilege of doing so. It would also extend to employees who are allowed by their employers to take leave additional to their actual annual leave entitlements. A payment received in consequence of the termination of an employee’s employment is an unused annual leave payment if: • it is for annual leave that the employee has not used • it is a bonus or other additional payment for unused annual leave, or • it is for annual leave to which the employee was not entitled just before the termination but that would have been available to the employee at a later time if the termination had not occurred. Taxation of unused annual leave payments The general rule is that an unused annual leave payment is included in full in the taxpayer’s assessable income for the year the payment is received and is taxed at marginal rates. There are two exceptions to this general rule: • the payment was made before 18 August 1993 or is in respect of leave that accrued to the taxpayer for service before 18 August 1993, and • the payment is a genuine redundancy amount, an early retirement scheme amount or an invalidity amount.

For payments that come within those exceptions, an offset applies to ensure that the marginal tax rate is limited to a maximum of 30% (s 83-15), plus, if appropriate, Medicare levy. For the PAYG amounts to be withheld from unused leave payments, see ¶11-320. The portion of the unused annual leave that accrued in respect of service before 18 August 1993 can be calculated as follows: Number of days in the accrual period Payment × that occurred before 18 August 1993   Number of days in the accrual period  where: accrual period is the number of whole days over which the unused annual leave accrued, assuming that the leave accrues in accordance with the employee’s ordinary conditions of employment and that it relates to the last period of service (Taxation Determination TD 94/8). A taxpayer is assessed on the amount actually received in a particular year even if the amount, or part of the amount, could be said to relate to a previous year (Hannavy). Pro rata payments Pro rata payments of annual leave entitlements received by taxpayers who retire or have their employment terminated before becoming fully entitled to annual leave are also covered by s 83-10. Example If Manuel resigns after completing only eight months of the 12 months’ service that would have given him an entitlement to four weeks’ annual leave (worth $2,000), he might be treated under the relevant industrial award as being entitled to a pro rata payment of 8/12 of the full 12-month entitlement, ie $1,333. This payment will be treated in the same way as unused annual leave for the purposes of s 83-10. This will be so no matter how the entitlement is described, as long as the description recognises that the qualifying period for the annual leave had been partially served by Manuel at the date of his resignation.

[FITR ¶130-425, ¶130-430; SLP ¶39-085]

¶8-900 Unused long service leave payments An unused long service leave payment to an employee that comes within ITAA97 Subdiv 83-B (s 83-70 to 83-115) is assessable income. “Long service leave” generally means long service leave, long leave, furlough, extended leave or leave of a similar kind to which a person is entitled by law, award or contract (s 83-70). A payment that an employee receives in consequence of the termination of their employment is an unused long service leave payment if: • it is for long service leave that the employee has not used • it is a bonus or other additional payment for unused long service leave, or • it is for long service leave to which the employee was not entitled just before the termination but that would have been available to the employee at a later time if the termination had not occurred. Taxation of unused long service leave payments The taxpayer’s assessable income in the year the payment is made includes: • the whole amount received in respect of the unused long service leave that accrued after 15 August 1978, and • 5% of any amount received in respect of the unused long service leave that accrued before 16 August 1978 (s 83-80).

The amount included in assessable income is taxed at marginal rates, but a tax offset ensures that the rate of tax does not exceed 30% on that part of the post-15 August 1978 amount of the assessable income that (s 83-85): • is in respect of a genuine redundancy amount, an invalidity amount or an early retirement scheme amount, or • exceeds the post-17 August 1993 component of the amount (this being the proportion of the amount attributable to unused long service leave which accrued between 16 August 1978 and 17 August 1993 (inclusive)). The maximum 30% rate may be increased by the Medicare levy. For the PAYG amounts to be withheld from unused leave payments, see ¶11-320. Unused long service leave payments to a deceased employee’s beneficiaries or to the trustee of the deceased’s estate are exempt from tax (ITAA36 s 101A(2)). A taxpayer is assessed on the amount actually received in a particular year even if the amount, or part of the amount, could be said to relate to a previous year (Hannavy). The following table shows the extent to which unused long service leave payments are included in assessable income. To the extent the payment is attributable to …

Assessable income includes …

Pre-16/8/78 period

5%

16/8/78 to 17/8/93

100%

Post-17/8/93 period

100%

The remainder of that part (if any) of an unused long service leave payment that is attributable to the pre16/8/78 period is not assessable income and is not exempt income (s 83-80). The calculation of the various periods is explained in s 83-90. If employment is wholly full-time or wholly part-time, the amount of payment attributable to each period is explained in s 83-95, 83-100 and 83-105. If employment is partly full-time and partly part-time, the attribution of the payment to the different employment periods is explained in s 83-110 and 83-115. [FITR ¶130-465, ¶130-470, ¶130-475; SLP ¶39-087]

¶8-910 Foreign termination payments Special rules apply to termination payments arising out of foreign employment. These payments are not employment termination payments and are tax free (Subdiv 83-D: s 83-230 to 83-240) except for amounts specifically stated not to be included in this general rule. Foreign termination payments covered by Subdiv 83-D are in two categories: • termination payments relating to a period when the taxpayer was not an Australian resident, and • termination payments relating to a period when the taxpayer was an Australian resident. Termination payments relating to foreign resident period A payment received by a taxpayer is not assessable income and not exempt income if (s 83-235): • it was received in consequence of the termination of the taxpayer’s employment in a foreign country • it is not a “superannuation benefit”, basically a benefit paid from a superannuation fund (¶8-130) • it is not a payment of a pension or an annuity (whether or not the payment is a superannuation benefit) — this ensures the termination payment is a lump sum, and

• it relates solely to a period of employment when the taxpayer was not an Australian resident. Payment relates solely to period of employment when the taxpayer was not an Australian resident The following decisions indicate the difficulties encountered by taxpayers in showing that a payment relates solely to a period of employment when the taxpayer was not an Australian resident. To avoid these difficulties, it seems that, where an employee has service with an employer both overseas and in Australia, either a separate termination payment should be made for each service component or, if only one termination payment is made, documentation should clearly indicate how the payment can be apportioned between the two components. In Branson 2008 ATC ¶20-080, a bank employee received a $1.5m termination payment when his threeyear secondment to Tokyo ended. The payment was not an exempt foreign resident termination payment because it did not relate “solely” to the period of overseas service. Rather, it related to the taxpayer’s service in both Japan and Australia, and apportionment of the payment between the two periods of service was not possible because the taxpayer and the employer had not negotiated the payment to this effect. In Case 16/2006 2006 ATC 228, a taxpayer received a termination payment of $348,000, paid in two amounts of $203,000 and $145,000, when her employment with an Australian company was terminated in 2002. The taxpayer argued that the $203,000 amount related to her seven years of service with a related company in the UK before transferring to Australia and should be tax-free as an exempt non-resident foreign termination payment. She admitted that her employer had not explicitly recognised her UK service in the deed of release, but said that this was because the termination was acrimonious. The AAT held the entire payment was taxable and no part was an exempt foreign termination payment. The taxpayer had not discharged the burden of proof to establish that her employer had calculated the payment in respect of her UK service, and there was no evidence of why the payment was split into two amounts or that the Australian employer had agreed to discharge the obligation of the UK employer to the taxpayer. In Case 16/2000 2000 ATC 243, a termination payment received by a bank officer after 13 years of service with a bank in Australia and overseas was not an exempt non-resident foreign termination payment as the payment did not relate solely to a period when the taxpayer was a non-resident. The calculation of the payment took into account the whole period of the taxpayer’s service within and outside Australia and he was a non-resident for only part of that time. The payment was taxable as an eligible termination payment. Termination payment relating to Australian resident period A payment received by a taxpayer may be tax free if it is received in consequence of: • termination of the taxpayer’s employment in a foreign country, or • termination of the taxpayer’s engagement on qualifying service on an approved project (within the meaning of ITAA36 s 23AF) in a foreign country — this includes retirement from the engagement and cessation of the engagement because of the taxpayer’s death (s 83-240). A payment in either of these cases is non-assessable non-exempt income if: • it relates only to the period of that employment or engagement • it is not a payment from a superannuation fund • it is not a payment of a pension or an annuity, ie it must be a lump sum payment • the taxpayer was an Australian resident during the period of the employment or engagement • the payment is not exempt from income tax under the law of the foreign country — the Commissioner’s view is that, if a foreign country does not impose income tax on a termination payment, this condition is not satisfied because the payment is exempt (Interpretative DecisionID 2013/67)

• if the payment relates to a period of employment — the taxpayer’s foreign earnings from the employment are exempt from income tax under ITAA36 s 23AG, and • if the payment relates to a period of engagement — the taxpayer’s eligible foreign remuneration from the service is exempt from income tax under s 23AF. [FITR ¶130-600, ¶130-610, ¶130-615; SLP ¶40-192]

9 MYSUPER • SUPERSTREAM MYSUPER PRODUCTS What is MySuper?

¶9-000

MySuper — key terms and administration

¶9-030

AUTHORISATION TO OFFER MYSUPER PRODUCTS Application for authorisation to offer MySuper products

¶9-100

Elections by RSE licensees under s 29SAA, 29SAB and 29SAC

¶9-120

Accrued default amount

¶9-130

Characteristics of a MySuper product

¶9-150

Products with material goodwill

¶9-170

MySuper products for large employers

¶9-180

FEE RULES FOR MYSUPER PRODUCTS Fee charging rules — superannuation funds and MySuper products

¶9-200

Fees that may be charged in a MySuper product

¶9-210

Fee charging rules for MySuper products

¶9-220

Performance-based fees

¶9-240

Percentage-based administration fees may be capped

¶9-250

MYSUPER — ADDITIONAL TRUSTEE OBLIGATIONS Enhanced trustee obligations

¶9-300

Insurance standards — MySuper members

¶9-360

Assessing member outcomes and fund sustainability

¶9-400

OFFENCES Misrepresentation

¶9-450

Dealing with contributions

¶9-460

DASHBOARD AND OTHER DISCLOSURE REQUIREMENTS MySuper products — dashboard and other disclosures

¶9-600

Dashboard publication

¶9-610

Portfolio holdings disclosure

¶9-620

Remuneration and other disclosures

¶9-650

Consistency in calculation of published data

¶9-660

APRA PRUDENTIAL STANDARDS APRA may determine prudential standards

¶9-700

APRA prudential standards and prudential practice guides

¶9-720

REPORTING STANDARDS — RSE Returns and other reports to APRA under FSCDA

¶9-740

Superannuation reporting standards and forms

¶9-750

SUPERSTREAM — DATA AND PAYMENT STANDARDS SuperStream — superannuation administration

¶9-780

Superannuation data and payment standards — funds and employers ¶9-790 SuperStream and events based reporting

¶9-795

APRA LETTERS — MYSUPER GUIDELINES APRA priorities and letters

¶9-810

ASIC — other superannuation guidelines

¶9-880

MySuper Products ¶9-000 What is MySuper? One highlight of the Cooper Review into the governance, efficiency, structure and operation of Australia’s superannuation system in 2010 was to recommend a new architecture for the superannuation industry, namely MySuper. The reason for MySuper is best described by the issue identified by the Cooper Panel and its solution, as below (Final Report Part Two: Recommendation Packages, p 5): “Issue The current superannuation system assumes that all members want to make choices about their superannuation and are interested in receiving a variety of superannuation-related services. ‘Default’ members are not adequately protected and can find themselves paying for services that they do not need or request and, on some occasions that they do not receive. Trustees are not always focussed on acting for the benefit of members and maximising members’ retirement incomes in an efficient and cost-effective way. MySuper product solution The Panel proposes measures, including: • a new architecture for the superannuation industry, designed from a member — not an industry or product — perspective; • the creation of MySuper, a simple, cost-effective product intended to better serve the interests of members who want the trustee to be responsible for making decisions about their super; • a requirement that only MySuper is eligible to be a ‘default’ fund under the SGA Act nominated by an employer or under Fair Work Australia awards; and • a renewed emphasis on duties for MySuper trustees, with the trustee explicitly responsible for a single, diversified investment strategy and controlling costs. Benefits for members Members will benefit from the new choice architecture as: • they would have the confidence to be engaged as much or as little with their super as they want; • MySuper trustees would have to design and give effect to an investment strategy aimed at optimising members’ financial interests; and • the effect of commissions (and like payments) would be contained and fees would not be charged for advice that is not requested or received”.

The final report of the Cooper Review is available at strongersuper.treasury. gov.au/content/publications/government_response/downloads/Stronger_Super.pdf. The government accepted the MySuper solution and legislation for its implementation was enacted in Pt 2C of the Superannuation Industry (Supervision) Act 1993 (SISA) and its Regulations (the core legislative framework) (¶9-030), complemented by amendments to the Superannuation Guarantee (Administration) Act 1992 (SGAA), the Corporations Act 2001 (CA) and the Fair Work Act 2009 (FW Act) and their Regulations. Object of MySuper The MySuper regime commenced on 1 July 2013. Below is the “Object of MySuper” in Pt 2C: (1) It is intended that all MySuper products will be simple products sharing common characteristics. (2) The object of this Part is to ensure that a class of beneficial interest in a regulated superannuation fund is not offered as a MySuper product unless it has those characteristics. (3) This is done by requiring the RSE licensee of a regulated superannuation fund to obtain authority from APRA before offering a class of beneficial interest in the fund as a MySuper product. (4) The ability of an RSE licensee to offer a MySuper product is significant for the purposes of the SGA Act. Under that Act, employers will need to pay contributions for an employee who has no chosen fund into a fund that offers a MySuper product, in order to meet the choice of fund requirements and so avoid an increased individual superannuation guarantee shortfall for the employee (s 29R). MySuper regime — a brief overview A class of beneficial interest in a regulated superannuation fund is a MySuper product if an RSE licensee is authorised under s 29T to offer that class of beneficial interest in the fund as a MySuper product (s 10(1)). Defined benefit members MySuper is designed to apply to accumulation arrangements only. Regulation 1.04(2) of SISR sets out the circumstances in which a member who is not a defined benefit member under the general definition in s 10(1) is taken to be a defined benefit member for s 20B (about accrued default amounts) or Pt 2C (MySuper) (see ¶9-030). Under the SG scheme, employers are only permitted to make contributions for employees who do not have a chosen fund to a fund that offers a MySuper product (¶12-048) (see also SGAA s 19(2CA) for the exemption for defined benefit members). Regulation 6 of SGA Regulations 2018 (SGAR) sets out circumstances in which a member who is not a defined benefit member under the general definition is taken to be a defined benefit member for this purpose. Main features of MySuper and transition to MySuper Registrable superannuation entity (RSE) licensees of superannuation funds are able to offer MySuper products. They are required to apply to APRA for authorisation for each MySuper product that they offer. This approach builds upon the existing RSE licensing processes in SIS Act (¶3-480), avoids duplication, and ensures that APRA is given sufficient powers to regulate the MySuper regime consistent with the additional prudential supervision of MySuper products and their issuers under SIS Act. Employers must make SG contributions for employees who have not made a choice of fund (ie “default contributions”) to a superannuation fund that offers a MySuper product so as to comply with the SG choice of funds rules (¶12-040). A superannuation fund must offer a MySuper product in order to be named in a modern award. The FW Act provides the process for the expert panel of the Fair Work Commission to review the default superannuation funds to be named in modern awards.

Trustees of regulated superannuation funds must transfer the balances of their default members (accrued default amount) to a MySuper product in their fund (or, if they do not offer MySuper products, to another fund which offers MySuper products), subject to certain exceptions (eg balances of defined benefit scheme member or balances in certain legacy products), in accordance with transition rules in SISA. Pricing and branding Superannuation funds with MySuper products must offer a product with a single investment strategy and a standard set of fees available to all prospective members. However, employers may be able to negotiate with funds to obtain a discounted administration fees for their employees. To maintain transparency, details of tailored MySuper products and discounted administration fees must be reported to APRA and be separately published by trustees. While each fund is limited to offering one MySuper product, separate brands of MySuper products can be offered within a fund in cases where there is a pre-existing and distinct MySuper, or default products are acquired as a result of a merger or takeover. Funds must apply to APRA for approval to offer more than one brand of MySuper product. Investment strategy — level of risk and investment return target A MySuper product must have a single, diversified investment strategy. Fund trustees must set a targeted rate of return (over a rolling 10-year period) and level of risk that they have determined is appropriate for MySuper members, and use the same approach for calculating and presenting this information in their product dashboard. Investment strategy — lifecycle investment options Lifecycle investment options enable trustees to automatically move members into a different investment mix based on their age and can be particularly relevant as part of a transition to retirement. Trustees are allowed to use a lifecycle investment option as the single investment strategy for their MySuper product. Fees The fees that a member can be charged in a MySuper product are limited to: • administration fee • investment fee (including a performance-based fee, subject to the limitations outlined below) • buy and sell spreads (limited to cost recovery) • exit fee (prohibited from 1 July 2019), and • switching fee (limited to cost recovery). In addition, trustees may charge fees for certain member-specific costs initiated by the member or a court, for example, account splitting following a family law decision. All fees charged for MySuper products must be able to be included under these standard descriptions, to make it simpler for members to understand and to compare fees against other MySuper products. Trustees are not restricted on the types of fees that can be charged in “choice products” (¶9-030). Insurance — MySuper and choice products RSE trustees must allow members to opt out of life and total and permanent disability (TPD) insurance cover within 90 days of joining a fund, or on each anniversary of the member joining the fund. Where trustees are unable to obtain opt-out cover at a reasonable cost, MySuper product trustees are required to offer compulsory insurance, while choice product trustees can either offer compulsory insurance or no insurance. These arrangements do not apply to defined benefit funds that have insurance cover as part of the benefit design. Trustees have a discretion whether to offer income protection insurance, on an opt-in or opt-out basis or at all. Default insurance in MySuper products

MySuper products are required to offer a standard, default level of life and TPD insurance. MySuper product members can increase or reduce their insurance cover (if offered by the trustee) without having to leave the MySuper product. As particular factors at a workplace may influence the appropriate level and structure of insurance for employees at that workplace, the MySuper standard insurance cover may be replaced by a default insurance strategy tailored to meet the specific requirements of the employees of a particular employer. Post-retirement products not part of MySuper MySuper products only cover the pre-retirement phase. • the Financial Sector (Collection of Data) Act 2001 to empower APRA to obtain information on expenses incurred by RSE and RSE licensees in managing or operating the RSE.

¶9-030 MySuper — key terms and administration Below are definitions and concepts (listed alphabetically) which are relevant to MySuper products and providers. All legislative references are to SIS Act unless specified otherwise. • accrued default amount, for a member of a regulated superannuation fund, has the meaning given by s 20B (¶9-130) • beneficiary, in relation to a fund, scheme or trust, means a person (whether described in the governing rules as a member, a depositor or otherwise) who has a beneficial interest in the fund, scheme or trust and includes, in relation to a superannuation fund, a member of the fund despite the express references in SIS Act to members of such funds • choice product — a class of beneficial interest in a regulated superannuation fund is a choice product unless: – all the members of the fund who hold that class of beneficial interest in the fund are defined benefit members, or – that class of beneficial interest in the fund is a MySuper product • connected entity, in relation to an RSE licensee of a registrable superannuation entity, means: – a subsidiary of the RSE licensee (where the RSE licensee is a body corporate), and – any other entity of a kind prescribed by the regulations (¶9-700) • contributing employer means an employer having obligations under Pt 3B (about the superannuation data and payment regulations and standards) • death benefit — means a benefit provided in respect of a regulated superannuation fund member only in the event of the member’s death (see s 68AA) • defined benefit member, subject to s 10(1A): – in the s 10(1) definition of choice product, s 20B and Pt 2C — has the same meaning as in SGA Act – in Pt 8 Div 3A (in-house asset rules) and Pt 23 (financial assistance for funds) — has the meaning given by s 83A, and – in any other provision of SIS Act — has the meaning given by the regulations Section 10(1A) provides that regulations may prescribe: – circumstances in which a member of a superannuation fund is not a defined benefit member for SIS Act purposes or a SIS Act provision

– circumstances in which a member of a superannuation fund who is not otherwise a defined benefit member for the purposes of SIS Act, or a provision of SIS Act, is to be taken to be a defined benefit member for SIS Act purposes or a SIS Act provision (s 10(1A)) — see reg 1.04 • eligible rollover fund — a regulated superannuation fund is an eligible rollover fund if an RSE licensee is authorised under s 242F to operate the fund as an eligible rollover fund • enhanced director obligations means: – for MySuper products — the obligations imposed by: (a) s 29VO, and (b) covenants prescribed under s 54A that are specified in the regulations as forming part of the enhanced director obligations for MySuper products, and – for eligible rollover funds — the obligations imposed by: (a) s 242L, and (b) covenants prescribed under s 54A that are specified in the regulations as forming part of the enhanced director obligations for eligible rollover funds • enhanced trustee obligations means: – for MySuper products — the obligations imposed by: (a) covenants referred to in s 52, as enhanced by the obligations imposed under s 29VN, and (b) covenants prescribed under s 54A that are specified in the regulations as forming part of the enhanced trustee obligations for MySuper products, and – for eligible rollover funds — the obligations imposed by: (a) covenants referred to in s 52, as enhanced by the obligations imposed under s 242K, and (b) covenants prescribed under s 54A that are specified in the regulations as forming part of the enhanced trustee obligations for eligible rollover funds • entry fee has the meaning given by s 99B (¶9-210) • fees — charging rules under s 29VA (¶9-220) • fees — fees that may be charged in relation to a MySuper product: – activity fee has the meaning given by s 29V(7) – administration fee has the meaning given by s 29V(2) – advice fee has the meaning given by s 29V(8) – investment fee has the meaning given by s 29V(3) – buy-sell spread has the meaning given by s 29V(4) – exit fee has the meaning given by s 29V(6) – insurance fee has the meaning given by s 29V(9) – switching fee has the meaning given by s 29V(5) (¶9-210) • fee rules, in relation to MySuper products, means the rules in Pt 2C Div 5 (see also “general fees

rules”) • general fees rules means the fee rules in Pt 11A (¶3-245) • MySuper product — a class of beneficial interest in a regulated superannuation fund is a MySuper product if an RSE licensee is authorised under s 29T to offer that class of beneficial interest in the fund as a MySuper product • MySuper scheme: – applying for authority to issue MySuper products under s 29S (¶9-100) – authority to offer a MySuper product — s 29T (¶9-100) – characteristics of a MySuper product — s 29TC (¶9-150) – product in another fund in which there is already material goodwill — s 29TA (¶9-170) – MySuper product for large employers — s 29TB (¶9-180) – offences — s 29W to 29WB (¶9-450, ¶9-460) • MySuper provisions — Pt 2C comprising s 29R to 29XC • MySuper member — a member of a regulated superannuation fund is a MySuper member of the fund if the member holds a beneficial interest in the fund of a class that the RSE licensee of the fund is authorised to offer as a MySuper product • permanent incapacity — a member of a superannuation fund or an approved deposit fund is suffering permanent incapacity if the member is taken, under the regulations, to be suffering permanent incapacity for the purposes of SIS Act • permanent incapacity benefit — see s 68AA • personal advice has the same meaning as in Ch 7 of the Corporations Act 2001 • prudential matter has the meaning given by s 34C(4) • prudential standard means a standard determined by APRA under s 34C(1) (¶9-720) • registrable superannuation entity means a regulated superannuation fund, an ADF or a PST, but does not include an SMSF (¶3-010) • RSE licence means a licence granted under s 29D • RSE licensee means a constitutional corporation, body corporate, or group of individual trustees, that holds an RSE licence granted under s 29D (¶3-485) • RSE licensee law means: SIS Act or SIS Regulations; prudential standards; the Financial Sector (Collection of Data) Act 2001; the Financial Institutions Supervisory Levies Collection Act 1998; and the provisions of the Corporations Act 2001 listed in a subparagraph of the definition of “regulatory provision” in s 38A(b) or specified in regulations made for the purposes of subparagraph (b)(xvi) of that definition, as applying in relation to superannuation interests; and any other provisions of any other law of the Commonwealth as prescribed in the regulations (¶9-100) • standard employer-sponsor has the meaning given by s 16(2); standard employer-sponsored fund has the meaning given by s 16(4); standard employer-sponsored member has the meaning given by s 16(5) (¶3-120)

• superannuation entity director has the meaning given by s 29VO(3). MySuper terms in Fair Work Act 2009 (FW Act) Section 23A of the FW Act, which commenced on 1 January 2014, contains the following terms: • a MySuper product has the meaning given by the Superannuation Industry (Supervision) Act 1993 • a standard MySuper product is a MySuper product that is not an employer MySuper product (note that this term replaced the previously enacted term generic MySuper product which is similarly defined) • an employer MySuper product is a tailored MySuper product or a corporate MySuper product • a tailored MySuper product is a MySuper product in relation to which s 29TB of the Superannuation Industry (Supervision) Act 1993 is satisfied • a corporate MySuper product is a MySuper product that is offered by a superannuation fund that: – is a standard employer-sponsored fund (within the meaning of the Superannuation Industry (Supervision) Act 1993), and – is not a public offer superannuation fund (within the meaning of that Act), and – has: (a) one standard employer-sponsor (within the meaning of that Act), or (b) two more standard employer-sponsors (within the meaning of that Act) that are associates of each other for the purposes of that Act. RSE licensing and MySuper scheme — legislation and administration responsibility The core provisions for the MySuper regime are contained in Pt 2C of SISA and Regulations, and the transitional provisions in SISA Pt 33 and 34. APRA has general administration of the above Parts in SISA, other than s 29SAA(3), 29QB, 29QC which are under ASIC’s administration (¶9-650, ¶9-660). Outside of the MySuper regime: • APRA has general administration of Pt 2A and 2B of the SISA which deal with RSE licensing and registration (¶3-480–¶3-485), and • ASIC has general administration of the Corporations Act 2001 which deals with licensing for financial services and products, including RSE licensees and their service providers (¶4-600 and following).

Authorisation to Offer MySuper Products ¶9-100 Application for authorisation to offer MySuper products The trustee of a registrable superannuation entity or entities must be licensed by APRA under SISA Pt 2A (an “RSE licensee”) and be registered with APRA in accordance with SISA Pt 2B (¶3-480–¶3-485). An RSE licensee may apply to APRA, in the approved form, for authority to offer a class of beneficial interest in a regulated superannuation fund as a MySuper product (SISA s 29S(1)(2)). Importantly, the information must be accompanied by elections made in accordance with s 29SAA, 29SAB, and 29SAC (see ¶9-120) and include specified information relating to the application requested by APRA (s 29SA). Authority to offer a MySuper product

APRA must authorise an RSE licensee to offer a class of beneficial interest in a regulated superannuation fund as a MySuper product if the following requirements in SISA 29T(1) are met: (a) the application for authority complies with s 29S (see above) (b) the applicant has given APRA all information as requested under s 29SA, or the request has been disposed of (c) the fund is registered under SISA Pt 2B (¶3-490) (d) either the fund has five or more members or, if authority is given, will have five or more members within a period specified in the authority (e) the fund is not an eligible rollover fund (¶3-520) (f) one of the following applies: (i) the licensee is not already authorised to offer another class of beneficial interest in the fund as a MySuper product (ii) the licensee is already authorised to offer another class of beneficial interest in the fund as a MySuper product, but s 29TA (about another product with material goodwill: see ¶9-170) or 29TB (about tailored products for large employers: see ¶9-180) is satisfied in relation to the class of beneficial interest in the fund to which the application relates (iii) the licensee is already authorised to offer another class of beneficial interest in the fund as a MySuper product, but s 29TA or 29TB was satisfied in relation to each class of beneficial interest that the RSE licensee is already authorised to offer as a MySuper product, at the time APRA gave that earlier authority (g) APRA is satisfied that s 29TC (about characteristics of the product: see ¶9-150) is satisfied in relation to that class of beneficial interest (h) APRA has no reason to believe that the RSE licensee (if a body corporate trustee) or each of the individual trustees of the RSE licensee (if a group of individual trustees) may fail to comply with the enhanced trustee obligations for MySuper products (¶9-300) (i) where the RSE licensee is a body corporate — APRA has no reason to believe that the directors of the RSE licensee are likely to comply with the enhanced director obligations for MySuper products (¶9-300) (j) APRA is satisfied that the RSE licensee (if a body corporate trustee) or each of the individual trustees of the RSE licensee may fail to comply with the general fees rules and the fees rules in relation to MySuper products (¶3-245, ¶9-200), and (k) APRA has no reason to believe that the RSE licensee may contravene s 29W, 29WA or 29WB (about offences: ¶9-450). The s 29T conditions mean that SMSFs and small APRA-regulated funds are not able to offer MySuper products (as they cannot have five or more members, see (d) above). PSTs and ADFs are also precluded as they cannot accept superannuation guarantee contributions or maintain individual member accounts, ie they are unable to offer individual members a class of beneficial interest in the entity. Also, from 6 April 2019, APRA may refuse an authority to offer a MySuper product if APRA considers there are one or more reasons why an RSE licensee may fail to comply with its obligations (see s 29T(h)(k)). Previously, APRA was required by those provisions to assess, on a balance of probabilities, whether the RSE licensee was likely to comply with its obligations. APRA decision

APRA must decide an application by an RSE licensee for authority to offer a MySuper product within 60 days of receiving an application (s 29SB(1)). Where additional information is required, APRA will have a further 60 days from when it receives this information. Also, APRA may extend the period for making a decision by a further 60 days, provided it notifies the RSE licensee in writing (s 29SB(2)). If APRA has not decided an application by the end of the required period, APRA is taken to have decided, at the end of the last day of that period, to refuse the application (s 29SB(4)). APRA’s decision to refuse an application is a reviewable decision. Cancellation of authority to offer MySuper products An authority to an RSE licensee to offer a class of beneficial interest in a regulated superannuation fund as a MySuper product may be cancelled (s 29U(1)). The circumstances in which APRA may cancel the authorisation of a MySuper product are where: • APRA ceases to be satisfied that the governing rules of the fund meet the required characteristics of a MySuper product in s 29TC (¶9-150) • the RSE licensee was authorised to provide a tailored MySuper product to a large employer and that large employer either no longer meets the requirements to be offered this product on the last day before the annual reporting period or did not meet the 500-member test by the end of the period specified in the authority (s 29TB: ¶9-150) • APRA has reason to believe that the RSE licensee may not comply with the enhanced trustee obligations for MySuper products (whether because of a previous failure to do so, or for any other reason) (¶9-300) • APRA has reason to believe that the RSE licensee may not comply with the fee rules in relation to MySuper products (whether because of a previous failure to do so, or for any other reason) (s 29V to 29VE: ¶9-200) • APRA has reason to believe that the RSE licensee may contravene s 29W, 29WA or 29WB (whether because of a previous contravention of that section, or for any other reason) • APRA ceases to be satisfied that the RSE licensee is not likely to represent a product as a MySuper product when they are not authorised to do so (s 29W: ¶9-450) • the fund no longer has five or more members, or was granted authorisation on the basis that the fund is expected to have five or more members within a time period specified by APRA and that fund does not have five or more members by the end of that time period (s 29T, see above) • APRA ceases to be satisfied that the fund is not an eligible rollover fund (s 29T, see above) • the RSE licensee contravenes a governing rule of the fund in relation to the MySuper product (¶3100), or • the fund ceases to be registered (¶3-490) (s 29U(2)). If an RSE licensee is also a financial services licensee, APRA is required to consult with ASIC before deciding to cancel the licensee’s authorisation to offer a MySuper product if it believes that the cancellation will affect the licensee’s ability to offer one or more financial services (s 29UA). APRA guidelines — MySuper authorisation and FAQs APRA guidelines to RSE licensees applying to issue MySuper products and on operational matters, are available on its website (www.apra.gov.au/applying-mysuper-or-erf-authorisation).

¶9-120 Elections by RSE licensees under s 29SAA, 29SAB and 29SAC An application to APRA for an authority to offer a class of beneficial interest in a regulated superannuation

fund as a MySuper product must be accompanied by elections which are made in accordance with SISA s 29SAA, 29SAB and 29SAC (see ¶9-100). These elections, when made, become a condition of the RSE’s licence to give effect to the elections (s 29E(6B)). Section 29SAA — election to move “accrued default amounts” An application by an RSE licensee for authority to offer a MySuper product requires an election that the RSE licensee will attribute to a MySuper product each accrued default amount in each fund for which the RSE licensee is the trustee (s 29SAA). The meaning of “accrued default amount” is discussed in ¶9-130. An RSE licensee is not required to transfer an accrued default amount if the member directs the RSE licensee in writing not to. This ensures that members have the right to opt out of having their existing balance moved to a MySuper product if they so wish (s 29SAA(1)(a)(i)). An RSE licensee may attribute an amount to a MySuper product by obtaining authorisation for an existing default investment option as a MySuper product. In other cases, to attribute an accrued default amount to a MySuper product will require the amount to be transferred. Notification under s 29SAA(3) — accrued default amount attributed to MySuper product (SISR reg 9.46) For s 29SAA(3), an RSE licensee must give the member a notice in writing of the matters prescribed in SISR reg 9.46(3) at least 90 days before the attribution of the accrued default amount or the transfer of the accrued default amount to another fund (reg 9.46(1)). ASIC is responsible for enforcing the reg 9.46 notice requirements. No notification is required if the attribution or transfer will not result in any of the following: • an increase in a fee or charge that applies to the amount • a reduction in an insured benefit that is attributable to the member • an increase in an insurance premium that is attributable to the member • a change in the investment strategy that relates to the amount (reg 9.46(2)). An RSE licensee that is required to provide the reg 9.46 notice does not have an obligation to provide a significant event notice that would usually be required by s 1017B of the Corporations Act 2001 (CA) (CR reg 7.9.11L; 7.9.11B: ¶4-170). In some cases, there may be only immaterial changes to a member’s rights as a result of the RSE licensee being authorised to offer a MySuper product, for example, if an existing default investment option can simply be converted into a MySuper product. In this case, it is expected that a notice may be given after the change has occurred. An RSE licensee is also not required to provide a notice under CA s 1017B where a member’s accrued default amount is moved under a s 29SAA election to avoid duplication. Notification under s 29SAA(3) — periodic statements (SISR reg 9.46A) For s 29SAA(3), an RSE licensee must give a member of the fund mentioned in s 29SAA(3)(a) or (b) (see above) a notice in writing stating: • the RSE licensee’s obligation to move the accrued default amount by 30 June 2017 and promote the financial interests of the member in relation to a MySuper product held by the member (see below) • the accrued default amount, and • either: – if the RSE licensee has identified a MySuper product, either within the fund or in another regulated superannuation fund, to which the RSE licensee proposes to move the accrued default amount — the name of the MySuper product, and when the proposed move will occur, or

– if the RSE licensee has not identified such a MySuper product — why the RSE licensee has not done so, and what the RSE licensee has done, and will do, to do so (reg 9.46A(3)). The notice must be given to the member with the first periodic statement sent to the member after the RSE licensee has identified the accrued default amount, and each subsequent periodic statement sent to the member until the accrued default amount is moved to a MySuper product (reg 9.46A(4)). Related matters APRA may cancel an authority to offer a MySuper product where it is satisfied that the RSE licensee has failed to give effect to its election to transfer accrued default amounts to a MySuper product (s 29U(2)(j)). If an RSE licensee makes a s 29SAA election, it will also be a condition of their licence to give effect to this election (s 29E(6B)). An RSE licensee’s actions in giving effect to an election under s 29SAA will not give rise to a liability to a member (s 29XA). A provision of the governing rules of a superannuation fund that prevents an RSE licensee giving effect to an election to transfer an amount in an accrued default amount to a MySuper product is void to the extent that it would prevent the RSE licensee from giving effect to the election (s 55B: ¶3-140). A member that opts out of the attribution of their accrued default amount to a MySuper product may opt to remain in their existing investment option where it continues to exist. However, in cases where the existing investment option is no longer available, the trustee may require a member to nominate an investment option for their accrued default amount to be transferred to, in order for the member to validly opt out. Section 29SAB — election to transfer amounts if MySuper authorisation cancelled An RSE licensee that applies for authority to offer a class of beneficial interest in a regulated superannuation fund as a MySuper product makes an election in accordance with s 29SAB if: • the RSE licensee elects: – to take the action required under the prudential standards in relation to any asset or assets of the fund that are attributed to the MySuper product, if the authority to offer the relevant class of beneficial interest in the fund as a MySuper product is cancelled under s 29U(1), and – to do so before the end of a period of 90 days beginning on the day on which notice of the cancellation is given to the RSE licensee under s 29U(3), and • the election is in writing and is in the approved form. A provision of the governing rules of a superannuation fund that prevents an RSE licensee giving effect to this election to transfer amounts in a MySuper product if authorisation is cancelled is also void to the extent that it would prevent the RSE licensee from giving effect to the election (s 55B: ¶3-140). Section 29SAC — election not to charge MySuper members for payment of conflicted remuneration An RSE licensee that applies for authorisation to offer a MySuper product must include with its application an election under s 29SAC not to charge members of the MySuper product a fee relating to the payment of conflicted remuneration (s 29SAC(1)). The RSE licensee must elect that it will not charge any member of the MySuper product a fee in relation to that MySuper product that relates directly or indirectly to costs of the fund in paying conflicted remuneration to a financial services licensee or a representative of a financial services licensee. This part of the election effectively prohibits the trustee from making any commission payment to a financial adviser that is deducted from a MySuper product (s 29SAC(1)(a)(i)). The second part of the election by the RSE licensee extends to not charging a member of the MySuper product a fee in relation to that MySuper product that relates to costs of the fund in paying an amount to another person that the RSE licensee knows, or reasonably ought to know, relates to conflicted

remuneration paid by that other person to a financial services licensee, or a representative of a financial services licensee (s 29SAC(1)(a)(ii)). This second part of the election will prohibit an RSE licensee from paying premiums on insurance policies that have embedded commissions paid by an insurance company to a financial adviser in relation to the insurance arrangements offered through the superannuation fund. An RSE licensee is only required to elect not to pay amounts to other parties to the extent that they know or reasonably ought to know that the amount paid relates to the payment of conflicted remuneration. This prevents an RSE licensee from breaching the election due to another party to whom they have paid an amount using part or that entire amount to pay conflicted remuneration that they are unaware of, and cannot reasonably be expected to be aware of. “Representative”, of a financial services licensee, has the same meaning as in Pt 7.6 of the Corporations Act 2001. Conflicted remuneration In s 29SAC, the expressions “conflicted remuneration” has the same meaning as in Pt 7.7A of the Corporations Act 2001 (CA) (¶4-530), subject to the extension that conflicted remuneration also has the meaning it would have if: (a) financial product advice provided to the RSE licensee by a financial services licensee, or a representative of a financial services licensee were provided to the RSE licensee as a retail client, and (b) financial product advice provided to the other person mentioned in s 29SAC(1)(a)(ii) by a financial services licensee, or a representative of a financial services licensee were provided to the other person as a retail client (s 29SAC(3)). A trustee of a superannuation fund is considered to be a retail client if it has net assets of less than $10m (CA s 761G(6): ¶4-060). This definition would exclude most RSE licensees. For this reason, the extended meaning of “conflicted remuneration” means that all RSE licensees must be treated as a retail client so as to prevent the cost of commission payments relating to advice provided to the RSE licensee being deducted from a MySuper product in these circumstances (s 29SAC(3)). For example, an RSE licensee may receive advice in relation to a life insurance product which the RSE licensee subsequently acquires for the MySuper product members of the fund and the insurer may pay a commission to the financial adviser in respect of that advice. The RSE licensee will be deemed to be a retail client in relation to this advice, so that the commission is treated as conflicted remuneration for the purposes of the election, even if, under the CA, the RSE licensee is not a retail client. If APRA is satisfied that the RSE licensee has failed to give effect to the election in s 29SAC, APRA may cancel the licensee’s authorisation to offer MySuper products (s 29U(2)(k): ¶9-100). APRA and ASIC guidelines For APRA prudential standards and guidelines, see ¶9-720. ASIC Information Sheet INFO 169 “Notifying members about superannuation transfers: Accrued default amounts (MySuper transition)” provides guidelines on s 29SAA(3) (¶9-880).

¶9-130 Accrued default amount The total amount attributed by the trustee of a regulated superannuation fund to a member of the fund is an “accrued default amount” for the member if either of the following is satisfied: • the member has given the trustee of the fund no direction on the investment option under which the assets of the fund attributed to the member in relation to the amount (the member’s underlying assets) are to be invested (SISA s 20B(1A)), or • the investment option under which the assets of the fund attributed to the member in relation to the amount (the member’s underlying assets) is invested is one which, under the current governing rules

of the fund, would be the investment option for a new member if no direction were given (ie that is the current default investment option) (s 20B(1B)). This means if a member makes a direction to invest their entire balance in the current default investment option relevant to that member, the entire amount will be an accrued default amount. However, if a member makes a direction to invest part of their balance in an investment option other than the current default investment option, then the entire balance of that member, even though part may be invested in the current default investment option, will not be an accrued default amount. For the purposes of s 20B(1A), a person is taken to have given the trustee of a later fund (see below) a direction to invest in the equivalent investment option any asset (or assets) of the later fund that is attributed to the person in relation to an amount attributed to the person if: (a) the person’s benefits in a regulated superannuation fund (the earlier fund) are transferred to another regulated superannuation fund (the later fund) (b) the person gave or is taken to have given the trustee of the earlier fund a direction on the investment option under which an asset (or assets) of the earlier fund is to be invested, and (c) an amount attributable to the person is invested under an equivalent investment option offered by the later fund (the equivalent investment option) (s 20B(3A)). The above will apply, for example, where a member has given an investment direction to an RSE licensee of a previous fund and the member’s benefits are transferred under the successor fund transfer rules to an equivalent investment option in the current fund. The member is deemed to have given an investment direction in the equivalent investment option to the RSE licensee of the current fund (s 20B(3A)). This includes directions given to a previous fund before 1 January 2013 (the commencement date of s 20B). This deeming similarly applies where a member’s benefits have been transferred more than once between funds (ie transfers to multiple funds). Whether a member has given an investment direction is a question of fact. An RSE licensee is therefore not required to have a physical copy of the investment direction if, for example, the RSE licensee can show that a member would only be able to be invested in the current investment option if he/she had given an investment direction to an RSE licensee of a previous fund and was transferred to an equivalent investment option. In this case, as a matter of fact, the amount so invested would not be an accrued default amount. An RSE licensee may attribute an amount to a MySuper product by obtaining authorisation for an existing default investment option as a MySuper product. In other cases, to attribute an accrued default amount to a MySuper product will require the amount to be transferred. Amounts that are not accrued default amounts An amount in a member’s account is not an accrued default amount in the following situations: • to the extent that the amount is attributed to the member in relation to a MySuper product • if the member is a defined benefit member of the fund • if the fund is an eligible roll-over fund • to the extent that an amount (ie the underlying assets) is invested in one or more of the following: – a capital guaranteed life insurance policy where the contributions and accumulated earnings may not be reduced by negative investment returns or any reduction in the value of assets in which the policy is invested – a life policy providing benefits based solely on the realisation of a risk, and not related to the performance of an investment – an investment account contract that is held solely for the benefit of that member, and relatives and dependants of that member — to cover legacy products such as endowment and whole of

life policies, and – an investment option under which the investment is held as cash, or • to the extent that a pension is payable out of the underlying asset(s) (in this case, such an amount cannot be part of a MySuper product: see s 29TC(1)(i)) (s 20B(2), (3), (4)). APRA may determine prudential standards dealing with accrued default amounts and with assets attributed to former MySuper products (s 29X; 29XA (see below)). Moving accrued default amounts to MySuper product As noted in ¶9-120, an RSE licensee’s application to APRA for authorisation to offer a MySuper product includes an election by the RSE licensee to transfer accrued default amounts to a MySuper product unless the member opts out in writing. An RSE licensee must elect in writing in the approved form to transfer accrued default amounts held within all funds for which it is trustee to a MySuper product unless the member opts out in writing. An RSE licensee will not be subject to any liability to a fund member for action taken to transfer the member’s accrued default amounts or amounts on the cancellation of a MySuper authorisation. In addition, any provision of a fund’s governing rules of a fund that would prevent an RSE licensee from giving effect to a requirement to transfer accrued default amounts, or amounts on the cancellation of a MySuper authorisation, is void. Transitional provisions relating to moving accrued default amounts Part 33 of SISA contains transitional provisions to ensure that each accrued default amount held by an RSE licensee before 1 July 2017 is moved into a MySuper product and allow RSE licensees to prepare for and manage the transfer of accrued default amounts from their existing superannuation arrangements to the MySuper regime. APRA prudential standards APRA prudential standards and guidelines are discussed generally in ¶9-720. SPS 410 provides relief from compliance with certain paragraphs of the standard where an existing default investment option is rebadged as a MySuper product.

¶9-150 Characteristics of a MySuper product Section 29TC of SISA sets out the characteristics of a MySuper product. A class of beneficial interest in a regulated superannuation fund is MySuper product if, under the governing rules of the fund: (a) a single diversified investment strategy is to be adopted in relation to assets of the fund, to the extent that they are attributed to that class of beneficial interest in the fund (b) all members who hold a beneficial interest of that class in the fund are entitled to access the same options, benefits and facilities, except to the extent that a benefit is provided by taking out risk insurance (c) amounts are attributed to members in relation to their beneficial interest of that class in the fund in a way that does not stream gains or losses that relate to any assets of the fund to only some of those members, except to the extent permitted under a lifecycle exception under s 29TC(2) (see below) (d) the same process is to be adopted in attributing amounts to members in relation to their beneficial interest of that class in the fund, except to the extent that a different process is necessary to allow for fee subsidisation by employers (e) if fee subsidisation by employers is permitted, that subsidisation does not favour one member who

holds a beneficial interest of that class in the fund and is an employee of a subsidising employer over another such member who is an employee of that employer (f) the only limitations imposed on the source or kind of contributions made by or on behalf of persons who hold a beneficial interest of that class in the fund are those permitted under s 29TC(3) (see below) (g) a beneficial interest of that class in the fund cannot be replaced with a beneficial interest of another class in the fund, unless: • the person who holds the interest consents in writing to that replacement no more than 30 days before it occurs, or • the person who holds the interest has died and the interest is replaced with a beneficial interest of another class in the fund of a kind, and in the circumstances, prescribed by the regulations (h) a beneficial interest of that class in the fund (the old interest) cannot be replaced with a beneficial interest (the new interest) in another superannuation entity unless: • the replacement is permitted, or is required, under a law of the Commonwealth, or • the person who holds the old interest consents in writing to the replacement with the new interest no more than 30 days before it occurs (i) to the extent that assets of the fund are attributed to beneficial interests of that class, a pension is not payable out of those assets by the trustee of the fund on the satisfaction of a condition of release of benefits, unless the payment is derived from a benefit of the kind mentioned in s 62(1)(b)(ii) provided to the fund by an insurer (j) no member who holds a beneficial interest of that class in the fund is precluded from holding a beneficial interest of another class in the fund because of that fact, and (k) no member is precluded from holding a beneficial interest of that class in the fund because the member holds a beneficial interest of another class in the fund (s 29TC(1)). Section 62(1)(b)(ii) is about benefits payable when a person ceases work due to ill-health (as part of the approved benefits under the sole purpose test: ¶3-200). The effect of item (i) above is that RSE licensees are not permitted to brand any retirement pension product as a MySuper product. For this reason, a pension cannot be payable within a MySuper product to members on meeting a condition of release for retirement or reaching preservation age. RSE licensees may still pay pensions to member, but will be required to move the member’s interests into a separate choice product before commencing pension payments (s 29TC(1)(i)). Lifecycle exception — s 29TC(2) A “lifecycle exception” is a rule under the governing rules of the fund that allows gains and losses from different classes of asset of the fund to be streamed to different subclasses of the members of the fund who hold a MySuper product only on the basis of the age of those member, or the age and other prescribed factors in prescribed circumstances (s 29TC(2)). The prescribed factors are: • the member’s account balance, contribution rate, current salary and gender, and • the time remaining, in the opinion of the trustee, before the member could be expected to retire (SISR reg 9.47). Limitation on kinds of contributions — s 29TC(3) A limitation on the source or kind of contributions made by or on behalf of persons who hold a beneficial interest of a particular class in a regulated superannuation fund is permitted for the purposes of s 29TC(1)

(f) if the limitation is of a prescribed kind or is imposed by or under the general law or another law of the Commonwealth (s 29TC(3)). The following limitations on the source or kind of contributions made by or on behalf of a person who holds a MySuper product offered by a regulated superannuation fund are prescribed: (a) a limitation on a contribution, by way of transfer, from a fund that is, at the time the transfer is made, a foreign superannuation fund or a fund similar to a foreign superannuation fund (b) a limitation on the contribution of an asset in a form other than money (c) a limitation in relation to a contribution by a non-associated employer to: (i) a MySuper product that is authorised because s 29TB is satisfied (large employer MySuper product: ¶9-150), and (ii) a corporate MySuper product (reg 9.48(1)). A “corporate MySuper product” has the meaning given by s 23A(3) of the Fair Work Act 2009. A “foreign superannuation fund” has the meaning given by ITAA97 s 995-1(1). A “non-associated employer” means a person who is not: • an employer of the person who holds the MySuper product, or • an employer associated with the employer of the person who holds the MySuper product. APRA and ASIC guidelines For APRA prudential standards and guidelines, see ¶9-720. ASIC Information Sheet INFO 169 “Notifying members about superannuation transfers: Accrued default amounts (MySuper transition)” provides guidelines on the requirements under s 29SAA(3) (¶9-880).

¶9-170 Products with material goodwill APRA can give an RSE licensee authorisation to offer more than one MySuper product in a superannuation fund in order to preserve a corporate brand where there is already goodwill in that product (SISA s 29TA).This is to ensure that superannuation funds are not precluded from deriving administrative or other efficiencies from operating more than one MySuper product within a fund. APRA must authorise an RSE licensee to offer a class of beneficial interest in a regulated superannuation fund as a MySuper product if (among other conditions in s 29T: see ¶9-100): (i) the licensee is not already authorised to offer another class of beneficial interest in the fund as a MySuper product (ii) the licensee is already authorised to offer another class of beneficial interest in the fund as a MySuper product, but s 29TA (or s 29TB: ¶9-180) is satisfied, in relation to the class of beneficial interest in the fund to which the application relates, at the time APRA gives authority (iii) the licensee is already authorised to offer another class of beneficial interest in the fund as a MySuper product, but s 29TA or 29TB was satisfied in relation to each class of beneficial interest that the RSE licensee is already authorised to offer as a MySuper product, at the time APRA gave that earlier authority. Section 29TA is satisfied in relation to a class of beneficial interest in a regulated superannuation fund (the proposed MySuper product) if the benefits of members and beneficiaries in another regulated superannuation fund (the original fund) are to be transferred to the fund and APRA is satisfied that: (i) some or all of the persons whose benefits are to be transferred hold a class of interest in the original fund that is similar to the proposed MySuper product

(ii) there is material goodwill in that class of interest in the original fund (iii) that goodwill could not be maintained unless the RSE licensee were authorised to offer the proposed MySuper product as an additional MySuper product in the fund, and (iv) it would be in the best interests of the members of the fund, and those persons whose benefits are to be transferred to the fund, to maintain the distinction between the proposed MySuper product and other MySuper products within the fund. The proposed MySuper product must be similar to the product from the original fund from which members are being transferred, for example with respect to the investment strategy, insurance and fees, and the product must be maintained to ensure that it is sufficiently similar so that the goodwill in that product will continue. If the product was changed significantly, this would remove the justification for a separately branded MySuper product. The explanatory memorandum to Act No 162 of 2012 which inserted s 29TA states the following: “3.42 For the avoidance of doubt, this Bill will not prevent RSE licensees from having more than one product disclosure statement for a MySuper product. This includes using employer names to label a MySuper product or using an RSE licensee’s different brand names to label a MySuper product. However, this does not permit any variation in the features of the underlying product that is offered under a different label. Therefore, for example, two members that enter a MySuper product under different labels will have the same investment strategy and will be charged the same fee structure. 3.43 Where an RSE licensee labels or badges a MySuper product they must continue to meet the obligations of Part 7.10 of the Corporations Act. Therefore, to ensure that product disclosure statement documentation is not misleading, the name of the underlying MySuper product should be clearly stated”. Regulation 1.0.02 of the Corporations Regulations 2001 provides that “generic MySuper product”, as a class of beneficial interest in a superannuation entity, is a generic MySuper product if: (a) the superannuation entity is a regulated superannuation fund (b) the RSE licensee of the fund (within the meaning of SIS Act) is authorised to offer that class of beneficial interest in the fund as a MySuper product under s 29T, and (c) the RSE licensee of the fund is not authorised to offer that class of beneficial interest in the fund as a MySuper product because s 29TA or 29TB is satisfied in relation to the class.

¶9-180 MySuper products for large employers An RSE licensee may apply to APRA for authorisation of a “tailored” MySuper product that is established for a large employer and its associates that contribute to the fund on behalf of at least 500 members who are either employees of the large employer or associates of that large employer (SISA s 29TB). This is to enable RSE licensees to offer a tailored MySuper product to large employers where it is viable to offer a distinct product to suit the particular needs of the workplace. APRA must authorise an RSE licensee to offer a class of beneficial interest in a regulated superannuation fund as a MySuper product if (among other conditions in s 29T: see ¶9-100): (i) the licensee is not already authorised to offer another class of beneficial interest in the fund as a MySuper product (ii) the licensee is already authorised to offer another class of beneficial interest in the fund as a MySuper product, but s 29TB (or s 29TA: ¶9-170) is satisfied, in relation to the class of beneficial interest in the fund to which the application relates, at the time APRA gives authority (iii) the licensee is already authorised to offer another class of beneficial interest in the fund as a MySuper product, but s 29TA or 29TB was satisfied in relation to each class of beneficial interest that the RSE licensee is already authorised to offer as a MySuper product, at the time APRA gave that

earlier authority. Section 29TB is satisfied in relation to a class of beneficial interest in a regulated superannuation fund if: • under the governing rules of the fund, one employer is specified as a large employer in relation to the fund who is relevant to that class of beneficial interest • either that employer is a large employer in relation to the fund or will be a large employer in relation to the fund by the end of the period specified in an APRA authority to offer the class of beneficial interest in the fund as a MySuper product • under the governing rules of the fund, a person is not entitled to hold an interest of that class in the fund unless the person is an employee or a former employee of the large employer or of an associate of the large employer, or a relative or dependant of an employee or a former employee as mentioned, and • under the governing rules of the fund, where the large employer or an associate contributes to the fund or would, apart from a temporary cessation of contributions, contribute to the fund for an employee, any employee of the large employer or associate who is not a defined benefit member of the fund may hold an interest of that class in the fund. An employer is a “large employer” in relation to a regulated superannuation fund if there are 500 or more members of the fund. The member of the fund must be an employee of the employer or an associate of the employer in relation to whom the employer or an associate of the employer contributes to the fund or would, apart from a temporary cessation of contributions, contribute to the fund (s 29TB(2)). In working out whether an employer is a large employer, defined benefit members of the fund are not counted (s 29TB(3)). For s 29TB, the definition of “associate” (as defined in SISA s 12) is broadly consistent with the definition of “associate” in the Corporations Act 2001.

Fee Rules for MySuper Products ¶9-200 Fee charging rules — superannuation funds and MySuper products The SIS Act sets out: • general rules in relation to fees charged and costs passed on to members of regulated superannuation funds and ADFs (Pt 11A s 99A to 99F) (see ¶3-245) • fee charging rules for MySuper products (Pt 2C Div 5 s 29V to 29VE) (see ¶9-210–¶9-250). The general fees rules in Pt 11A prohibit regulated superannuation funds and ADFs from charging entry fees and limit the charging of switching fees and buy-sell spreads to an amount that is not more than what it would be if it were charged on a cost recovery basis. The fee charging rules for MySuper products in Pt 2C Div 5 set out the kind of fees that a regulated superannuation fund which offers a MySuper product may charge, and impose fee charging rules in relation to those fees. Broadly: • an RSE licensee that applies for a MySuper product must elect that they will not charge a fee on an amount in a MySuper product that relates to the payment of conflicted remuneration (¶4-530) to a financial services licensee • performance-based fees must comply with criteria regarding how the fee is determined • superannuation trustees are prohibited from charging across the membership of the fund for providing personal financial product advice on specific topics and personal financial product advice on an ongoing basis

• the cost of personal financial advice that is provided to an employer of one or more members of the fund will be prohibited from being recovered through a fee charged to any member of the fund • switching fees and buy-sell spreads are limited to being charged at an amount that is not more than it would be if it were charged on a cost recovery basis. For MySuper products, activity fees and insurance fees are also limited to being charged at an amount that is not more than it would be if it were charged on a cost recovery basis • entry fees and exit fees are prohibited (¶9-220–¶9-250). While RSE licensees will have to comply with the general fees rules for all products they offer, APRA can specifically ensure that the general fees rules are complied with in relation to a MySuper product at the time they consider an application for authorisation (eg by way of conditions imposed with the authorisation). Also, an RSE licensee that does not comply with the general fees rules will be in breach of a standard condition on their RSE licence. In addition, if they do not comply with the general fees rules in relation to the MySuper product, APRA may cancel authorisation of that MySuper product (s 29T(1)(i); 29U(2)(d)).

¶9-210 Fees that may be charged in a MySuper product The trustee of a regulated superannuation fund that offers a MySuper product may only charge fees of one or more of the following kinds in relation to that product (as specified in SISA s 29V(1)): (a) an administration fee (b) an investment fee (c) a buy-sell spread (d) a switching fee (e) an exit fee (prohibited from 1 July 2019: ¶3-250) (f) an activity fee (g) an advice fee (h) an insurance fee. The charging rules for the above kinds of fees in a MySuper product are discussed in ¶9-220. An entry fee cannot be charged by the trustee of a regulated superannuation fund under the SISA general fees rules (see below and ¶3-245). An administration fee is a fee that relates to the administration or operation of a superannuation entity and includes costs incurred by the trustee of the entity that: (a) relate to the administration or operation of the fund, and (b) are not otherwise charged as an investment fee, a buy-sell spread, a switching fee, an exit fee, an activity fee, an advice fee or an insurance fee (s 29V(2)). An investment fee is a fee that relates to the investment of the assets of a superannuation entity and includes: (a) fees in payment for the exercise of care and expertise in the investment of those assets (including performance fees) (b) costs incurred by the trustee of the entity that: (i) relate to the investment of assets of the entity, and

(ii) are not otherwise charged as an administration fee, a buy-sell spread, a switching fee, an exit fee, an activity fee, an advice fee or an insurance fee (s 29V(3)). Performance-based fees must satisfy certain criteria (s 29VD: ¶9-240). A buy-sell spread is a fee to recover transaction costs incurred by the trustee of a superannuation entity in relation to the sale and purchase of assets of the entity (s 29V(4)). A switching fee is a fee to recover the costs of switching all or part of a member’s interest in a superannuation entity from one class of beneficial interest in the entity to another (s 29V(5)). An exit fee before 13 March 2019 was a fee to recover the costs of disposing of all or part of members’ interests in a superannuation entity (former s 29V(6)). A fee is an activity fee if: (a) the fee relates to costs incurred by the trustee of a superannuation entity that are directly related to an activity of the trustee, or the trustees: (i) that is engaged in at the request, or with the consent, of a member, or (ii) that relates to a member and is required by law, and (b) those costs are not otherwise charged as an administration fee, an investment fee, a buy-sell spread, a switching fee, an exit fee, an advice fee or an insurance fee (s 29V(7)). An activity fee must be charged on a cost recovery basis (s 29VC: ¶9-220). A fee is an advice fee if: (a) the fee relates directly to costs incurred by the trustee of a superannuation entity because of the provision of financial product advice to a member by: (i) a trustee of the entity, or (ii) another person acting as an employee of, or under an arrangement with, a trustee or trustees of the entity, and (b) those costs are not otherwise charged as an administration fee, an investment fee, a switching fee, an exit fee, an activity fee or an insurance fee (s 29V(8)). A fee is an insurance fee if: (a) the fee relates directly to either or both of the following: (i) insurance premiums paid by the trustee of a superannuation entity in relation to a member or members of the entity (ii) costs incurred by the trustee of a superannuation entity in relation to the provision of insurance for a member or members of the entity, and (b) the fee does not relate to any part of a premium paid or cost incurred in relation to a life policy or a contract of insurance that relates to a benefit to the member that is based on the performance of an investment rather than the realisation of a risk, and (c) the premiums and costs to which the fee relates are not otherwise charged as an administration fee, an investment fee, a switching fee, an exit fee, an activity fee or an advice fee (s 29V(9)). An insurance fee must be charged on a cost recovery basis (s 29VC: ¶9-220). Entry fee An entry fee is a fee, other than a buy-sell spread, that relates, directly or indirectly, to the issuing of a beneficial interest in a superannuation entity to a person who is not already a member of the entity (s

99B(2)). The trustee of a regulated superannuation fund must not charge entry fees under the SIS Act general fees rules (¶3-245). Cap on certain fees and costs and prohibition on exit fees A cap on administration fees, investment fees and associated costs that are charged by superannuation entities on members’ accounts and a prohibition on exit fees apply from 1 July 2019 (¶3-250).

¶9-220 Fee charging rules for MySuper products The trustee of a regulated superannuation fund that offers a MySuper product may only charge a fee in relation to the MySuper product during a period if it satisfies one of the charging rules set out in SISA s 29VA(2) to 29VA(10) in relation to that period (s 29VA(1)), namely that: • all MySuper members are charged the same flat fee • all MySuper members are charged the same percentage of account balance • all MySuper members are charged a combination of same flat fee and same percentage of account balance • all MySuper members to whom a specified action relates are charged same flat fee • all MySuper members to whom a specified action relates are charged the same percentage of account balance • all MySuper members to whom a specified action relates are charged a combination of same flat fee and same percentage of account balance • an administration fee exemption applies for employees of an employer-sponsor • lifecycle differentiated investment fees are charged on a fair and reasonable attribution of cost basis • an advice fee that directly relates to financial product advice is charged to the MySuper member • an insurance fee charged to a MySuper member is on a cost recovery basis. The charging rules are discussed below. From 1 July 2019, a cap applies on administration fees and investment fees and certain costs, and the imposition of exit fees is prohibited (see ¶3-245). If a fund charges a member an activity fee or an insurance fee in relation to a MySuper product, the fee must be no more than it would be if it were charged on a cost recovery basis (s 29VC(1)). The regulations may prescribe the way in which activity or insurance fees charged on a cost recovery basis are worked out. All MySuper members charged same flat fee This rule is satisfied if the fee is charged in relation to all members of the fund who hold the MySuper product and the amount of the fee is the same for each of those members (s 29VA(2)). All MySuper members charged same percentage of account balance This rule is satisfied if: (a) the fee is charged in relation to all members of the fund who hold the MySuper product (b) the amount of the fee charged in relation to one member is a percentage of so much of the member’s account balance with the fund that relates to the MySuper product, and (c) the amount of the fee charged in relation to each other member of the fund who holds the MySuper

product is the same percentage of so much of that member’s account balance with the fund that relates to the MySuper product (s 29VA(3)). All MySuper members charged combination of same flat fee and same percentage of account balance This rule is satisfied if: (a) the fee is charged in relation to all members of the fund who hold the MySuper product (b) the amount of the fee charged in relation to one member is the sum of a fixed amount (the flat fee) and another amount that is a percentage of so much of the member’s account balance with the fund that relates to the MySuper product, and (c) the amount of the fee charged in relation to each other member of the fund who holds the MySuper product is the sum of the flat fee and the same percentage of so much of that member’s account balance with the fund that relates to the MySuper product (s 29VA(4)). All MySuper members to whom action relates charged same flat fee This rule is satisfied if: (a) the fee is a buy-sell spread, a switching fee, an exit fee or an activity fee (b) the fee is only charged in relation to those members of the fund who hold the MySuper product and to whom a relevant action is taken by the trustee or trustees of the fund, and (c) the amount of the fee charged is the same for each member to whom it is charged (s 29VA(5)). All MySuper members to whom action relates charged same percentage of account balance This rule is satisfied if: (a) the fee is a buy-sell spread, a switching fee, an exit fee or an activity fee (b) the fee is only charged in relation to those members of the fund who hold the MySuper product and to whom a relevant action is taken by the trustee or trustees of the fund (c) the amount of the fee charged in relation to one of those members is a percentage of so much of the member’s account balance with the fund that relates to the MySuper product and in relation to which the relevant action is taken, and (d) the amount of the fee charged in relation to each of the other of those members is the same percentage of so much of that member’s account balance with the fund that relates to the MySuper product and in relation to which the relevant action is taken (s 29VA(6)). All MySuper members to whom action relates charged combination of same flat fee and same percentage of account balance This rule is satisfied if: (a) the fee is a buy-sell spread, a switching fee, an exit fee or an activity fee (b) the fee is only charged in relation to those members of the fund who hold the MySuper product and in relation to whom a relevant action is taken by the trustee or trustees of the fund (c) the amount of the fee charged in relation to one of those members is the sum of a fixed amount (the flat fee) and another amount that is a percentage of so much of the member’s account balance with the fund: (i) that relates to the MySuper product, and (ii) in relation to which the relevant action is taken

(d) the amount of the fee charged in relation to each of the other of those members is the sum of the flat fee and the same percentage of so much of that member’s account balance with the fund: (i) that relates to the MySuper product, and (ii) in relation to which the relevant action is taken (s 29VA(7)). Administration fee exemption for employees of an employer-sponsor This rule is satisfied if: (a) the fee is an administration fee charged in relation to one or more members of the fund who hold the MySuper product in accordance with the administration fee exemption for employees of an employee-sponsor (see s 29VB), and (b) in relation to those members of the fund who hold the MySuper product but in relation to whom the administration fee is not charged in accordance with the administration fee exemption for employees of an employee sponsor (the remaining members) — the fee would satisfy the charging rule in s 29VA(2), (3) or (4) if the remaining members were the only members of the fund who held the MySuper product (s 29VA(8)). In some circumstances, the RSE licensee may wish to offer a MySuper product for the employees of a large employer or its associates (see s 29T and 29TB). Any fee set for that MySuper product may differ from the equivalent fee set for another MySuper product within the fund. In other circumstances, a separate MySuper product may not be offered, but instead a lower administration fee is charged to the employees of a particular employer-sponsor (see s 29VB). Single employer exemption for administration fee RSE licensees can offer individual employers an arrangement that secures a discounted administration fee for their employees in relation to a standard MySuper product, so that the employers are able to pass on the lower costs from any administrative efficiency to their employees. RSE licensees are not permitted to provide discounts to employers in relation to any of the other permitted fee types within a MySuper product. An RSE licensee that offers a discounted administration fee will be required to adhere to one of three charging rules set out in s 29VB(2) to (4), as below: • all employees charged same flat fee • all employees charged same percentage of account balance • all employees charged combination of same flat fee and same percentage of account balance. In addition, the total amount of the administration fee charged in relation to the employee members is at least equal to an amount that reasonably relates to costs that: • are incurred by the trustee of the fund in the administration and operation of the fund in relation to those members, and • are not otherwise charged as an investment fee, a buy-sell spread, a switching fee, an exit fee, an activity fee, an advice fee or an insurance fee (s 29VB(5)). Lifecycle differentiated investment fees This rule is satisfied if: (a) the fee is an investment fee (b) the fee would satisfy one of the charging rules in s 29VA(2) to (4) if the rule were applied to an age cohort identified in the governing rules in relation to the MySuper product for the purposes of s 29VA(9), rather than in relation to all members of the fund who hold the MySuper product

(c) the governing rules identify no more than four age cohorts in relation to the MySuper product for the purposes of s 29VA(9), and (d) the investment fees for the age cohorts reflect a fair and reasonable attribution of the investment costs of the fund between the age cohorts (s 29VA(9)). Advice fees This rule is satisfied if the fee is an advice fee that relates directly to financial product advice provided to a member who holds a MySuper product and the fee is charged to the member (s 29VA(9A)) (see “Certain fees and application of charging rules” below). Insurance fees This rule is satisfied if: (a) the fee is an insurance fee that relates directly to either or both of the following: (i) insurance premiums paid by the trustee of a superannuation entity in relation to a member (ii) costs incurred by the trustee of a superannuation entity in relation to the provision of insurance for a member, and (b) the member holds a MySuper product, and (c) the fee is charged to the member (s 29VA(10)). If the trustee of a regulated superannuation fund charges an activity fee to a member in relation to a MySuper product, the fee must be no more than it would be if it were charged on a cost recovery basis (s 29VC(1)) (see also “Certain fees and application of charging rules” below). Certain fees and application of charging rules Advice fee and activity fee Under the MySuper product fee rules, the cost of financial product advice (other than intra-fund advice) provided to a member can be charged to that member as an advice fee (s 29V(8)). An RSE licensee must charge each member that has an interest in a MySuper product, and to whom a particular activity relates, an activity fee calculated on the same basis (¶9-220). For example, each member that requests that their contribution is split must be charged the same flat fee, same percentage fee or same combination of flat fee and percentage fee. To allow the costs of financial advice to be passed directly to the member to whom it relates, an advice fee relating to financial advice does not have to comply with the charging rules in relation to MySuper products and may be a different fee for each MySuper member (s 29VA(9)). For more complex financial advice, this means that the trustee may charge for certain financial advice as an activity fee to pass the cost of that advice directly onto the member who was provided that advice, rather than to charge the costs of that advice to all members of the fund. Financial advice may also be charged as part of the administration fee to all members of the fund unless it is a certain type of personal advice that must be charged to the member to whom the advice relates. Insurance fee The cost of insurance premiums and any costs relating to the provision of insurance for the member may be charged as an insurance fee. The premiums that can be included in an insurance fee must be for an insurance policy or contract for the realisation of a risk. It cannot include premiums paid for an insurance policy or contract that is for investment. These costs, if charged for, must be part of the investment fee (s 29VA(10)). The definition of insurance fee clarifies that amounts deducted for the cost of insurance are to be considered a fee and, therefore, fall within provisions that apply to fees such as the election not to charge a fee that relates to conflicted remuneration.

An insurance fee does not have to comply with the charging rules in relation to MySuper products and may be a different fee for each MySuper member. This allows variability in the insurance fee to reflect that there are different premiums that are attributable to members depending on their level of coverage and other relevant factors such as the age of the member. Investment fee and administration fee An insurance fee that is charged to a MySuper member must be an amount that is not more than it would be if it were charged on a cost recovery basis (s 29VC). This ensures that a trustee cannot charge above cost fees outside of the investment fee and administration fee, and the advice fee which may be charged where the member seeks financial advice. The explanatory memorandum to Act No 171 of 2012 provides the following explanation: “1.63… This allows variability in the insurance fee to reflect that there are different premiums that are attributable to members depending on their level of coverage and other relevant factors such as the age of the member. 1.64 The insurance fee charged must be an amount that is not more than it would be if it were charged on a cost recovery basis. This will ensure that a trustee cannot charge above cost fees outside of the two main headline fees of a MySuper product — the investment fee and administration fee — and the advice fee which may be charged where the member seeks financial advice. These two main headline fees will be a key point of comparison between MySuper products, and therefore, by only allowing certain fees to be charged greater than cost recovery, this comparability will place downward pressure on the total fees that are charged to members in MySuper products (s 29VC). 1.65 Similarly, an activity fee in MySuper will be limited to being charged at an amount that is not more than if the fee was charged on a cost-recovery basis (s 29VC)”. Entry fee The charging of entry fees is prohibited from 1 July 2019 (¶3-245). Buy-sell spread, switching fee and exit fee Buy-sell spreads and switching fees can only be charged as an amount that is not more than it would be if the fee was charged on a cost recovery basis (s 99C(1)). Charging a fee on a cost recovery basis means that the fee aims to recover the expected costs of that action. It does not require precise cost recovery in each instance of the fee being charged to a member. Rather, a cost recovery basis would mean that the cumulative amount of fees must equal, as close as is practicable, the costs of undertaking that action for all members that are charged the fee. The SIS Regulations may prescribe the ways in which these fees may be calculated on a cost recovery basis (s 99C(2)).

¶9-240 Performance-based fees Performance-based fees typically entitle an investment manager to a payment equal to a pre-determined percentage of the increased value of the asset or income received from the investment that exceeds a given benchmark over a particular testing period. If a regulated superannuation fund offers a MySuper product and the fund trustee enters into an arrangement with an investment manager for the investment of one or more assets of the fund attributed, in whole or in part, to the MySuper product, and under the arrangement, a fee payable to the investment manager is determined, in whole or in part, by reference to the performance of the investments (a performance-based fee), the trustee must ensure that the arrangement complies with criteria set out in SISA s 29VD. The five criteria below must be contained in the terms of the arrangement the fund has with the investment manager if there is a performance-based fee (s 29VD(3) to (7)): 1. if the investment manager is entitled to a fee in addition to the performance-based fee, this fee must be lower than it would be if there was no performance-based fee (s 29VD(3)).

This requires the trustee to only agree to pay performance-based fees where the investment manager puts at risk the fees they would otherwise be entitled to. This ensures that there is sufficient incentive for the investment manager to achieve the required performance 2. the period over which the performance-based fee is determined must be appropriate to the kinds of investment to which it relates (s 29VD(4)). To satisfy this requirement, certain assets, such as infrastructure, may require longer testing periods to reflect that these investments are usually made for several years and may have high costs to exit early. Conversely, other assets that may be invested in over shorter periods, such as bonds, may have shorter testing periods 3. the performance of the investment must be measured by comparison with the performance of investments of a similar kind (s 29VD(5)). Investment managers should only be paid a performance-based fee where they generate returns greater than assets with a comparable level of risk and that are subject to the same market forces. For example, a performance-based fee for any shares traded on the Australian Securities Exchange can be measured by comparison to an after-tax benchmark that uses the All Ordinaries Index. In this example, it will not be appropriate to determine the performance of these shares against the interest rate paid on Commonwealth Government securities 4. a performance-based fee must be determined on an after-costs and, where possible, an after-tax basis (s 29VD(6)). This is consistent with the obligation of RSE licensees in relation to MySuper product members to promote the members’ financial interests, in particular returns to the members after the deduction of fees, costs and taxes (see ¶9-300). Trustees should only agree to an arrangement that is targeted to the objective of maximising the returns members receive 5. the performance-based fee must be calculated in a way that includes disincentives for poor performance (s 29VD(7)). The ability to terminate the arrangement with an investment manager without reasons and at short notice is not sufficient to satisfy this criterion. For item 5, there must be commensurate disincentives for investment managers to avoid under performance compared to the potential performance-based fee that provides the incentive to outperform. That is, a disincentive for poor performance must be part of the calculation of the performance fee that is payable in any given testing period. For example, there may be clawback provisions that require performance-based fees from earlier testing periods to be returned to the fund for underperformance in a testing period. Also, there could be highwater mark provisions that require an investment manager to recover prior periods of underperformance before entitlement to a performance-based fee in the current testing period. Exception An RSE licensee may have an arrangement under which assets attributable to the MySuper product are invested subject to a performance-based fee which does not meet the criteria if it can demonstrate that the arrangement promotes the financial interests of the fund members who hold the MySuper product (s 29VD(8)). The criteria in s 29VD(3) to (7) should be able to be included in the majority of arrangements that RSE licensees have with investment managers. If an arrangement does not meet some or all of the criteria in s 29VD, an RSE licensee may find it difficult to assert that the arrangement is in the best financial interests of MySuper members if the RSE would have been able to invest in those same assets under an alternative arrangement that includes a performance-based fee containing the criteria or that has no performance-based fee. However, in practice, entering into an arrangement that does not contain one or more of these criteria

may arise, for example, where the fund trustee would otherwise not be able to access certain assets or markets.

¶9-250 Percentage-based administration fees may be capped All members of a MySuper product must be charged the same percentage where a fee is charged, in whole or in part, as a percentage of each member’s account balance (SISA s 29VA: ¶9-220). Fund trustees may have a single cap on percentage-based administration fees. The amount of the administration fee can be capped at a specified amount, and must be the same for all members of that MySuper product (s 29VE) (¶9-220).

MySuper — Additional Trustee Obligations ¶9-300 Enhanced trustee obligations “Enhanced trustee obligations” for a MySuper product means the obligations imposed by a covenant referred to in s 52 and covenants prescribed under s 54A that are specified in the regulations as forming part of the enhanced trustee obligations for MySuper products (SISA s 10(1)). “Enhanced director obligations” for a MySuper product means the obligations imposed by a covenant referred to in s 52A(2)(f), as it relates to covenants referred to in s 52(9), (12) or (13), and any covenant prescribed under s 54A that are specified in the regulations as forming part of the enhanced trustee obligations (s 10(1)). The enhanced trustee obligations and enhanced director obligations are discussed in ¶3-100. Briefly, the covenants in s 52(9) and 52(12) deal with the annual outcomes assessments and promotion of the financial interests of beneficiaries obligations. The covenant in s 52(9) requires each trustee of a regulated superannuation fund: 1. to determine, in writing, on an annual basis, for each MySuper product and choice product offered by the entity, whether the financial interests of the beneficiaries of the entity who hold the product are being promoted by the trustee, having regard to the certain specified matters 2. to determine, in writing, on an annual basis, whether each trustee of the entity is promoting the financial interests of the beneficiaries of the fund, as assessed against benchmarks specified in regulations 3. to make the determination referred to in point 1, and a summary of the assessments and comparisons on which the determination is based, publicly available on the website of the entity within 28 days after the determination is made, and 4. to keep the determination, and the summary of the assessments and comparisons on which the determination is based, on the website until a new determination is made as referred to in point 1. The covenant in s 52(12) requires each trustee of the regulated superannuation fund to promote the financial interests of the beneficiaries of the entity who hold a MySuper product or a choice product, in particular returns to those beneficiaries (after the deduction of fees, costs and taxes). The enhanced trustee obligations were previously imposed on RSE trustees who offer MySuper products only, and have been extended to cover choice products from 6 April 2019. These enhanced trustee obligations and enhanced director obligations were previously set out in SISA former s 29VN, which has been repealed following the relocation of the obligations to s 52(9) to (13) as SIS covenants. Also repealed are former s 29VN, 29VO, 29VP, 29VPA and 29Q. These were related provisions which supplemented the operation of the enhanced trustee director obligations when they were imposed by s 29VN.

¶9-360 Insurance standards — MySuper members Each trustee of a regulated superannuation fund must ensure that: (a) the fund provides permanent incapacity benefit to each MySuper member of the fund (b) the fund provides death benefit in respect of each MySuper member of the fund, and (c) the benefits in (a) and (b) are provided by taking out insurance (SISA s 68AA(1)). The insurance obligations and prescribed operating standards relating to insurance for regulated superannuation funds are discussed in ¶3-240. For measures applying from 1 July 2019 to ensure that insurance arrangements in superannuation are appropriate so that members are not paying for insurance cover that they do not know about or premiums that inappropriately erode their retirement savings, see ¶3-240.

¶9-400 Assessing member outcomes and fund sustainability

APRA has provided guidelines to RSE licensees on assessing member outcomes and fund sustainability (APRA letter, 31 August 2017: www.apra.gov.au/sites/default/files/Letter_to_RSE_Licensees_assessing_member_outcomes_in_the_superannuation_indu APRA’s approach and expectations APRA considers that it is essential that RSE licensees continue to act in the best interests of beneficiaries to deliver quality outcomes on an ongoing basis. Among other things, this entails RSE licensees providing high quality, value for money superannuation products and services, seeking to deliver optimal retirement benefits and other benefits and services, such as insurance, to fund members consistent with their strategic objectives. APRA’s view is that it is not sufficient for an RSE licensee to simply comply with their legislative and prudential obligations without giving due consideration to how their RSEs will deliver quality outcomes for members now and into the future. As such, it is necessary and timely for all RSE licensees to review, and consider whether there is a need to enhance their approach to delivering quality member outcomes and maintaining the future sustainability of their RSEs. This would include consideration of whether insurance offerings may be inappropriately eroding member retirement benefits. APRA states that there is a wide range of measures and metrics that may be relevant for assessing member outcomes and future sustainability of RSEs and products, and the particular measures used by APRA will be reviewed and refined over time to reflect industry developments. Each RSE licensee should develop their own framework and approach for an assessment that best suits their business operations. APRA expects RSE licensees, when assessing outcomes for members of their products, to establish appropriate targets and objectives and measure performance against them. Establishing appropriate targets involves use of relevant benchmarks and, where like-for-like comparisons are possible, comparisons against peer offerings. Reproduced below are key points from APRA’s letter on the methodology for assessing member outcomes and fund sustainability. The metrics below are expected to be relevant to the vast majority of RSE licensees, but are not exhaustive. APRA’s methodology for assessing member outcomes and fund sustainability Based primarily on data provided to APRA by RSE licensees, an assessment by APRA has identified RSEs which, in APRA’s view, appear not to have consistently delivered quality member outcomes in the recent past, or may be unlikely to deliver quality member outcomes in the future and/or may not be sustainable into the future. APRA’s assessment considers both an RSE’s historical member outcomes, as well as key indicators for future sustainability. It also incorporates APRA’s supervisory knowledge of the unique characteristics of

each RSE and RSE licensee, including APRA’s assessment of the adequacy of governance and risk management frameworks, strategic and business planning practices and business operations. The metrics for APRA’s assessment of historical outcomes and future sustainability include: • net returns, on an absolute basis and relative to risk/return targets • costs per member for MySuper products • cost of insurance cover • administration and operating expenses as a percentage of average net assets (operating cost ratio) • net cash flows as a percentage of average net assets (net cash flow ratio) • net member benefit outflow ratio • net roll-overs as a percentage of average net assets (net roll-over ratio) • trends in membership base, and • active member ratio. APRA’s quantitative assessment of an RSE’s performance considers each of the metrics on an absolute and relative basis as appropriate. Absolute performance is an indicator of both the delivery of member outcomes and future sustainability in the context of the RSE’s circumstances. Assessment of performance on a relative basis assists APRA to identify outliers, based on the RSE or product ranking for each metric, and in particular to identify RSEs that are in the bottom quartile on a specific measure. In assessing historical member outcomes of RSEs, APRA has considered net returns relative to return targets of each fund’s MySuper products, operating cost ratios, and insurance costs, particularly the rate at which insurance premiums are likely to have eroded member balances. For funds without a MySuper product, assessing net returns requires consideration of product-level information. When assessing future sustainability of an RSE, APRA considers various measures linked to potential stability or growth in membership and assets as this is relevant to the likelihood that the RSE will be able to deliver quality member outcomes into the future. Net cash flow, roll-over ratios and membership trends are the key metrics used when assessing an RSE’s potential future stability or growth, reflecting its ability to acquire new members and retain existing ones. APRA’s approach to assessing fund performance and sustainability serves as a starting point only, in a more holistic assessment process that includes qualitative assessments by APRA supervisors. The qualitative aspect of the assessment captures APRA supervisors’ judgment as to the robustness of an RSE licensee’s strategic and business planning practices and the quality of the RSE licensee’s governance and risk management frameworks. Generally, the RSEs that APRA has identified as having concerns in respect of quality member outcomes and future prospects are those which have performed poorly on an absolute and relative basis on a majority of the quantifiable metrics. In APRA’s experience, RSE licensees of these RSEs can also have inadequate strategic and business planning practices, governance and/or risk management frameworks to address the risks arising from poor performance. APRA response and supervisory focus APRA states that RSE licensees identified as a result of APRA’s assessment will be required to develop a robust and implementable strategy to address identified weaknesses within a reasonably short period and to engage more regularly with APRA to monitor the implementation of that strategy. Where a particular product or RSE is unlikely to be able to continue to operate in the best interests of its members, APRA expects the relevant RSE licensee to act to ensure a timely and well-managed transfer of members to another suitable product or RSE, either within the RSE licensee’s own operations or those of another RSE licensee.

Charts in APRA’s letter Four examples of stylised charts based on various metrics used in APRA’s assessment of member outcomes and fund sustainability and the action that APRA contemplates are noted in the letter. Proposed reforms to operational governance practices and assessing member outcomes APRA letters on proposed changes to the superannuation prudential framework to lift operational governance practices of RSE licensees and to assess member outcomes in superannuation are listed in ¶9-810.

Offences ¶9-450 Misrepresentation A superannuation fund is prohibited from offering a MySuper product unless it is authorised by APRA (¶9100). A person commits an offence if: • the person makes a representation that a class of beneficial interest in a regulated superannuation fund is a MySuper product, and • the RSE licensee for the fund does not have authority to offer a beneficial interest of that class in the fund as a MySuper product (SISA s 29W). A breach of s 29W is an offence of strict liability (penalty: 60 penalty units). Penalty units are discussed in ¶3-800. For strict liability offences, see s 6.1 of the Criminal Code Act 1995 and Pt IA of the Crimes Act 1914 (¶3-810, ¶3-820). A strict liability offence is necessary as the consequences of an RSE licensee contravening this provision could inadvertently cause an employer who makes superannuation guarantee (SG) contributions for their employees to the fund to breach the SG choice of fund rules (¶12-040) and may also cause the employer to incur an SG shortfall (¶12-150).

¶9-460 Dealing with contributions Sections 29WA and 29WB provide rules for dealing with contributions made to a superannuation fund for the benefit of members. Contribution where no investment direction is given by member Section 29WA applies if: • a person is a member of a regulated superannuation fund (other than a defined benefit member) and a contribution to the fund is made for the benefit of the person, and • either the member: – has not given the fund trustee a direction that the contribution is to be invested under one or more specified investment options, or – has given the trustee a direction that some of the contribution is to be invested under one or more specified investment options, but no direction in relation to the remainder of the contribution. Where s 29WA applies, the trustee must treat the contribution or any of the “no-direction” contribution as a contribution to be paid into a MySuper product of the fund (s 29WA(2)). A trustee that contravenes s 29WA(2) commits an offence of strict liability (penalty: 50 penalty units). Giving directions

Directions on investment options given after 31 March 2013 are required to be in writing. For the purposes of s 29WA, a direction alleged to be given to the trustee after 31 March 2013 is taken not to have been given if the direction was not given in writing, or a copy of the direction is not held by or on behalf of the trustee (s 29WA(4)). The above clarifies that it is necessary for a member to make a direction to have contributions placed in a particular investment option; it is not sufficient that the member has joined the fund by selecting one product offered by the fund. This is necessary because a product offered by a superannuation fund is one way in which a member may have joined the fund and does not represent a decision to have contributions made to an investment option other than a MySuper product. The subsection does not prevent a member providing a direction to pay contributions to a MySuper product. The regulations may prescribe circumstances in which a direction given to the trustee of one regulated superannuation fund is to be taken to be a direction given to the trustee of another regulated superannuation fund for s 29WA purposes (s 29WA(5)). This is to address cases where a member has been moved from one fund to another under a successor fund transfer. Exception — life policies, investment account contracts and cash investment options An exception applies if an asset (or assets) attributed to the person is invested in one or more of the following on 31 March 2013: (a) a life policy under which contributions and accumulated earnings may not be reduced by negative investment returns or any reduction in the value of assets in which the policy is invested (b) a life policy under which the benefit to the person (or a relative or dependant of the person) is based only on the realisation of a risk, not the performance of an investment (c) an investment account contract the only beneficiaries of which are the person, and relatives and dependants of the person (d) an investment option under which the investment is held as cash (s 29WA(6)). In that case, s 29WA(2) (which requires the trustee to treat any contribution in relation to which no direction has been given as a contribution to be paid into a MySuper product of the fund) does not apply to the extent that the contribution to the fund for the benefit of the person is invested in the life policy, under the investment account contract or in the cash investment option. This exception ensures that future contributions can continue to be directed to these products; that is, the contributions do not have to be paid into a MySuper product, and the trustee will not have to secure a formal direction from the member to continue the payment of the contributions into the relevant product. Note also that the exception applies to the same categories of products that are excluded from the application of s 20B(3)(c) (in respect of the definition of “accrued default amounts”: see ¶9-130). Contributions by large employers where no direction is made Section 29WB applies if: (a) the trustee of a regulated superannuation fund is authorised to offer a class of beneficial interest in the fund as a MySuper product on the basis that s 29TB is satisfied in relation to that class of beneficial interest (ie a tailored MySuper product for large employers: ¶9-170) (b) a member (other than a defined benefit member) is entitled to hold the MySuper product (c) a contribution is made for the benefit of the member, and (d) either: (i) the member has not given the trustee of the fund a direction that the contribution is to be invested under one or more specified investment options, or (ii) the member has given the trustee a direction that some of the contribution is to be invested

under one or more specified investment options, but no such direction has been made in relation to the remainder of the contribution. Where s 29WB applies, the trustee of the fund must treat so much of the contribution in relation to which no direction is given as a contribution to be paid into the MySuper product (s 29WB(2)). A trustee that contravenes s 29WB(2) commits an offence of strict liability (penalty: 50 penalty units). The regulations may prescribe circumstances in which a direction given to the trustee of one regulated superannuation fund is to be taken to be a direction given to the trustee of another fund for s 29WB purposes (s 29WB(5)). Exception — life policies, investment account contracts and cash investment options An exception (similar to that under s 29WA(6)) applies (see above) if an asset (or assets) attributed to a member is invested in life policies, investment account contracts and cash investment options on 31 March 2013 (s 29WB(6)). Section 29WB therefore has the effect that where a trustee is authorised to offer a tailored MySuper product for employees of a particular employer, contributions made by the employer for those employees must be paid into that tailored MySuper product unless the employee has directed the trustee that all or part of their contributions are to be invested in one or more investment options. This ensures that employees appropriately have their contributions placed in the MySuper product tailored for their benefit, rather than any other MySuper product offered by the trustee. This is to prevent contributions of a subset of employees being paid into a tailored MySuper product while other employees of the same employer have their contributions paid into a generic MySuper product. Like s 29WA(6), the exception in s 29WB(6) ensures that future contributions can continue to be directed to these products; that is, the contributions do not have to be paid into a MySuper product, and the trustee will not have to secure a formal direction from the member to continue the payment of the contributions into the relevant product. Note also that the exception applies to the same categories of products that are excluded from the application of s 20B(3)(c) (in respect of the definition of “accrued default amounts”: see ¶9-130).

Dashboard and Other Disclosure Requirements ¶9-600 MySuper products — dashboard and other disclosures An RSE licensee that is authorised to offer a MySuper product is required to: • publish a product dashboard for each of the fund’s MySuper and choice products (¶9-610) • make the details of their portfolio holdings publicly available, by publishing the information on the fund’s website (¶9-620) • disclose details of remuneration of each executive officer or each trustee of the RSE licensee (¶9650), and • provide information that is calculated in the same way as required under an APRA reporting standard (¶9-660). The above obligations which are imposed by the Corporations Act 2001 are “regulatory provisions” in the SIS Act (¶2-140). In addition to penalties, non-compliance with a regulatory provision may result in the superannuation fund of which the RSE licensee is the trustee losing its complying fund status for SIS Act and tax purposes.

¶9-610 Dashboard publication An RSE licensee of a superannuation fund is required to publish a product dashboard for each of the

fund’s MySuper and choice products. This should be made available on a part of the RSE licensee’s website that is accessible to the public at all times. The product dashboard must include key information that is useful for both new and existing members. The requirement for standardised and public disclosure of key information is intended to allow members and others to easily compare products and thus make informed choices. The product dashboard obligations are imposed by s 1017BA of the Corporations Act 2001 (CA). For the purposes of the product dashboard provisions, the terms “choice product”, “member”, “MySuper product” and “regulated superannuation fund” are defined as having the same meaning as in SIS Act (¶9030). These terms are used with the same underlying concepts and are superannuation-specific (CA s 1017BA(5)). The obligation on RSE licensees to make product dashboards for choice products publicly available has been deferred to 1 July 2023 (see “Application and deferrals” below). ASIC has issued Information Sheet INFO 170 in relation to the product dashboard requirements in s 1017BA, including an example of a MySuper dashboard (see ¶9-880). Dashboard requirements The trustee of a regulated superannuation fund that has five or more members must ensure: (a) that a product dashboard for each of the fund’s MySuper products and choice products is publicly available at all times on the fund’s website (b) that each product dashboard sets out the information required by s 1017BA(2) or (3) (c) that the information set out in each product dashboard about fees and other costs is updated within 14 days after the end of a period prescribed by the regulations (d) that the other information set out in each product dashboard is updated within 14 days after any change to the information, and (e) if the regulations prescribe the way in which information is to be set out in a product dashboard — that each product dashboard sets out the information in accordance with the regulations (s 1017BA(1)). The product dashboard for a MySuper product must set out: (a) the following, worked out in accordance with the regulations in relation to the period or periods prescribed by the regulations: (i) a return target or return targets for the product (ii) a return or returns for the product (iii) a comparison or comparisons between return targets and returns for the product (iv) the level of investment risk that applies to the product (v) a statement of fees and other costs in relation to the product, and (b) any other information prescribed by the regulations (s 1017BA(2)). The product dashboard for a choice product must set out: (a) the following for each investment option offered within the choice product, worked out in accordance with the regulations in relation to the period or periods prescribed by the regulations: (i) a return target or return targets for the investment option (ii) a return or returns for the investment option

(iii) a comparison or comparisons between return targets and returns for the investment option (iv) the level of investment risk that applies to the investment option (v) a statement of fees and other costs in relation to the investment option, and (b) any other information prescribed by the regulations (s 1017BA(3)). Section 1017BA(3) does not apply to an investment option within a choice product if: (a) the assets of the fund that are invested under the option are invested only in one or more of the following: (i) a life policy under which contributions and accumulated earnings may not be reduced by negative investment returns or any reduction in the value of assets in which the policy is invested (ii) a life policy under which the benefit to a member (or a relative or dependant of a member) is based only on the realisation of a risk, not the performance of an investment (iii) an investment account contract the only beneficiaries of which are a member, and relatives and dependants of a member, or (b) the sole purpose of the investment option is the payment of a pension to members who have satisfied a condition of release of benefits specified in SISR Sch 1, or (c) the assets of the fund that are invested under the option are invested only in another single asset (s 1017BA(4)). The regulations may prescribe circumstances in which assets of a regulated superannuation fund are, or are not, to be treated as invested in a single asset for the purposes of s 1017BA(4)(c). Dashboard information and presentation — MySuper products Regulations 7.9.07M to 7.9.07W of the Corporations Regulations 2001 prescribe the information required in the dashboard and the way in which information is to be set out in the product dashboard for the purposes s 1017BA(1)(c) and (e) and s 1017BA(2), ie as they apply to MySuper products — see “Dashboard requirements” above. Regulation 7.9.07Q requires the specified information to be set out in a table which presents the target return, a graphical presentation of the return and a comparison of the return target and the return, the level of investment risk that applies to the product and a statement of fees and other costs. The completed table will form the product dashboard. The regulation sets out the general parameters relating to the specified information to be included in the product dashboard. APRA’s SRS 700.0 “Product dashboard” provides further information on the requirements, including providing information that is calculated in a way prescribed by APRA’s reporting standards (¶9-720, ¶9750). Product dashboard must be included in a periodic statement Trustees of superannuation entities are required to provide, generally every 12 months, a periodic statement to their members (s 1017DA(1), (2): ¶4-180). Section 1017BA requires fund trustees to publish product dashboards on their fund’s websites. Regulation 7.9.20(1)(o) of the Corporations Regulations 2001 requires that the latest product dashboard for MySuper products (or investment option within a choice product in which a member is invested in) must be included as part of a periodic statement if the trustee is required to make publicly available a product dashboard for the investment option under s 1017BA. If a member is fully invested in a MySuper product, the member’s periodic statement must include the product dashboard that was most recently published on the fund’s website. If a member has a part of the

member’s superannuation interest in each of several investment options, the periodic statement must include the product dashboard for each investment option that has assets that are attributable to the member. Application — deferrals for choice products The requirements regarding the presentation and content of the information in a product dashboard for MySuper products are specified by regulations (see above), but corresponding regulations have not yet been made for the product dashboard requirements in relation to choice products. Accordingly, ASIC has deferred the commencement of the product dashboard provisions for choice products to 1 July 2023 (Class Orders CO 14/443 (F2014L00594), as amended by ASIC Corporations (Amendment) Instrument 2019/240 (F2019L00541). ASIC stop orders ASIC may issue a stop order if information in the product dashboard is defective, eg where the product dashboard contains misleading or deceptive information, there is an omission, or it is not updated as required. In this situation, ASIC may order specific conduct in respect of the product which the defective product dashboard relates to in order to remedy the situation, similar to ASIC’s stop order powers for other disclosure documents. Offences An RSE trustee who is required to publish a product dashboard commits an offence if it fails to do so (s 1021NA(1)). It is also an offence for a trustee to publish a product dashboard containing defective information, for example, if the trustee knows that the information is not updated as required, or the dashboard contains misleading or deceptive information, or there is an omission (s 1021NA(2), (3)). The failure to update the product dashboard as required, or for having omissions from the product dashboard, are strict liability offences, which arise regardless of whether the trustee knew or did not know the information was not updated as required or there was an omission. The strict liability offence mirrors similar offences that apply to other disclosure requirements, such as in a product disclosure statement (s 1021NA(4)). A statutory defence is available where the trustee has taken reasonable steps to ensure that the dashboard was updated as required, not misleading or deceptive, and contained no omissions, consistent with the defences available for other disclosure offences (s 1021NA(5)). A civil action may be taken against the trustee by a person who suffers loss or damage as a result of the trustee’s product dashboard not containing information as required by s 1017BA, not being updated as required, containing misleading or deceptive information, or for omissions, consistent with the other civil liability disclosure offences in s 1022B.

¶9-620 Portfolio holdings disclosure The portfolio holdings disclosure (PHD) and related obligations are imposed by CA s 1017BB, applicable from 1 December 2019. Section 1017BB sets out the obligation of a trustee of a registrable superannuation entity (RSE licensee) (other than a PST) to make publicly available, for each of their investment options, information about the assets and derivatives that they, or an associated entity, have invested in. The PHD requirements were introduced in 2012 by the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012. When enacted in 2012, the PHD obligations as imposed by s 1017BB (as it then applied) were also supported by s 1017BC, 1017BD and 1017BE which required intermediaries to provide the RSE licensee with full details of assets invested that are, or are derived from, an asset of an RSE. These “look through provisions” were designed to require the full reporting of superannuation assets that were invested through one or more intermediaries.

Section 1017BC, 1017BD and 1017BE covering the reporting obligations on parties to contracts and arrangements under which financial products or other property are acquired using the assets, or assets derived from assets, of an RSE have been repealed from 6 April 2019. As those obligations were primarily designed to enable RSE trustees to obtain information from non-associated entities, they are no longer required because the PHD obligations under current s 1017BB only extend to associated entities. ASIC Class Order 14/443 had deferred the commencement of the PHD requirements until 1 July 2015 (from the 31 December 2013). Subsequently, ASIC amended the Class Order to defer the first reporting day for PHD to 31 December 2019. Obligation to make investment of assets information publicly available An RSE licensee is required to make details of its portfolio holdings publicly available twice annually, as at each reporting day (30 June and 31 December each year), by publishing the information below on the fund’s website within 90 days after each reporting day: • sufficient information to identify each investment item (a disclosable item) allocated to the investment option at the end of the reporting day that (i) is held by the reporting entity, an associated entity or a pooled superannuation trust (PST), and (ii) is neither an investment in an associated entity of the reporting entity, nor an investment in a PST • sufficient information to identify the value, and the weighting or exposure, at the end of the reporting day of each disclosable item, and • the total value, and the total weighting or exposure, at the end of the reporting day of all disclosable items(s 1017BB(1)). The sufficient information required to be obtained will be determined by the way that the information will be disclosed. This information will include but is not limited to the name of the disclosable item. For example, if a disclosable item is listed on the ASX, the ASX code for the investment item would also be required in order to ensure sufficient information is available to identify the investment item. The regulations may provide that s 1017BB(1) applies for a prescribed kind of disclosable item in the manner as provided in s 1017BB(1A). For example, by limiting it to the name of the kind of disclosable item, and the total value and the total weighting or exposure of all disclosable items of that kind. The RSE trustee must ensure the information continues to be made publicly available on the RSE’s website until it makes the information pertaining to the next reporting period publicly available, and that the information made publicly available is organised in the way prescribed by regulations (s 1017BB(2), (3)). Exemptions Section 1017BB(1) does not apply to the trustee of an RSE if the entity is a PST, a single member fund or a small APRA fund. In addition, partial exemptions apply to the RSE for certain investment options and investments as specified (s 1017BB(4), (5), (5A)). The exemptions are intended to reduce the compliance burden on RSEs where the benefit of disclosure of investment details for members and their employers is outweighed by the compliance burden associated with publicly disclosing the information. For example. PSTs have no individual members, and members in small funds can obtain information on their fund’s portfolio holdings through other means. The exemptions also cover an investment item that is: • not a material investment for an investment option in accordance with regulations • invested solely to support a defined benefit interest, and • invested in a life policy or an investment account contract described in paragraph 1017BA(4)(a) (s 1017BB(5)(b) to (d)). The exemption in respect of defined benefit interest is to exempt investments allocated to a defined benefit fund on the basis that their returns are not dependent on the fund’s holdings. Likewise, the

exemption in respect of a life policy or an investment account contract reflects that the benefits provided to members of such products are not dependent on the performance of the underlying investments of the fund. In addition to the exemptions listed above, regulations may exempt a kind of investment item held by the fund (s 1017BB(5)(e)). For avoidance of doubt, an investment item is not a disclosable item if it is not a material investment, is invested solely to support a defined benefit interest, is invested in a life policy or an investment account contract, or is a kind of investment item prescribed by regulations to be exempt (Note to s 1017BB(5)). 5% exemption rule The trustee of an RSE may determine up to 5% of the assets (excluding derivative assets) attributable to each of their investment options for which they are not required to make information publicly available. To qualify for this exemption, the prescribed information that would otherwise have to be disclosed about the investment items must be commercially sensitive and the disclosure of the information must be detrimental to the interests of the members of the fund (s 1017BB(5A)). What is an investment option? For the purposes of s 1017BB, an “investment option” for an RSE covers: • an investment option within a choice product or a MySuper product, and • a choice product or a MySuper that does not have multiple investment options (s 1017BB(6)). A choice product with only one investment option is itself considered to be an investment option to which the s 1017BB requirements apply. The obligation on RSE licensees to disclose their portfolio holdings therefore applies equally in respect of all choice products and all MySuper products. Offences relating to publication of information An RSE licensee who fails to publish the details of their portfolio holdings on the fund’s website under s 1017BB commits an offence with a penalty of 100 penalty units or imprisonment for two years, or both. It is a defence to show that the RSE licensee would have published the information, but for the fact that the trustee was not provided with the required information (s 1021NB(1), (5)). An RSE licensee who knowingly publishes misleading or deceptive information, or information containing omissions, commits an offence, punishable on conviction by a penalty of 200 penalty units or imprisonment for five years, or both (s 1021NB(2)). A corresponding strict liability offence applies where the RSE licensee knew or did not know whether the information was misleading or deceptive or contained an omission (penalty: 100 penalty units or imprisonment for two years, or both) (s 1021NB(3)). Where portfolio holdings information that is published contains an omission, it is a defence to show that the trustee took reasonable steps to ensure there would not be an omission, or that necessary information to meet the requirement was not provided to the RSE licensee by other parties, or that the information was omitted because it would have been misleading and deceptive and the trustee took reasonable steps to obtain information that would not have been misleading or deceptive (s 1021NB(6)). An additional defence is also available for the strict liability offence in relation to publishing misleading or deceptive information where the RSE licensee took reasonable steps to ensure that the information published would not be misleading or deceptive (s 1021NB(7)). For additional defences under transitional arrangements in any proceedings under s 1021NB(1) and s 1021NB(2), see s 1541.

¶9-650 Remuneration and other disclosures The licensee of a registrable superannuation entity (RSE licensee) must ensure that the following is made publicly available, and kept up-to-date, at all times on the RSE’s website:

(a) details of the remuneration of each executive officer in relation to the RSE licensee (if RSE licensee is a body corporate) and each individual trustee of the RSE (if the RSE licensee is a group of individual trustees), as prescribed by reg 2.37 (b) any other document or information, as prescribed by reg 2.38 (see below) (SISA s 29QB(1)). ASIC has the general administration of s 29QB. Prescribed remuneration disclosure — SISR reg 2.37 RSE licensees must disclose the remuneration of each director or other executive officer if the RSE licensee is a body corporate, or each trustee if the RSE licensee is a group of individual trustees. This includes disclosure of all payments, benefits and compensation paid for or provided by the RSE licensee or by related body corporates of the RSE licensee. Regulation 2.37 of SISR prescribes the details of the information for the purposes of s 29QB(1)(a). The remuneration information requirements are modelled on the existing requirements for listed companies under reg 2M.3.03 of the Corporations Regulations 2001. Remuneration information includes general information, in addition to the items relating to payments and benefits and compensation in each financial year. Where monies attributable to service as a director are not paid to the director, this must also be disclosed. For example, in funds where the director has been appointed by an employer or employee-sponsor and the fee for their service is paid to the organisation rather than to the person, the name of the organisation and amount paid must also be disclosed. Information on payments and benefits received by relevant executive officers and individual trustees must, in most cases, be disclosed for the two most recently completed financial years. In addition, where an executive officer or individual trustee also receives payments or benefits from a related entity to the RSE, reg 2.37(2) requires the disclosure of the amount of those payments or benefits that accurately represents the proportion of the person’s time committed to their obligations to the RSE. In reg 2.37, “financial year” means: (a) in relation to a relevant executive officer, the financial year of the RSE licensee, and (b) in relation to an individual trustee, a period of 12 months ending on 30 June (reg 2.37(6): inserted by former CO 14/509; ASIC Superannuation (RSE Websites) Instrument 2017/570: www.legislation.gov.au/Details/F2017L00738). Publishing other document or information — SISR reg 2.38 Regulation 2.38 of SISR specifies the documents and information that RSE licensees need to publish on the public section of their website to promote systemic transparency for the purposes of s 29QB(1)(b). Currently, a large amount of information is only available to members on request or on the “Member section” of an RSE’s website. The Corporations Act 2001 prescribes that some documents must be provided in a certain form. Regulation 2.38 sets out further documents and information that must be published, and be kept up-todate at all times, on the RSE licensee’s website. The information and documents include the trust deed, the governing rules, rules relating to the nomination, appointment and removal of trustees and trustee directors, actuarial reports, product disclosure statements, annual reports, financial services guides, summaries of significant event notices and material change notices, the details of the providers of outsourced material business activities, details of executive officers or trustees, board attendance records, registers of relevant interests and duties, a summary of the conflicts management policy, the proxy voting policies and a summary of how the entity has exercised its voting rights in relation to shares in listed companies (reg 2.38(2)(a)–(o)). Instead of making available and updating a document referred to in reg 2.38(2)(a), (b), (d), (e), (f) and (h), an RSE licensee may make available and update a version of that document that has been redacted to exclude information that is personal information in relation to a beneficiary of the RSE. “Personal information” is defined by reference to s 6(1) of the Privacy Act 1988. Also, the start date requiring the

disclosure for those documents has been deferred for standard employer-sponsored sub-plans (see “Summary of s 29QB requirements and deferrals” below). The deferral means that in respect of standard employer-sponsored sub-plans, documents such as product disclosure statements, trust deeds and governing rules, actuarial reports of defined benefit funds, annual reports and summaries of significant event notices do not have to be published on the RSE’s website until the deferred application date or may be redacted if the document relates to both the sub-plan and the RSE more generally (reg 2.38(4A), inserted by former CO 14/509 and amended by CO 14/592; ASIC Superannuation (RSE Websites) Instrument 2017/570: www.legislation.gov.au/Details/F2017L00738). In reg 2.38, “financial year” means: • in reg 2.38(2)(f) and (o), the financial year of the RSE, and • in reg 2.38(2)(k) and 2.38(3), the financial year of the RSE licensee (reg 2.38(5), former CO 14/509 and former CO 14/592; ASIC Superannuation (RSE Websites) Instrument 2017/570: www.legislation.gov.au/Details/F2017L00738). The term “standard employer-sponsored sub-plan” is defined to mean a segment of a public offer superannuation fund, so that the relief will not apply to a corporate fund that is not a segment of a public offer superannuation fund. Class Order CO 14/592 deals with both non-publication of documents (where the document only relates to the sub-plan) and redaction (redaction of information relating to the sub-plan is permitted for documents that do not only relate to the sub-plan). A failure to publish up-to-date information on the fund’s website at all times is a strict liability offence (penalty: 50 penalty units). A strict liability offence is necessary to ensure effective enforcement so that RSE licensees are obliged to do everything that they can reasonably do to ensure that there is complete transparency on the financial products members have an equitable interest in (s 29QB(2), (3)). Safe harbour timeline and relief ASIC Superannuation (RSE Websites) Instrument 2017/570 (www.legislation.gov.au/Details/F2017L00738) (replacing former Class Order CO 14/509) clarifies the requirement in s 29QB that superannuation websites must be kept up to date at all times. The class order provides a safe harbour so that if RSE licensees who update the responsible superannuation entity’s website within certain specified time frames will be taken to comply with the s 29QB updating obligations. ASIC Superannuation (RSE Websites) Instrument 2017/570 (www.legislation.gov.au/Details/F2017L00738) sets release times for each document or item of information prescribed under the SIS Regulations. These include: • name and details of executive officers and individual trustees of the RSE licensee (reg 2.37(1), items 1–4) • remuneration, payments and benefits made to executive officers and individual trustees (reg 2.37(1), items 5–16), • various documents and information relating to the relevant superannuation fund, such as trust deeds and summaries of significant event notices given to members of the fund (reg 2.38; s 29QB(1A)). The class order uses the concepts of “triggers” and “release times” as a simple way of dealing with the complexities of the regulations although these terms are not used in the class order. The class order also modifies reg 2.37 and 2.38 by clarifying how references to “financial year” are to operate in various circumstances (see above). An RSE licensee can take advantage of the safe harbour offered by ASIC Superannuation (RSE Websites) Instrument 2017/570 (www.legislation.gov.au/Details/F2017L00738) if it updates the responsible superannuation entity’s website after a trigger event within a given time after the day the trigger occurs, ie on the basis — update time = trigger + release time. The release times are:

• twenty business days for executive officer details (reg 2.37(1), items 1–4) • four months for remuneration items (reg 2.37(1), items 5–16), and • twenty business days for all information and documents required under reg 2.38 (29QB(1A) to (1C)). The day of the trigger is not counted. For example, if a trigger occurs on 10 November 2014 (Monday) and the release time is 20 business days, the RSE licensee must update the responsible superannuation entity’s website by the end of 8 December 2014 (Monday) to be taken as complying with the updating obligation. To extend the example to one of the prescribed documents, the trigger for the publication of the PDS of a superannuation product will be when a copy “is first given to a person in a recommendation, issue or sale situation” which, in this example, is the 10 November 2014. This means that the PDS must be on the website 20 business days from the day after it is given (ie day one is 11 November 2014). Counting the release time of 20 business days from that date means that the website will be up to date if the PDS is published by 8 December 2014. ASIC considers a failure to comply with a time period specified as a breach of the s 29QB updating obligation and expects RSE licensees who are also Australian financial services licensees to apply their normal breach handling procedures to such a breach. Summary of s 29QB requirements and deferrals Section 29QB requires the publication of the information and documents prescribed in reg 2.37 and reg 2.38 in the public section of a superannuation fund’s website. These provisions require an RSE licensee to make publicly available, and to keep up to date at all times, on the RSE’s website, details and remuneration of executive officers and individual trustees and information and documents relevant to the superannuation fund. These requirements (originally scheduled to commence on 1 July 2013) have largely come into effect on 1 July 2015 (for the deferral instruments, see ASIC Class Orders CO 13/1275; CO 13/830 and CO 14/592). Safe harbour A safe harbour rule enables RSE licensees which update the RSE’s website within certain time frames to be taken to have complied with the updating obligations under s 29QB (former Class Order CO 14/509; ASIC Superannuation (RSE Websites) Instrument 2017/570: www.legislation.gov.au/Details/F2017L00738). Standard employer-sponsored sub-plans For standard employer-sponsored sub-plans, ASIC has further deferred the start date of the disclosure requirements until 30 June 2024 (former Class Order CO 14/509, as amended: ASIC Superannuation (Amendment) Instrument 2018/474: www.legislation.gov.au/Details/F2018L00709). This further deferral means that RSE documents, such as product disclosure statements, trust deeds and governing rules, actuarial reports of defined benefit funds, annual reports and summaries of significant event notices, in respect of standard employer-sponsored sub-plans do not have to be published on the RSE’s website until 30 June 2024, or they may be redacted if the document relates to both the sub-plan and the RSE more generally. The further deferral is to allow the government time to consider the practical implications of applying s 29QB to employer sub-plans and settle its policy position on the operation of s 29QB to require potentially sensitive information in relation to the commercial terms negotiated with different employer sponsors. Under the extension, the relief in relation to the operation of s 29QB to the extent it requires the publication of personal information continues unaffected, eg other documents or information required by reg 2.37 and 2.38 (ASIC media release 18-164mr; www.asic.gov.au/about-asic/media-centre/find-amedia-release/2018-releases/18-164mr-asic-temporarily-extends-relief-for-managed-investment-andsuperannuation-schemes-for-certain-disclosure-obligations/). Regulators’ guidelines

• ASIC’s Regulatory Guide RG 252 “Keeping superannuation websites up to date” • APRA’s Superannuation Prudential Standard SPS 510 “Governance” (see ¶9-720).

¶9-660 Consistency in calculation of published data To improve comparability of superannuation products and consistency in how information is calculated and reported, an RSE licensee is required to give a person information that is calculated in the same way as required under an APRA reporting standard (SISA s 29QC(1)). The section applies if: • the RSE licensee is required to give information to APRA under a reporting standard (¶9-750) under which information is required to be calculated in a particular way, and • the same or equivalent information is given by the RSE licensee to a person (other than an agency of the Commonwealth or of a state or territory), whether or not by publishing the information on a website. The effect of the above is that an RSE licensee must always ensure that the information given to the other person is calculated in the same way as the information given to APRA. ASIC has the general administration of s 29QC. A contravention of s 29QC(1) is a subject to a penalty of 50 penalty units (a strict liability provision). Section 29QC(1) does not apply to information given to the other person in the circumstances prescribed by SIS Regulations (s 29QC(2)). This is to address situations where APRA may require information to be reported for prudential purposes, but which may be misleading if it is calculated in the same way when disclosed to members. Deferral of application date The start date in s 29QC for RSE licensees to provide consistent information has been deferred from 1 January 2019 to 1 January 2024 (ASIC Superannuation (Amendment) Instrument 2016/1232 (www.legislation.gov.au/Details/F2016L01990); ASIC Superannuation (Amendment) Instrument 2018/1080 (www.legislation.gov.au/Details/F2018L01779)). Reporting standards, ASIC guides, and consultation papers For APRA reporting standards for RSEs, see ¶9-750. For ASIC class orders, Regulatory Guides and Information Sheets, see ¶4-800 and ¶4-850. Recent ASIC Consultation Papers and Reports are summarised at ¶4-860.

APRA Prudential Standards ¶9-700 APRA may determine prudential standards APRA may determine prudential standards relating to prudential matters which must be complied with by RSE licensees of RSEs or their connected entities, a specified class of RSE licensees or their connected entities, one or more specified RSE licensees or one or more specified connected entities (SISA s 34C(1)). A prudential standard may impose different requirements to be complied with by different classes of RSE licensees of RSEs or connected entities, or in different situations or in respect of different activities (s 34C(2)). “Connected entities” are subsidiaries, as defined in the Corporations Act 2001, or other entities as prescribed in the regulations. Extending the application of prudential standards to connected entities aims to ensure that compliance with prudential standards cannot be avoided through arrangements with related entities. Prudential matter

A “prudential matter” for which APRA can determine prudential standards is a matter relating to: • the conduct by an RSE licensee of an RSE of the affairs of the RSE or a connected entity in such a way as to protect the interests or meet the reasonable expectations of the beneficiaries of the RSE • the conduct by a connected entity of an RSE licensee of an RSE of the affairs of a connected entity in such a way as to protect the interests or meet the reasonable expectations of the beneficiaries of the RSE • the conduct by an RSE licensee of an RSE of the affairs of the RSE licensee in such a way as to keep itself in a sound financial position or not to cause or promote instability in the Australian financial system • the conduct by an RSE licensee of an RSE of the affairs of the RSE in such a way as not to cause or promote instability in the Australian financial system • the conduct by a connected entity of its affairs in such a way as to keep itself in a sound financial position or not to cause or promote instability in the Australian financial system • the conduct by an RSE licensee of an RSE, or a connected entity, of any of its affairs that are relevant to the RSE with integrity, prudence and professional skill • appointment of auditors and actuaries, and • the conduct of audits and actuarial investigations (s 34C(4)). The reference to “conduct” in the first dot point makes it clear that prudential standards are not restricted to issues addressing potential adverse or detrimental impacts on the interests of beneficiaries, but can cover issues involving the advancement of interests of beneficiaries. This will allow APRA to make prudential standards that ensure that the conduct of RSE licensees will meet the beneficiaries’ reasonable expectations in relation to all aspects of their superannuation interest (such as, expectations related to investments, the generation of retirement benefits and other product features), consistent with the SIS Act standards and covenants (see Chapter 3). For example, in an accumulation fund, a member’s entitlement is dependent on net investment returns, rather than being a specified dollar amount or sum referable to a formula. In this context, it is appropriate for prudential standards to go beyond simply protecting the value of member contributions but also to cover investing assets attributable to those members to generate additional retirement benefits. Prudential standard dealing with accrued default amounts A prudential standard determined under s 34C may include provisions which: • require an RSE licensee of a regulated superannuation fund who holds an accrued default amount (¶9-130): – for a member of the fund who is not eligible to hold a MySuper product offered by the fund, or – for a member of a regulated superannuation fund of the RSE licensee that does not offer a MySuper product, to transfer that amount to another regulated superannuation fund that includes a MySuper product • set out the requirements that must be met in relation to the transfer of such an accrued default amount, and • deal with other matters relating to such an accrued default amount (s 29X). Prudential standards dealing with assets attributed to former MySuper products A prudential standard determined under s 34C may include provisions which:

• require an RSE licensee who is authorised to offer a MySuper product to transfer any asset or assets of the fund that are attributed to the MySuper product into another MySuper product within the fund, or a MySuper product within another fund, if the authority to issue the MySuper is cancelled under s 29U(1) • set out the requirements that must be met in relation to the transfer of such an asset or assets, and • deal with other matters relating to such an asset or assets (s 29XA). Prudential standards dealing with transitional matters A prudential standard determined under s 34C may include provisions dealing with matters of a transitional nature in the Acts which established the MySuper regime, namely: (a) the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 (b) the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 (c) the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012, and (d) the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Act 2013 (s 389). Interaction of prudential standards with other SIS provisions To avoid confusion due to potential conflict between prudential standards and other laws, a prudential standard may be determined by APRA that elaborates, supplements or otherwise deals with any aspect of a prudential matter to which a covenant in s 52 to 53 or a covenant prescribed under s 54A relates, or a prudential matter to which a SIS Act or SIS Regulations provision relates. However, a prudential standard is of no effect to the extent that it conflicts with the SIS Act or SIS Regulations (s 34D(1), (2)). In determining prudential requirements, APRA recognises that the nature, size and complexity of institutions vary across any industry. Prudential standards allow for appropriate flexibility, avoiding a “onesize-fits-all” approach to regulation. APRA’s emphasis is on sound prudential outcomes, without specifying or prescribing the exact manner in which those outcomes are to be achieved. APRA provides guidance material to the superannuation industry in many different forms, such as prudential practice guides (PPGs), letters to RSEs and frequently asked questions. APRA’s view is that some guidance material may be incorporated as requirements in the prudential standards, while others will be incorporated into PPGs (¶9-720). RSE licensee law Prudential standards form part of the definition of RSE licensee law in s 10(1) (¶9-030). Accordingly, APRA can issue directions to an RSE licensee to comply with the standards.

¶9-720 APRA prudential standards and prudential practice guides APRA has determined the prudential standards below pursuant to SISA s 34C as discussed in ¶9-700. The standards are legislative instruments (see below) and may be downloaded from www.apra.gov.au/superannuation-standards-and-guidance or www.legislation.gov.au. APRA refers to the standards by the generic term “Superannuation Prudential Standard” (SPS). Superannuation Prudential Standard • SPS 114 — Operational Risk Financial Requirement

Superannuation (prudential standard) determination – No 1 of 2012: F2012L02221

• SPS 160 — Defined Benefit Matters

– No 2 of 2013: F2013L01247

• SPS 220 — Risk Management

– No 2 of 2012: F2012L02222

• SPS 231 — Outsourcing

– No 3 of 2012: F2012L02223

• SPS 232 — Business Continuity Management

– No 4 of 2012: F2012L02224

• SPS 250 — Insurance in Superannuation

– No 5 of 2012: F2012L02225

• SPS 310 — Audit and Related Matters (see Note 1 below)

–No 1 of 2018: F2018L00495 (repealing No 3 of 2013: F2013L01260)

• SPS 410 — MySuper Transition (revoked 28.2.19)

Superannuation (Prudential Standard) Determination No 1 of 2019 (F2019L00220) (repealing No 9 of 2012: F2012L02509)

• SPS 450 — Eligible Rollover Fund (ERF) Transition

– No 1 of 2013: F2013L00912

• SPS 510 — Governance (commences 1 July 2017)

– No 1 of 2016: F2016L01707 (repealing No 6 of 2012: F2012L02229)

• SPS 515 — Strategic Planning and Member Outcomes

• See “Consultation on Prudential Standard SPS 515” below

• SPS 520 — Fit and Proper

– No 7 of 2012: F2012L02230

• SPS 521 — Conflicts of Interest

– No 4 of 2013: F2013L01266

• SPS 530 — Investment Governance

– No 8 of 2012: F2012L02231

Note 1: Paragraph 19(b)(iv) of SPS 310 previously required auditors to provide, via the auditor’s report, limited assurance addressing the RSE licensee’s compliance with its operational risk financial requirement (ORFR) strategy. This requirement was intended to ensure adequate review of the ORFR target amount and tolerance limit, how the financial resources will be used, the replenishment plan, and review and monitoring processes in relation to the ORFR. The audit profession had advised that, as there is no additional testing that the external auditor can effectively and efficiently undertake as part of the year-end audit, a limited assurance review requirement adds little value. Also, any other testing of this requirement would be considered to be an internal audit function rather than a function of the RSE auditor. Auditors are already required to provide reasonable assurance on RSE licensee compliance with relevant Acts and regulations, including the requirement to maintain ORFR reserves at the required target amount, and the annual reporting forms that relate to these requirements. Auditors also provide limited assurance on the systems, procedures and internal controls designed to ensure that the RSE licensee has complied with all applicable prudential requirements. APRA has therefore removed both the limited assurance review requirement in para 19(b)(iv) of SPS 310 and the equivalent provision in the approved form of the audit report (which must comply with SPS 310). Consultation on Prudential Standard SPS 515 In April 2019, APRA released a consultation pack on proposed revisions to Prudential Standard SPS 515 Strategic Planning and Member Outcomes (SPS 515) following the passage of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1 Act 2019) (www.apra.gov.au/strengthening-superannuation-member-outcomes). The revised SPS 515 requires a Business Performance Review (BPR) to be undertaken as part of an RSE licensee’s strategic and business planning process. SPS 515 is expected to commence at 1 January 2020.

The draft SPS 515 and APRA’s letter are available at: • www.apra.gov.au/sites/default/files/prudential_standard_sps_515_strategic_planning_and_member_outcomes.pdf •

www.apra.gov.au/sites/default/files/letter_proposed_revision_to_prudential_standard_sps_515_strategic_planning_an Superannuation prudential practice guides APRA issues prudential practice guides (PPG) in relation to certain elements of RSE operations and business that are prescribed in SPSs (see above). APRA refers to the guides by the generic term “Prudential Practice Guide”. Superannuation-specific guides are prefixed “SPG”. The numbering of the SPGs corresponds or relates to that of the prudential standard (SPS) to which they relate (eg SPG 520 — Fit and Proper and SPS 520 — Fit and Proper) or to the SPG topic group to which they relate (eg SPG 221 — Adequacy of Resources and SPG 223 — Fraud Risk Management in relation to SPG 220 — Risk management). See “Summary of PPGs (SPG series)” below. APRA also issues a separate series of cross-industry prudential practice guides prefixed “CPG” which are not related to a specific superannuation prudential standard (see “Cross-industry prudential practice guides” below). PPGs and CPGs are available at www.apra.gov.au/superannuation-standards-and-guidance-ppgs.aspx. Summary of PPGs (SPG series) PPGs provide guidance on APRA’s view of sound practice in particular areas, discuss statutory requirements from legislation, regulations or APRA’s prudential standards, but they do not themselves create enforceable requirements. While the PPGs provide guidance for managing data and complying with APRA’s prudential requirements, they do not seek to be all-encompassing. APRA states with regard to the guidelines that, subject to the requirements of SPSs to which the PPGs relate, an RSE licensee has the flexibility to structure its business operations in the way most suited to achieving its business objectives. Therefore, not all practices outlined in PPGs will be relevant for every RSE licensee and some aspects may vary depending upon the size, business mix and complexity of the RSE licensee’s business operations.

Table of SPGs Prudential Practice Guide (SPG) SPG 114 — Operational Risk Financial Requirement (ORFR)

Some key points This PPG is to be read with other PPGs related to risk management, including: – SPG 220 Risk Management – SPG 231 Outsourcing – SPG 232 Business Continuity Management – SPS 114 establishes requirements for an RSE licensee to maintain adequate financial resources to address operational risk events that may affect its business operations – SPG 220 provides examples of operational risks that may lead to operational risk events. APRA expects a soundly run RSE licensee that has implemented an effective risk management framework to have an ORFR target amount that is equivalent to at least 0.25% of funds under management (FUM). For the purposes of calculating the ORFR target amount, APRA views FUM as the total of asset balances of each RSE within the RSE licensee’s business operations.

SPG 160 — Defined Benefit Matters

Prudential Standard SPS 160 Defined Benefit Matters: – sets out APRA’s requirements in relation to the management of defined benefit funds and sub-funds with the objective of meeting the liabilities of the fund as they fall due – deals with self-insurance where that is permitted. This PPG aims to assist an RSE licensee in complying with those requirements and, more generally, to outline prudent practices in relation to certain defined benefit matters. In particular, it provides guidance to assist an RSE licensee in complying with the actuarial investigation, self-insurance and reporting requirements set out in SPS 160. It includes a particular focus on action to restore a fund to a satisfactory financial position.

SPG 220 — Risk Management – see Note 1 below

Prudential Standard SPS 220 Risk Management sets out APRA’s requirements for RSE licensees to have systems for identifying, assessing, managing, mitigating and monitoring material risks that may affect its ability to meet its obligations to beneficiaries. This PPG, which aims to assist RSE licensees in complying with those requirements and, more generally, to outline prudent practices in relation to risk management, is to be read with other PPGs related to risk management, including: – SPG 114 Operational Risk Financial Requirement – SPG 231 Outsourcing – SPG 232 Business Continuity Management. An effective risk management framework includes appropriate levels of risk governance (oversight, monitoring and control) to enable an RSE licensee to manage the material risks of its business operations. This PPG provides guidance on APRA’s expectations with regard to an RSE licensee’s risk management framework and outlines sound practices in relation to the management of risk throughout an RSE licensee’s business operations. The definition of an RSE licensee’s business operations is sufficiently broad to include risks arising from not only RSEs within those business operations but also other non-superannuation activities of the licensee, such as the operation of a managed investment scheme, to the extent that these activities may pose a material risk to its activities as an RSE licensee.

SPG 221 — Adequacy of Resources

Prudential Standard SPS 220 — Risk Management sets out APRA’s requirements for an RSE licensee to maintain adequate resources to undertake the activities for which it holds an RSE licence. This requires an RSE licensee to have (or have available to it under an enforceable agreement): (a) adequate financial resources to ensure the ongoing solvency of the RSE licensee, and (b) adequate liquidity to support the business operations of the RSE licensee. The requirement to have adequate financial resources does not operate as a de facto capital requirement. It is also distinct from the ORFR, the purpose of which is to provide financial resources to address operational risk events that may affect an RSE licensee’s business operations and cause a beneficiary to sustain a loss or be deprived of a gain due to the event. This PPG aims to assist RSE licensees in complying with those requirements and, more generally, to outline prudent practices in relation to adequacy of resources. APRA expects that an RSE licensee

would consider the size, business mix and complexity of its business operations when determining the adequacy of its financial resources. It is to be read with other PPGs related to risk management, including: – SPG 114 Operational Risk Financial Requirement – SPG 220 Risk Management – SPG 222 Management of Reserves – SPG 231 Outsourcing, and – SPG 232 Business Continuity Management). SPG 222 — Management of Reserves

This PPG aims to assist RSE licensees in complying with the management of reserves requirements in SISA and, more generally, to outline prudent practices in this area. An RSE licensee may establish reserves for different purposes within an RSE. APRA’s view is that before establishing a reserve, it is important for an RSE licensee to be clear as to why the reserve is to be established, and its ongoing purpose. Where a reserve is established, APRA expects that an RSE licensee’s strategy for the management of the reserve would be comprehensive and contain appropriate objectives for which the reserve is established, as well as measures to manage the reserve. An RSE licensee may seek appropriate independent advice to assist it in formulating its strategy and managing and reviewing the operation of reserves. The common types of reserves are: • Administration reserve: this may be used to fund future administration and operational expenses of an RSE or sub-fund. • Investment reserve: this may be used in conjunction with crediting rates or unit pricing in an RSE or a sub-fund to smooth the impact of market fluctuations on members’ account balances over a number of years. • Operational risk reserve: this may be used to hold the financial resources to meet an RSE licensee’s Operational Risk Financial Requirement (ORFR) target amount (Prudential Standard SPS 114 Operational Risk Financial Requirement includes specific requirements in relation to the use of an operational risk reserve). • Self-insurance reserve: RSE licensees that are permitted to self-insure insured benefits are expected to maintain reserves, or have other arrangements approved by APRA, to fund current and future insurance claims and to allow for the inherent uncertainty regarding the size and timing of claims, and any other risks that may arise from the selfinsurance or other arrangements.

SPG 223 — Fraud Risk Management

An RSE licensee is responsible under SPS 220 for ensuring that its risk management framework covers all material risks to its business operations, both financial and non-financial. An effective risk management framework therefore includes appropriate consideration of fraud risk, which is a subset of operational risk. Fraud risk refers to the risk of loss from: • internal fraud — losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy (excluding diversity/discrimination events) which involves at least one internal party • external fraud — losses due to acts of a third party that are of a type intended to defraud, misappropriate property or circumvent the law. This PPG provides guidance on APRA’s expectations for the treatment of fraud risk in an RSE licensee’s risk management framework, covering the below topics:

– Fraud risk management framework – Development and implementation of the fraud risk management framework – Planning and resourcing – Fraud prevention, detection and response – Monitoring and review – Superannuation-specific fraud risks – Fraud related investment risks – Outsourcing risks. SPG 227 — Successor Fund Transfers and Wind-ups

This PPG aims to assist an RSE licensee in addressing the particular risks that occur when undertaking successor fund transfers (SFTs). This guide does not attempt to cover all possible issues related to SFTs as these will vary according to the particular circumstances. It covers: • the key areas of equivalent rights, including rights under the trust deed, legally enforceable rights, rights as a “bundle of rights” and rights for the individual member/groups of members. • MySuper to MySuper successor fund transfers, and planning for a SFT, including an RSE licensee’s strategic direction, business plan and due diligence assessment.

SPG 231 — Outsourcing

Prudential Standard SPS 231 Outsourcing sets out APRA’s requirements in relation to outsourcing. This PPG aims to assist an RSE licensee in complying with those requirements and, more generally, to outline prudent practices in relation to managing outsourcing arrangements. For the purposes of SPS 231, outsourcing: – refers to all arrangements with any other party to perform, on a continuing basis, a business activity that is a function or responsibility of an RSE licensee pursuant to its duties under the governing rules and where the business activity has been delegated to that other party — includes business activities that the RSE licensee performs in its capacity as trustee and does not include business activities that the RSE licensee performs in its capacity as a corporate entity. Where a business activity has been outsourced, the risks and responsibility of the business activity continue to be borne by the RSE licensee. While SPS 231 only applies to arrangements to outsource material business activities, the practices outlined in this guide are matters that an RSE licensee could find beneficial when considering any outsourcing arrangement, material or otherwise.

SPG 232 — Business Continuity Management

Prudential Standard SPS 232 Business Continuity Management sets out APRA’s requirements in relation to business continuity management (BCM). This PPG aims to assist an RSE licensee in complying with those requirements and, more generally, to outline prudent practices in relation to BCM. Although the Board of the RSE licensee (Board) is ultimately responsible for BCM under SPS 232, APRA recognises that the Board may delegate certain functions. A Board may delegate day-to-day operational responsibility to a responsible committee and/or senior management and need not have a detailed knowledge of, or familiarity with, the particulars of the day-to-day management of BCM. Business continuity is generally defined as a state of continued and uninterrupted operations of a business. BCM is an approach taken across the whole of the business to ensure business continuity. In order to adopt a whole-of-business approach, many of the processes embedded within an RSE licensee’s business operations will need to

consider BCM, for example, in: • the planning phase for new business acquisitions, joint ventures and major projects involving the introduction of new business processes and systems, and • staff training, including those without specific BCM responsibilities, to ensure staff are aware of business continuity issues. A consistent method of documenting the BCM will typically be implemented throughout the RSE licensee’s business operations and have detailed input at the business unit level. A centralised business continuity function may be of assistance to ensure that common standards and practices are in place across an RSE licensee’s business operations or a corporate group. SPG 250 — Insurance in Superannuation – see Note 2 below

Prudential Standard SPS 250 Insurance in Superannuation sets out APRA’s requirements in relation to making insured benefits available to beneficiaries and Prudential Standard SPS 160 Defined Benefit Matters sets out APRA’s requirements in relation to self-insurance. This PPG aims to assist an RSE licensee in complying with those requirements and, more generally, to outline prudent practices in relation to insurance in superannuation, regardless of how the RSE licensee chooses to undertake this activity. Under SISA, RSE licensees: • are generally required to provide, death benefits and permanent incapacity benefits to all MySuper beneficiaries on an opt out basis. • can make certain types of insured benefits available to choice members. • are ultimately responsible for insured benefits that are made available to beneficiaries within its business operations. For the purposes of this PPG and consistent with SPS 250, insured benefits means benefits that are made available to beneficiaries via insurance acquired by the RSE licensee from an insurer or insurance offered under an RSE licensee’s self-insurance arrangements. An RSE licensee’s insurance management framework encompasses all aspects of the RSE licensee’s business operations that affect insured benefits made available to beneficiaries. APRA expects an RSE licensee to develop its insurance management framework in a way that pays particular attention to factors that could adversely affect these insured benefits. It is common for parties other than the RSE licensee to have roles and responsibilities in relation to making insured benefits available to beneficiaries, including with respect to managing the risks relating to insurance. These parties can include, but are not limited to, insurer(s) and administrator(s). APRA expects an RSE licensee would ensure that it understands the roles and responsibilities of all such persons and documents these appropriately as part of the insurance management framework.

SPG 270 — Contribution and Benefit Accrual Standards

SISA and SISR Pt 7 set out the circumstances and forms in which an RSE licensee may accept contributions or grant benefit accruals in respect of members of an RSE that is an APRA-regulated superannuation fund. SISA and SISR and the Superannuation Data and Payment Standards 2012 also set out the requirements for common data standards and processing requirements for contributions (¶9-780). This PPG aims to assist RSE licensees in complying with the SIS contribution and benefit accrual standards and superannuation data and payment standards and, more generally, to outline prudent practices in

relation to accepting contributions and granting benefit accruals. APRA expects: • an RSE licensee would ordinarily establish, monitor and review policies and procedures regarding the acceptance, classification and allocation of contributions. Such policies and procedures would contain measures that an RSE licensee would take (or require an outsourced service provider to take) in case of a breach of the contribution and benefit accrual standards. • an RSE licensee would ordinarily ensure that, in addition to complying with its legal obligations to collect certain data, it would also collect and record additional data that may be relevant to and facilitate the effective processing of contributions. This may include details related to the chosen investment option, and the relative amounts for each option in relation to the contribution and, for members aged 65 or over, recording the gainful employment status of that member for any financial year in which a contribution is accepted. • as good practice, an RSE licensee to classify each contribution according to its appropriate income tax status (eg concessional, nonconcessional). This may enable an RSE licensee to ensure that all appropriate financial, cash flow and taxation records are able to be generated for the RSE. Such classification would also ensure that equity is maintained across the RSE’s membership in terms of tax paid or payable. • as good practice, an RSE licensee to ensure that appropriate information relating to contributions and the RSE’s policies and procedures relating to contributions are communicated to members and potential members (eg via its website, product disclosure documents (PDS) or other RSE documents). Appropriate information may include legal and taxation matters such as contribution caps, concessional contributions and the potential consequences of exceeding allowable limits and/or not complying with particular provisions. Material business activity. APRA considers the processing of contributions to be a material business activity of an RSE licensee. To the extent that some or all of the function is outsourced, including arrangements to ensure the processing of contributions complies with the superannuation data and payment regulations and standards, the arrangements are expected to meet the requirements of Prudential Standard SPS 231 Outsourcing. An RSE licensee or its external administrator may use an additional service provider, such as a gateway service, to assist in ensuring compliance with the superannuation data and payment regulations and standards. APRA considers that it is the RSE licensee’s responsibility to determine whether this element of contributions processing is of itself a material business activity. For example, an RSE licensee may consider whether there would be a significant impact on the RSE licensee’s ability to meet its regulatory requirements should the gateway service fail. Where an RSE licensee has outsourced its administration function, APRA expects the RSE licensee to ensure its administration agreement makes specific reference to compliance with the superannuation data and payment regulations and standards and the approach for ensuring that the administrator is able to deliver the required service, including any element it may subcontract to a gateway or other service provider.

SPG 280 — Payment Standards

SISA and SISR Pt 6 set out the circumstances and forms in which an RSE licensee must or may pay member benefits from an RSE SISA and SISR and the Superannuation Data and Payment Standard 2012 (superannuation data and payment standard) also set out the requirements for common data standards and processing requirements for benefit payments paid as roll-overs or transfers. This PPG aims to assist an RSE licensee in complying with the requirements of the SIS payment standards and superannuation data and payment standards and, more generally, to outline prudent practices in relation to paying benefits. Risk management. Under SPS 220 Risk Management, an RSE licensee: – is responsible for ensuring that it identifies, manages and regularly reviews all material risks to its business operations through its risk management framework – must have and maintain a Board-approved Risk Management Strategy (RMS). While an RSE licensee may have a number of different approaches to the development of its risk management framework, APRA expects that an RSE licensee would consider the risks arising from processing and paying benefits and address these risks, as appropriate, in its risk management framework and RMS. Particular emphasis may be appropriate on the following risk areas: liquidity and cash flow risk and how these are affected by the requirement under the superannuation data and payment regulations and standards to generally pay benefits within three business days, operational risk, outsourcing risk and fraud risk. Administration. A prudent RSE licensee would establish, monitor and review policies and procedures regarding the acceptance, identification and processing of applications to pay, transfer or roll over benefits. Such policies and procedures would ordinarily contain measures that an RSE licensee would take (or require an outsourced service provider to take) in the case of a breach of the payment standards. This may include identifying which parties are to be notified (eg member, receiving RSE, paying institution, Board or Board committee, regulators), procedures for rectification, disclosure to members and the basis of reporting to the relevant party. APRA expects that: – an RSE licensee’s policies and procedures would clearly outline typical and maximum timeframes for the payment of different types of benefits and also contain details of the application of the investment policy and the unit pricing policy/crediting rate policy in relation to benefit payments once notified by the member. – an RSE licensee would ensure there is equitable treatment among members when paying benefits and that members are not disadvantaged due to delays between the date of receipt of the benefit payment application and the payment date. It would also be prudent for the RSE licensee to include in its policy, details on how the risks of these timing differences are managed. – an RSE licensee would ensure that the data storage and benefit processing systems for each RSE it manages are adequate to ensure the correct and timely payment of benefits in any form. The systems would ordinarily keep up-to-date records of benefits, including changes to benefits, eg according to each event that constitutes a condition of release, in a way that permits the different amounts for each member

account to be classified correctly. An adequate data storage and processing system would ordinarily record the taxable and non-taxable components of each benefit. It would also be able to re-calculate the amounts in each preservation category (and the tax components where required) in response to changes that may impact on tax or preservation status and conditions of release (see Prudential Practice Guide CPG 234 Management of Security Risk in Information and Information Technology for more information on APRA’s expectations in relation to data storage, recovery and management). These changes may include the member’s age, the member satisfying a condition of release and/or correctly recording the impact of earnings growth on the relevant components of the benefit. Material business activity. APRA considers the processing of benefit payments to be a material business activity of an RSE licensee. To the extent that some or all of the function is outsourced, including arrangements to ensure the processing of roll-overs and transfers complies with the superannuation data and payment regulations and standards, the arrangements are expected to meet the requirements of Prudential Standard SPS 231 Outsourcing. Outsourcing to service provider. An RSE licensee or its external administrator may use an additional service provider, such as a gateway service, to assist in ensuring compliance with the superannuation data and payment regulations and standards. – APRA considers that it is the RSE licensee’s responsibility to determine whether this element of payment processing is of itself a material business activity. For example, an RSE licensee may consider whether there would be a significant impact on the RSE licensee’s ability to meet its regulatory requirements should the gateway service fail. – APRA expects the RSE licensee to ensure its administration agreement makes specific reference to compliance with the superannuation data and payment regulations and standards and to the approach to compliance to ensure that the administrator is able to deliver the required service, including any element it may subcontract to a gateway or other service provider. SPG 310 — Audit and Related Matters

Prudential Standard SPS 310 Audit and Related Matters sets out: – APRA’s requirements in relation to the audit of an RSE licensee’s business operations, and – the responsibilities of both the RSE licensee and RSE auditor with respect to the external audit of an RSE (it is the ultimate responsibility of the RSE licensee to ensure that the RSE auditor undertakes their role and responsibilities). This PPG aims to assist an RSE licensee in complying with those requirements and, more generally, to outline prudent practices in relation to audit arrangements. It also outlines sound practices for an effective external audit framework to assist the Board and senior management to carry out their responsibilities for the sound and prudent management of the operations, financial position and risk controls of the business operations of the RSE licensee. The Auditing Assurance and Standards Board (AUASB) issues guidance statements for audit engagements required under prudential standards, including guidance to RSE auditors on matters relating to the audit of certain annual reporting forms submitted to APRA for the RSE, compliance with legislative provisions, the RSE licensee’s systems,

procedures and internal controls, risk management framework and operational risk financial requirement (ORFR) strategy required under SPS 310. Note: APRA has removed the requirement for the auditor’s report to provide limited assurance addressing the RSE licensee’s compliance with its operational risk financial requirement (ORFR) strategy arising under Prudential Standard SPS 114 Operational Risk Financial Requirement. The requirement is considered unnecessary, given the existing responsibilities of the auditor to provide reasonable and limited assurance in their audit as set out in para 19 of SPS 310 (APRA letter 30 April 2018: www.apra.gov.au/sites/default/files/Letter-RSELicensees_Minor-amendments-to-SPS-310.pdf). SPG 410 — MySuper Prudential Standard SPS 410 MySuper Transition previously set out Transition (SPS 410 revoked) APRA’s requirements in relation to the identification of accrued default amounts, the preparation and implementation of a transition plan addressing the attribution of these amounts to a suitable MySuper product and reporting of these amounts to APRA. This prudential practice guide aims to assist an RSE licensee to comply with those requirements and, more generally, to outline prudent practices in relation to the transition to MySuper. It covers the activities of RSE licensees as they relate to the attribution of accrued default amounts to a suitable MySuper product. SPS 410 outlines the requirements during the transition period from 1 January 2013 to 1 July 2017, by which date all accrued default amounts of members must be in a MySuper product, unless the member opts out in writing. APRA expects the attribution of accrued default amounts to a MySuper product would occur at the earliest opportunity possible where it is in the best interests of beneficiaries to do so. Key dates In conjunction with each periodic member statement — Provide information to members with an accrued default amount as specified in the Corporations Regulations 2001 No later than 30 June 2016 — Identify one or more suitable MySuper products to which members’ accrued default amounts could be attributed. No later than 31 July 2016 — If no suitable MySuper product can be identified for a member or class of members, report to APRA. Prior to attributing a member’s accrued default amount to a MySuper product — Provide information to the member about the proposed attribution as specified in SISR reg 9.46. Within 120 days of providing the specified information to an affected member — If no contrary instruction is provided by the member within three months of the date of providing the specified information, attribute the member’s accrued default amount to the specified MySuper product. SPG 510 — Governance

Prudential Standard SPS 510 Governance sets out APRA’s requirements in relation to the governance of an RSE licensee’s business operations. This PPG aims to assist RSE licensees in complying with those requirements and, more generally, to outline prudent practices in relation to certain governance matters. A number of principles underpin a sound and effective governance framework for an RSE licensee. These include: (a) responsibility — the board of directors (the Board) is ultimately

responsible and accountable for the decisions and actions taken by an RSE licensee (b) independence — demonstrated by a Board that discharges its review and oversight role effectively and independent of the interests of dominant shareholders, management, and competing or conflicting business interests (c) renewal — a policy of renewal provides for fresh insight and general reinvigoration of a Board while also ensuring ongoing effective oversight and understanding of the business of the RSE licensee by the Board (d) expertise — demonstrated by a Board with the necessary expertise to fulfil its role and functions, and access to independent expertise not readily available among the current directors (e) diligence — demonstrated by a Board that discharges its duties and responsibilities carefully and conscientiously (f) prudence — demonstrated by a Board with a clear focus on the prudent management of the RSE licensee’s business operations (g) transparency — demonstrated by a Board that is open and honest in its dealings on behalf of the RSE licensee, and (h) oversight — demonstrated by a Board that is able to satisfy itself that the management and operation of the RSE. Governance framework. An effective governance framework includes the oversight of systems, structures, policies, processes and people that underpin accountability within the RSE licensee’s business operations. It supports an RSE licensee to make objective business decisions in the best interests of beneficiaries. APRA expects that a Board would establish a process to ensure that governance risks are properly and regularly evaluated and managed by the Board. Governance risks include, but are not limited to, risks associated with: (a) accountability and transparency of decision-making processes (b) delegation of roles and responsibilities (c) remuneration arrangements (d) fitness and propriety, and (e) the management of conflicts of interest. For the avoidance of doubt, where an RSE licensee already has in place a policy that satisfies requirements set out in SPS 510, the RSE licensee may incorporate such policies by reference into the governance framework. That is, the materials do not have to be duplicated for the purposes of

complying with the requirements of SPS 510. APRA’s view is that a prudent Board would determine a target size for the Board and its committees and reflect in the Board’s renewal policy an outline of how the Board intends to achieve and maintain this target size. APRA considers it would be prudent practice for an RSE licensee to periodically review the total number of directors on the Board and assess whether the size of the Board supports the effective functioning and decision-making of the Board. The size of the Board is ultimately a matter for the RSE licensee to set in light of the size, business mix and complexity of their business operations. APRA’s view, however, is that there are likely to be very limited circumstances where an RSE licensee would need a Board of more than 12 directors. APRA’s view is that, when determining the overall composition of the Board, an RSE licensee would ordinarily take into account the RSE licensee’s business and strategic plans and the skills and capabilities required to effectively oversee the implementation of that strategy. APRA expects that an RSE licensee would establish policies and procedures relating to voting rights which support effective decisionmaking by the Board. This would be expected to include procedures which ensure that the views of all directors are adequately reflected in all decisions made by the Board. It would be prudent practice for the Board to consider using relevant board committees to provide appropriate oversight of key governance matters. Such committees may include a dedicated nomination committee or another appropriate board committee, such as the board risk committee. The responsibilities of a dedicated nomination committee might include: • overseeing the nomination, appointment, reappointment and removal processes for directors of the Board • recommending candidates for appointment to the Board, and • overseeing remuneration and performance assessment policies and processes (if these roles are not otherwise performed by the Board Remuneration Committee). SPG 511 — Remuneration

RSE licensees are required to perform their duties in the best interests of beneficiaries and to exercise the same degree of care, skill and diligence as a “prudent superannuation trustee” would exercise in relation to an entity of which it is a trustee and on behalf of the beneficiaries of which it makes investments. Prudential Standard SPS 510 Governance sets out APRA’s requirements in relation to the governance of an RSE licensee, which includes a range of requirements relating to remuneration arrangements within the RSE licensee’s business operations. These requirements support the alignment of prudent remuneration practices with the best interest duties of the RSE licensee. This PPG aims to assist an RSE licensee in complying with remuneration requirements contained in SPS 510 and, more generally, to outline prudent practices in relation to certain remuneration matters. APRA considers that: – an RSE licensee’s business objectives with regard to remuneration are likely to be wider than those discussed in this PPG. For example, remuneration objectives are likely to relate to attracting and retaining staff. APRA’s remuneration requirements and guidance relate to managing or limiting risk incentives associated with remuneration. They are not intended to affect business decisions regarding pay levels or

limit innovative methods of rewarding staff, provided such measures do not compromise the requirements of SPS 510. – an RSE licensee may have regard to the Principles for Sound Compensation Practices — Implementation Standards issued by the Financial Stability Board (in September 2009) for further guidance in addressing APRA’s remuneration requirements. SPG 520 — Fit and Proper

Prudential Standard SPS 520 Fit and Proper sets out APRA’s requirements in relation to assessing the fitness and propriety of responsible persons of an RSE licensee. This PPG aims to assist an RSE licensee in complying with those requirements and, more generally, to outline prudent practices in relation to fitness and propriety. The Fit and Proper Policy of an RSE licensee assists it in prudently managing the risk that responsible persons are not fit and proper. It forms a part of the entity’s broader risk management framework. A Fit and Proper Policy may be developed and implemented as a group policy provided the RSE licensee meets the requirements of SPS 520, including para 7 of that standard. An RSE licensee may consider extending its assessment process for fitness and propriety to a wider range of persons than is required under SPS 520. The assessment process for responsible persons under the Fit and Proper Policy could be adapted for this purpose. Members of the Board of an RSE licensee must collectively satisfy criteria of both fitness and propriety. The standard requires that each individual satisfies the requirements of propriety, including character, honesty, integrity, diligence and judgment. Each individual would also be expected to make a contribution to the RSE licensee satisfying the requirements of fitness at a collective level.

SPG 521 — Conflicts of Interest

Prudential Standard SPS 521 Conflicts of Interest sets out APRA’s requirements in relation to an RSE licensee’s management of conflicts of interest and duty. This PPG aims to assist an RSE licensee in complying with those requirements and, more generally, to outline prudent practices in relation to conflicts of interest. An RSE licensee must undertake its business operations in the best interests of beneficiaries, consistent with the retirement purposes of superannuation. In this regard, an RSE licensee and each individual director of an RSE licensee must comply with covenants set out in SISA s 52 and 52A, respectively, to act honestly, to exercise a required degree of care, skill and diligence and to perform their duties and powers in the best interests of beneficiaries. Under s 52(2)(d) and 52A(2)(d) (the conflicts of interest covenants), an RSE licensee is required to ensure that, where a conflict arises and has not been avoided, the duties to, and interests of, beneficiaries receive priority over any duties to, and interests of, other persons. A conflict has the potential to prevent an RSE licensee from performing its duties by placing it in a position where it may deliberately or inadvertently prefer the interests of another person to those of an RSE’s beneficiaries. Alternatively, a person or firm undertaking a material business activity for, or otherwise advising, an RSE licensee may have a conflict that could affect the nature or quality of the advice given or service provided. APRA considers that transparency of an RSE licensee’s approaches is fundamental to the effective management of conflicts. The requirements in SISR reg 2.38 for public disclosure of an RSE licensee’s registers of relevant duties and interests, as well as its conflicts management policy,

encourage an environment of openness and disclosure. Conflicts management framework. The Board of an RSE licensee (the Board) is ultimately responsible for the management of conflicts throughout the entirety of its business operations. A conflicts management framework enables an RSE licensee to implement a holistic approach to the management of conflicts and ensure that all business units are aware of the potential impact of competing duties and interests on the RSE licensee’s ability to comply with the conflicts of interests covenants. This can be achieved through ensuring that potential and actual conflicts are identified and disclosed, then assessed and avoided or, if not, managed. SPS 521 requires an RSE licensee to have in place a conflicts management framework approved by the Board to ensure that the RSE licensee identifies all potential and actual conflicts in its business operations and takes all reasonably practical actions to ensure that they are avoided or prudentially managed. A sound conflicts management framework supports the ability of the Board to assess conflicts on an ongoing basis and address unexpected conflicts of duty or interest appropriately and in a timely manner. Prudent practice in relation to conflicts management would include continual assessment of the conflicts management framework in light of changes to matters. In APRA’s view, an effective conflicts management framework is one that mitigates and manages the risk that a conflict may result in an RSE licensee acting improperly to the detriment of its beneficiaries. It would also mitigate and manage the risk that an RSE licensee may be perceived to have acted improperly, which may affect the reputation of its business operations. APRA also expects that reporting structures and processes for the escalation of issues, including any whistleblowing procedures, would be clearly defined and documented to enable implementation and consistent understanding of the conflicts management framework. SPS 521 requires that an RSE licensee’s conflicts management framework is comprehensively reviewed by operationally independent, appropriately trained and competent persons at least every three years, and that the RSE licensee also reviews the conflicts management framework on an annual basis. APRA expects the annual review would cover ongoing monitoring processes and controls focused on potential and actual conflicts as well as broader compliance with the conflicts management framework across the entirety of its business operations. If the annual review is undertaken by a person with a role in the implementation of the conflicts management framework, a prudent RSE licensee would consider appropriate steps to ensure the review is objective. The outcomes of the review may be used to assist the future development or enhancement of the conflicts management framework. SPG 530 — Investment Governance

Prudential Standard SPS 530 Investment Governance sets out APRA’s requirements in relation to investment governance for an RSE licensee’s business operations. This PPG aims to assist an RSE licensee in complying with those requirements in relation to the formulation and implementation of an investment strategy and, more generally, to outline prudent practices in relation to corresponding investment risk management arrangements. The PPG provides guidance on the following: • The investment strategy • Investment objectives • Portfolio construction

• Implementing an investment strategy • Maintaining an investment strategy • Investment risk management • Stress testing • Liquidity management. SPG 531 — Valuation

This PPG aims to assist an RSE licensee in complying with those requirements and, more generally, to outline prudent practices in relation to the valuation of assets. It is to be read in conjunction with SPG 530 Investment Governance and Prudential Standard SPS 530 (see above). Both SISA and SPS 530 require an RSE licensee to consider the availability of reliable asset valuation information when formulating, implementing and reviewing an investment strategy. SISA s 52(2)(e) and (f) also impose duties on an RSE licensee to act fairly in dealing with classes of beneficiaries within an RSE and with beneficiaries in a class. In keeping with these obligations, APRA expects that an RSE licensee would have appropriate arrangements and processes so that asset values are measured reliably and valuation risk is adequately managed. Valuations are a critical input into the calculation of investment performance, enabling the equitable distribution of investment earnings to beneficiaries. This PPG provides guidance to assist an RSE licensee in implementing appropriate governance arrangements for the valuation of investments under the topics below. • Valuation governance • Valuation policy and procedures • Methodology • Frequency • Types of valuation risks. While the PPG’s guidelines on establishing valuation policies and procedures, and adopting valuation methodologies, apply to both listed and unlisted investments, the main focus is on unlisted investments where valuation risk is generally considered to be higher. • Listed investments generally have readily available quoted market prices as they trade through exchanges or central clearing agents. There are, however, a number of valuation decisions an RSE licensee may need to consider for listed investments on matters such as the timing of the valuation, the frequency of revaluation, the nature of the investment, the relevance of quoted market prices and the treatment of exchange rates. • Unlisted investments do not trade through exchanges or central clearing agents and do not have readily available prices. Unlisted investments can present valuation challenges due to factors such as multiple management layers, complex investment structures, lack of transaction data, and/or underlying assets that are opaque in nature or where undertaking frequent valuations is costly and/or time consuming.

Note 1 — APRA has written to all RSE licensees regarding its expectations in terms of materiality for the purposes of risk management declarations under para 33 of Prudential Standard SPS 220 Risk Management.). Note 2 — Prudential Practice Guide LPG 270 Group Insurance Arrangements (LPG 270) outlines prudent practices in relation to group insurance arrangements, including life insurance provided to RSE licensees, the identification of risks in accordance with an insurer’s risk management framework, responding to

tenders and data management, and the implications of Prudential Standard SPS 250 for insurers. APRA expects the guidance in LPG 270 may be useful to insurers of other types of group insurance arrangements. Cross-industry prudential practice guides and standards (CPG series, CPS series) • Prudential Practice Guide CPG 233 — Pandemic Planning • Prudential Practice Guide CPG 234 — Information Security (replacing former CPG 234 Management of Security Risk in Information and Information Technology from 1 July 2019) • Prudential Standard CPS 234 — Information Security • Prudential Practice Guide CPG 235 — Managing Data Risk. Information Paper — outsourcing and shared services APRA has a number of existing prudential standards and practice guides that are pertinent to shared computing services (including SPS 231 (see above). This Information Paper applies the concepts included in those standards and guides. Prudential Standard CPS 231 Outsourcing (CPS 231) and Prudential Standard SPS 231 Outsourcing (SPS 231) include requirements relating to the risk management of outsourcing arrangements. APRA’s review of these arrangements has identified some areas of weakness, reflecting risk management and mitigation techniques that are yet to fully mature in this area. This Information Paper outlines prudential considerations and key principles that could be considered when contemplating the use of shared computing services, and may also be of interest to superannuation entities (available at www.apra.gov.au/sites/default/files/information-paper-outsourcing-involving-shared-computingservices_0.pdf). FAQs on prudential standards The APRA website contains FAQs on APRA’s prudential standards for superannuation and proposed legislative amendments which have not yet become law (see www.apra.gov.au/frequently-askedquestions-faqs-prudential-standards-guidance). APRA superannuation consultation packages For access to APRA consultation on a range of reform and prudential governance measures, see www.apra.gov.au/superannuation-consultation-packages. The consultation is grouped under three topics — Governance, Risk management and Other consultations — consistent with the prudential and reporting framework. Consultations can include letters, discussion papers, response papers, draft guidance material and other draft information.

Reporting Standards — RSE ¶9-740 Returns and other reports to APRA under FSCDA Superannuation entities are required to provide annual and periodic returns and other data to APRA under the Financial Sector (Collection of Data) Act 2001 (FSCDA). The FSCDA applies to a “financial sector entity”, which is defined to include a regulated entity (ie a body regulated by APRA). An SMSF is not covered by the FSCDA as it is not a regulated entity. The FSCDA data obligations apply in addition to the SIS Act reporting and disclosure requirements which apply to superannuation entities generally (see ¶3-310). APRA uses the term “registrable superannuation entity” (RSE) to refer to the superannuation entities covered by the FSCDA. An RSE is a regulated superannuation fund (other than an SMSF), an approved deposit fund or a pooled superannuation trust (¶3-480). What are reporting standards?

APRA is empowered to determine reporting standards for financial sector entities under FSCDA s 13. These standards cover reporting financial or accounting data and other information regarding the business or activities of the entities (see ¶9-750 for reporting standards which have been determined). APRA reporting standards are legislative instruments under the Legislation Act 2003 (called the Legislative Instruments Act 2003 previously) and are registered in the Federal Register of Legislation under that Act. A failure to comply with a reporting standard is a breach of a strict liability provision, punishable by a fine of up to 50 penalty units. Under the FSCDA, APRA may issue an infringement notice and impose an administrative penalty in lieu of prosecution of the offence. D2A reporting system Reporting data to APRA is made using a “Direct to APRA” (D2A) reporting process. This is a flexible, secure and user-friendly electronic data submission system which enables APRA-regulated entities to lodge their statutory returns with APRA. Data can be manually entered or imported directly into D2A from the reporting institutions’ own information systems. D2A submits returns by passing information in an encrypted form to APRA using a direct internet connection. APRA uses validation rules within D2A to validate the data submitted by reporting entities. These entities are expected to correct any reporting errors identified by these rules. The list of latest D2A Validation Rules for superannuation entities is available at the APRA webpage (see www.apra.gov.au/direct-aprad2a). APRA has commenced a major data transformation program to keep pace with advancements in data, analytics and technology which will replacing the data collection tool Direct to APRA (D2A) — see www.apra.gov.au/apra-replacing-d2a. Reporting standards and forms for RSEs The reporting standards cover reporting periods before and after 1 July 2013 (see ¶9-750). A reporting period (whether annual or quarter) is based on the financial year of the superannuation entity, not a calendar year. The data or financial information required under the reporting standards are based on the last day of the reporting period on a financial year to date basis of the entity.

¶9-750 Superannuation reporting standards and forms APRA-regulated superannuation entities are required under the Financial Sector (Collection of Data) Act 2001 to provide data to APRA in accordance with the reporting standards made under that Act (¶9-740). APRA uses the prefix “SRS” to denote superannuation reporting standards to distinguish them from other reporting standards made by APRA under the FSCDA for other APRA-regulated entities, such as financial institutions and insurance companies. The data requirements specified by the superannuation reporting standards are set out in the SRS reporting forms and instructions issued by APRA (see “Reporting forms and instructions” below). Some data and forms are subject to audit requirements. The SRS series of standards, data forms and reporting requirements are revised or updated by APRA from time to time. Reporting standards — SRS series Superannuation reporting standards are noted in the table below.

Reporting standards — SRS series Superannuation reporting standard (SRS) (Financial Sector (Collection of Data) (reporting standard) determination No)

Application Revokes (Financial Sector (Collection of Data) (reporting standard) determination No and SRS made under that determination)

SRS 001.0 — Profile and Structure (Baseline) applies on (No 1 of 2015: and from 30 www.legislation.gov.au/Details/F2015L00807) June 2015

No 16 of 2014 www.legislation.gov.au/Details/F2014L00678

SRS 114.0 — Operational Risk Financial Requirement (No 2 of 2015: www.legislation.gov.au/Details/F2015L00808)

applies for reporting periods on or after 1 July 2015

No 64 of 2013 www.legislation.gov.au/Details/F2013L00956

SRS 114.1 — Operational Risk Financial Requirement (No 65 of 2013: www.legislation.gov.au/Details/F2013L00981)

applies for reporting periods ending on or after 1 July 2013

SRS 160.0 — Defined Benefit Matters applies for No 66 of 2013 (No 3 of 2015: reporting www.legislation.gov.au/Details/F2013L00980 www.legislation.gov.au/Details/F2015L00809) periods ending on or after 1 July 2015 SRS 160.1 — Defined Benefit Member Flows applies for (No 4 of 2015: reporting www.legislation.gov.au/Details/F2015L00810) periods ending on or after 1 July 2015

No 17 of 2014 www.legislation.gov.au/Details/F2014L00540 (revoking No 67 of 2013: www.legislation.gov.au/Details/F2013L00960

SRS 161.0 — Self-Insurance applies for No 68 of 2013 (No 5 of 2015: reporting www.legislation.gov.au/Details/F2013L00964 www.legislation.gov.au/Details/F2015L00811) periods ending on or after 1 July 2015 SRS 250.0 — Acquired Insurance applies for No 69 of 2013 (No 6 of 2015: reporting www.legislation.gov.au/Details/F2013L00975 www.legislation.gov.au/Details/F2015L00812) periods ending on or after 1 July 2015 SRS 320.0 — Statement of Financial Position applies for (No 27 of 2015: reporting www.legislation.gov.au/Details/F2015L01291) periods ending on or after 1 April 2015

No 18 of 2014 www.legislation.gov.au/Details/F2014L00545 (revoking No 5 of 2014: www.legislation.gov.au/Details/F2014L00351 (revoking No 70 of 2013: www.legislation.gov.au/Details/F2013L00976

SRS 320.1 — Statement of Financial Position applies for No 71 of 2013 (No 7 of 2015: reporting www.legislation.gov.au/Details/F2013L00977 www.legislation.gov.au/Details/F2015L00813) periods ending on or after 1 July 2015 SRS 330.0 — Statement of Financial

applies for

No 19 of 2014

Performance reporting (No 36 of 2015: periods www.legislation.gov.au/Details/F2015L01971) ending on or after 1 July 2016

www.legislation.gov.au/Details/F2014L00546 (revoking No 6 of 2014: www.legislation.gov.au/Details/F2014L00354 (revoking No 72 of 2013: www.legislation.gov.au/Details/F2013L00986

SRS 330.1 — Statement of Financial Performance (No 28 of 2015: www.legislation.gov.au/Details/F2015L01292)

applies for reporting periods ending on or after 1 July 2015

No 12 of 2014 www.legislation.gov.au/Details/F2014L00674 (revoking No 73 of 2013: www.legislation.gov.au/Details/F2013L00941

SRS 330.2 — Statement of Financial Performance (No 8 of 2015: www.legislation.gov.au/Details/F2015L00814)

applies for reporting periods ending on or after 1 July 2015

No 13 of 2014 www.legislation.gov.au/Details/F2014L00675 (revoking No 74 of 2013: www.legislation.gov.au/Details/F2013L00944

SRS 331.0 — Services applies for No 75 of 2013 (No 9 of 2015: reporting www.legislation.gov.au/Details/F2013L00947 www.legislation.gov.au/Details/F2015L00815) periods ending on or after 1 July 2015 SRS 410.0 — Accrued Default Amounts applies for (No 10 of 2015: reporting www.legislation.gov.au/Details/F2015L00816) periods ending on or after 1 July 2015

No 20 of 2014 www.legislation.gov.au/Details/F2014L00548 (revoking No 76 of 2013: www.legislation.gov.au/Details/F2013L00958

SRS 520.0 — Responsible Persons applies from No 77 of 2013 Information 1 April 2014 www.legislation.gov.au/Details/F2013L00978 (No 7 of 2014: www.legislation.gov.au/Details/F2014L00343) SRS 530.0 — Investments applies for (No 11 of 2015: reporting www.legislation.gov.au/Details/F2015L01005) periods ending on or after 1 July 2015

No 1 of 2014 www.legislation.gov.au/Details/F2014L00796 (revoking No 21 of 2014: www.legislation.gov.au/Details/F2014L00543 (revoking No 78 of 2013: www.legislation.gov.au/Details/F2013L00984

SRS 530.1 — Investments and Investment Flows (No 22 of 2014: www.legislation.gov.au/Details/F2014L00544)

No 8 of 2014 www.legislation.gov.au/Details/F2014L00345 (revoking No 79 of 2013: www.legislation.gov.au/Details/F2013L00948

applies for reporting periods ending on or after 1 April 2014 and ending on or before 30 June 2014

SRS 531.0 — Investment Flows applies for (No 12 of 2015: reporting www.legislation.gov.au/Details/F2015L01006) periods

No 23 of 2014 www.legislation.gov.au/Details/F2014L00541 (revoking No 80 of 2013:

ending on or www.legislation.gov.au/Details/F2013L00962 after 1 July 2015 SRS 532.0 — Investment Exposure Concentrations (No 37 of 2015: www.legislation.gov.au/Details/F2015L01984)

applies for reporting periods ending on or after 1 July 2016

No 27 of 2014 www.legislation.gov.au/Details/F2014L00792 (revoking No 24 of 2014: www.legislation.gov.au/Details/F2014L00542 (revoking No 81 of 2013: www.legislation.gov.au/Details/F2013L00961

SRS 533.0 — Asset Allocation applies for (No 13 of 2015: reporting www.legislation.gov.au/Details/F2015L01007) periods ending on or after 1 July 2015

No 25 of 2014 www.legislation.gov.au/Details/F2014L00552 (revoking No 9 of 2014: www.legislation.gov.au/Details/F2014L00348 (revoking No 82 of 2013: www.legislation.gov.au/Details/F2013L00973

SRS 533.1 — Asset Allocation and Members’ Benefits Flows (No 38 of 2015: www.legislation.gov.au/Details/F2015L01979)

applies for reporting periods ending on or after 1 July 2016

SRS 534.0 — Derivative Financial Instruments (No 39 of 2015: www.legislation.gov.au/Details/F2015L01981)

applies for reporting periods ending on or after 1 July 2016

No 29 of 2015 www.legislation.gov.au/Details/F2015L01790 (revoking No 83 of 2013: www.legislation.gov.au/Details/F2013L00967

SRS 535.0 — Securities Lending applies for (No 84 of 2013: reporting www.legislation.gov.au/Details/F2013L00969) periods ending on or after 1 July 2014 SRS 540.0 — Fees applies for No 85 of 2013 (No 14 of 2015: reporting www.legislation.gov.au/Details/F2013L00971 www.legislation.gov.au/Details/F2015L00817) periods ending on or after 1 July 2015 SRS 600.0 — Profile and Structure (RSE Licensee) (No 15 of 2015: www.legislation.gov.au/Details/F2015L00818)

applies for No 86 of 2013 reporting www.legislation.gov.au/Details/F2013L00972 periods ending on or after 1 July 2015

SRS 601.0 — Profile and Structure (RSE) applies for No 87 of 2013 (No 16 of 2015: reporting www.legislation.gov.au/Details/F2013L00952 www.legislation.gov.au/Details/F2015L00819) periods ending on or after 30 June 2015

SRS 602.0 — Wind-up applies to No 88 of 2013 (No 17 of 2015: decisions or www.legislation.gov.au/Details/F2013L00951 www.legislation.gov.au/Details/F2015L00820) resolutions to wind up an RSE, defined benefit RSE, PST, ERF, SAF or SMADF made on or after 1 July 2015 SRS 610.0 — Membership Profile applies for No 89 of 2013 (No 18 of 2015: reporting www.legislation.gov.au/Details/F2013L00950 www.legislation.gov.au/Details/F2015L00821) periods ending on or after 1 July 2015 SRS 610.1 — Changes in Membership Profile (No 19 of 2015: www.legislation.gov.au/Details/F2015L00823)

applies for No 90 of 2013 reporting www.legislation.gov.au/Details/F2013L00954 periods ending on or after 1 July 2015

SRS 610.2 — Membership Profile applies for No 91 of 2013 (No 20 of 2015: reporting www.legislation.gov.au/Details/F2013L00953 www.legislation.gov.au/Details/F2015L00824) periods ending on or after 1 July 2015. SRS 700.0 — Product Dashboard applies on No 98 of 2013 (No 21 of 2015: and from 30 www.legislation.gov.au/Details/F2013L01740 www.legislation.gov.au/Details/F2015L01008) June 2015 an RSE licensee that has a lifecycle MySuper product must provide the information required by this SRS in respect of each lifecycle stage of that product, but is not required to report information

that would otherwise be required to be reported in respect of the lifecycle MySuper product as a whole SRS 702.0 — Investment Performance applies for (No 40 of 2015: reporting www.legislation.gov.au/Details/F2015L01982) periods ending on or after 1 July 2016

No 26 of 2014 www.legislation.gov.au/Details/F2014L00553 (revoking No 10 of 2014: www.legislation.gov.au/Details/F2014L00353 (revoking No 92 of 2013: www.legislation.gov.au/Details/F2013L01739

SRS 702.1 — Investment Performance (On hold) SRS 703.0 — Fees Disclosed applies on (No 41 of 2015: and from 1 www.legislation.gov.au/Details/F2015L01996) July 2016

No 100 of 2013 www.legislation.gov.au/Details/F2013L02064 (revoking No 99 of 2013: www.legislation.gov.au/Details/F2013L01741

SRS 710.0 — Conditions of Release applies for No 93 of 2013 (No 22 of 2015: reporting www.legislation.gov.au/Details/F2013L00963 www.legislation.gov.au/Details/F2015L00825) periods ending on or after 1 July 2015 SRS 711.0 — SuperStream Benchmarking Measures (No 23 of 2015: www.legislation.gov.au/Details/F2015L00827)

applies for reporting periods commencing on or after 1 July 2015 and ending on or before 30 June 2019

SRS 720.0 — ABS Statement of Financial Position (No 42 of 2015: www.legislation.gov.au/Details/F2015L01997)

applies for reporting periods ending on or after 1 July 2016

SRS 721.0 — ABS Securities Subject to Repurchase and Resale and Stock Lending and Borrowing (No 43 of 2015: www.legislation.gov.au/Details/F2015L01998)

applies for reporting periods ending on or after 1 July 2016

SRS 722.0 — ABS Derivatives Schedule (No 44 of 2015:

applies for reporting

www.legislation.gov.au/Details/F2015L01999) periods ending on or after 1 July 2016 SRS 800.0 — Financial Statements applies for (No 24 of 2015: reporting www.legislation.gov.au/Details/F2015L00828) periods ending on or after 1 July 2015

No 14 of 2014 www.legislation.gov.au/Details/F2014L00676 (revoking No 94 of 2013: www.legislation.gov.au/Details/F2013L00955

SRS 801.0 — Investments and Investment Flows (No 25 of 2015: www.legislation.gov.au/Details/F2015L01011)

No 15 of 2014 www.legislation.gov.au/Details/F2014L00677 (revoking No 95 of 2013: www.legislation.gov.au/Details/F2013L00957

applies for reporting periods ending on or after 1 July 2015 (applies to each RSE licensee of a small APRA fund (SAF) or a single member approved deposit fund (SMADF) within its business operations in respect of each SAF or SMADF)

SRS 802.0 — Fund Profile applies for No 96 of 2013 (No 26 of 2015: reporting www.legislation.gov.au/Details/F2013L00987 www.legislation.gov.au/Details/F2015L00830) periods ending on or after 1 July 2015 Additional information on SRSs — Meeting reporting obligations triggered by “ad hoc” events APRA document “Meeting reporting obligations triggered by ‘ad hoc’ events” states that RSE Licensees have obligations to submit returns that are triggered by certain events not based on its year of income (ad hoc events) under these reporting standards: • SRF 001.0 Profile and Structure (Baseline): RSE licensee must submit a new return for: – Changes to any information previously reported for defined benefit — RSE or defined benefit sub-fund (Part C) – Change to any information previously reported for MySuper product (Part D), and – Cessation of Select Investment Options (Part E). See further SRF 001.0 reporting guidance. • SRF 602.0 Wind-up: RSE licensee must submit a wind-up return within three months of the date that

the entity has been finally wound-up • SRF 700.0 Product Dashboard: RSE licensee must submit a new return for: – an RSE licensee is authorised to offer a MySuper product – changes to any information previously reported for product dashboards • SRF 703.0 Fees Disclosed: RSE licensee must submit a new return for: – RSE licensee is authorised to offer a MySuper product – changes to any information previously reported for Product Disclosure Statements (PDS). APRA document “Meeting reporting obligations triggered by ‘ad hoc’ events” is available at www.apra.gov.au/meeting-reporting-obligations-triggered-ad-hoc-events. Reporting forms and instructions Superannuation reporting forms carry the prefix “SRF” and have same number and name as the SRS to which they relate (eg SRF 160 for SRS 160 Defined Benefit Matters). Reporting forms and instructions for quarterly, annual and ad-hoc reporting are available at sbrpet.apra.gov.au/SRF/SRF.html. The application dates and due dates for reporting are also noted in the SRS instruments (see table of SRSs above). Reporting remuneration for RSE licensee directors APRA states that there will be limited circumstances where it would be appropriate for RSE licensees to report nil director remuneration amounts on Reporting Form SRF 600.0 Profile and Structure (RSE Licensee) (SRF 600.0). This is consistent with revised ASIC FAQ D4: Pursuant to 2.37(2) of the Superannuation Legislation Amendment (MySuper Measures) Regulations 2013 what disclosure is required where no direct payment, benefit or compensation is paid to directors? (see www.asic.gov.au/regulatory-resources/superannuation-funds/stronger-super-reforms/stronger-superfaqs). RSE licensees should liaise with their respective APRA supervisors if clarification is required for specific circumstances. Remuneration for directors who are no longer directors as at the end of the year of income should not be reported in the SRF 600.0 for that year of income. Where a single director acts across related RSE licensee boards, each RSE licensee should report the remuneration that a director receives with respect to their role. APRA acknowledges that this may require the remuneration received by a director to be apportioned across all roles performed. RSE licensees are requested to review data in their SRF 600.0 submissions, and if reported incorrectly, to notify APRA via [email protected]. Other information to assist with reporting APRA’s gateway page Information to assist superannuation entities to complete reporting forms is located at www.apra.gov.au/information-on%20reporting-for-superannuation. FAQs on superannuation reporting (Reporting framework — frequently asked questions) are found at www.apra.gov.au/frequently-asked-questions-faqs-superannuation-reporting-framework. Winding up APRA must be advised as soon as practicable after an official resolution has been passed to wind up an RSE. Reporting Standard SRS 602.0 Wind-up, which commenced on 1 July 2013, applies to funds that are winding up. This return must be submitted to APRA within three months of the wind-up date.

Reporting Form SRF 520.0 Responsible Persons Information (SRF 520.0) to APRA using D2A SRF 520.0 is generated on an annual basis but can be submitted more frequently if required for the purposes of providing information to APRA. SRF 520.0 must be submitted to advise APRA of a change in Responsible Person: • within 14 days of any change or new appointment of a responsible person, and • within 14 days of an RSE licensee assessing that a responsible person is not fit and proper. Superannuation reporting practice guide — SRPG 700 Reporting practice guides (RPGs) provide guidance on particular areas of APRA’s reporting requirements to assist completion of the reporting forms. RPGs discuss requirements from legislation or reporting standards, but they do not themselves create enforceable requirements. Reporting Practice Guide SRPG 700 “Superannuation Disclosure Reporting” covers: • Reporting period versus reporting day • Starting date for product dashboard items • Calculating the moving average return and moving average return target • Product dashboard for merged products • Calculating representative member returns, fees, costs and taxes • Activity fees • Indirect cost ratio • Cash flow adjusted assets • Insurance • Attachment A: Worked example for SRF 702.0.

SuperStream — Data and Payment Standards ¶9-780 SuperStream — superannuation administration SuperStream is the name used by the Cooper Superannuation Review to describe the package of reforms and measures to enhance the “back office” of superannuation. The SuperStream measures: • provide new data and e-commerce standards for superannuation transactions • allow the use of TFNs as the primary locator of member accounts, and • facilitate account consolidation and improve the treatment of contributions made without sufficient member details. Standard Business Reporting (SBR) is used as the platform to develop the taxonomy and message structures for superannuation transactions, along with the use of eXtensible Business Reporting Language (XBRL) for exchanging information, the payment standard prescribed by the Australian Payments Clearing Association (APCA) and international financial messaging standards prescribed by the International Organisation for Standardisation (ISO 20022). E-commerce data and payment standards The use of data and payment standards will be mandatory for superannuation transactions and reporting so as to maximise efficiencies. In particular:

• superannuation funds will receive member information and linked payments in a standard electronic format removing substantial manual processing. Improvements to the quality of member information received from employers will reduce costs associated with rework arising from incomplete or incorrect information • employers will be able to send contributions in a standard electronic format removing the need to submit this information to separate funds in different paper formats, and • employees/members will have contribution payments allocated to their account more rapidly and better quality data will result in less instances of lost superannuation arising from incorrect or incomplete data being sent to funds. A reduction in processing costs will reduce fees charged to members in the long-term. Data and payment standards which have been prescribed under SIS Act are discussed in ¶9-790. Similar standards have been prescribed under the RSA Act for RSA providers (see ¶10-380).

¶9-790 Superannuation data and payment standards — funds and employers The Commissioner of Taxation (after consultation with APRA) may issue “superannuation data and payment standards” relating to superannuation data and payment matters which must be complied with by the trustees of superannuation entities and employers in their dealings with superannuation entities (SISA Pt 3B; s 34H to 34Z) (see “Superannuation data and payment standards 2012” below). A similar framework of RSA data and payment standards applies to RSA operations and transactions and employers in their dealings with RSA providers (¶10-380). The standards may prescribe different requirements for different classes of superannuation entity or employer (s 34K(1) to (4)). What is a “superannuation data and payment matter” A “superannuation data and payment matter” is a matter relating to the manner in which payments and information of a kind mentioned in SISA s 34K(6) (see below) are dealt with: • relating to a member of a superannuation entity or an employee for whose benefit a contribution to a superannuation entity is to be made by an employer, and • in connection with the operation of the superannuation entity (s 34K(5)). The kinds of payments and information specified in s 34K(6) are: (a) transactions, including payments, contributions, roll-over superannuation benefits (within the meaning of the ITAA97), allocations, transfers and refunds (eg transactions between two RSA providers or superannuation entities, such as a roll-over of superannuation benefits, or transactions between an employer and an RSA provider or superannuation entity, such as contributions and the registration of members) (b) reports (eg from an RSA provider or superannuation entity to the ATO such as member contribution statement reporting) (c) records, including registrations (d) unique identifiers for use with such transactions, reports and records (eg a unique identifier would link the transfer of money and the transfer of information between funds when a member’s benefits are rolled over or transferred) (e) any other kind of payment or information that is prescribed by the regulations, and (f) to avoid doubt, any payment or information of a kind mentioned in items (a) to (e) and made or provided by the Commissioner.

The regulations and/or standards may adopt or incorporate other third party standards that exist at a particular time or from time to time (s 34K(7)). For example, the ability to use existing payment standards, such as the Bulk Electronic Clearing System (BECS) Direct Credit Standard will ensure alignment with existing payment channels. The incorporation of third party standards that exist from time to time is an exception to s 14(2) of the Legislative Instruments Act 2003, so as to ensure continuity of the interaction between the superannuation data and payment regulations and standards and third party standards that are adopted or incorporated, such as the BECS, that may be updated in future. Interaction of data and payment standard with other laws — offences A superannuation data and payment standard may elaborate on or supplement any aspect of the regulations made under Pt 3B, but a standard is of no effect to the extent that it conflicts with the SIS Act or SIS Regulations (s 34L). Superannuation entities and employers must comply with the prescribed regulations and standards made under s 34K (a strict liability provision) relating to payments and information connected with their operation or dealings. However, a contravention does not affect the validity of a transaction (s 34M; 34N). If the Regulator reasonably believes that a trustee of the superannuation entity has contravened, or is likely to contravene a particular prescribed regulation or standard, the Regulator may direct superannuation trustees and employers as the Regulator considers is necessary to address the contravention or prevent the likely contravention (s 34P; 34Q). The time specified in the direction must be 21 days or more after the day the direction is given, and the trustee or employer must ensure the direction is complied with by the specified time (s 34P(6); 34Q(6)) (this is a strict liability provision). Infringement notices An administrative penalty may be imposed for a contravention of s 34M, 34N, 34P(6) or 34Q(6) (TAA Sch 1 s 288-110). If the Regulator has reasonable grounds to believe that a person has contravened an offence of strict liability in Pt 3B, the Regulator may give the person an infringement notice for the alleged contravention imposing a penalty (s 34R to 34W) (see further “Penalties for non-compliance” below). The Commissioner may correct and rectify information in the Commissioner’s possession for the purpose of ensuring the information complies with the superannuation data and payment regulations and/or standards (s 34X). Register and provision of information Each trustee of a prescribed eligible superannuation entity must provide information in relation to the entity to the Commissioner in accordance with regulations prescribed under s 34Z. The Commissioner must keep a register of information for the purposes of Pt 3B, by electronic means, containing the information given under s 34Z (s 34Y). Superannuation data and payment standards 2012 Superannuation Data and Payment Standards 2012 (F2013L00041) (Standard) determines the “superannuation data and payment standards” relating to “superannuation data and payment matters” for the purposes of SIS Act (s 34K(5), (6)). The standards for contribution transactions and associated payments apply to APRA-regulated superannuation entities, SMSFs which receive contributions from employers that are not related parties of the SMSF, and employers who make contributions to funds except where they only contribute to an SMSF of which the employer is a related party. Employers Employers will need to pay superannuation contributions for their employees electronically (EFT or BPAY) and send the associated data electronically. The data is in a standard format so it can be transmitted consistently across the superannuation system between employers, superannuation funds, service providers and the ATO, and the data is linked to the payment by a unique payment reference number. Employers can make all of their contributions in a single transaction, even if the contributions are going to multiple superannuation funds.

Superannuation funds All superannuation funds, including SMSFs, must receive contributions electronically in accordance with SuperStream. SuperStream does not affect an SMSF if it does not receive any employer contributions and only receives personal member contributions and contributions from related-party employers. Roll-overs to SMSFs are not required to be made using SuperStream. APRA-regulated superannuation funds must: • be able to send and receive electronic messages and payments using the SuperStream standard • validate new member registrations using SuperTICK • be able to receive contribution data and payments from employers using the SuperStream standard, and allocate contributions to member accounts within three business days • use the SuperStream standard to process and validate roll-overs, and • use the Fund Validation Service to update their product details (ATO website: www.ato.gov.au/super/superstream/apra-regulated-funds). SuperStream decision tool for employers The ATO has released a SuperStream decision tool to assist employers who are making superannuation guarantee contributions or salary sacrifice contributions for employees to determine how to comply with the SuperStream data and payment standards (see www.ato.gov.au/uploadedFiles/Content/SPR/downloads/Superstream_Decision_tree.pdf). Standards and ATO guidelines Further information and the standard and associated schedules are available from the following ATO documents: • SuperStream data and payment legislation, standards and schedules — www.ato.gov.au/super/superstream/in-detail/legal-framework/legislative-instrument/superstreamlegislation,-standards-and-schedules/ APRA-regulated funds — Superstream — www.ato.gov.au/super/superstream/apra-regulated-funds/ • SMSFs — SuperStream — www.ato.gov.au/super/superstream/self-managed-super-funds • SuperStream — Employer checklist and FAQs — www.ato.gov.au/super/superstream/employers • SuperStream — Factsheet and gateway — www.ato.gov.au/super/superstream To help track employer contributions sent using SuperStream, the ATO has advised employers who are not eligible for an ABN to enter their Withholding Payer Number (WPN) in the data field used to record an ABN. Penalties for non-compliance A trustee of a superannuation entity (other than an SMSF) or an RSA provider may be issued an infringement notice if the trustee or RSA provider does not ensure that payments and information relating to a member of the superannuation entity or a holder of an RSA account are dealt with in a manner that complies with any applicable superannuation data and payment standards contained in the Schedules to the Standard in accordance with SISA s 34R and RSA Act s 45H. A trustee of an SMSF is liable to an administrative penalty if the trustee does not ensure that payments and information relating to a member are dealt with in a manner that complies with any applicable superannuation data and payment standards contained in the Schedules to the Standard in accordance with SISA s 34M and TAA Sch 1 s 288-110.

An employer is liable to an administrative penalty if the employer does not deal with payments and information relating to an employee, for whose benefit a contribution to a superannuation entity or an RSA is to be made, in a manner that complies with any applicable superannuation data and payment standards contained in the Schedules to the Standard in accordance with SISA s 34N, RSA Act s 45E and TAA Sch 1 s 288-110. Consistent with other contraventions of SIS Act and RSA Act, non-compliance with the standards also constitutes a strict liability offence. The maximum penalty that may be imposed upon conviction is 20 penalty units. The Regulator can give trustees of superannuation entities, RSA providers and employers a direction requiring them to address a contravention of the Standard or take action to avoid contravening the Standard.

¶9-795 SuperStream and events based reporting The tax-related and member information reporting obligations of APRA-regulated funds were brought into the SuperStream data standard at different stages throughout 2018 through the three events-based reporting channels below (www.ato.gov.au/super/superstream/apra-regulated-funds/reportingobligations): • Member Account Attribute Service (MAAS) • Member Account Transaction Service (MATS) • Unclaimed super money (using the SuperStream rollover message). Fund reporting protocol document The ATO’s protocol document provides detailed information and guidelines to superannuation providers and their administrators for their ATO and member reporting and other associated reporting obligations (www.ato.gov.au/super/apra-regulated-funds/fund-reporting-protocol/). It covers (among other things): • Provision of member information • Unclaimed superannuation money protocol • Lost members register — protocol • Member contributions statement protocol (for 2017/18 and prior years) • Transfer Balance Cap protocol. Member contributions statement (MCS) The final MCS was for the 2017/18 financial year and was due on 31 October 2018. MCS reporting has been replaced by: • Member Account Attribute Service (MAAS) — for reporting updates to member account attributes • Member Account Transaction Service (MATS) — for reporting member contributions data. The MASS and MATS are discussed further below. These services introduce a number of significant changes to the former MCS reporting: • Funds no longer report annually, but are required to report specified information throughout the year at the time a transaction or event occurs (MATS event-based reporting). • Member account details (or attributes), such as account status or account phase, no longer need to be reported annually, but are reported when there are changes via MAAS attributes reporting.

• Funds have to report contributions data at a transactional level, rather than in aggregated amounts, by reporting these transactions using MATS. Lost member statement (LMS) Reporting information using the LMS has been replaced by the MAAS. The last LMS was for the period 1 July 2017 to 31 December 2017 (due by 30 April 2018). When a member becomes lost, funds can update the member’s lost status through MAAS. Unclaimed super money statement The unclaimed super money (USM) statement is no longer used. Instead, funds report USM through the SuperStream data standard using the roll-over message. The ATO will issue notices under s 20C of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (Section 20C notices) to notify funds of former temporary residents using the roll-over message. The USM reporting obligations for funds remain twice a year; however the roll-over message will allow funds to report USM or respond to Section 20C notices sooner if they wish (see protocol document for further guidance). MAAS and MATS The MAAS and MATS requirements, including lodgment dates, have been prescribed in the legislative instruments below. Taxation Administration Member Account Attribute Service — the Reporting of Information relating to Superannuation Account Phases and Attributes 2018 This instrument (www.legislation.gov.au/Details/F2018L00467) sets out the way in which superannuation providers in relation to superannuation plans (excluding SMSFs) and life insurance companies are required to give a statement to the Commissioner under TAA 1953 Sch 1 s 390-5 and s 390-20 in relation to an individual’s “superannuation account phases and attributes” (see below). The Member Account Attribute Service (MAAS) form is the approved form for the above purpose. Penalties may be imposed for failure to lodge on time in the approved form. Reporting in the MAAS form commenced from 1 April 2018. Superannuation account phases and attributes include opening and closing of accounts, defined benefit interest indicator, acceptance of contributions, and government roll-overs. Requirement to lodge a MAAS form and lodgment period A MAAS form must be lodged no later than 5 business days after the day on which: • an account is opened or a life insurance policy is first held, and • any changes to the account phases and/or attributes relating to the account or policy occur. The Commissioner may allow a longer time for lodgment (TAA Sch 1 s 388-55). Former Instrument on reporting repealed This instrument repeals and replaces Instrument F2017L00142 Reporting of all new member accounts and closed member accounts by superannuation providers in relation to superannuation plans (other than self managed superannuation funds) in accordance with the Taxation Administration Act 1953. Reporting obligations unaffected This instrument does not change the reporting requirements detailed in the separate legislative Instrument F2017L01273 Reporting of event based transfer balance account information in accordance with the Taxation Administration Act 1953, registered on 27 September 2017 (ie TBAR reporting: see below and ¶6-422). This instrument does not alter the reporting obligations for the financial year ending the 30 June 2018 and prior financial years as detailed in the separate legislative instrument F2014L00691 Lodgment of statements by superannuation providers in relation to superannuation plans (other than self managed

superannuation funds) for each financial year ended 30 June in accordance with the Taxation Administration Act 1953, registered on 10 June 2014 (ie former MCS reporting). Taxation Administration Member Account Transaction Service — the Reporting of Information Relating to Superannuation Account Transactions 2018 This instrument (www.legislation.gov.au/Details/F2018L00906) sets out the time frame for the giving of a statement under TAA Sch 1 s 390-5 and s 390-20 in relation to an individual’s “superannuation account transactions” (see below). The Member Account Transaction Service (MATS) form is the approved form for the above purpose. The reporting of information using the MATS form commenced from 1 July 2018. Entities affected All superannuation providers in relation to superannuation plans (excluding SMSFs) and life insurance companies are required to report information relating to an individual’s superannuation account transactions to the Commissioner by lodging a MATS form by the relevant due date specified in the instrument. A penalty may be imposed for failure to lodge on time and in the approved form. Superannuation account transactions to report and lodgment period The information to be reported includes, but is not limited to, information in relation to the following types of superannuation account transactions. The Commissioner may allow a later date from that indicated below. (i) employer contributions — no later than 10 business days after the day the contribution amount is allocated to the individual’s superannuation account (ii) non-employer transactions — no later than 10 business days after the day the transaction amount is allocated to the individual’s superannuation account (iii) retirement phase events — no later than 10 business days after the day the relevant reporting event occurs (iv) acknowledgement of valid notices of intent to claim a personal superannuation contribution deduction — no later than 10 business days after the day the notice of intent is acknowledged (v) member contribution balance amounts — no later than 31 October following the end of the financial year to which the amount relates. “Member contribution balance amounts” include account balances, retirement phase values, and accumulation phase values to be reported as at 30 June of a financial year, and “notional taxed contributions” (uncapped) and “defined benefit contributions” that are required to be reported for a financial year. “Non-employer transactions” include all contributions made by an entity other than an employer and amounts allocated from a reserve. “Retirement phase events” are transactions that result in a credit or debit in an individual’s transfer balance account, including: (i) superannuation income streams that commence or begin to be in the retirement phase on or after 1 July 2017, (ii) limited recourse borrowing arrangement repayments, (iii) member commutations, and (iv) superannuation income streams that stop being in the retirement phase.

Reporting obligations unaffected This instrument does not alter the reporting obligations for the financial year ending 30 June 2018 and prior financial years, as detailed in legislative instrument F2014L00691 — Lodgment of statements by superannuation providers in relation to superannuation plans (other than self managed superannuation funds) for each financial year ended 30 June in accordance with the Taxation Administration Act 1953 (ie former MCS reporting). Transfer Balance Account Report The Transfer Balance Account Report (TBAR) obligations of superannuation funds are discussed in ¶6422. The TBAR is the form/report that the funds use to advise the ATO of events that impact their members’ transfer balance account and total superannuation balance. For APRA-regulated funds, TBAR reporting will eventually be subsumed by MAAS and MATS. The MAAS and MATS designs incorporate the required elements of the TBAR, except for Commissioner commutation events which will continue to be reported through TBAR until version three of the SuperStream roll-over message is implemented. The TBAR reporting requirements are provided in legislative instrument — Reporting of event-based transfer balance account information in accordance with the Taxation Administration Act 1953 (F2017L01273). The TBAR is required to be lodged no later than 10 business days after the end of the month, or such later date as the Commissioner may allow, in which the relevant reporting event occurred. Superannuation providers in relation to superannuation plans (excluding SMSFs) and life insurance companies continue to use the TBAR to report transactions to enable the ATO to determine: (i) if an individual has exceeded their transfer balance cap and take appropriate action, (ii) an individual’s total superannuation balance, and (iii) an individual’s uncapped notional taxed contributions. Compliance with a commutation authority issued by the Commissioner will continue to be reported by superannuation providers and life insurance companies via the TBAR. If an error is identified in information originally reported in a TBAR, the report may be cancelled via the TBAR or a MATS form, and the information re-reported where applicable.

APRA Letters — MySuper Guidelines ¶9-810 APRA priorities and letters APRA has released its 2019 policy priorities document outlining its areas of intended policy focus over the next 12 to 18 months for each of the industries it regulates (www.apra.gov.au/information-papersreleased-apra). APRA’s near term policy agenda will be shaped by its response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, as well as major developments including other inquiries, new legislation and important industry trends. Much of APRA’s focus in 2019 would be on strengthening the prudential framework to lift the bar for industry in terms of governance, remuneration practices and the management of non-financial risks. In superannuation, APRA’s plans include: • ensuring superannuation trustees are prepared to implement new member outcomes assessments from 1 January 2020 (including any amendments required by legislative changes) • completing the post-implementation review of the prudential framework introduced in response to 2013’s Stronger Super reforms, and consulting on proposals to address areas where changes are

needed, and • updating the superannuation data collection, with a particular focus on expanding the information collected on choice products. APRA letters on superannuation regulation compliance and changes The table below provides a summary of the 2019 and 2018 letters issued by APRA (and sometimes jointly with the ATO) to superannuation fund trustees and RSE licensees relating to superannuation prudential standards, reporting standards and SuperStream, and changes or proposed changes to prudential legislation (available at www.apra.gov.au/letters-notes-advice-superannuation-rse). Letters issued in earlier years are also available from the website.

2019 letters Date

Letter title

25 June 2019

Response to Submissions — Prudential Practice Guide CPG 234 Information Security

8 May – Protecting Your Super legislative amendments — Implementation 2019 (www.apra.gov.au/sites/default/files/letter_protecting_your_super_legislative_amendments_implementation.pdf – Protecting Your Super Package — frequently asked questions (www.apra.gov.au/protecting-your-super-package-frequently-asked-questions)

10 April 2019

Oversight of fees charged to members’ superannuation accounts www.apra.gov.au/sites/default/files/apra_asic_letter_oversight_of_fees_charged_to_members_superannuation_ac

27 Putting members first — Expectations and areas of focus for the year ahead March www.apra.gov.au/sites/default/files/letter_putting_members_first_expectations_and_areas_of_focus_for_the_year 2019

2018 letters Date

Letter title

Subject matter

29 June 2018

Cash investment options’ non-cash holdings industry guidance www.apra.gov.au/sites/default/files/letter_cash_investments_options_noncash_holdings_industry_guidance_june_2018.pdf

This letter sets out APRA’s findings of examples in the industry where “cash” investment options appear to include exposure to underlying investments that would not generally be considered cash or cash-like in nature. APRA will monitor RSE licensees’ cash investment options during the course of its supervisory activities on an ongoing basis. APRA expects that RSE licensees consider the content of this letter and, where necessary, review and restructure “cash” investment options with exposure to noncash assets. APRA also expects RSE licensees to review relevant investment governance policies such that an appropriate framework is in place, including criteria for

inclusion of particular assets in a cash option. 29 May 2018

Related party thematic review www.apra.gov.au/sites/default/files/rpatr_-_letter_to_rsels_-_29_may_2018.pdf

APRA completed a conflicts of interest thematic review in 2014, which examined how the superannuation industry was implementing Prudential Standard 521 Conflicts of Interest (SPS 521). APRA also undertook a further thematic review specifically examining the RSE licensees’ management and governance of related party arrangements. This letter provides an overview of the outcomes from the review, including areas where APRA expects to see industry-wide improvement. Attachment A details observations and recommendations from the thematic review which RSE licensees must consider to ensure that their related party arrangements are in the best interests of members and contribute to the delivery of sound

member outcomes. 17 May 2018

Board governance thematic review This letter www.apra.gov.au/sites/default/files/BGTR_letter%2520to%2520industry_20180516.pdf contains APRA’s observations from the thematic review into the board governance practices of RSE licensees in 2016 and 2017, and recommendations for consideration by RSE licensees (see Attachment to the letter). Some high-level observations from the thematic review are: • many RSE licensees, in seeking to comply with SPS 510 and Prudential Standard 520 Fit and Proper 520), have adopted processes to ensure that individual directors meet minimum fit and proper requirements. However, the majority do not go further to actively consider the optimal composition that is appropriate for the board as a whole, taking into account their strategic plan and the skills, capabilities and experience needed to effectively

execute the plan; • better governance practice was demonstrated by RSE licensees with clearly articulated policies on optimal board composition, which addressed a range of relevant aspects including achieving appropriate diversity, policies on multiple directorships and current and expected future skills and experience requirements; • renewal policies and practices of some RSE licensees demonstrated a tension with the spirit and intent of SPS 510, for example by not requiring the board to take into consideration previous terms served on the board when assessing the period of tenure or not enforcing the tenure limits set out in the policy; and • board performance assessments that move beyond self-assessment, to include more objective and independent review, often

through the use of external experts, are viewed by those boards as providing significant benefits through identifying means for improving the board’s performance. 30 April 2018

Minor amendments to SPS 310 Audit and Related Matters APRA has made www.apra.gov.au/sites/default/files/Letter-RSE-Licensees_Minor-amendments-to-SPS- minor 310.pdf amendments to Prudential Standard 310 Audit and Related Matters (SPS 310) and consequential amendments to Prudential Practice Guide SPG 310 Audit and Related Matters 310) (see Attachment A of this letter for details of the changes).

4 April 2018

Remuneration practices at large financial institutions www.apra.gov.au/sites/default/files/180328-Information-Paper-RemunerationPractices.pdf

In June 2017, APRA requested detailed information on remuneration practices from a sample of 12 regulated institutions to support its analysis, including the largest institutions across the ADI, life insurance, general insurance and superannuation industries. The primary focus of the review was to gauge whether

regulated institutions were meeting APRA’s expectations established in the current prudential framework and to assist APRA’s consideration of whether changes to the framework are required to better achieve prudential objectives. The superannuation framework is noted in Prudential Standard 510 Governance and Prudential Guide Remuneration. In the next phase of its work, APRA intends to review the prudential framework to support a more robust and credible implementation of the objectives of the prudential requirements and guidance on remuneration supported by ongoing supervision. APRA will also consider the expansion and strengthening of prudential requirements to reflect evolving international standards and regulatory expectations related to remuneration, including the application of the

most recent FSB Supplementary Guidance on Sound Compensation Practices. 26 New Data Collection Solution to replace D2A www.apra.gov.au/sites/default/files/letter- This letter February dcs-commencement-of-industry-engagement-20180226.pdf advises of the 2018 proposed commencement of a new era for data collection through the replacement of the current APRA data collection tool, Direct to APRA (D2A), with a new Data Collection Solution (DCS). APRA has published broad information on its website, providing a detailed outline of the DCS project’s goals, scope and timeline. Throughout March and April, APRA will hold multiple sessions to inform and listen to stakeholders about the DCS.

¶9-880 ASIC — other superannuation guidelines ASIC’s superannuation gateway homepage provides guidelines on a range of topics about superannuation reforms, compliance requirements for superannuation trustees, and ASIC's role in superannuation. — see www.asic.gov.au/asic/ASIC.NSF/byHeadline/Superannuation%20overview. For the main legislative instruments, class orders and regulatory guides issued by ASIC dealing with superannuation regulation and compliance, see www.asic.gov.au/asic/asic.nsf/byheadline/Regulatory+guides?openDocument and www.asic.gov.au/asic/ASIC.NSF/byHeadline/Instruments (¶4-800, ¶4-850). Information sheets From time to time, ASIC also publishes information sheets on issues affecting superannuation operations or implementation of new laws at www.asic.gov.au/asic/ASIC.NSF/byHeadline/Information%20Sheets%20Content%20Page. Some superannuation-related information sheets are noted below (see also ¶4-850).

INFO 89 — choice of funds Information Sheet INFO 89 “What can I tell my employees about making a choice of superannuation fund?” addresses the issues employers face in communicating to employees about choice of superannuation fund (“superannuation choice”) and provides general guidance about what employers can say to employees about superannuation choice without breaking the law (eg financial product advice: ¶4630). The principles outlined may also apply to other persons who are not licensed or authorised under the Corporations Act 2001 to give financial product advice, such union officials who give information about choice to union members (available at www.asic.gov.au/regulatory-resources/superannuationfunds/superannuation-advice/what-can-i-tell-my-employees-about-making-a-choice-of-superannuationfund). INFO 90 — Notifying members about superannuation transfers without consent Information Sheet INFO 90 “Notifying members about superannuation transfers without consent”, explains the requirements for disclosure to members where there is a “significant event” or “material change” regarding their superannuation fund. Any decision that fundamentally affects a member’s investment, including a decision to transfer a member’s benefit without their consent, is a change or event that must be disclosed. INFO 90 provides examples of situations when notice is required, outlines when a member must be notified and how, and what information should be given (CA s 1017B; CR reg 7.9.37(1)(q); SISR reg 6.29; 9.46) (available at www.asic.gov.au/asic/asic.nsf/byheadline/Notifying+Superannuation+members+about+member+tranfers? openDocument) (see also INFO 169). INFO 133 — shorter PDS regime: Superannuation Information Sheet INFO 133 “Shorter PDS regime: Superannuation, managed investment schemes and margin lending” explains how the Product Disclosure Statement requirements in the Corporations Regulations apply to certain financial products (¶4-130). INFO 133 is available at www.asic.gov.au/regulatory-resources/financial-services/financial-product-disclosure/shorter-pds-regimesuperannuation-managed-investment-schemes-and-margin-lending. INFO 155 — complying with requirements for superannuation products Information Sheet INFO 155 “Shorter PDSs: Complying with requirements for superannuation products and simple managed investment schemes” provides concise guidance for industry on technical issues related to implementation of the PDS requirements in the Corporations Regulations 2001, as amended by the Corporations Amendment Regulations 2010 (No 5), for superannuation products and simple managed investment schemes (¶4-130). INFO 155 is available at www.asic.gov.au/regulatory-resources/financialservices/financial-product-disclosure/shorter-pdss-complying-with-requirements-for-superannuationproducts-and-simple-managed-investment-schemes. INFO 167 — trustees must provide information that is consistent Information Sheet INFO 167 “Disclosure requirements for superannuation trustee: s 29QC” provides guidance on SISA s 29QC which requires a superannuation trustee to use the same calculation when providing information to a person or on a website as it does when giving the same or equivalent information to APRA under a reporting standard (¶9-660). INFO 167 explains what the disclosure requirements mean for trustees and what happens if the disclosure requirements and reporting standards conflict (available at www.asic.gov.au/regulatoryresources/superannuation-funds/stronger-super-reforms/disclosure-requirements-for-superannuationtrustees-s29qc). INFO 168 — giving and collectively charging for intra-fund advice Information Sheet INFO 168 “Giving and collectively charging for intra-fund advice” explains: • what intra-fund advice is • the restrictions on collectively charging for advice

• MySuper and conflicted remuneration • how the Future of Financial Advice (FOFA) reforms and other advice laws apply to intra-fund advice, and • what records must be kept (available at www.asic.gov.au/regulatory-resources/superannuationfunds/stronger-super-reforms/giving-and-collectively-charging-for-intra-fund-advice). INFO 169 — notifying members about superannuation transfers: Accrued default amounts Information Sheet INFO 169 “Notifying members about superannuation transfers: Accrued default amounts (MySuper transition)” covers the requirements under s 29SAA(3) and regulations where a superannuation trustee must provide a notice to a fund member with an “accrued default amount” regarding an intended transfer or attribution to a MySuper product in the same fund, or to another fund, within specific timeframes. INFO 169 covers: • the notification requirements • exemptions from having to provide a notice under reg 9.46 • timing of the notifications, and • how the notification should be made (available at www.asic.gov.au/regulatoryresources/superannuation-funds/stronger-super-reforms/notifying-members-about-superannuationtransfers-accrued-default-amounts-mysuper-transition). INFO 170 — MySuper product dashboard requirements Information Sheet INFO 170 “MySuper product dashboard requirements for superannuation trustees” gives guidance to superannuation trustees and other persons in relation to the product dashboard requirements in s 1017BA of the Corporations Act 2001 for MySuper products, including an example of a MySuper dashboard (¶9-600) and following). INFO 170 is available at www.asic.gov.au/asic/asic.nsf/byheadline/MySuper+product+dashboard+requirements+for+superannuation+ trustees?openDocument. INFO 182 — super switching advice: Complying with your obligations Information Sheet INFO 182 “Super switching advice: Complying with your obligations” provides general information and compliance tips for financial advisers who provide superannuation switching advice. It provides specific examples of inadequate conduct in some of those areas where we frequently encounter compliance issues, such as the best interests duty (¶4-530). INFO 182 is available at www.asic.gov.au/asic/asic.nsf/byheadline/Super+switching+advice+-+complying+with+your+obligations++INFO+182?openDocument. INFO 197 — fee and cost disclosure requirements Information Sheet INFO 197 “Fee and cost disclosure requirements for superannuation trustees” gives guidance to superannuation trustees and other persons in relation to the fee and cost disclosure requirements in Sch 10 and 10D to the Corporations Regulations 2001. It explains the information that superannuation trustees must disclose about fees and costs, including: • what are the fee and cost disclosure requirements • what definitions have been introduced or amended under Sch 10 • when the new disclosure requirements start • the approach ASIC will take to the new requirements • the PDS disclosure required for each MySuper product and Choice product • the disclosure required for indirect costs

• how fee disclosure should be treated from a tax perspective • how performance fees should be disclosed how advice fees should be disclosed (available at www.asic.gov.au/regulatory-resources/superannuation-funds/stronger-super-reforms/fee-and-costdisclosure-requirements-for-superannuation-trustees). INFO 205 — Advice on SMSFs: Disclosure of risks Information Sheet INFO 205 provides guidance for Australian financial services (AFS) licensees (including limited AFS licensees) and their representatives who provide personal advice to retail clients about SMSFs (available at www.asic.gov.au/regulatory-resources/financial-services/giving-financialproduct-advice/advice-on-self-managed-superannuation-funds-disclosure-of-risks/). It explains: • the relevant conduct and disclosure obligations • the risks that should be considered by the adviser and disclosed to the client when providing personal advice about SMSFs, including: – the lack of statutory compensation – the impact on insurance – access to complaints mechanisms – the appropriateness of different SMSF structures – trustee obligations and the time and skills necessary to operate an SMSF – trustee obligations to develop an investment strategy – the need to consider an exit strategy • the additional information that must be included in a Statement of Advice (SOA). INFO 205 should also help AFS licensees and their representatives comply with the conduct and disclosure obligations in Pt 7.7 and 7.7A of the Corporations Act 2001. It focuses on the risks associated with setting up and switching to an SMSF, and should be read with INFO 182 (see above) and INFO 206. INFO 205 — Advice on SMSFs: Disclosure of costs Information Sheet INFO 206 provides guidance for Australian financial services (AFS) licensees (including limited AFS licensees) and their representatives who provide personal advice to retail clients about SMSFs (available at www.asic.gov.au/regulatory-resources/financial-services/giving-financialproduct-advice/advice-on-self-managed-superannuation-funds-disclosure-of-costs/). It explains: • the relevant conduct and disclosure obligations • the need for advice on the cost-effectiveness of an SMSF — in particular, if the starting balance is below $200,000 • the need for advice on the costs of setting up, operating and winding up an SMSF • the need for advice on the continued suitability of an SMSF for the client. It focuses on the costs associated with setting up, operating and winding up an SMSF, and should be read with INFO 182 and INFO 205 (see above).

INFO 216 — AFS licensing requirements for accountants who provide SMSF services Information Sheet INFO 216 is discussed in ¶5-570 (see www.asic.gov.au/for-finance-professionals/afslicensees/applying-for-and-managing-an-afs-licence/limited-financial-services/afs-licensing-requirementsfor-accountants-who-provide-smsf-services/). Other Information Sheet s dealing with limited AFLS licensees and their obligations: • INFO 227 What can limited AFS licensees do?, which explains the scope of the activities you can carry out under your limited AFS licence • INFO 228 Limited AFS licensees: Advice conduct and disclosure obligations, which explains what you need to do when you provide advice to retail clients (especially advice about SMSFs) • INFO 229 Limited AFS licensees: Complying with your licensing obligations, which sets out the licensing obligations that apply to a limited AFS licensee (see ¶4-657).

10 RETIREMENT SAVINGS ACCOUNTS THE RSA SCHEME Retirement savings accounts

¶10-000

Legislation governing RSAs

¶10-010

Administration of the RSA Act

¶10-015

Powers of the Regulators

¶10-020

RSAs AND RSA INSTITUTIONS Nature of an RSA

¶10-030

Approval of RSA institutions

¶10-050

PRUDENTIAL SUPERVISION OF RSAs Operating standards for RSAs and RSA providers

¶10-100

Acceptance of contributions

¶10-110

Benefit protection

¶10-120

Preservation, portability and payment of benefits

¶10-130

Provision of information to RSA holders

¶10-140

Dealing with lost RSA holders

¶10-150

Splitting RSA interest under the family law

¶10-160

Offering RSAs and applications for RSAs

¶10-170

Stop orders and cooling-off period

¶10-190

Improper conduct in provision of RSAs

¶10-195

Other duties of RSA providers and employers

¶10-220

Unclaimed RSA money

¶10-260

Approved auditor and auditor’s obligations

¶10-270

RSAs and TFNs

¶10-350

Dealing with RSA complaints

¶10-360

Data and payment standards

¶10-380

TAXATION OF RSA BUSINESS Taxation of RSA business of RSA providers

¶10-400

RSA business of financial institutions

¶10-420

RSA business — assessable income, exempt income and deductions ¶10-430 RSA business of life offices

¶10-440

RSA business — complying superannuation class

¶10-460

CONTRIBUTIONS TO AND PAYMENTS FROM RSAs Tax treatment of contributions to RSAs

¶10-500

Tax treatment of payments from RSAs

¶10-525

The RSA Scheme ¶10-000 Retirement savings accounts The retirement savings accounts (RSA) scheme was introduced in 1997 to provide a simple, low cost and low risk savings product which employers may use as an alternative to making contributions to superannuation funds for their employees, and which individuals may use for their personal superannuation contributions or for contributions for their spouse or children. The use of RSAs is especially aimed at people with low amounts of superannuation benefits or with transient working patterns. Banks, building societies, credit unions, life insurance companies, friendly societies and other registered organisations and prescribed financial institutions may apply under the Retirement Savings Accounts Act 1997 (RSA Act) to become an RSA institution and provide RSAs to the general public (¶10-030). Unlike conventional superannuation arrangements, RSAs do not come under a trust structure (eg having a trustee or trust deed) but take the form of a “capital-guaranteed” account if the RSA is provided by an authorised deposit-taking institution or a policy if the RSA is provided by a life insurance company. For income tax and superannuation purposes, however, RSAs are treated in a similar manner to traditional superannuation products. In broad terms, this means that: • RSA providers and payments from RSAs are generally subject to an equivalent taxation regime to that applying to superannuation funds (Chapter 7) and superannuation benefit payments (Chapter 8) • employers can make superannuation contributions for their employees to RSAs to satisfy their SG obligations (Chapter 12) • employer contributions and personal contributions to RSAs are eligible for tax concessions in the same way as contributions made to complying superannuation funds (Chapter 6) • RSAs may be used as roll-over vehicles, ie RSAs may accept superannuation benefits rolled over from other entities in the superannuation system (eg superannuation funds and ADFs) • the operation of RSAs and RSA providers is subject to prudential supervision under a broadly identical regime to that for other superannuation providers and products (¶10-010) • the Superannuation Complaints Tribunal has jurisdiction to deal with complaints concerning RSAs and RSA providers (¶10-360). [FTR ¶790-010; SLP ¶60-100]

¶10-010 Legislation governing RSAs The legislation governing the prudential supervision of RSA providers, the issue of RSAs and RSA business is the Retirement Savings Accounts Act 1997 (RSA Act) and its Regulations (RSAR), regardless of the type of institution providing the RSA. The non-RSA business of RSA institutions is governed by other Acts applicable to the institution concerned, such as the Banking Act 1959 in the case of banks and the Life Insurance Act 1995 in the case of life insurance companies. A discussion of the prudential requirements of non-RSA business under those Acts is not covered by this Guide. Regulation under the RSA legislation APRA, ASIC and the ATO are responsible for the administration of the RSA legislation (¶10-015) (called the “Regulators” in the RSA Act). The ATO replaced the Chief Executive Medicare who was a Regulator from 1 November 2011 to 30 June 2018 (¶10-015). The regulatory regime under the RSA Act is modelled on that for superannuation entities under the SIS legislation and related regulatory Acts (¶3-000 and following). Broadly, it covers:

• the rules for approval, suspension or revocation of RSA institutions (¶10-050) • the information reporting and disclosure requirements (¶10-140) • the rules for opening RSAs and dealing with “lost” members (¶10-120), and the requirements to comply with operating standards (¶10-100) • the collection and use of TFNs by RSA providers (¶10-350) • the duties of auditors (¶10-270) • the Regulators’ powers in relation to investigation and enforcement (¶10-020). The RSA Act applies subject to any superannuation order (within the meaning of the Crimes (Superannuation Benefits) Act 1989 and the Australian Federal Police Act 1979) that is made in relation to an RSA holder. This is to facilitate recovery of superannuation money which is paid by the Commonwealth into superannuation funds in respect of persons covered by those Acts, which is later transferred into an RSA (RSA Act s 195). The RSA Act does not apply to the exclusion of a state or territory law to the extent that law is capable of operating concurrently with the Act (RSA Act s 197). Regulation under Corporations legislation The Corporations Act 2001 (CA) provides a comprehensive and harmonised regulatory regime for all financial products and their providers (¶4-050) under what is commonly known as the financial services regime (FSR). Like superannuation interests, an RSA is a “financial product” (¶4-060) and the FSR similarly regulates RSA operations in the areas of product disclosure and the licensing and conduct of RSA providers (Chapter 4). Regulation under the Financial Sector (Collection of Data) Act 2001 (FSCDA) The FSCDA regulates the provision of returns and other information to APRA by RSA providers and all other APRA-regulated entities. The Act empowers APRA to make determinations which prescribe the reporting standards applicable to each type of APRA-regulated entity (eg RSA providers, superannuation entities), such as lodging annual and periodic returns and provision of other specific information (¶9-740). The RSA legislation also requires RSA providers to comply with reporting and information requirements in particular circumstances or in relation to specific RSA operations (¶10-220). Penalty provisions Penalties may be imposed on the RSA provider for a contravention of the RSA legislation or other regulatory Acts (eg CA). As with other federal legislation, the Criminal Code Act 1995 applies to offences against the RSA Act and other regulatory Acts and specifies certain offences under those Acts as strict liability offences (¶3-820). Supervisory levy RSA providers do not have to pay a separate supervisory levy for their RSA business to recoup the costs of supervision by the Regulators from the 2005/06 financial year. Instead, the RSA business of RSA institutions is taken into account in the supervisory levy payable by those institutions each year, based on their classification in the financial sector. Accordingly, the levy determinations under the Retirement Savings Account Providers Supervisory Levy Imposition Act 1998 and the Financial Institutions Supervisory Levies Collection Act 1998 are 0% from 2005/06 onwards (s 7 to 15). Taxation of RSA business As with other superannuation products, three aspects of RSA business are subject to special tax treatment under ITAA97: (1) the concessions available for, and tax regime applicable to, contributions to RSAs (¶10-500)

(2) the special tax regime for the RSA business of RSA providers (¶10-400) (3) the special tax regime for payments from RSAs to account holders or beneficiaries (¶10-525). As RSA business is conducted by different types of institutions, the provisions dealing with the taxation of the RSA business are set out in: • ITAA97 Div 295 (¶10-420) — for a financial institution RSA provider, and • ITAA97 Div 320 (¶10-440) — for a life office RSA provider. RSA holders’ complaints and bankruptcy RSA providers and the operation of RSAs come within the jurisdiction of the Superannuation (Resolution of Complaints) Act 1993 (SRC Act) and within the Australian Financial Complaints Authority (AFCA) scheme in Ch 7 of the Corporations Act 2001. This enables the Superannuation Complaints Tribunal (SCT) (for complaints received by SCT before 1 November 2018) and AFCA (for complaints received on or after 1 November 2018) to review complaints and make determinations in respect of an RSA provider’s conduct and decisions that are alleged to be unfair or unreasonable in relation to a particular RSA holder (¶10-360). The SRC Act will be repealed on 5 March 2022 or a date to be fixed by proclamation (see Chapter 13). The Bankruptcy Act 1966 applies to contributions to and money held in RSAs in the same way as contributions to or money held in superannuation funds (¶15-300). [SLP ¶60-110]

¶10-015 Administration of the RSA Act APRA, ASIC and the ATO have general administration responsibility of the RSA Act. The division of administration responsibility is specified in the RSA Act s 3(1) (¶10-020). Many RSA Act provisions relating to product disclosure, licensing and conduct of RSA providers were repealed by the Financial Services Reform (Consequential Provisions) Act 2001 following the commencement of the financial services regime in 2002 under the Corporations Act 2001 (¶4-050). The equivalent provisions from 2002 are contained in Ch 7 of the Corporations Act 2001 and are administered by ASIC. RSA providers and money held in RSAs are subject to the unclaimed RSA money provisions (previously contained in RSA Act former s 80 to 86) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 which is administered by the Commissioner of Taxation (¶10-260). Like other APRA-regulated entities, RSA providers are required to provide returns and other information to APRA under the Financial Sector (Collection of Data) Act 2001 (FSCDA) (¶10-010). The responsibility for administration of the early release of a person’s benefits in an RSA on compassionate grounds under the RSA legislation was transferred from APRA to the Chief Executive Medicare from 1 November 2011, with APRA retaining the regulator role for the release of benefits on other grounds. From 1 July 2018, administration responsibility in this area was transferred from the Chief Executive Medicare to the Commissioner of Taxation, and the Chief Executive Medicare ceased to be a regulator from that date. Application of RSA Act cannot be excluded or modified The RSA Act applies in relation to RSAs despite any provision in the terms and conditions of the RSA, including any provision that purports to substitute, or has the effect of substituting, the provisions of the law of a state or territory or of a foreign country for all or any of the provisions of the RSA Act (s 4).

¶10-020 Powers of the Regulators The term “Regulator” is used in the RSA Act to mean APRA, ASIC or the ATO to the extent to which they

have administration responsibility as specified in s 3(1) of the RSA Act. APRA and ASIC have primary responsibility to monitor, investigate and examine RSA providers in relation to the provision of RSAs and compliance matters (RSA Act Pt 10). They are also empowered to grant exemptions from, and make modifications to, “modifiable provisions” as defined in RSA Act s 173 (RSA Act Pt 15). The more important powers of APRA or ASIC in the RSA Act on prudential supervision of RSA providers and RSAs include: • the approval of RSA institutions (¶10-050) • the disqualification of an auditor of an RSA provider (¶10-270) • making stop orders in relation to regulated documents issued by RSA providers (¶10-190) • directing RSA institutions not to accept any contributions made to RSAs by employers (RSA Act s 182) • requiring RSA providers to provide information and reports or produce books, on request, and the appointment of inspectors to investigate the affairs of an RSA provider (RSA Act s 92 to 113) • intervening in proceedings relating to any matter arising under the RSA Act (RSA Act s 168). ASIC’s general powers for prudential regulation of RSA providers under the RSA Act are similar to those under the SIS Act for superannuation entities (see ¶3-860). Likewise, ASIC is empowered under the Corporations Act 2001 for the administration of the financial services licensing regime for RSA providers, the RSA product disclosure regime and the market conduct rules (see Chapter 4). The powers conferred by the RSA Act on the ATO (from 1 July 2018) deal primarily with the making of determinations for the release of a person’s benefits in an RSA on compassionate grounds (¶10-130). As part of the regulatory and penalty regime, the RSA Act also provides rules about the power of the courts to deal with matters arising under the Act, including the power to punish for contempt of court and to grant orders, directions, injunctions and relief (RSA Act Pt 13). [SLP ¶60-150]

RSAs and RSA Institutions ¶10-030 Nature of an RSA An RSA is an account or policy opened or issued after 30 June 1997 which has the following features: • it is provided by an RSA institution and is held by an eligible person (an individual, see below) at the time the account is opened or the policy is issued • it is capital guaranteed • it is maintained to provide prescribed benefits (RSA Act s 8). An RSA is a deposit account (similar to that in a bank) and is represented as a liability in the balance sheet of the RSA provider. An RSA can only be provided by a life insurance company as a contracted policy through a statutory fund of the company (or equivalent benefit fund for a friendly society). This ensures that the RSA business is subject to the prudential measures for life insurance companies. There is no limit to the amount of money held in an RSA, but RSA providers have to give prescribed information to account holders (such as information advising the lower-risk/lower-return nature of RSAs and alternative “balanced portfolio” products offering potentially higher returns over the longer term) when the account balance reaches $10,000 (¶10-140).

RSA institution and RSA provider An RSA institution is any authorised deposit-taking institution (ADI), life insurance company or prescribed financial institution which has been approved by APRA as an RSA institution (under RSA Act s 26), where the approval has not been suspended or revoked (¶10-050) (RSA Act s 11). An ADI means a body corporate that is an ADI for the purposes of the Banking Act 1959. A “life insurance company” means a body corporate registered under the Life Insurance Act 1995 or a state or territory public authority that carries on life insurance business within the meaning of s 11 of that Act (RSA Act s 16). A person is an RSA provider at a particular time if, at that time, the person is the provider of one or more RSAs (RSA Act s 12). Therefore, an RSA institution that has had its approval suspended or revoked will still be an RSA provider if at any time it offers or has offered RSAs. The definitions of “RSA institution” and “RSA provider” mean that an RSA institution will always be an RSA provider, and every RSA provider must have been an RSA institution at one time, even though it may have ceased to be an RSA institution. This ensures that RSA institutions and RSA providers are subject to the RSA legislation at all times. An RSA institution is thus able to continue to accept contributions into existing RSAs, as well as offer and accept contributions into new RSAs, while only those RSA providers that have not had their approval to issue RSAs or accept contributions into existing RSAs revoked or suspended under RSA Act Pt 3 can be RSA institutions. Institutions approved by APRA to offer RSAs are listed on the APRA website (www.apra.gov.au/registersuperannuation). Eligible person Because an “eligible person” must be an individual, RSAs cannot be opened for a non-individual person (RSAR reg 1.04). Capital guaranteed All RSA products are required to be “capital guaranteed”. An RSA account or RSA policy is capital guaranteed if the account balance may not be reduced by the crediting of negative interest or, in the case of a policy, the contributions and accumulated earnings may not be reduced by negative investment returns or a reduction in the value of assets in which the policy is invested (RSA Act s 14). The effect of the capital guarantee is that a person’s RSA benefits cannot be reduced because of negative investment returns but may be reduced because of fees and charges imposed by the RSA provider. However, RSAs with balances below $1,000 are protected by an operating standard which restricts the amount of fees and charges that can be imposed by the RSA provider (¶10120). An RSA provider that contravenes the capital guarantee requirement in RSA Act s 42 (a strict liability offence) is liable on conviction to a fine of 100 penalty units (¶10-100). In addition, a person who suffers loss or damage because of the contravention may bring an action for recovery against the RSA provider or any person involved in the contravention. An action must be initiated within six years after the day on which the cause of action arose (RSA Act s 43). Prescribed RSA benefits — sole purpose test An RSA must be maintained to provide benefits for one or more “primary purposes”. It may also be maintained to provide benefits for “ancillary purposes” (RSA Act s 15). This requirement is similar to the “sole purpose” test which applies to regulated superannuation funds (¶3-200). [SLP ¶60-200]

¶10-050 Approval of RSA institutions Any constitutional corporation (ie a financial or trading corporation formed within the limits of the Commonwealth) that is an authorised deposit-taking institution (ADI), life insurance company or prescribed financial institution (¶10-030) may apply to APRA for approval as an RSA institution (RSA Act s 22 to 35).

An application to APRA for approval as an RSA institution must be in the approved form, contain the information required by the form (including the TFN of the applicant), and such information as APRA may request, and be accompanied by the prescribed application fee (currently $500) (RSAR reg 6.04). Only RSA institutions are able to offer new RSAs and accept additional contributions from existing RSA holders (¶10-030). Where payments made to an RSA provider cannot be accepted as contributions, the payments must be dealt with by the RSA provider as discussed at ¶4-680 (see “Dealing with clients’ money”). For the purposes of ITAA97 and the SG legislation, any contribution that is refunded is taken never to have been made. Breach of approval conditions An RSA institution must, as soon as practicable (and in any event within 30 days) after becoming aware of a contravention of a condition to which the approval of the RSA institution is subject, give APRA a written notice setting out particulars of the contravention. An RSA institution which fails to do so may be liable to a penalty of up to 250 penalty units. This is a strict liability offence (s 35(3)). Licensing under CA The RSA institution approval is different from the licensing requirements under the Corporations Act 2001 (see Chapter 4), which requires any person who carries on a financial services business to hold an Australian financial services licence issued under that Act. [SLP ¶60-250]

Prudential Supervision of RSAs ¶10-100 Operating standards for RSAs and RSA providers RSA providers and the operation of RSAs are subject to operating standards prescribed by the RSAR. These standards apply in addition to the specific duties and obligations imposed under the RSA Act, the Corporations Act 2001, the FSCDA or any other regulatory Act (¶10-170–¶10-270). An RSA provider must ensure that the prescribed standards applicable to the operation of the RSA provider are complied with at all times (RSA Act s 39(1)). A person who intentionally or recklessly breaches an operating standard is guilty of an offence punishable on conviction by a fine of up to 100 penalty units. A “penalty unit” equals $210 for offences committed on or after 1 July 2017 (Crimes Act 1914, s 4AA). If a body corporate is convicted of an offence, the Crimes Act s 4B(3) allows a court to impose a fine that is not greater than five times the maximum fine that could be imposed by the court on an individual convicted of the same offence (¶3-800). A contravention of a prescribed operating standard does not affect the validity of a transaction. APRA may take into account the severity of the breach and whether the RSA provider has put into place procedures to rectify the breach when determining whether it should continue to be an RSA institution. The principal operating standards applicable to RSA providers and RSAs are discussed in the following paragraphs: • acceptance of contributions (¶10-110) • benefit protection (¶10-120) • preservation, portability and payment of RSA benefits (¶10-130) • providing information to RSA holders and other parties (¶10-140) • dealing with lost RSA holders (¶10-150). Many of the standards mirror those applying to regulated superannuation entities under the SIS and Corporations legislation, as discussed in Chapters 3 and 4. Cross-references have been provided to the corresponding paragraphs in those chapters where more detailed discussion may be found.

[SLP ¶60-300]

¶10-110 Acceptance of contributions An RSA institution may accept contributions into RSAs maintained by it for the benefit of the RSA holders only in accordance with RSAR reg 5.03. “Contributions” include payments of SG shortfall components to the RSA and payments to the RSA from the Superannuation Holding Accounts Special Account (SHASA), but exclude benefits rolled over or transferred to the RSA. The main two rules, which mirror those in the SIS Regulations for contributions made to regulated superannuation funds (with a minor exception, see “Work test” below), are summarised below. Further explanations of the rules (including the expressions in italics in the table below) and ATO and APRA rulings and guidelines are discussed in ¶3-220. Rule 1 — Based on age, type of contribution and work test If RSA holder is …

RSA institution may accept …

– under 65

– contributions that are made in respect of the RSA holder

– not under 65, but is under 70

– contributions that are made in respect of the RSA holder that are: (a) mandated employer contributions, or (b) if the RSA holder has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made (see “Work test” below): (i) employer contributions (except mandated employer contributions), or (ii) RSA holder contributions (ie contributions for or by the holder other than employer contributions), or (c) downsizer contributions (within the meaning of ITAA97 s 292-102) (from 1 July 2018), or (d) if the RSA holder has not been gainfully employed, either on a full-time or a part-time basis, during the financial year in which the contributions are made, but all of the requirements mentioned in reg 5.03(1A) are satisfied for the RSA holder: (i) employer contributions (except mandated employer contributions); or (ii) RSA holder contributions (see “Work test exemption” below)

– not under 70, but is under 75

– contributions that are made in respect of the RSA holder that are: (a) mandated employer contributions, or (b) if the RSA holder has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made (see “Work test” below) — contributions received on or before the day that is 28 days after the end of the month in which the RSA holder turns 75 that are: (i) employer contributions (except mandated employer contributions), or (ii) RSA holder contributions made by the RSA holder (ie only personal contributions) (c) downsizer contributions (from 1 July 2018), or (d) if the RSA holder has not been gainfully employed, either on a full-time or a part-time basis, during the financial year in which the contributions are made, but all of the requirements

mentioned in reg 5.03(1A) are satisfied for the RSA holder: (i) employer contributions (except mandated employer contributions); or (ii) RSA holder contributions made by the RSA holder (see “Work test exemption” below) – not under 75

– mandated employer contributions

Work test Compliance with the work test by a person is a precondition before an RSA institution can accepting the following “voluntary contributions” in relation to RSA holders aged 65 to 69 years: • employer contributions (except mandated employer contributions); or • RSA holder contributions. “Employer contribution”, “mandated employer contributions” and “RSA holder contributions” are defined in RSAR. Similarly, compliance with the work test by a person is a precondition before an RSA institution can accept the following “voluntary contributions” in relation to RSA holders aged 70 to 74 years: • employer contributions (except mandated employer contributions); or • RSA holder contributions made by the RSA holder. In the SISR, a person must be gainfully employed on at least a part-time basis during the financial year in order to satisfy the work test for a financial year (ie before a regulated superannuation fund can accept voluntary contributions). The SISR work test effectively requires a person to be employed at least 40 hours in any 30 day period in that financial year. For example, a person who works 40 hours in a fortnight can make voluntary contributions to a regulated superannuation fund for the rest of the financial year. Regulation 5.03 of the RSAR provides analogous rules restricting RSA institutions from accepting voluntary contributions. However, the work test for contributions to RSA institutions requires that the RSA holder must be gainfully employed at least 10 hours each week in the financial year. Exemption from work test Regulation 5.03(1A) of the RSAR provides an exemption from the work test which ensures that an RSA institution may accept voluntary contributions made in respect of an RSA holder aged 65 to 74 where the RSA holder does not satisfy the work test in the contribution year, provided the RSA holder has satisfied the work test in the previous financial year. This work test exemption under the RSAR reg 5.03(1A) is analogous to a similar exemption in SISR reg 7.04(1A) for voluntary contributions made to regulated superannuation funds (see ¶3-220). In summary, the exemption from the work test under RSAR reg 5.03(1A) allows an RSA institution to accept voluntary contributions made in respect of a member aged 65 to 69 years or aged 70 to 74 if the following requirements are satisfied: (a) the RSA holder has been gainfully employed on at least a part-time basis during the financial year (the previous financial year) ending before the financial year in which the contributions are made (b) the RSA holder has a total superannuation balance (within the meaning of ITAA97 s 307-230) of less than $300,000 at the end of the previous financial year (c) no contributions have been accepted by an RSA institution in respect of the RSA holder, in the previous financial year or any earlier financial year, because of the work test exemption; and (d) no contributions have been accepted by a regulated superannuation fund in respect of the RSA holder, in the previous financial year or any earlier financial year, because of the work test exemption in SISR reg 7.04(1A).

The work test exemption applies in relation to contributions made in the 2019/20 financial year and later financial years. An individual may only utilise the work test exemption in one financial year. This ensures that if retired individuals return to work and meet the work test in future financial years, they would not be able to utilise the exemption again. This exception is not intended to incentivise individuals to make a brief return to work in order to contribute more money to superannuation than they would otherwise be entitled to. However, this does not preclude such an individual from returning to work and making contributions in a future year in which they satisfy the work test, as may occur under the current law. One way that a regulated superannuation fund or RSA institution could be satisfied that the work test exemption requirements are met is to obtain a statement from a member attesting to the member having never utilised the work test exemption in a prior financial year. Also, one way to satisfy the $300,000 superannuation balance requirement is to obtain a statement from a member attesting to the member having a total superannuation balance below $300,000 on the 30 June of the previous financial year. A particular superannuation fund or RSA institution is not able to independently calculate an individual’s total superannuation balance as they do not know the individual’s superannuation interests held in other funds/RSA institutions. An individual is not precluded from utilising the work test exemption in a particular financial year where the individual qualified for the work test exemption in a prior financial year but did not utilise the exemption at that time by making contributions in that year. Rule 2 — TFN must be provided An RSA institution must not accept any RSA holder contributions if the RSA holder’s TFN has not been quoted (for superannuation purposes) to the RSA provider. Proposed changes — 2019/20 Federal Budget superannuation Individuals aged 65 and 66 will be able to make voluntary superannuation contributions (both concessional and non-concessional) from 1 July 2020 without being required to meet the work test. The proposed change will align the work test with the eligibility for the Age Pension, which is scheduled to reach age 67 from 1 July 2023. Amendments will also be made to ITAA97 to extend access to the bring-forward arrangements for nonconcessional contributions by those aged 65 and 66. The existing annual caps for concessional contributions and non-concessional contributions ($25,000 and $100,000 respectively) will continue to apply (2019/20 Budget Paper No 2, p 22; Treasurer's media release, 1 April 2019) (www.budget.gov.au; jaf.ministers.treasury.gov.au/media-release/057-2019/). [SLP ¶60-310]

¶10-120 Benefit protection The benefit protection provisions in RSAR prescribe the minimum level of benefits that RSA providers must maintain for the benefit of RSA holders, and the RSA holder-protection standards prevent RSAs with balances under $1,000 or RSAs of lost holders from being eroded by administration fees and charges (RSAR reg 3.01 to 3.13). Treatment of RSA holder’s benefits All of the benefits of an RSA holder in the RSA are minimum benefits (reg 3.04). An RSA provider must ensure that an RSA holder’s minimum benefits are maintained in the RSA until the benefits are cashed as benefits of the RSA holder (other than for the purpose of the RSA holder’s temporary incapacity), rolled over or transferred by or for the RSA holder (reg 3.05(1)). The cashing of benefits is governed by RSAR Div 4.3 (see “Payment of benefits” at ¶10-130). From 6 August 2011, the restriction in reg 3.05(1) does not apply to an RSA holder’s benefits that are required to be paid under a court forfeiture order (see ¶3-286: “Forfeiture orders and confiscation orders”).

An RSA holder’s benefits in an RSA would generally consist of “mandated employer-financed benefits” (ie mandated employer contributions plus investment earnings less applicable “costs”), “RSA holder-financed benefits” (ie contributions by or on behalf of the RSA holder other than by an employer plus investment earnings less applicable costs) and any such benefits rolled over or transferred to the RSA. For this purpose, “investment earnings” means the total of amounts credited to the RSA by way of positive interest or, in the case of an RSA that is a policy, by way of positive investment returns or increases in the value of assets in which the policy is invested; and “costs” cover establishment, operating and termination direct costs, administrative, insurance and taxation costs, and repayments of government co-contributions, being recovery of overpayments by the government (RSAR reg 1.03(1)). There is a presumption that contributions to an RSA are mandated employer contributions unless the RSA provider is provided with satisfactory evidence that they are not (reg 3.06). RSA holder-protection standards A “protected RSA holder” is an RSA holder who has withdrawal benefits or net benefits of any kind payable to him/her on closing the RSA (otherwise than in a voluntary closing) that: (a) are less than $1,000 (net of any applicable exit fee); and (b) are made up of mandated employer-financed benefits (reg 1.03(1)). A benefit in an RSA is taken to contain or have contained mandated employer-financed benefits unless the RSA provider knows otherwise. The “RSA holder-protection standards” in reg 3.07 to 3.13 apply to “protected RSA holders” (and to lost RSA holders up to 28 August 2002), with some exceptions (see below). These standards ensure that the administration costs charged by an RSA provider against the RSA holder’s benefits for a reporting period do not exceed the amount of investment earnings credited to the RSA in that period. The standards also prohibit an RSA provider from deferring the charging of administration costs in a period and charging them in a future reporting period (reg 1.03(1); 3.12; 3.13). For the purposes of the standards, a payment from the SHASA is taken to be a mandated employer contribution and an RSA holder’s benefits are taken to be comprised wholly of mandated employerfinanced benefits except to the extent that the RSA provider knows otherwise (reg 3.01(2); 3.12(5)). “Administration costs” include all fees and charges, except the cost of providing death benefits or permanent or temporary incapacity benefits (whether insured internally or externally) to the RSA holder or taxation costs (eg contributions tax, superannuation contributions surcharge) (reg 3.01(1)). Administration costs would thus cover exit fees charged by an RSA provider (ie fees charged in relation to the payment of benefits that the provider would not have charged if the payment had not been made). Lost RSA holder An RSA holder is taken to be a lost RSA holder at a particular time if: • the RSA holder is uncontactable, ie either the RSA provider has never had an address for the RSA holder, or two written communications have been sent, or, if the RSA provider so chooses, one written communication has been sent, by the RSA provider to the RSA holder’s last known address and returned unclaimed, and the RSA provider has not received a contribution or roll-over in respect of the RSA holder within the last 12 months of the RSA holder’s being an RSA holder, or • the RSA holder is an inactive RSA holder, ie he/she has been an RSA holder for longer than two years, and the RSA has not received a contribution or rollover in respect of him or her within the last five years of his/her being an RSA holder (reg 1.06(1)). The consequences of an RSA holder becoming a lost RSA holder are: • the RSA provider must report certain information about the RSA holder to the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶10-260) • if the RSA holder is transferred to a superannuation entity or an exempt public sector superannuation scheme (EPSSS), the RSA provider must supply certain information about the RSA holder to the trustee of the superannuation entity or the EPSSS (see Corporations Regulations 2001, reg 7.9.82). There may also be consequences regarding the information to be supplied to the RSA holder (see CR reg

7.9.60A; Sch 10A Pt 14). Exemption from RSA holder-protection standards The RSA holder-protection standards do not apply in the following circumstances (reg 3.09 to 3.11): • where an RSA provider reasonably expects that an RSA holder (who would otherwise be a protected RSA holder) will have withdrawal benefits of at least $1,500 and whose benefits reach $1,500 within 12 months after the end of the RSA holder’s reporting period • to the extent of that part of the RSA holder’s benefits which has commenced to be taken in the form of a pension or annuity, or • to the extent of that part of the RSA holder’s benefit which is wholly determined by a life insurance policy (eg traditional life policies or bundled policies). [SLP ¶60-350]

¶10-130 Preservation, portability and payment of benefits An RSA holder’s benefits in an RSA may only be cashed, transferred or rolled over in accordance with the RSAR (reg 4.20(1)). RSA providers are subject to rules for the preservation, portability and payment of RSA holders’ benefits which are largely similar to those applying to regulated superannuation funds and ADFs under the SIS Regulations, as discussed at ¶3-280–¶3-286. These rules (which are set out in RSAR reg 4.01 to 4.34) reflect the general policy that money set aside for superannuation purposes should be accessible only on retirement or occurrence of a retirementrelated event to minimise dissipation during the accumulation stage by requiring specified conditions of release to be satisfied, while allowing full portability, and by having certain restrictions on the persons who may have access to the benefits. RSA holders are permitted to maintain an RSA with no restriction (eg even after the holder’s retirement), but the account must be closed (“compulsory cashing”) when the RSA holder dies. Special rules govern the manner and form for voluntary cashing (by satisfying a condition of release, see below) and compulsory cashing of an RSA holder’s benefits (see “Payment of benefits” below). Preservation of benefits An RSA holder’s benefits in an RSA may comprise one or more of the following components: • preserved benefits (PBs) • restricted non-preserved benefits (RNPBs) • unrestricted non-preserved benefits (UNPBs). Broadly, PBs and RNPBs are benefits which cannot be cashed and must be retained in the RSA until the RSA holder satisfies a condition of release and cashing restrictions, if any, are met (eg see “retirement” on or after attaining his/her “preservation age” below). UNPBs may be cashed at any time. Conditions of release and cashing restrictions The conditions of release and cashing restrictions applying to PBs and RNPBs in RSAs are specified in RSAR Sch 2, as below.

CONDITIONS OF RELEASE AND CASHING RESTRICTIONS — PRESERVED BENEFITS AND RESTRICTED NON-PRESERVED BENEFITS Column 1

Column 2

Column 3

Item no

Conditions of release

Cashing restrictions

101

Retirement

Nil

102

Death

Nil

Terminal medical condition

Nil

103

Permanent incapacity

Nil

104

Former temporary resident to Amount that is at least the amount of the whom reg 4.23A applies, temporary resident’s withdrawal benefit in the requesting in writing the release of RSA paid: his or her benefits (a) as a single lump sum, or

102A

(b) if the RSA provider receives any combination of contributions, transfers and roll-overs after cashing the benefits — in a way that ensures that the amount is cashed 104A

The RSA provider is required to pay an amount to the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s interest in the RSA

Amount that the RSA provider is required to pay to the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s interest in the RSA, paid as a lump sum to the Commissioner

105

Severe financial hardship

For a person taken to be in severe financial hardship under reg 4.01(5)(a) — in each 12month period (beginning on the date of first payment), a single lump sum not less than $1,000 (except if the amount of the person’s preserved benefits and restricted non-preserved benefits is less than that amount) and not more than $10,000 For a person taken to be in severe financial hardship under reg 4.01(5)(b) — Nil

106

Attaining age 65

Nil

107

Termination of gainful employment 1. Preserved benefits: Non-commutable life with an employer who had, or any pension or non-commutable life annuity of whose associates had, at any 2. Restricted non-preserved benefits: Nil time, contributed to the RSA in relation to the RSA holder

108

Temporary incapacity

A non-commutable income stream cashed from the RSA for: (a) the purpose of continuing (in whole or part) the gain or reward which the RSA holder was receiving before the temporary incapacity, and (b) a period not exceeding the period of incapacity from employment of the kind engaged in immediately before the temporary incapacity

109

The Regulator has determined A single lump sum, not exceeding an amount under reg 4.22A(2) that a specified determined, in writing, by the Regulator, being amount of benefits in the RSA may an amount that:

be released on a compassionate ground

(a) taking account of the ground and of the person’s financial capacity, is reasonably required, and (b) in the case of the ground mentioned in reg 4.22A(1)(b) — in each 12-month period (beginning on the date of first payment), does not exceed an amount equal to the sum of: (i) three months’ repayments, and (ii) 12 months’ interest on the outstanding balance of the loan

109A

110

For acquiring a superannuation The restriction contained in reg 1.06A(3)(e) of interest (within the meaning in the SISR ITAA97) which supports a deferred superannuation interest to be provided under a contract that meets the standards in SISR reg 1.06A(2) Attaining preservation age

Any of the following: (a) a transition to retirement pension (b) a non-commutable allocated pension (c) a non-commutable pension (d) a non-commutable allocated annuity, or a non-commutable annuity, within the meaning of SISR Pt 6 (e) an annuity being provided as a transition to retirement income stream within the meaning of SISR Pt 6

111

Being a lost RSA holder who is Nil found, and the value of whose benefit in the RSA, when released, is less than $200

111A

The Commissioner of Taxation gives a superannuation provider a release authority under Div 131 in Sch 1 to the TAA

The restrictions contained in s 131-35 and 13140 in that Schedule

111B

A person gives a superannuation provider a release authority under s 135-40 in Sch 1 to the TAA

The restrictions contained in s 135-75 and 13585 in that Schedule

113

A person gives a transitional release authority to a superannuation provider under ITTPA s 292-80B

Restrictions contained in ITTPA s 292-80C(1) and (2)

114

Any other condition, if expressed Restrictions expressed in the approval to be to be a condition of release, in an cashing restrictions applying to the condition of approval under RSA Act s 15(4)(d) release

Note: The expressions and terms in the above table are set out in the definitions in reg 4.01(2), unless

they are immaterial or expressed not to apply to Sch 2. The RSAR conditions of release and cashing restrictions for access to benefits are similar to those in SISR Sch 1 for accessing preserved and restricted non-preserved benefits held in regulated superannuation funds (see ¶3-280 for a discussion of the conditions and the special tests to be met for certain conditions of release). Portability of benefits At the request of an RSA holder, an RSA provider must transfer the holder’s benefits in his/her RSA to another RSA provided by an RSA institution, to a superannuation entity or a regulated exempt public sector superannuation scheme, or to purchase a deferred annuity (¶10-220). Except in certain circumstances (see below), the RSA holder’s benefits in the RSA cannot be rolled over or transferred to an RSA provided by another RSA institution or a superannuation entity (“transferee entity”) unless the transferor RSA provider has the holder’s consent or has reasonable grounds to believe that the transferee entity has that consent (eg a transfer initiated by the transferee entity) (reg 4.31 to 4.34). A benefit is “rolled over” if it is paid as superannuation lump sum (other than by way of a transfer) within the superannuation system, and is “transferred” if it is paid from an RSA to another RSA provided by an RSA institution or to a superannuation entity other than upon the satisfaction of a condition of release (RSAR reg 3.01(1)). A “consent” means written consent or any form of consent determined by APRA as sufficient in the circumstances. An RSA holder’s benefits may be transferred without the holder’s consent if a takeover or merger of the transferor RSA provider occurs, or if the transfer is made under a relevant law or voluntary transfer of engagements or is requested by a prescribed regulatory agency. A corresponding restriction prevents an RSA institution from accepting a roll-over or transfer of a benefit from another RSA or a superannuation entity unless the receiving RSA institution reasonably believes that the transferring entity made the roll-over or transfer in the belief that the receiving institution has received the RSA holder’s or member’s consent to the roll-over or transfer. Compulsory roll-over and transfer of benefits in an RSA An RSA holder may ask, in writing, an RSA provider (transferring entity) to roll over or transfer an amount that is the whole or part of the RSA holder’s withdrawal benefit to a superannuation entity or an RSA provided by another RSA provider (receiving entity) in accordance with Div 4.4A in Pt 4 of the RSAR (comprising reg 4.35 to 4.35P). A “withdrawal benefit”, in relation to an RSA holder, means the total amount of the benefits that would be payable to any of the following if the RSA holder voluntarily ceased to be an RSA holder: • to the RSA holder • in respect of the RSA holder, to another RSA or the trustee of a superannuation entity or an exempt public sector superannuation scheme • to another person or entity because of a payment split in respect of the RSA holder’s interest in the RSA (RSAR reg 1.03(1)). The scheme for compulsory roll-over and transfer of benefits in RSAs in Div 4.4A mirrors that for the compulsory rollover or transfers of superannuation benefits by regulated superannuation funds and ADFs (as provided in SISR Pt 6 Div 6.4A as discussed in ¶3-286). Electronic portability of benefits form RSA holders (and superannuation fund members) may electronically request the Commissioner to rollover or transfer of their superannuation benefits from their RSA or fund (called the “Electronic portability request scheme”) using the online service provided by the ATO (www.ato.gov.au/super/apraregulated-funds/managing-member-benefits/rollover-benefits/receiving-member-rollover-requests). The scheme is given effect by s 39A of RSA Act.

Under the electronic portability request scheme, the RSA holder may give the Commissioner a request to roll over or transfer the whole of the RSA holder’s withdrawal benefits held by the RSA provider, and the Commissioner may give the request to the RSA provider (RSAR reg 4AA.01). The electronic scheme provides a simple and streamlined process for RSA holders to initiate the roll-over or transfer of their benefits. Some key features of the electronic portability scheme include the following: • the RSA holder applies electronically to the Commissioner, rather than in writing to their RSA provider • the Commissioner verifies the RSA holder’s identity, instead of the holder providing certified copies of identity documents to the RSA provider • the Commissioner also confirms the ownership of the benefits and membership details, and • the Commissioner gives the request electronically to the holder’s RSA provider. The Commissioner may decline to give the request to the RSA provider if: • the request does not comply with the requirements mentioned in reg 4AA.02, or • it appears to the Commissioner that conduct has been, is being, or is proposed to be, engaged in by a trustee or an investment manager of the complying superannuation fund to which the roll over or transfer is to be made that is likely to adversely affect the values of the interests of beneficiaries of that fund (reg 4AA.03). Payment of benefits As part of the preservation rules, the RSAR contains specific rules for voluntary and compulsory cashing of benefits by RSA holders, such as how and when the cashing may or must take place, the form of payment and to whom benefits may be paid. Voluntary cashing The rules on voluntary cashing of benefits from an RSA depend on whether the benefits in the RSA are PBs, RNPBs or UNPBs. These rules are also subject to the terms and conditions of the particular RSA, eg an RSA’s terms and conditions may specify more stringent rules for voluntary cashing of benefits. The general rule is that an RSA holder’s PBs and RNPBs may be cashed only if the RSA holder has satisfied a condition of release, subject to any cashing restriction attached (see above). With many conditions of release, there is no cashing restriction (see Sch 2). In contrast, all or part of the UNPBs of an RSA holder may be cashed without restrictions (reg 4.23). Compulsory cashing From 10 May 2006, an RSA holder’s benefits must be cashed, or rolled over for immediate cashing, as soon as practicable after the RSA holder dies (reg 4.24(1)). The general rules on benefit payments and the restrictions on death benefit payments after an RSA holder’s death are set out below. Form of payment of benefits An RSA holder’s benefits may be cashed as: • a single lump sum in respect of each person to whom benefits are cashed, or • one or more pensions, each or which is a superannuation income stream that is in the retirement phase, or the purchase of one or more annuities, each or which is a superannuation income stream that is in the retirement phase (reg 4.24(3)). The meaning of “superannuation income stream that is in the retirement phase” is discussed in ¶6-490. The cashing of benefits as an income stream on or after 1 July 2007 is subject to special rules where this is because of the death of the RSA holder (see below). Persons who may cash benefits

An RSA holder’s benefits may be cashed in favour of: (a) the RSA holder or his/her legal personal representative (eg if the RSA holder becomes of unsound mind); (b) his/her legal personal representative or one or more dependants if the RSA holder dies; or (c) any other individual person if no legal personal representative or dependant of the RSA holder is found after making reasonable inquiries (reg 4.26). This rule does not apply if an RSA provider is required to pay the RSA holder’s benefits in accordance with a court forfeiture order (reg 4.26(1A)). A similar rule applies for benefits held in a superannuation fund (see “Forfeiture orders and confiscation orders” in ¶3-286). The cashing of the RSA holder’s benefits is also subject to reg 4A.24 and 4A.28, which deal with the splitting of benefits under the family law. An RSA provider that has received an ATO release authority in respect of an RSA holder (under ITAA97 or a provision in Sch 1 to the Taxation Administration Act 1953: see Sch 2 table above) can cash the RSA holder’s benefits in favour of the Commissioner in accordance with the authority in satisfaction of the RSA holder’s tax liability (reg 4.26(3)). For the purposes of the RSA Act, a “dependant” includes the RSA holder’s spouse or child and any person with whom the RSA holder has an interdependency relationship (RSA Act s 20; 20A). The terms “dependant” and “interdependency relationships” in the RSA Act are defined in a similar manner as in the SIS Act and are discussed at ¶3-020. The RSAR rules are subject to the specific terms and conditions of the RSA, which may not permit payment to certain persons (eg payment of death benefits to non-dependants). Additional conditions — cashing benefits as income streams after the RSA holder’s death From the 2007/08 year of income, the terms and conditions of an RSA must not permit an RSA holder’s benefits to be cashed after the holder’s death otherwise than in accordance with the RSAR standards (s 43A). The RSAR standards prevail if the terms and conditions of an RSA are inconsistent with the standards and the terms and conditions are invalid to the extent of the inconsistency. On or after 1 July 2007, a deceased RSA holder’s benefits may be paid to a person as a pension or to purchase an annuity under reg 4.24(3)(b)(i) and (ii) (see “Form of payment of benefits” above) only if, at the time of the RSA holder’s death, the person: • is a dependant of the RSA holder, and • in the case of a child of the RSA holder: – is less than 18 years of age, or – being 18 or more years of age, is either financially dependent on the RSA holder and less than 25 years of age or has a disability of the kind described in s 8(1) of the Disability Services Act 1986 (reg 4.24(3A)). Further, if the death benefits are paid to a child of the deceased RSA holder in the form of a pension under reg 4.24(3A), the benefits must be cashed as a lump sum on the earlier of: (a) the day on which the pension is commuted, or the term of the pension expires (unless the benefit is rolled over to commence a new annuity or pension), and (b) the day on which the child attains age 25, unless the child has a disability of the kind described in s 8(1) of the Disability Services Act 1986 on the day that would otherwise be applicable under (a) or (b) (reg 4.24(3B)). [SLP ¶60-400]

¶10-140 Provision of information to RSA holders An RSA is a “financial product” in the Corporations Act 2001 (CA) (s 764A(1)(h): ¶4-060). RSA providers

must give information to potential and existing RSA holders in accordance with the Corporations Act 2001 and Corporations Regulations 2001 (CR) under the financial services reform (FSR) framework (¶10-015). Some non-FSR information requirements continue to be prescribed by the RSA legislation (see ¶10-160 and ¶10-220). FSR information regime The disclosure requirements for superannuation products, including RSAs, under CA and CR are discussed in Chapter 4. The FSR disclosure and reporting regime covers: • the information that must be provided: – before or soon after a person becomes an RSA holder – regularly to RSA holders concerning their RSA benefits – when the balance in the RSA reaches $10,000 – when a significant event occurs – when a person ceases to be an RSA holder – on request by the RSA holder or other concerned persons • the time allowed for provision of information and the persons to whom the information must be given in each case • the method of providing the information. Some of these requirements are summarised below. RSA with balance of $10,000 or more Where the balance of an RSA is $10,000 or more at the end of a reporting period, the periodic statement for the reporting period to the RSA holder must include information which: • informs the holder that the account balance exceeds $10,000 and which states that the information contained in the statement is important and must be read carefully • outlines the effect of the lower-risk/lower-return nature of the RSA on possible benefits in the longer term • suggests that the RSA holder may wish to consider: (a) other superannuation arrangements that may provide a greater return over the long term; and (b) seeking advice on alternative investment strategies that may be more suitable (CR reg 7.9.28). [SLP ¶60-500]

¶10-150 Dealing with lost RSA holders An RSA provider must protect the benefits of “lost RSA holders” (as defined in RSAR reg 1.06(1)) in accordance with benefit protection standards (¶10-120), and report lost RSA holders or transfer lost RSA holders to another superannuation entity. In certain cases, the RSA provider must pay unclaimed RSA money to the Commissioner of Taxation or a state or territory authority (¶10-260). Reporting lost RSA holders An RSA provider must give to the Commissioner a statement in the approved form containing prescribed information about each RSA holder who becomes a lost RSA holder or who ceased to be lost during the half-year in accordance with the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLM Act). The lost member reporting requirements are similar to those for lost superannuation fund members and are discussed in ¶3-380.

Transfer of lost RSA holders An RSA provider may “transfer” the benefits of lost holders (within 90 days of their becoming lost) to another RSA provided by an RSA institution, a superannuation entity or an exempt public sector superannuation scheme. This is one of the exceptional circumstances when an RSA holder’s benefits can be paid by the RSA provider otherwise than upon the RSA holder satisfying a condition of release in respect of those benefits (RSAR reg 3.01(1)). Where a transfer occurs, the RSA provider must give to the trustee of the transferee entity prescribed information about the lost RSA holder (¶10-120). [SLP ¶60-550]

¶10-160 Splitting RSA interest under the family law The Family Law Act 1975 (FLA) allows an RSA holder (member spouse) to make an agreement with his/her non-member spouse to split the member spouse’s RSA interest between them in accordance with the FLA. If the parties are unable to agree, the Family Court can order that the member spouse’s RSA interest be split between them. An RSA interest that is liable to be split is referred to as a “splittable payment”. The splitting of RSA and other superannuation interests under the FLA is discussed in detail in Chapter 14. RSAR Pt 4A contains provisions to facilitate the payment splitting arrangements for a member spouse’s RSA interest and provides additional options that may be exercised in relation to the splitting (RSAR reg 4A.01 to 4A.28). In summary, the provisions: • require the RSA provider to give notice to the member spouse and non-member spouse that the member spouse’s RSA interest is subject to a payment split • allow the non-member spouse to either request the RSA provider to open a new RSA on his/her behalf or transfer the entitlement to a regulated superannuation fund, RSA, ADF, or exempt public sector superannuation scheme nominated by the non-member spouse or, if the non-member spouse has met a condition of release, request the lump sum payment of his/her entitlement • allow the RSA provider, if no request is received from the non-member spouse, to roll over or transfer the non-member spouse’s entitlement to another regulated superannuation fund, RSA, ADF, or eligible rollover fund • ensure that unrestricted non-preserved, restricted non-preserved and preserved benefits are shared between the parties on an equal basis in proportion to their share of overall benefits • prescribe information and disclosure requirements that must be complied with by the RSA provider, as well as the information to be given to the non-member spouse before creating the non-member spouse interest and the ongoing information requirements where an interest has not been created or transferred. RSA providers are also required to comply with the information requirements set out in RSAR reg 2.18A to 2.18D for the purposes of the RSA split.

¶10-170 Offering RSAs and applications for RSAs The rules governing the offer of, and application for, RSAs are contained in the Corporations Act 2001 (CA), which sets out the financial services regulatory regime for all financial products (see Chapter 4). An RSA is specifically included in the definition of “financial product” in CA (s 764A(1)(h): ¶4-060). Generally, this means that the product disclosure rules and other protection provisions under CA will apply in relation to potential and existing RSA holders (¶10-140). The specific rules which govern the offering of, and application for, RSAs include the following. • A person intending to be an RSA holder, or the employer of that person, must make an eligible

application to the RSA institution to open an RSA. • An employer must comply with procedural requirements providing employees with alternative options if the employer gives an employee an RSA application form or intends to apply for an RSA on behalf of the employee. • RSA institutions must give product disclosure statements (PDSs) and other information to prospective RSA holders or employers who apply for RSAs on behalf of employees (¶4-150). • RSA providers must comply with “stop orders” issued by ASIC, and with requests to close RSAs during the “cooling-off period”, under CA (¶10-190). In addition, RSA providers must deal with RSA application money in a prescribed manner (¶4-680), and must comply with rules which prohibit false, improper or misleading conduct in relation to RSAs (¶4-500, ¶4-680). Applying to be an RSA holder A person who is provided with an RSA (a “financial product”) is a retail client for the purposes of CA (s 761G(6)(a): ¶4-060). An RSA institution must only issue a financial product to a person (or employer of that person) as a retail client pursuant to an eligible application. Broadly, this means that the application must be made using the application form issued by the RSA institution, where the form is included in, or accompanied by, a PDS and all the PDS requirements are satisfied. The PDS requirements prescribed by CA are discussed in Chapter 4. [SLP ¶60-600, ¶60-610]

¶10-190 Stop orders and cooling-off period ASIC may issue a “stop order” to an RSA provider directing that no contract or agreement for the provision of RSAs may be entered into while the stop order is in force, if it appears that a material statement in a product disclosure statement (PDS) or supplementary PDS or advertising is false or misleading (CA s 1020E). If ASIC makes a stop order, the RSA institution or provider must take reasonable steps to notify relevant financial services licensees of the stop order and to ensure the financial service licensees do not recommend or arrange the issue of products under a stop order (CA s 1020E(8), (9)). “Cooling-off period” If an RSA is opened or issued by a retail client or as a result of an employer making an application on an employee’s behalf, the client or employee may, by written notice at any time during a 14-day “cooling-off period”, request the RSA provider to close the RSA and transfer the balance of the RSA to another RSA provided by an RSA institution, or to a superannuation entity (CA s 1019A; 1019B). The 14-day “cooling-off period” starts on the earlier of: • the time when the confirmation requirement (in CA s 1017F) is complied with, or • the end of the fifth day after the day on which the RSA was opened for the client or employee. The RSA balance to be transferred is all amounts contributed to the RSA reduced only by tax paid, or liable to be paid, by the RSA provider in respect of those amounts. No fees may be charged to the RSA. The cooling-off period will not apply where the RSA is chosen as a result of an employee exercising a choice under the SGAA choice of fund rules. This will avoid any inconsistency with the choice rules under which employees will have 28 days in which to decide whether they wish to have compulsory employer contributions made to the RSA (¶12-040). [SLP ¶60-650]

¶10-195 Improper conduct in provision of RSAs An RSA provider (or an associate) must not engage in improper conduct in relation to the provision of RSAs such as giving inducements, or refusing to supply a good or service, to a person (eg an employer) on the condition that employees of the person must become holders of RSAs issued by the provider (RSA Act s 78). This restriction may be relevant in situations under which employers give their employees a choice of fund as to where SG contributions made for them will be paid (¶12-040). The prohibited conduct includes: • an RSA provider (or associate) supplying or offering to supply goods or services to a person, or at a particular price, or giving or offering to give a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods or services • an RSA provider (or associate) refusing to supply goods or services to a person, or at a particular price, or refusing to give or allow a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods or services. A contravention of s 78 is not an offence, but it gives rise to civil liability under RSA Act s 74. A contravention also does not affect the validity of any transaction or of any other act. Exceptions The following conduct by an RSA provider (or an associate) will not breach the restriction in s 78: • supplying a business loan on a commercial arm’s length basis to a person where only that person is required to be a holder of an RSA issued by that provider. For example, an associate of an RSA provider is able to supply a business loan to an employer on the basis that the employer is an RSA holder. An employer is still required to meet the standard credit approval process that applies to someone else applying for a loan • providing a “clearing house” service to a person. Such a service forwards superannuation contributions (and related information) made by that person on behalf of anyone employed by the person (eg contributions to an employee’s chosen fund on behalf of the employer) • providing an administration or advice service to either a person or employees of the person which relates to the payment of superannuation contributions (eg providing software to an employer to allow them to make contributions to the RSAs) • supplying a good or service to an employer, where the supply or offer is also available to all of the employer’s employees who are RSA holders and the terms of the supply or offer to each employee are no less than the terms offered to the employer. This would cover, for example, offering RSA holders discounted computers, low cost health insurance, or a discounted shopping service such as accommodation or entertainment, as a result of the employee becoming a holder of an RSA issued by that provider (RSAR reg 6.16A). [SLP ¶60-680]

¶10-220 Other duties of RSA providers and employers The RSA Act imposes a number of duties on RSA providers, as summarised below, in addition to the operating standards prescribed by RSAR (¶10-100), the rules dealing with the offering of and application for RSAs (¶10-170), and the rules dealing with unclaimed RSA money (¶10-260). A breach of the duties does not affect the validity of a transaction or any other act (RSA Act s 46). However, penalties by way of a fine or term of imprisonment may be imposed on the contravening party. Interest offset arrangements or charges on RSA An RSA provider must not enter into any interest offset or combination account arrangements where one of the accounts involved is an RSA. A breach of this restriction is an offence punishable on conviction by

a fine of 100 penalty units (¶10-100). This is a strict liability offence (RSA Act s 40). Examples of offset arrangements include using the interest received from an RSA to reduce outstanding loans or other bank facilities (eg credit card loans) of the RSA holder, or paying the interest receivable on the RSA into another account (eg a savings account) or paying the interest earned from another account into an RSA. Charges and assignments An RSA provider must not recognise, or in any way encourage or sanction, a charge over an RSA or an assignment of benefits provided under an RSA (RSA Act s 41). If a person does an act and the doing of the act results in a breach of the above requirements, the person is guilty of an offence punishable on conviction by a fine of up to 100 penalty units (¶10-100). Any term or condition in a contract or agreement providing for a charge over or in relation to an RSA is of no effect. In addition, benefits provided under an RSA cannot be assigned. For the above purposes, a “charge” includes the placing of a mortgage, lien or other encumbrance on the RSA. Establishing arrangements to deal with inquiries/complaints An RSA provider: (a) must be a member of the Australian Financial Complaints Authority (AFCA) scheme (within the meaning of Ch 7 of the Corporations Act 2001) (b) must have an internal dispute resolution (IDR) procedure that complies with the standards, and requirements, mentioned in subparagraph 912A(2)(a)(i) of the Corporations Act 2001 in relation to financial services licensees (c) must give to ASIC the same information as the RSA provider would be required to give under s 912A(1)(g)(ii) of the Corporations Act 2001 if the RSA provider were a financial services licensee, and (d) must ensure that written reasons are given, in accordance with requirements specified under subsection (2A) of this section, for any decision of the RSA provider (or failure by the RSA provider to make a decision) relating to a complaint. An RSA provider who intentionally or recklessly contravenes s 47(1) is guilty of an offence punishable on conviction by a fine not exceeding 100 penalty units. The AFCA is the external dispute resolution (EDR) body for all complaints in the financial sector from 1 November 2018. The Superannuation Complaints Tribunal (SCT) which was the previous EDR body only has residual functions to deal with complaints received by it before 1 November 2018 (see ¶18-933). When a decision is made in relation to an RSA complaint in accordance with IDR arrangements of the RSA provider, the RSA provider must give its decision to the complainant (RSA holder or relevant person) together with information about the AFCA. The complainant may then apply to the AFCA for review of the decision if the complainant so wishes (¶10-360). An RSA provider must not fail, without lawful excuse, to comply with an order, direction or determination of the AFCA (or SCT) (RSAR reg 6.14; RSA Act s 95(1A)). Keeping minutes, records and reports An RSA provider must keep, and retain for at least 10 years, minutes of all matters relating to decisions made by it in relation to the operation of the RSA legislation as discussed at meetings of the RSA provider (RSA Act s 48). In addition, an RSA provider must keep, and retain for as long as is relevant but not less than 10 years, copies of reports given to all RSA holders under the RSA Act or under the terms and conditions of the RSA. Copies of the reports must also be made available for inspection on request by APRA/ASIC (RSA Act s 49). A similar duty to maintain records also arises for audit purposes (see below). A person who fails to comply with the above requirements is guilty of an offence punishable on conviction

by a fine not exceeding 50 penalty units (s 48(23); 49(2)). Record-keeping for audit and annual return purposes An RSA provider must keep such records as are necessary to correctly record and explain the transactions relating to the RSAs provided by it, and which must be sufficient to enable the RSA provider to prepare returns and other reports to APRA under the FSCDA (RSA Act s 64). This obligation is additional to the general duty under s 48 to maintain minutes, records and reports (see above). An RSA provider who fails to comply with the above requirements is guilty of an offence punishable on conviction by a fine not exceeding 100 penalty units. The records must be kept in Australia, be in writing in the English language (or be readily accessible and convertible into writing in the English language), and be retained for at least five years after the end of the income year to which the transactions relate. Penalties may be imposed for failing to comply with the above requirements. In addition, a strict liability offence arises for incorrectly keeping records (RSA Act s 151). Audit arrangements An RSA provider must make such arrangements as are necessary to enable an approved auditor (¶10270) to give the RSA provider, within five months after the end of each year of income, a report in the approved form on the degree of compliance by the RSA provider with the RSA legislation and the FSCDA, as specified in the form (RSA Act s 65(1); RSAR reg 6.16). An RSA provider who intentionally or recklessly contravenes the above requirements (including a failure to act in accordance with the requirements) is guilty of an offence punishable on conviction by a term of imprisonment of up to two years. Audit report An RSA provider must, within five months after the end of each year of income, give APRA, in respect of that year of income, a copy of the report given to the RSA provider by an approved auditor under RSA Act Pt 6 in relation to the RSA provider (¶10-270). The copy must be certified by a responsible officer of the RSA provider to be a true copy of the report (RSA Act s 44; RSAR reg 6.10). A person who contravenes s 44 is guilty of an offence punishable on conviction by a fine of up to 50 penalty units. Lodging annual and other returns with APRA RSA providers must lodge annual returns and other returns with APRA in accordance with the standards determined under the FSCDA (¶9-740). Other APRA and ASIC information requirements An RSA provider must notify APRA and/or ASIC in writing of any change in: (a) its name; (b) its postal address, registered address or address for service of notices; or (c) details of its contact person and telephone and facsimile numbers. Such notifications must be given within one month of the change (RSAR reg 6.08). Transfer or roll-over of RSA balances An RSA provider must, at the written request of an RSA holder, transfer or roll over the whole or a part of the holder’s RSA benefits to: • another RSA provided by an RSA institution • a superannuation entity or regulated exempt public sector superannuation scheme, or • a deferred annuity (RSAR Div 4.4A; reg 6.15). The procedural requirements dealing with the request for a transfer or roll-over of benefits and requests from the RSA provider for further information are set out in reg 4.35B to 4.35E. The request form for the transfer or roll-over is the same as that for transfers from superannuation funds, as prescribed in SISR

Sch 2A (as modified by reg 4.35B for RSA transfers). The RSA provider must roll over or transfer the amount (or the part of the amount requested to be transferred) as soon as practicable, and in any case within 30 days, after: • the RSA provider receives a request, or • if the RSA provider requires further information, the time when the RSA provider receives all of the information that would be required (reg 4.35D(5)). An RSA provider may refuse to roll over or transfer an amount requested under reg 4.35D, and advise the RSA holder in writing of the refusal, if: (a) the fund or RSA to which the RSA holder has requested the amount to be rolled over or transferred will not accept the amount (b) the amount to be rolled over or transferred is part only of the RSA holder’s interest in the fund, and the effect of rolling over or transferring the amount would be that the RSA holder’s interest in the fund from which the amount is to be rolled over or transferred would be less than $5,000, or (c) the RSA provider has rolled over or transferred an amount of the RSA holder’s interest within 12 months before the request is received (reg 4.35E). Contributions splitting with a spouse Eligible RSA holders can apply to their RSA providers to split their personal and employer contributions with a spouse. It is optional for RSA providers to provide contributions splitting. The mechanism for contributions splitting (effectively, a roll-over, transfer or allotment of an amount of the RSA holder’s benefits for the benefit of the spouse of the RSA holder) and the circumstances in which an RSA provider may accept such an application are set out in RSAR Div 4.5 (reg 4.37 to 4.43). The contributions splitting rules are similar to those which apply to eligible members of superannuation funds (see ¶6-850). The taxation consequences are discussed at ¶6-870. Payment of RSA benefits to ERFs An eligible rollover fund (ERF) has the same meaning as in the SISA. An RSA provider may transfer an RSA holder’s benefits to an ERF (RSA Act s 89). This may arise, for example, if the RSA holder becomes “lost” or the RSA provider is unable to accept a payment from an employer that is intended as a contribution to an RSA because its approval as an RSA institution has been suspended or revoked (¶10-050), or an APRA direction prohibiting acceptance of contributions is in force (¶10-020). The procedure for the transfer of benefits is for the RSA provider to apply on the RSA holder’s behalf to the ERF trustee for the issue of a superannuation interest in the ERF to the holder. The consideration for the issue of the interest is the amount of the RSA holder’s withdrawal benefits in the RSA or the relevant amount received as an intended contribution to the RSA (RSAR reg 6.17). An RSA holder’s “withdrawal benefit” is the total amount of the benefits that would be payable to or in respect of the RSA holder if he/she voluntarily ceased to be an RSA holder (RSAR reg 1.03(1)). Once the superannuation interest in the ERF is issued, the RSA holder ceases to have any rights against the RSA provider, and a person who has a contingent right to a death or disability benefit immediately before the issue of the superannuation interest similarly ceases to have contingent rights against the RSA provider, as corresponding rights will arise against the transferee ERF. [SLP ¶60-700ff]

¶10-260 Unclaimed RSA money An RSA provider is required to pay unclaimed money of RSA holders to the Commissioner of Taxation or a state or territory government or authority (state or territory authority) in accordance with the

Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLMA s 16). The Commissioner is responsible for the administration of the SUMLM Act and maintains the unclaimed money register. When any unclaimed money is paid to the Commissioner or a state or territory authority, the RSA provider is discharged from further liability in respect of that money. RSA providers must also report and pay “lost member accounts” (as defined in the SUMLM Act) to the ATO (SUMLMA s 24C). In addition, where an RSA provider receives a notice from the ATO under s 20C of the SUMLMA about an RSA holder who was a “former temporary resident” (as defined in SUMLMA s 20AA), the provider must pay to the ATO the superannuation benefits of the former temporary resident (SUMLMA s 20E). The operation of the unclaimed money scheme is discussed at ¶3-380. Taxation of payments to the ATO and repayments of unclaimed money by the ATO A payment of lost member accounts or a former temporary resident’s superannuation (unclaimed money) to the Commissioner (or a state or territory authority, where applicable) is not assessable to the person entitled to the unclaimed money at the time of payment. However, when unclaimed money held by the Commissioner or a state or territory authority is subsequently repaid to a person entitled to the unclaimed money (eg the RSA holder or a legal personal representative), the payment to the recipient may be assessable as a superannuation benefit or a departing Australia superannuation payment (¶3-380, ¶8130, ¶8-400). [SLP ¶60-760ff]

¶10-270 Approved auditor and auditor’s obligations An “approved auditor” for the purposes of the RSA Act means a person who is a registered company auditor and a member of the Australian Society of Certified Practising Accountants or The Institute of Chartered Accountants in Australia, but not a person who is disqualified from being or acting as an auditor of all RSA providers under RSA Act s 67 (RSA Act s 16). On application by APRA, the Federal Court of Australia may disqualify a person from being an approved auditor by making a disqualification order if: • the person has failed, whether within or outside Australia, to carry out or perform adequately and properly an auditor’s duties under the RSA legislation or any duties required of an auditor under a Commonwealth, state or territory law, or any functions that an auditor is entitled to perform in relation to the RSA legislation or the FSCDA, or • the person is otherwise not a fit and proper person to be an approved auditor for the purposes of the RSA Act (RSA Act s 67). The court may disqualify a person from being or acting as an auditor of a particular RSA provider, or a class of RSA providers, or any RSA provider (s 67(3)). As soon as practicable after the court disqualifies a person under s 67, particulars of the disqualification must be given to the person concerned and be published in the Gazette. A person who is disqualified under s 67, or APRA, may apply to the Federal Court for a variation or a revocation of the court order (RSA Act s 67A). If APRA considers that an approved auditor has failed to carry out or perform adequately and properly the duties of an auditor or is otherwise not a fit and proper person to be an approved auditor for the purposes of the RSA Act (whether or not a disqualification order has been issued against the auditor), APRA may refer the matter to the auditor’s professional association for appropriate disciplinary action (RSA Act s 68). Auditor’s obligation to provide report An approved auditor must, within five months after the end of each year of income of an RSA provider, provide the RSA provider with a report in the approved form on the degree of compliance by the RSA provider with the RSA legislation or the FSCDA, as specified in the form (RSA Act s 65(4); RSAR reg 6.16).

A person who fails to comply with the above requirements is guilty of an offence punishable on conviction by a term of imprisonment of six months. The RSA provider is required to include a copy of the auditor’s report with the APRA annual return that it is required to submit each year (¶10-220). Auditor’s obligation on compliance matters An approved auditor must notify the RSA provider (and APRA in certain circumstances) if, in the course of or in connection with the performance of audit functions of an RSA provider under the RSA Act or the FSCDA, the auditor forms the opinion that it is likely that a contravention of the RSA legislation may have occurred, may be occurring, or may occur in the future (RSA Act s 66). This obligation does not arise if the auditor has an honest belief that the opinion is not relevant to the performance of audit functions under the RSA Act. An auditor who fails to comply with the above obligations is guilty of an offence punishable on conviction by a fine not exceeding 50 penalty units (¶10-100). An auditor (or former auditor) of an RSA provider may also provide APRA with information about the RSA provider that is obtained in the course of, or in connection with, the performance of audit functions under the RSA Act or Regulations or the FSCDA if the auditor considers that giving the information will assist the Regulator in performing its functions (RSA Act s 66A). A person who, in good faith, gives information to the Regulator in accordance with s 66A is not subject to any action, claim or demand by, or any liability to, any other person in respect of the information. [SLP ¶60-800ff]

¶10-350 RSAs and TFNs The rules governing TFNs under the tax, SIS and RSA laws are discussed in detail in Chapter 11. Part 11 of the RSA Act contains TFN provisions for RSA providers, RSA holders and employers of the RSA holders. APRA shares administration of these provisions with the Commissioner of Taxation. The RSA Act TFN provisions are similar to those in SISA Pt 25A (¶3-340) for trustees of superannuation entities and beneficiaries in those entities. Broadly, the TFN provisions: • enable an RSA holder or prospective RSA holder to quote his/her TFN to the RSA provider, whether directly or through an employer (s 131; 134; 139) • specify the circumstances when an employer may or must inform the RSA provider of the TFNs of employees who are RSA holders (s 132; 133) • require RSA providers to seek the TFNs of RSA holders (s 135; 136) • specify the use of the TFNs of RSA holders by RSA providers (eg recording, retaining and destroying TFNs, using the TFNs to locate and identify amounts held for a particular person, and consolidating those amounts) (s 137) • enable an RSA provider to use an RSA holder’s TFN as a method of locating, in the records or accounts of the provider, member accounts, or to facilitate the consolidation of multiple accounts (s 137A) (see below) • allow RSA providers to provide an RSA holder’s TFN to the transferee entity, when transferring the RSA holder’s benefits in the RSA to another RSA, superannuation entity or regulated exempt public sector superannuation scheme (s 138) • allow APRA to seek the TFNs of RSA providers in certain circumstances. RSA holders or prospective RSA holders may provide their TFNs (called “quotation of TFNs”) to RSA providers on a voluntary basis, and failing to do so is not an offence (s 135). However, the consequences

of not providing a TFN are that tax instalment deductions at the top marginal rate will be made on payments from the RSA (although any excess tax paid is reclaimable through the normal assessment process) and difficulties may arise when amalgamating or locating the RSA holder’s benefit entitlements. In addition, additional tax is payable on the no-TFN contributions income of an RSA provider (¶6-502). An RSA holder is deemed to have quoted his/her TFN to an RSA provider in certain circumstances, eg if the RSA holder has provided the TFN to the RSA provider for taxation or superannuation purposes, or has provided the TFN to his/her employer, or the ATO has given the RSA provider the RSA holder’s TFN (s 140 to 143). TFN approvals for the purposes of the TFN rules in RSA Act APRA has made a revised TFN approval under Pt 11 of the RSA Act effective from 1 October 2017 (Retirement Savings Accounts Tax File Number approval No 1 of 2017) (www.legislation.gov.au/Details/F2017L01270), which revokes the former approval Retirement Savings Accounts Tax File Number approval No 1 of 2007 (F2007L02022). In summary, the 2017 TFN approval made approvals under the following RSA Act provisions: • s 135(1) — approved the manner of an RSA provider requesting that a holder, or a person applying to be a holder, of an RSA quote their TFN in connection with the operation or the possible future operation of the RSA Act and the other Superannuation Acts • s 136(1) — approved the manner of an RSA provider requesting that a person becoming a holder of an RSA quoting their TFN in connection with the operation or the possible future operation of the Acts referred to in that subsection • s 138(2) — approved the manner of an RSA provider informing another superannuation provider (within the meaning of the 2017 TFN approval) of a TFN of a beneficiary of the first fund • s 139(a) (for the purposes only of s 134) — approved the manner for an RSA holder, or applicant to become an RSA holder, to quote their TFN to an RSA in connection with the operation or possible future operation of the RSA Act and the other Superannuation Acts, and • s 142(1) — approved the manner of a person setting out their TFN in an application to the RSA provider for payment of a benefit (see further ¶11-750). Privacy rules reflected in 2017 TFN approval The 2017 TFN approval also reflects the current Privacy (Tax File Number) Rule 2015 (2015 Privacy Rule) issued by the Privacy Commissioner under s 17 of the Privacy Act 1988 (Privacy Act), which replaced the previous requirements in the Tax File Number Guidelines 2011. The 2015 Privacy Rule regulates the collection, storage, use, disclosure, security and disposal of an individual’s TFN information and is legally binding on superannuation and RSA providers. APRA guidelines and further information For additional information, including FAQs, explanation of the TFN obligations under the 2015 Privacy Rule and TFN penalties, see: • APRA website — www.apra.gov.au/tax-file-number-approvals • APRA’s letter on the TFN approval, 28 September 2017 — www.apra.gov.au/sites/default/files/letterall-rse-licensees_superannuation-legislative-instruments_28-september-2017.pdf Using a TFN to locate amounts or to facilitate account consolidation An RSA provider may (subject to the conditions in RSAR reg 4.46; 4.47) use the TFNs quoted to it by an RSA holder: • to locate, in the records or accounts of the RSA provider, amounts held in RSAs provided by it, or • to facilitate the consolidation of the following in relation to a particular person:

(i) RSAs provided by one or more RSA providers and held by the person (ii) interests of the person in eligible superannuation entities or regulated exempt public sector superannuation schemes (s 137A(2)). The above wide use of TFNs applies, regardless of when the TFN was quoted. RSAR conditions An RSA provider must obtain the RSA holder’s consent to use his/her TFN to seek superannuation information relating to the RSA holder from the ATO or to contact an RSA provider or superannuation entity to seek superannuation information relating to the RSA holder. Consent includes: • consent provided in writing by the RSA holder • consent provided over the phone by the RSA holder, where the RSA holder’s identity has been confirmed through the RSA provider’s proof of identity procedures • consent provided through an online form or portal where the RSA holder has logged into their member account through a secure online website, or • consent provided through a recorded instruction or interactive voice response function within a call centre (explanatory statement to SLI 2011 No 277 which inserted reg 4.46 and 4.47). Example Sarah (an RSA holder) can provide one consent to her RSA provider which encompasses both the process of seeking information from the ATO regarding member accounts and, should any accounts be found, the original consent will also allow the RSA provider to seek information from those specific superannuation entities or RSA providers. Alternatively, if Sarah is aware that she has a superannuation account with X Fund, she can provide consent to her current RSA provider for them to seek the information from X Fund.

According to the explanatory statement, it is not intended that RSA holders are able to provide a general consent to their RSA providers to search for accounts with any superannuation entity or RSA provider. Also, the search for information under consent is carried out by the RSA provider at the request of the RSA holder. That is, the RSA provider is the agent of the RSA holder, and the superannuation fund or RSA provider from which the information is requested is required to respond to the RSA provider’s request and provide details of any accounts held for the RSA holder. [SLP ¶61-300]

¶10-360 Dealing with RSA complaints A person who is dissatisfied with the conduct or decision of an RSA provider in relation to his/her RSA, or about the payment of death benefits from an RSA, on the grounds that the conduct or decision was unfair or unreasonable, may make an inquiry or complaint to the RSA provider through the internal resolution of complaints process that the RSA provider is required to establish under the Corporations Act 2001 (¶10220). A person who is still dissatisfied may then make a complaint to the Australian Financial Complaints Authority (AFCA) which is the external dispute resolution (EDR) body for all complaints in the financial sector from 1 November 2018 (see ¶18-933). The Superannuation Complaints Tribunal (the former EDR body established under the Superannuation (Resolution of Complaints) Act 1993 (SRC Act)) has only residual functions to deal with complaints received by it before 1 November 2018. The types of complaints which the AFCA can review include: • the RSA provider’s conduct in opening RSAs • the RSA provider’s decision in relation to particular RSA holders or former RSA holders • the RSA provider’s decision to set out certain amounts in the superannuation contributions surcharge

statement given to the Commissioner regarding an RSA holder • an insurer’s conduct or decision in connection with the sale of insurance benefits under an insurance contract where the premiums are paid from an RSA • a decision made by a person other than the RSA provider or insurer as to whether, and the extent to which, a person is totally or permanently disabled. If the AFCA (or SCT) determines that the RSA provider’s or insurer’s conduct or decision was unfair or unreasonable, it may provide appropriate remedies (eg vary a decision, cancel or vary the terms of an RSA or insurance policy, or order the repayment of money with interest). Certain types of complaints are excluded from the AFCA’s jurisdiction, such as disability complaints where more than one year has elapsed since the decision to which the complaint relates, or if a person fails to lodge a claim for a disability benefit with the RSA provider or insurer within one year of permanently ceasing employment due to disability. A person (other than an RSA provider or insurer) who has responsibility for determining the existence and extent of disablement for the purpose of providing temporary or permanent disability benefits to an RSA provider and who is joined to a complaint under the SRC Act must comply with any determination made by the AFCA (or SCT) in relation to that complaint (RSA Act s 184). The operation of the complaints resolution process and the AFCA is discussed in detail in Chapter 13. [SLP ¶61-400]

¶10-380 Data and payment standards Part 4A of the RSA Act (comprising s 45 to 45R) provides for standards to be made relating to payments and provision of information connected with the operation of RSAs. These standards are similar to those under SISA Pt 3B for superannuation fund operations and are discussed in ¶9-780 to ¶9-790. The RSA legislative scheme dealing with data and payment standards is summarised below. The term “SuperStream” is used to describe the whole system covering the submission of data and making of payments electronically in a consistent and simplified manner under the data and payment standards. The Commissioner has general administration of Pt 4A Div 2 (about data and payment standards) to the extent it relates to employers and to payments and information given to the Commissioner and APRA has general administration of Div 2 and 3 (about infringement notices) to the extent that administration of the provisions is not conferred on the Commissioner. The RSAR may prescribe provisions in relation to data and payment matters relating to RSAs to be complied with by RSA providers and employers in their dealings with RSA providers, including different requirements for different classes of RSA or employer (s 45B(1)) (see “Prescribed matters for compulsory roll-overs and transfers of benefit” below). Also, the Commissioner may, by legislative instrument, determine standards relating to “data and payment matters relating to RSAs”, applicable to RSA providers and employers in their dealings with RSAs, including different requirements for different classes of RSAs or employers (s 45B(3), (4)). Data and payment matters relating to RSAs A “data and payment matter relating to RSAs” means a matter relating to the manner in which payments and information, as mentioned in s 45B(6) dealing with an employer contribution to an RSA for an RSA holder or an employee, and connected with the operation of the RSA, are dealt with. The kinds of payments and information under s 45B(6) are: • transactions, including payments, contributions, roll-over superannuation benefits (within the meaning of ITAA97), allocations, transfers and refunds • reports, records, including registrations, and unique identifiers for use with such transactions, reports and records

• any other kind of payment or information that is prescribed by the RSAR, and • any payment or information of a kind mentioned above that is made or provided by the Commissioner. A data and payment standard relating to RSAs may elaborate or supplement any aspect of regulations made under Pt 4A, but is of no effect to the extent that it conflicts with the RSA Act or RSAR (s 45C). The standard which has been determined is summarised below in “RSA data and payment standards 2013”. Register of information The Commissioner is required to keep a register of information for the purposes of Pt 4A by electronic means, and may cause the contents of all or part of the register to be made available to entities that must comply with the RSA data and payment regulations and standards or the superannuation data and payment regulations and standards (under SIS Act) (s 45Q). The Commissioner is to combine the register kept under s 45Q with the register kept under s 34Y of SISA. RSA providers are required to provide information to the Commissioner in accordance with the regulations (s 45R(2); reg 3A.01 to 3A.03). Prescribed matters for compulsory roll-overs and transfers of benefit RSAR Div 4.4A — compulsory roll-overs and transfers of benefit Division 4.4A in Pt 4 of RSAR (comprising reg 4.35A to 4.35P) applies to all RSAs. The matters to be complied with on data and payment matters by RSAs relating to compulsory roll-overs and transfers of benefit are prescribed in reg 4.35B to 4.35P (reg 4.35A). These cover the whole process of roll-overs and transfers from an RSA, including the request forms and information requirements, timeframes and when an RSA provider may refuse to roll over or transfer an amount. Prescribed matters for contributions RSAR Div 5.2 — contributions Division 5.2 in Pt 5 of RSAR (comprising reg 5.04 to 5.10) prescribes matters to be complied with on data and payment matters by RSAs relating to contributions. The matters include the provision of employee details for contributions (reg 5.07), requirements to electronically receive contributions and information (reg 5.08), incomplete contribution information issues (reg 5.09) and allocation of contributions to RSA holder (reg 5.10). RSA data and payment standards 2013 RSA Data and Payment Standards 2013 (Standard) made pursuant to s 45B(3) specifies the minimum requirements for dealing with payments and information relating to certain transactions within the superannuation system, including employer contributions to RSA providers, roll-overs and transfers between RSA providers and superannuation entities and associated reporting obligations for superannuation purposes. Broadly, the Standard establishes the system requirements that must be adhered to by: • RSA providers in relation to roll-over and transfer transactions, contributions and associated payments, and • employers in relation to contributions and associated payments. By dealing with payments and information in the manner specified in the Standard, RSA providers and employers will comply with the Standard and comply with their obligations under Pt 4A of the RSA Act. The Standard incorporates by reference documents as they exist from time to time, including further documents or website content referenced in such documents. Compliance with the Standard requires compliance with the specifications and requirements in those documents to the extent that they are relevant to the particular transaction. Penalties for non-compliance RSA providers and employers are required to comply with the Standard to the extent that the Standard is

applicable to them. A failure to comply may result in an administrative penalty imposed on an employer (s 45E; TAA Sch 1 s 288-110). Consistent with certain other contraventions of the RSA Act, non-compliance with the Standard also constitutes a strict liability offence, punishable upon conviction by a fine of 20 penalty units. The Regulator is also able to give RSA providers and employers a direction requiring them to address a contravention of the Standard or to take action to avoid contravening the Standard (s 45F (RSA providers); s 45G (employers)). Access to Standard The RSA Data and Payment Standards 2013 and Schedules are available at www.legislation.gov.au/Details/F2013L00881 (as amended by RSA Data and Payment Standards (Payments and Information from the Commissioner of Taxation) Amendment 2016: www.legislation.gov.au/Details/F2016L01738). SuperStream decision tool for employers The ATO has released a “SuperStream” decision tool to assist employers who are making superannuation guarantee contributions or salary sacrifice contributions for employees to determine how to comply with the data and payment standards (SuperStream) (see www.ato.gov.au/uploadedFiles/Content/SPR/downloads/Superstream_Decision_tree.pdf).

Taxation of RSA Business ¶10-400 Taxation of RSA business of RSA providers The tax treatment of RSA business is governed by: • ITAA97 Div 295 — for an RSA provider that is a bank, building society or credit union (financial institution) • ITAA97 Div 320 — for an RSA provider that is a life insurance company (life office). In summary, the RSA provider’s taxable income for its RSA business is calculated to take into account: • specific amounts which are exempt from tax (eg amounts credited to RSAs paying current pensions or immediate annuities) • specific amounts to be included in assessable income (eg no-TFN contributions income, assessable contributions and other amounts credited to RSAs not paying current pensions or immediate annuities) • specific deductions (eg premiums that relate solely to providing death and disability benefits to RSA holders, but not amounts credited to RSAs or benefits paid from RSAs). For a financial institution RSA provider, once the total taxable income is determined (ie from its RSA business and other business), it is divided into an RSA component (and, for years up to and including 2014/15, an FHSA component, if any) which is taxed at 15%, and a standard component which is taxed at the general company tax rate. There is no FHSA component of taxable income from 2015/16 with the cessation of the FHSA scheme from 1 July 2015. For a life office RSA provider, its RSA business forms part of the complying superannuation class of taxable income which is taxed at 15%, while the ordinary class of taxable income of the life office is taxed at the company tax rate. The complying superannuation class comprises taxable income such as assessable contributions transferred to the RSA provider and specified roll-over amounts. For both types of RSA providers, any no-TFN contributions income received by the provider is included in the assessable income of the RSA provider and is taxed at 34% (rather than at the above rates). A tax

offset is available if a TFN is later given to the RSA provider (¶6-685, ¶7-200). [SLP ¶60-900]

¶10-420 RSA business of financial institutions ITAA97 Div 295 provides for the taxation of an RSA provider that is not a life insurance company. That Division also provides for the taxation of superannuation entities, whether complying or non-complying, other than non-complying PSTs (Chapter 7). The RSA providers covered by Div 295 are authorised deposit-taking institutions (ADIs), building societies or credit unions (referred to in the Guide as “financial institution RSA providers”). An ADI means a body corporate that is an ADI for the purposes of the Banking Act 1959 (ITAA97 s 995-1). The taxable income of a financial institution RSA provider is divided into two components, as below: • an RSA component (see below), and • a standard component (ITAA97 s 295-555(1)). The RSA component is taxed at 15%, the same concessional rate that applies to the low tax component of complying superannuation funds, complying ADFs and PSTs (Income Tax Rates Act 1986 (ITRA), s 23). The standard component is taxed at the company rate. Working out the RSA component The RSA component for an income year is worked out using the method statement below (s 295-555(2)). Step 1 — Add the following amounts included in the provider’s assessable income for the income year: • assessable contributions of the RSA provider, and • other amounts credited during the year to RSAs provided by the RSA provider. Step 2 — Subtract from the amount in step 1 amounts paid from those RSAs (except benefits for the RSA holders or tax). Step 3 — The result is the RSA component. Working out the standard component The standard component is worked out under s 295-555(3) and (4) (see below). If the sum of the RSA component is more than the RSA provider’s taxable income: (a) the provider’s taxable income is equal to that sum, and (b) ITAA97 applies to the provider as if it had a tax loss for the income year of an amount that would have been that loss if the RSA component were not ordinary income or statutory income (s 295555(3)). The standard component is the remaining part (if any) of the RSA provider’s taxable income for the income year after subtracting the RSA component (s 295-555(4)). Restriction on offsetting tax loss The effect of the above calculations of the standard component places a restriction on offsetting tax loss against RSA income (if any). Example 1 Smart Bank (an RSA provider) has a total taxable income of $250m. Assume that: • the assessable contributions deposited to RSAs provided by it amounted to $10m • the total interest credited to the RSAs amounted to $12m, of which $1.5m was to RSAs paying current pensions. The RSA component of Smart Bank’s taxable income is $20.5m, made up of contributions ($10m) plus amounts other than

contributions credited to RSAs ($12m) less amounts credited to RSAs that are paying current pensions ($1.5m). The standard component of Smart Bank’s taxable income is $229.5m, ie total taxable income ($250m) − RSA component ($20.5m).

Example 2 Assume that, in a year of income, Easi Bank (an RSA provider) has a taxable income of $1m. During the year, assessable contributions received in RSAs provided by it amounted to $2.2m, no earnings were credited to the RSAs and no amounts were withdrawn (except to pay contributions tax). The RSA component of Easi Bank’s taxable income (as calculated under s 295-555(2)) is $2.2m. The effect of special rule in s 295-555(3) means that Easi Bank will have both a taxable income and a tax loss for the year of income. The taxable income is the RSA component of $2.2m and the tax loss is $1.2m (ie the amount which would have been the tax loss if the RSA component was not income). The RSA component of taxable income of $2.2m of Easi Bank will be taxed at the rate of 15%.

Example 3 Assume in Example 2 that Easi Bank had a tax loss of $0.5m (instead of the $1m taxable income). In that case, its taxable income would be $2.2m (ie the RSA component of taxable income) and its tax loss would be $2.7m.

Calculating the tax payable by an RSA provider The following steps are taken to work out the tax payable on the components of the taxable income of an RSA provider (s 295-10(2)). Step 1 — Work out the RSA provider’s no-TFN contributions income (see below). Apply the applicable rates as set out in the Income Tax Rates Act 1986 to that income. Step 2 — Work out the RSA provider’s assessable income and deductions taking account of the special rules in Div 295 (see ¶10-430). Step 3 — Work out the RSA component and standard component of the entity’s taxable income (see above). Step 4 — Apply the tax rates set out in the Income Tax Rates Act 1986 to the components (the RSA component at 15%, and the standard component at 30%). Step 5 — Subtract tax offsets (if any) from the taxable income. A financial institution RSA provider is liable to pay tax on its no-TFN contributions income under ITAA97 Subdiv 295-I (if any), and may be entitled to a tax offset under ITAA97 Subdiv 295-J if a TFN is later provided to the RSA provider (ITAA97 s 320-150). The inclusion of no-TFN contributions in taxable income and the tax offset is discussed at ¶6-685 and ¶7-200. [FTR ¶791-791; SLP ¶60-950]

¶10-430 RSA business — assessable income, exempt income and deductions As noted at ¶10-420, the RSA component of the taxable income of a financial institution RSA provider is the sum of the RSA provider’s: • assessable contributions (¶10-420) made to RSAs provided by the RSA provider during the year of income, and • amounts (other than contributions) credited to RSAs provided by the RSA provider during the year of income (reduced by amounts credited to RSAs paying current pensions), less • any amounts paid or withdrawn from the RSAs, other than benefits paid to or in respect of RSA holders. The standard component of the taxable income is any remaining part of the RSA’s taxable income for the income year.

An RSA provider’s assessable income also includes no-TFN contributions. No-TFN contributions income (if any) is subject to tax at an additional rate but a tax offset is available if a TFN is later provided to the RSA provider. The inclusion of no-TFN contributions in taxable income and the tax offset is discussed at ¶6-502. Assessable income The following special rules in ITAA97 Div 295 apply to determine the assessable income, exempt income and deductions. A financial institution RSA provider’s assessable income specifically includes the following: • assessable contributions to the RSAs • non-exempt investment income credited to RSAs • rebate or refund of life insurance premiums which have been allowed as deductions under s 295-475. Assessable contributions The following contributions made to RSAs provided by a financial institution RSA provider (or a life office RSA provider: ¶10-460) are assessable contributions: • a contribution made by a person other than the RSA holder — these are mainly employer contributions for employees and non-employees (eg independent contractors) under an award, a law or contractual obligation. They do not include eligible spouse contributions or contributions for children or government co-contributions (¶6-100) (s 295-160 to 295-175: ¶7-120) • a payment under SGAA s 65 — these are payments of the shortfall component of a SG charge (¶12500) (s 295-160, item 3: ¶7-120) • a payment under the Small Superannuation Accounts Act 1995, s 61 — these are amounts transferred to the RSA from an individual’s account in the SHASA (¶12-620) (s 295-160, item 4: ¶7120) • a deductible personal contribution made by the RSA holder — these are contributions which are covered by a notice under s 290-170 (¶6-380, ¶7-120) • a roll-over superannuation benefit — these are amounts rolled over or transferred to the RSA to the extent of the element untaxed in the fund (eg a transfer from a public sector fund) and are not excess untaxed roll-over amounts for the RSA holder (¶8-600) (s 295-190, item 2: ¶7-120). An amount paid by a member spouse to an RSA for the benefit of a non-member spouse in satisfaction of the non-member spouse’s entitlement under the family law is not an assessable contribution of the RSA provider (s 295-175). The conditions and notice requirements for deductible personal contributions to RSAs are the same as for such contributions made to complying superannuation funds (¶6-380, ¶7-120). An RSA provider must include deductible personal contributions in assessable contributions in the year in which the contributions were made if the s 290-170 notice from the RSA holder is received before the RSA provider lodges its income tax return for that year. If the notice is received after lodgment of the tax return, the contributions are included as assessable contributions in the year the notice is received (s 295190(2)). An RSA holder may vary the amount covered by a s 290-170 notice (s 295-195). If the amount had been included in the provider’s taxable income in a previous year, the provider is entitled to a deduction for the amount (see “Clawback deduction” below). Other income credited to RSAs Amounts (other than contributions) credited to RSAs during a year of income by a financial institution RSA provider which are not exempt income under s 295-405 (see below) are included as assessable income

of the RSA provider. Examples of these are interest or other investment returns credited to RSAs which are not paying a current pension. Exempt income Interest and other amounts (other than contributions) which are credited by a financial institution RSA provider to an RSA that is paying a current pension are exempt income and are not included in the taxable income of the RSA provider (s 295-405, items 2 and 3). If the RSA pays a pension in respect of the whole of the year of income that the RSA is in existence, the total of such interest or other amounts credited is exempt income. If the RSA only pays a pension for a part of the year, the exempt income amount is calculated as below (s 295-410): Amount credited to RSA

×

Number of days in part of year that pension was paid  Number of days in year that RSA existed 

where: Number of days in part of year that pension was paid is the number of days in the period from the first day of the period to which the pension relates until the earlier of the end of the year of income or the day the RSA ceased to exist. Example Nicholas has an RSA with ABC Bank for the whole of a year of income (1 July 2018 to 30 June 2019). He becomes entitled and starts to receive a pension from the RSA from 1 February 2018. Assume that the total interest credited to his RSA for the 2018/19 year is $14,000 ($6,000 on 31 December 2018 and $8,000 on 30 June 2019). ABC Bank will have exempt income on Nicholas’ RSA calculated as follows:

$14,000  ×

150 (Number of days in period 1.2.18 to 30.6.18) =  $5,753  365 (Number of days in period 1.7.17 to 30.6.18) 

The remaining amount of the interest credited to the RSA of $8,247 ($14,000 − $5,753) is not exempt income and is included in ABC Bank’s assessable income.

Deductions Payments or withdrawals from RSAs An RSA provider is not entitled to a deduction for amounts withdrawn or benefits paid from RSAs (s 295495, item 3). Amounts credited to RSAs An RSA provider is not entitled to a deduction for amounts credited to RSAs (s 295-495, items 4, 4A). Cost of collecting contributions A financial institution RSA provider can treat contributions made to it (whether or not deductible to the contributor) as if they were assessable income for the purpose of claiming a deduction (s 295-95). This enables the provider to claim a deduction for the cost of collecting those contributions provided the criteria for deductible expenses are met. Deduction for insurance premiums Any amounts paid during the year as premiums by a financial institution RSA provider for insurance policies that are wholly for the provider’s liability to provide the benefits specified in ITAA97 s 295-460 (eg death or disability benefits: see ¶7-147) for its RSA holders are deductible for the year in which the premiums are paid (s 295-475). A rebate or refund of the premium which has been allowed as a deduction under s 295-475 is assessable income of the RSA provider (s 295-320, item 5). Clawback deduction The assessable income of an RSA provider may be reduced by a clawback amount in respect of

assessable contributions of an earlier year of income. This may arise where an RSA holder’s deductible personal contributions have been included in assessable contributions in a year of income and, after the lodgment of the RSA provider’s income tax return, the RSA provider receives from the RSA holder a variation notice which reduces the amount of the contributions to be included in the RSA provider’s assessable income (see “Assessable contributions” above). In such a case, the clawback amount (ie the amount covered in the notice) is an allowable deduction in the year that the notice is received. If an RSA provider is unable to appropriately utilise the deduction (eg that year’s taxable income is less than the deduction or the provider would lose the benefit of imputation credits), the RSA provider has the option to amend the assessment for the year in which the contributions were included in its assessable income (s 295-195(2), (3)). [FTR ¶791-794, ¶791-795; SLP ¶61-000, ¶61-010]

¶10-440 RSA business of life offices ITAA97 Div 320 provides the rules for working out the taxable income of life insurance companies. In addition to the general assessable income and deduction provisions in ITAA97, those rules: • include certain amounts in assessable income • exempt certain amounts of income • provide specific deductions for life insurance business and superannuation business. A life insurance company’s basic income tax liability depends on how much of the company’s taxable income relates to: • the complying superannuation class which is taxed at a rate of 15% • the ordinary class, which is taxed at the company tax rate. The Div 320 rules enable the life company to calculate its complying superannuation class (in pre 2015/16 years, called the complying superannuation/FHSA class) of taxable income arising from: • assets relating to its complying superannuation business that are held in a complying superannuation asset pool (in pre-2015/16 years, known as a complying superannuation/FHSA asset pool) • assets relating to immediate annuity and other exempt business (segregated exempt assets), and • where the company provides RSAs, its RSA business. A life company’s assessable income, exempt income and deductions from RSA business, and specific aspects of contributions to, and payments and withdrawals from, RSAs are discussed at ¶10-460. A life insurance company that is an RSA provider is also liable to pay tax on its no-TFN contributions income under ITAA97 Subdiv 295-I and may be entitled to a tax offset under ITAA97 Subdiv 295-J (ITAA97 s 320-150). The inclusion of no-TFN contributions income in taxable income and the tax offset is discussed at ¶6-685 and ¶7-200. Taxable income of life insurance company To calculate its basic income tax liability, ITAA97 Subdiv 320-D allows the company to have taxable incomes or tax losses for each of the classes (ITAA97 s 320-130; 320-131). Under Subdiv 320-D: • the taxable income of the complying superannuation class (or, in pre 2015/16 years, known as the complying superannuation/FHSA class) and ordinary class is worked out separately • tax losses of one class can only be applied to reduce future income of the same class.

Subdivision 320-D allocates a life insurance company’s assessable income and deductions to the complying superannuation class (or complying superannuation/FHSA class in pre-2015/16 years) and the ordinary class. The taxable income and tax losses of each class are then worked out under the ordinary provisions of the income tax law. This means that a life insurance company can have: • taxable incomes of both classes for the same income year • tax losses of both classes for the same income year, or • a taxable income of one class and a tax loss of the other class for the same income year (ITAA97 s 320-135). A life insurance company’s basic income tax liability (before tax offsets) is worked out separately for each class. The company’s tax offsets are then deducted from the sum of these amounts to arrive at the company’s income tax on its taxable income for the income year (ITAA97 s 320-134). Complying superannuation class taxable income and tax loss To work out the taxable income or tax loss of the complying superannuation class, ITAA97 s 320-137 and 320-141 specify the assessable income, net exempt income, deductions and tax losses of the company that relate to the complying superannuation class, as summarised below. Assessable income The assessable income of a life insurance company that is allocated under s 320-137(2) to the complying superannuation class (complying superannuation assessable income) comprises the following: • assessable income derived from the investment of complying superannuation assets (including gains on the disposal of complying superannuation assets) • life insurance premiums transferred to the complying superannuation asset pool • the amount that is included in assessable income because of ITAA97 s 320-200 as a result of an asset (other than money) being transferred from a complying superannuation asset pool where the transfer is made: – to reduce excess complying superannuation assets – in exchange for money, or – in respect of fees or charges • the transfer value of assets transferred to the complying superannuation asset pool to make up a shortfall in complying superannuation assets • assessable contributions transferred to the company from complying superannuation funds or ADFs (¶7-120) in respect of complying superannuation policies • certain rolled-over superannuation benefits (¶7-120) • amounts received relating to dividends paid by listed investment companies to trusts or partnerships in respect of complying superannuation assets that are included in the company’s assessable income under ITAA97 s 115-280(4) • the excess of relevant amounts credited to RSAs over relevant amounts debited from those RSAs (with certain amounts disregarded, as provided in ITAA97 s 320-137(3): ¶10-460). All other items of assessable income are attributed to the ordinary class of taxable income. Deductions The deductions (other than tax losses) of a life insurance company that are allocated under s 320-137(4) to the complying superannuation class (complying superannuation deductions) are:

• the component of life insurance premiums transferred to the complying superannuation asset pool that the company can deduct under ITAA97 s 320-55 (ie premium amounts for policies transferred to complying superannuation assets, excluding amounts attributable to death and disability cover) • amounts the company can deduct (other than tax losses) that relate to the investment of complying superannuation assets. These amounts include expenses incurred directly in respect of complying superannuation assets and amounts that the company can deduct under the capital allowances regime in respect of complying superannuation assets • the amount that is allowed as a deduction, because of s 320-200, as a result of an asset (other than money) being transferred from a complying superannuation asset pool where the transfer is made: – to reduce excess complying superannuation assets – in exchange for money, or – in respect of fees or charges • the transfer value of assets transferred from the complying superannuation asset pool to reduce excess complying superannuation assets • amounts that the company can deduct under s 115-280(1) that is, for one-third of the dividends received from shares in listed investment companies in respect of complying superannuation assets • amounts that the company can deduct under ITAA97 s 115-215(6) in respect of net capital gains of trust estates that are attributable to complying superannuation assets. This deduction ensures that a beneficiary is not taxed twice on a trust amount that is attributable to a trust estate’s net capital gain. All other deductions of the life insurance company are attributed to the ordinary class of taxable income. Working out taxable income of complying superannuation class The taxable income of the complying superannuation class is worked out under ITAA97 s 4-15 (the general method statement). A life insurance company will have a taxable income of the complying superannuation class for an income year if the company’s complying superannuation assessable income for that income year (see above) exceeds the sum of: • the complying superannuation deductions for that income year (see above) • tax losses of the complying superannuation class that the company can deduct in that income year (s 320-137(1)). Tax loss A tax loss of the complying superannuation class for an income year is worked out under ITAA97 s 36-10 (the general method statement for calculating a tax loss for an income year). That is, a life insurance company will have a tax loss of the complying superannuation class for an income year (that can be taken into account when working out its taxable income) if the company’s complying superannuation deductions for that income year (see above) exceed the sum of: • the complying superannuation assessable income for that income year (see above) • the net exempt income of the company for that income year that is attributable to exempt income derived from the company’s complying superannuation assets and in relation to the period when those assets were complying superannuation assets (ITAA97 s 320-141(1)). A tax loss of the complying superannuation class is deducted on the same basis as other tax losses, as provided by ITAA97 s 36-17. However, a tax loss of the complying superannuation class for an income year can only be deducted in a later income year from: • net exempt income that is attributable to the complying superannuation assets for that later income

year • that part of the complying superannuation assessable income that exceeds the complying superannuation/FHSA deductions for that later income year (s 320-141(2)).

¶10-460 RSA business — complying superannuation class A life insurance company’s taxable income of the “complying superannuation class” (¶10-440) is taxable income that is worked out taking into account: • the assessable income of the company that is covered by ITAA97 s 320-137(2) • the deductions of the company that are covered by ITAA97 s 320-137(4) • the tax losses of the company that are of the complying superannuation class as specified in ITAA97 s 320-141. Note that with the cessation of the FHSA scheme from 1 July 2015, the terms complying superannuation class, assets or asset pool, income or deduction, or policies, as used in the commentary in this paragraph, have replaced the former terms complying superannuation/FHSA class, complying superannuation/FHSA assets or asset pool, complying superannuation/FHSA assessable income or deduction, complying superannuation/FHSA policies. The assessable income of a life insurance company for its RSA business, subject to amounts that are disregarded (see below), is so much of its assessable income for the income year that is: • the total amount credited during that year to the RSAs provided by the company, less • the total amount debited during that year from the RSAs (s 320-137(2)(f)). Amounts disregarded for RSAs In working out the amount under s 320-137(2)(f), the following amounts are disregarded: • contributions credited to the RSAs that are not assessable contributions (¶10-420) • amounts debited from the RSAs that are benefits paid to, or in respect of, the RSA holders • income tax debited from the RSAs • if an annuity was paid from an RSA in respect of the whole of the income year, or the whole of the part of the income year in which the RSA existed, the total amount credited to the RSA during the income year • if an annuity was paid from an RSA in respect of a part (but not the whole) of the income year in which the RSA existed, so much of the total amount credited to the RSA during the income year as is equal to the amount worked out using the formula discussed below under “Exempt income” (s 320-137(3)). Exempt income Any interest or other amounts credited by a life office RSA provider to an RSA that is paying an immediate annuity are exempt income. If the RSA paid an annuity in respect of the whole of the year of income that the RSA was in existence, the total of such interest or other amounts credited is exempt income. If the RSA only paid an annuity for a part of the year, the exempt income amount is calculated using the formula: Amount credited to RSA   × where:

Number of days in part of year that annuity was paid  Number of days in year that RSA existed 

Number of days in part of year that annuity was paid is the number of days in the period from the first day of the period to which the annuity relates until the earlier of the end of the year of income or the day the RSA ceased to exist. The example at ¶10-420 showing the calculation of the exempt amount in respect of a pension is equally applicable to an annuity. Assessable contributions and non-exempt investment income The assessable income of a life office RSA provider includes the following: • assessable contributions made to RSAs provided by it • non-exempt investment income credited to RSAs provided by it. Assessable contributions Assessable contributions made to RSAs provided by a life office RSA provider are included in its assessable income (ITAA97 s 320-15(1)(l)). Also included are assessable contributions transferred to the life insurance company as specified in an agreement under ITAA97 s 295-260, eg transfers from a complying superannuation fund or ADF as discussed in ¶7-120 (s 320-15(1)(i)). In this case, the amount included in assessable income is included for the income year of the life insurance company that includes the last day of the transferor’s income year to which the agreement relates (ITAA97 s 320-15). The meaning of “assessable contributions” is discussed at ¶10-420. Other income credited to RSAs Any other amounts (not being contributions) that are not exempt income (see above) and are credited to RSAs during the year of income by a life office RSA provider are included as assessable income of the RSA provider. These amounts usually comprise interest, bonuses or other investment returns credited to RSAs which are not paying an immediate annuity. Deductions Payments or withdrawals from RSAs A life office RSA provider is not entitled to a deduction for amounts withdrawn or benefits paid from RSAs or amounts credited to RSAs (ITAA97 s 320-115). Cost of collecting contributions A life office can treat RSA contributions made to it (whether or not deductible to the contributor) as assessable income for the purpose of claiming a deduction. This means that the RSA provider may claim a deduction for expenses incurred in collecting RSA contributions, whether or not they are assessable contributions, provided the normal criteria for deductible expenses are met (ITAA97 s 295-95(1)). [FITR ¶270-130; SLP ¶61-050–¶61-110]

Contributions to and Payments from RSAs ¶10-500 Tax treatment of contributions to RSAs Contributions made to RSA are generally subject to the same treatment as contributions made to complying superannuation funds. Briefly, subject to the relevant conditions in ITAA97 being met, taxpayers who make contributions to RSAs are eligible for tax concessions. In addition, the contributions may be assessable income in the hands of the RSA providers, and/or excess contributions may be subject to additional tax or charge in the hands of the taxpayers. The taxation aspects of contributions are discussed in detail in Chapter 6 (as cross-referenced below). The following is a big picture summary. Employer contributions Employer superannuation contributions made to an RSA for the benefit of eligible employees are generally deductible with no limit provided the requirements in ITAA97 Subdiv 290-B are met (¶6-100).

Employer contributions are concessional contributions (see “Cap on concessional and non-concessional contributions” below). Personal contributions Individual taxpayers who make personal contributions to an RSA are entitled to a deduction for the contributions provided the conditions in ITAA97 Subdiv 290-C are satisfied (¶6-300). A taxpayer who is not entitled to a deduction for personal superannuation contributions may qualify for government co-contribution and a low income superannuation tax offset for the contributions provided the eligibility conditions are satisfied (¶6-700, ¶6-770). Contributions for spouse A taxpayer who makes superannuation contributions to an RSA for his/her low income or non-working spouse (other than in the capacity of an employer) is entitled to a tax offset for the contributions if the conditions in ITAA97 Subdiv 290-D are met (¶6-800). Total superannuation balance A “total superannuation balance” regime applies for valuing an individual’s total superannuation interests at a particular time and for limiting the amount of superannuation contributions that can be made for the individual (¶6-490). Cap on concessional and non-concessional contributions An annual cap is imposed on a person’s non-concessional contributions (these are generally personal contributions and other payments to an RSA that are not subject to contributions tax in the hands of the RSA provider: see ¶6-550). In addition, a separate annual cap is imposed on a person’s concessional contributions (these are generally deductible contributions that are included as assessable contributions in the hands of the RSA provider: see ¶6-510). These caps limit the amount of the contributions to RSAs for individual taxpayers that are subject to concessional treatment in the hands of the RSA provider (and in other superannuation funds). Excess contributions tax (or charge) is payable by the individual taxpayer if the relevant caps are exceeded in a year (¶6-500 to ¶6-570). An individual who is a high income earner may also be liable to pay Division 293 tax on certain concessionally taxed contributions (¶6-400). Taxation of contributions in RSA provider’s hands Contributions made to RSAs are included in the assessable income of the RSA provider in the year the contributions are received. Generally, an RSA provider’s assessable contributions comprise: (a) contributions made by the employer of the RSA holder; (b) certain rolled-over superannuation benefits; (c) deductible contributions made by an individual RSA holder; (d) contributions made under SGAA s 65; and (e) certain transfers from a person’s account under the Small Superannuation Accounts Act 1995, s 61 (¶10-420, ¶10-440). Contributions which are not assessable contributions include personal contributions made by the RSA holder for which a tax deduction is not available or not claimed, government co-contributions and contributions made for a spouse. An RSA provider is liable to pay additional tax on no-TFN contributions income received by it (if any), but a tax offset is available if a TFN is later provided to the RSA provider (see ¶6-685). [SLP ¶61-200]

¶10-525 Tax treatment of payments from RSAs The regulatory rules for the payment of benefits from an RSA are the preservation and payment provisions in the RSAR. An RSA holder’s ability to access benefits in an RSA is based on whether the benefits are classified under those rules as preserved benefits, restricted non-preserved benefits or

unrestricted non-preserved benefits and, where applicable, whether the RSA holder has met a condition of release and cashing restriction (if any). Additional rules prescribe how and when voluntary cashing may, and compulsory cashing must, take place, as well as other restrictions that may be applicable in a particular case (¶10-130). Subject to these rules, a benefit payment from RSAs is subject to similar tax treatment as for superannuation benefit payments from a taxed fund (see ¶8-200). These benefit payments may be in the form of lump sum payments to the RSA holder (or, if the RSA holder has died, to his/her legal personal representative or dependants), pensions to the RSA holder, or lump sum payments to an annuity provider to purchase one or more annuities for the benefit of the RSA holder. There are also restrictions on an RSA provider’s ability to make payment of RSA death benefits as pensions to beneficiaries as well as rules which require death benefit pensions that are paid to entitled beneficiaries to be commuted to a lump sum in certain circumstances (see “Additional conditions — cashing benefits as income streams after the RSA holder’s death” in ¶10-130). An RSA holder’s benefits may also be cashed in favour of the Commissioner in satisfaction of the holder’s tax liability under an ATO release authority (see “Persons who may cash benefits” in ¶10-130). Pensions paid from an RSA holder’s account must comply with the minimum standards in the RSAR (RSA Act s 16; reg 1.07 to 1.08A). The minimum pension standards in the RSAR (including the minimum pension payment requirements in each year) are similar to those in the SIS Regulations for accountbased superannuation income streams and other innovative income stream products which are paid from regulated superannuation funds and annuity providers (see ¶3-390) (RSAR Sch 1 cl 3B; Sch 1A cl 3B; Sch 4 cl 11; Sch 5 cl 3B). RSA providers must keep adequate records for each RSA holder, so as to be able to determine the preservation status of the amounts in the account and, for PAYG purposes, the rate of tax applicable to amounts withdrawn, if applicable. A transfer balance cap regime applies to limit the amount that an individual may have in an income stream that is in the retirement phase (¶6-420 and following). The taxation of superannuation benefits paid from an RSA, as a lump sum or income stream, is discussed in Chapter 8. [SLP ¶61-250]

11 TAX ADMINISTRATION • PAYG • TFNs SELF-ASSESSMENT SYSTEM FOR SUPERANNUATION ENTITIES Overview of the assessment process for superannuation entities

¶11-000

TAX RETURNS FOR SUPERANNUATION ENTITIES Lodgment of tax returns by superannuation entities

¶11-050

When a superannuation entity must lodge tax returns

¶11-070

PAYMENT OF TAX BY SUPERANNUATION ENTITIES UNDER PAYG INSTALMENT SYSTEM Rates of tax for superannuation entities

¶11-170

Payment of tax under PAYG instalment system

¶11-190

Amount of the PAYG instalment for superannuation entities

¶11-195

SUPERANNUATION AND THE PAYG WITHHOLDING SYSTEM Superannuation-related withholding payments

¶11-300

Determining the amount to be withheld

¶11-310

Withholding tax from unused leave payments

¶11-320

Withholding tax from superannuation lump sums and employment termination payments

¶11-330

Withholding tax from death benefits

¶11-335

Withholding tax from life benefit superannuation income streams

¶11-340

Obligation to pay withheld amounts to the Commissioner

¶11-350

Obligation to provide information to the Commissioner

¶11-360

Obligation to provide payment summaries

¶11-365

Single Touch Payroll reporting

¶11-368

PENALTIES, GIC AND SIC Penalties for failing to meet tax-related obligations

¶11-370

General interest charge

¶11-380

Shortfall interest charge

¶11-390

OBJECTIONS Objections against assessments

¶11-500

AUSTRALIAN BUSINESS NUMBERS Superannuation funds and ABNs

¶11-600

TAX FILE NUMBERS The TFN system

¶11-700

Use of TFNs for taxation purposes

¶11-720

TFN rules affecting superannuation

¶11-750

Self-assessment System for Superannuation Entities ¶11-000 Overview of the assessment process for superannuation entities Superannuation funds, ADFs, PSTs and RSA providers are, like other taxpayers, subject to selfassessment. Assessments Self-assessment means that taxpayers are responsible for determining their own taxable income and tax payable for the year, and they are generally assessed before their returns are examined in detail by the ATO. Thus, the Commissioner is specifically authorised to make an assessment on the basis of unverified information contained in a return. Under the “full” self-assessment system to which superannuation entities are subject, the Commissioner does not issue an assessment at all and the return is deemed to be a notice of assessment. The taxpayer’s liability to pay tax is determined by the information in the return. Returns/records Although taxpayers are required to provide only limited information in their return forms, they must retain records relating to the calculation of their taxable income and verification of deduction claims (¶11-050). Self-assessed returns are generally checked only when the ATO performs a tax audit. The Commissioner imposes penalties and interest to make up for tax shortfalls which are detected during a tax audit or at other times. A taxpayer may, as an alternative, be prosecuted in the courts. Although an election or notification may have to be retained by a taxpayer, very few have to be lodged with a return. A taxpayer who fails to lodge a return by the due date may be liable for a late lodgment penalty (¶11-370). Amendment of assessments The Commissioner has extensive powers to amend assessments. Where there has been fraud or evasion, the Commissioner may amend an assessment at any time, but otherwise there is generally a two-year limit on amending assessments (four years in complex cases). Where an assessment is amended to increase a taxpayer’s tax liability, the taxpayer may be required to pay interest. Taxpayers can request an amendment to an assessment (eg to give effect to a favourable public ruling). Because the Commissioner can rely on statements made by taxpayers other than in returns, he can amend an assessment, if requested to do so, without first checking all the taxpayer’s claims. The Commissioner may, of course, later check those claims in the course of a tax audit. Objections A superannuation entity retains rights of objection, review and appeal (¶11-500) despite fully selfassessing its tax liability. An entity may, for example, object against its own calculation of tax payable where it wishes to challenge a view expressed in a tax ruling which it has adopted for prudence in selfassessing its tax liability. An entity’s costs in managing its tax affairs, including challenging a tax decision, are deductible (ITAA97 s 25-5). Rulings The public and private rulings system is an important element in the self-assessment system. Rulings which are concerned with how tax liability is calculated are legally binding on the Commissioner if favourable to taxpayers. If there are conflicting rulings, the Commissioner is bound to assess in accordance with the ruling that produces the least amount of tax payable. Even rulings which are not binding on the Commissioner are treated as administratively binding and will only be departed from where: (a) there is a legislative change

(b) the AAT or court overturns or modifies an interpretation of the law on which the ruling is predicated, or (c) the approach adopted in the ruling is no longer considered appropriate. Oral rulings are intended to clarify the simple tax affairs of individuals, and superannuation entities are not eligible to apply. Interpretative decisions, which indicate the Commissioner’s view on the interpretation of the law on particular issues, and ATO publications such as TaxPack, are neither legally nor administratively binding on the Commissioner. A taxpayer who follows such advice and makes an honest mistake is, however, protected from penalty. Class rulings are used by the Commissioner to give binding advice about the application of the tax law to a specific class of persons in relation to a particular arrangement. For example, a superannuation fund may seek advice about the tax consequences for its members in the event of a restructure or for its employees if payments are made when a whole division is closed down. Product rulings are issued to clarify the tax benefits associated with particular products. Such rulings apply to all persons within a specified class who enter into the specified arrangement during the term of the ruling. Law Companion Rulings (LCRs) describe how the Commissioner proposes to apply the law contained in a Bill when it comes into effect. Practical Compliance Guidelines (PCGs) provide broad law administration guidance, addressing the practical implications of tax laws and outlining the Commissioner’s administrative approach. Penalties and interest The penalty tax provisions (¶11-370, ¶11-380) are intended to set appropriate standards for taxpayers in a self-assessment system. Where an assessment is amended to increase tax liability, GIC (¶11-380) and SIC are payable irrespective of whether a penalty is imposed. Funds which lodge annual returns late are liable to pay a penalty irrespective of whether any tax is payable. A person who fails to pay the penalty by the due date is liable to GIC on the unpaid amount (¶11-370). Payment of tax Flat rates of tax (¶11-170) are payable by superannuation funds, ADFs and PSTs. Superannuation entities generally pay PAYG instalments based on their income for the previous quarter (¶11-195). PAYG instalments are recorded on a Business Activity Statement (BAS) or Instalment Activity Statement (IAS) and must be paid by the date set by the Commissioner. GIC may be attracted where a tax payment is not made by the due date. The BAS/IAS is also used for remittance of PAYG withholding amounts (¶11-300) and the claiming of GST input tax credits (¶7-810). Early payments and overpayments Where a taxpayer pays an amount of income tax more than 14 days before the due date, the Commissioner must pay interest. Interest is also payable by the Commissioner on certain overpayments of tax, including where tax is refunded in the ordinary assessment process. Tax agents Only a registered tax agent may provide a tax agent service (¶16-060). This includes: • preparation or lodgment of a return, notice, statement, application or other document about a taxpayer’s liabilities, obligations or entitlements under a taxation law • preparation or lodgment on behalf of a taxpayer of an objection against an assessment, determination, notice or decision under a taxation law

• application to the Commissioner or the AAT for a review of, or instituting an appeal against, a decision on an objection (¶11-500) • giving a taxpayer advice about a taxation law that the taxpayer can reasonably be expected to rely upon to satisfy their taxation obligations, or • dealing with the Commissioner on behalf of a taxpayer. Some protection from statement and late lodgment administrative penalties is available to taxpayers who use a registered tax agent (or BAS agent). For example, the administrative penalty does not apply where a document (such as a return, notice or statement) is not lodged on time in the approved form due to the agent’s carelessness, provided the taxpayer gave the agent all relevant taxation information in sufficient time to enable the agent to lodge the document on time and in the approved form (¶11-050). There is also no administrative penalty where a false or misleading statement is made by a taxpayer’s agent carelessly, provided the taxpayer gave the tax agent all relevant taxation information necessary to make the statement (¶11-370).

Tax Returns for Superannuation Entities ¶11-050 Lodgment of tax returns by superannuation entities Near the end of each financial year, the Commissioner makes a Legislative Instrument calling for the lodgment of annual income tax returns (ITAA36 s 161). For 2018/19, this is Legislative Instrument F2019L00675. This includes trustees of superannuation funds, ADFs or PSTs that were residents or, if not residents, that derived income that is taxable in Australia, other than dividend, interest or royalty income subject to PAYG withholding and fund payments from managed investment trusts subject to PAYG withholding. In relation to individuals, this includes those who: • had reportable employer superannuation contributions identified on their payment summary • made personal contributions to a complying superannuation fund or RSA and will be eligible to receive a superannuation co-contribution in relation to these contributions • have exceeded their concessional contributions cap for the corresponding financial year • received an Australian superannuation lump sum that included an untaxed element when aged 60 years or over, or • received an Australian superannuation lump sum that included a taxed element or an untaxed element when aged under 60 years. Regulated superannuation funds, ADFs and PSTs are also required to file an annual regulatory return under the FSCDA with APRA (¶9-740) and a member contributions statement under the TAA with the ATO (¶12-530). For an SMSF, the Self-managed superannuation fund annual return 2019 (NAT 712266.2019) combines the tax return, the return under SIS Act and the contributions statement under the TAA. This return is lodged with the ATO (¶5-510). The Commissioner may also require any person to furnish a return at any time, or a further or fuller return of income, or a special return. A fund which is lodging its first return and has not been allocated a TFN or ABN, or which has not already lodged an election to become a regulated fund (¶2-130), should complete an “Application for ABN registration for superannuation entities” form (NAT 2944-07.2010). The trustee of a superannuation fund, ADF or PST that is required to lodge an income tax return uses Fund income tax return 2019 (NAT 71287-6.2019) for 2018/19. Unless specified otherwise, superannuation entities must complete and attach to their tax return a copy of the schedules and documents below (some may not be required depending on whether the relevant

amounts covered by the schedules exceed a specified amount): • CGT schedule • losses schedule • non-individual PAYG payment summary schedule (including payment summary withholding, where an ABN is not quoted) • international dealings schedule • family trust election, revocation or variation • interposed entity election or revocation • any election required by Taxation Ruling IT 2624. Assessments of superannuation entities are deemed to be made on the day their tax return is lodged. A return is not treated as duly lodged until it is correctly completed and received by the ATO at the appropriate place. An administrative penalty applies where a taxpayer fails to lodge a return by the due date in the approved form (¶11-370). Retention of records and documents Records, statements and notices (whether or not required to be lodged with a return) must be retained by taxpayers (ITAA36 s 262A). These include: • a balance sheet • a detailed profit and loss statement • notices and elections • documents containing particulars of any estimate, determination or calculation made for the purpose of preparing the return, together with details of the basis and method used in arriving at the figures in the return • a statement describing and listing the accounting systems and records that are kept manually and electronically. Records and documents must be readily accessible and produced to the ATO if required. The retention period is generally five years. All returns contain a declaration verifying the information contained in the return and any accompanying documents. The declaration is to be made by the person making the return. The return must be signed by the person furnishing it although, if that person is absent from Australia or is unable to lodge a return as a result of physical or mental infirmity, the return may be signed and delivered by a duly authorised person (ITAA36 s 161). [FTR ¶79-300, ¶978-210; SLP ¶46-700, ¶46-710]

¶11-070 When a superannuation entity must lodge tax returns The final date for lodging income tax returns is specified in the Legislative Instrument made by the Commissioner calling for the lodgment (¶11-050). Under the ATO's tax agent lodgment program, there are special extension of time arrangements for returns lodged through tax agents. For the applicable lodgment dates and the various qualifications thereto, see the details of the Lodgment Program 2019/20. Newly registered SMSFs

Tax returns for new registrant (taxable and non-taxable) SMSFs are usually due for lodgment on 31 October for SMSFs that prepare their own annual return and 28 February when the return is prepared by a tax agent. An SMSF is not legally established until the fund has assets set aside for the benefit of members and the return cannot be lodged until the SMSF audit has been finalised. The ATO will allow a return not necessary (RNN) for SMSFs for the first year of lodgment (and subsequent years if required) if strict criteria are met. These criteria require the trustee(s) to confirm that the SMSF: • had no assets and did not receive contributions or roll-overs in the first financial year • has documentary evidence of the date it first held assets and commenced operating • will be lodging future returns. Documentary evidence of the date assets were first held must be included with the request for an RNN. The request for the RNN must include: • the SMSF’s name, TFN or ABN • confirmation that it meets all eligibility conditions • documentary evidence of the date assets were first placed into the fund. For trustees not using a tax agent, this request can be sent to the ATO at: Australian Taxation Office GPO Box 9990 IN YOUR CAPITAL CITY Tax agents should use the tax agent portal mail option (or use the Online Services for Tax Agents Practice mail option) and select “superannuation” as the topic, and choose from the following mail subjects: • SMSF cancellation of registration where a fund has not been legally established • SMSF new registrant — Return Not Necessary request. An RNN is generally only allowed for a newly registered SMSF in its first year of registration. RNNs for subsequent years will only be granted in limited circumstances and where the fund provides documentary evidence of the date assets were first held by the fund (eg the SMSF’s first bank statement). Where the fund has not received assets within a reasonable period from the date it registered, the ABN may be cancelled. Older funds that do not have assets set aside for the benefit of members should cancel their ABN and re-register the fund when assets are available to be transferred or contributed to the fund. When an SMSF that has previously advised that a return was not necessary is legally established and needs to lodge a return for the first time, the due date of that first return will be the new registrant due date (ie 31 October for self-preparers and 28 February for SMSFs using a tax agent). Lodgment dates — self-preparers For 30 June balancing self-preparers, the general lodgment dates for the 2018/19 income year are: Type of superannuation fund

Lodgment date

All superannuation funds with one or more prior year returns outstanding at 30 June 2019. New registrant SMSFs

31 October 2019

Large/medium superannuation funds (ie with annual income 15 January 2020 (note that payment is greater than $10m or investments of more than $50m, nondue by 1 December 2019) complying superannuation funds, and pooled superannuation

trusts) whose 2017/18 return was taxable. Other funds, including new non-SMSF registrants

28 February 2020

Note: The original lodgment date for new registrant SMSFs was 31 October 2018 and, for all other SMSFs, 28 February 2019. Lodgment dates — prepared by tax agents For 30 June balancing superannuation funds whose returns are prepared by a tax agent, the tax agent program sets out the lodgment dates for the 2018/19 income year as follows: Type of superannuation fund

Lodgment date

All superannuation funds with one or more prior year returns outstanding at 30 June 2019; all superannuation funds that have been prosecuted for non-lodgment of prior year returns and advised of a lodgment date of 31 October 2019; and all superannuation funds that may be required to lodge early.

31 October 2019 (note that payment is due by 1 December 2019)

Large/medium superannuation funds (ie with annual income 15 January 2020 (note that payment is greater than $10m or investments of more than $50m, nondue by 1 December 2019) complying superannuation funds, and pooled superannuation trusts) whose 2017/18 return was taxable. Large/medium superannuation funds whose 2017/18 return was non-taxable (including those whose 2017/18 return was not necessary); large/medium superannuation funds established between 1 July 2017 and 30 June 2018 and the 2017/18 return was not necessary; new registrant large/medium superannuation funds; and new registrant SMSFs.

28 February 2020

Superannuation funds with total income in 2017/18 of more than $2m, unless required earlier.

31 March 2020

Superannuation funds that may not have an obligation to lodge; and new registrant superannuation funds (other than large/medium superannuation funds and SMSFs); and all remaining superannuation funds.

15 May 2020

Superannuation funds which were non-taxable or received a refund in the latest year lodged, and are actually non-taxable or receiving a refund in the current year (unless due earlier) Note: This is not a lodgment end date but a concessional arrangement where penalties will be waived if lodgment is made by this date.

5 June 2020

Requesting an extension of time A superannuation fund may request a lodgment deferral where exceptional and unforeseen circumstances affect its ability to lodge by a due date. A lodgment deferral provides additional time to lodge without incurring a failure to lodge on time penalty but, generally, it does not extend the payment due date. If additional time for payment is required, the superannuation fund is required to support this in the deferral request. To avoid any penalty, a deferral request should be made before the due date for lodging the return and should state the reason why the return cannot be lodged on time. Similarly, a tax agent may request a lodgment deferral and/or payment deferral where exceptional and unforeseen circumstances affect the agent’s ability to lodge by a due date. PS LA 2011/15 contains more details on

lodgment obligations, due dates and deferrals. A decision granting, or refusing to grant, an additional period of time is not reviewable by the AAT in proceedings under TAA Pt IVC but may be reviewed under the Administrative Decisions (Judicial Review) Act 1977. [FTR ¶79-310, ¶962-945, ¶978-210, ¶978-310; SLP ¶46-705, ¶46-710]

Payment of Tax by Superannuation Entities under PAYG Instalment System ¶11-170 Rates of tax for superannuation entities The following table shows the rates of tax payable by superannuation funds, ADFs and PSTs in relation to their income for the 2018/19 and 2019/20 income years. Type of fund

Tax rate

Complying superannuation fund • assessed on income, including realised capital gains and assessable contributions

15%

• assessed on non-arm’s length income, private company dividends and certain trust distributions

45%

Non-complying superannuation fund — assessed on income, including realised capital gains and assessable contributions

45%

Complying ADFs • assessed on income, including realised capital gains and assessable contributions

15%

• assessed on non-arm’s length income, private company dividends and certain trust distributions

45%

Non-complying ADFs — assessed on income, including realised capital gains and assessable contributions

45%

PSTs • assessed on income, including realised capital gains and assessable contributions

15%

• assessed on non-arm’s length income, private company dividends and certain trust distributions

45%

For complying funds, additional tax of 32% is imposed on no-TFN contributions income received by a fund. For non-complying funds the rate is 2%. A tax offset is available if a TFN is provided within four years (¶7-200). For the tax rates applicable to RSA providers, see ¶18-030.

¶11-190 Payment of tax under PAYG instalment system The legislation for the PAYG instalment system is in TAA Sch 1 Pt 2-10 Div 45. Under PAYG instalments, tax is based on current ordinary income (and, for superannuation entities, statutory income such as

capital gains: TAA Sch 1 s 45-120(2)), aligning tax payments for a period with income earned in that period. Tax is paid only after income is earned or received. PAYG instalments are reported on, and remitted with, a Business Activity Statement (BAS) or, if the taxpayer is not registered for GST (¶7-810), an Instalment Activity Statement (IAS). Superannuation entities that register for GST pay PAYG instalments at the same time as they remit GST or claim their GST input tax credits. GST credits can be offset against PAYG instalments or other payments (such as remittances of amounts withheld from salary) that are made at the same time. All debts notified on a BAS or IAS and any associated payments and credit entitlements for the taxpayer are recorded in a running balance account. Credit amounts are generally applied against the taxpayer’s tax debts, although in some circumstances the Commissioner has a discretion to refund a credit amount rather than applying it against a tax debt (TAA s 8AAZA to 8AAZN). Liability for PAYG instalments A superannuation entity is only liable to pay PAYG instalments if the Commissioner has, by written notice, given the entity an instalment rate (TAA Sch 1 s 45-15). Generally, superannuation entities are only required to pay PAYG instalments where either: • the instalment rate is greater than 0% and notional tax is $500 or more, or • investment income in the most recent income tax return is $2m or more. Under the PAYG instalments system, most taxpayers can pay their instalments quarterly or annually. In addition, certain large entities are required to pay PAYG instalments monthly. The timing of PAYG instalments depends on whether the taxpayer is a monthly, quarterly or annual taxpayer. Quarterly payers A superannuation entity which has been given an instalment rate by the Commissioner is liable to pay quarterly PAYG instalments, unless the entity is eligible to pay an annual instalment and chooses to do so or is required to pay monthly (TAA Sch 1 s 45-50). The due date for payment of quarterly PAYG instalments depends on whether the taxpayer is a “deferred BAS payer”. A deferred BAS payer is an entity that: • is required to give the Commissioner a GST return for a quarterly tax period or is a GST instalment payer, or • is not required to be registered for GST but: (a) is liable to pay quarterly PAYG instalments (b) is a small withholder for PAYG withholding purposes, or (c) is liable to pay quarterly FBT instalments. If a taxpayer is not a deferred BAS payer on the 21st day of the month after the end of a quarter, the instalment payable for the quarter is due on or before the 21st day of the month after the end of the quarter (unless the Commissioner extends the date). If the taxpayer is a deferred BAS payer on the 21st day of the month after the end of the quarter, the instalment payable for the quarter is due on or before the 28th day of the month after the end of the quarter (except for the December quarter, when an additional one month is allowed) (TAA Sch 1 s 45-61). Annual payers Instalments can be paid annually if the taxpayer’s most recent notional tax notified by the Commissioner is less than $8,000, and the taxpayer is not required to be registered for GST, or, if the fund is voluntarily registered for GST, it remits GST annually (TAA Sch 1 s 45-140). For superannuation entities, notional tax is the tax that would have been payable on the entity’s assessable income, less all deductions other than tax losses and less any carry forward tax losses, in the entity’s most recently assessed income year. GST registration is compulsory if the taxpayer’s GST turnover is $75,000 or more ($150,000 in the case

of a non-profit body). All annual PAYG instalment payers must pay the annual PAYG instalment on or before the 21st day of the fourth month following the end of the income year (TAA Sch 1 s 45-70). For a superannuation entity whose income year ends on 30 June, this means that the annual PAYG instalment is due on or before 21 October after the end of the income year. Monthly payers Certain large entities are required to pay PAYG instalments monthly rather than quarterly or annually. Generally, a fund that meets the monthly payer requirement at a particular time is a “monthly payer” and liable for monthly PAYG instalments from the start of the first month of their next income year. An entity will generally be a monthly payer if its threshold amount is equal to or greater than $100m (this is reduced to $20m if the fund is required to report and pay GST monthly) (TAA Sch 1 s 45-138; Tax Laws Amendment (2013 Measures No 2) Act 2013, Sch 1, items 46, 47(3) and (4)). The threshold is measured by reference to an entity’s base assessment instalment income (BAII). Broadly, an entity’s BAII is its assessable income for a year (base year), as calculated for its base assessment, that is determined to be instalment income by the Commissioner (TAA Sch 1 s 45-320(2)). For superannuation funds, instalment income is, generally, ordinary income less exempt and nonassessable non-exempt income, and includes statutory income (see ¶11-195). The Commissioner will calculate the BAII when producing an entity’s instalment rate. A monthly payer must notify and pay their monthly PAYG instalment on or before the 21st day of the next instalment month unless they are a deferred BAS payer on that date. If the monthly payer is a deferred BAS payer, their PAYG instalment must be paid by the 28th day of the next instalment month (TAA Sch 1 s 45-67). Monthly PAYG instalments must be notified and paid electronically unless the Commissioner specifies otherwise (TAA Sch 1 s 45-20(2); 45-72). [FTR ¶976-502, ¶977-125; SLP ¶46-760]

¶11-195 Amount of the PAYG instalment for superannuation entities Quarterly PAYG instalments Options available to superannuation entities for working out a quarterly PAYG instalment amount are (TAA Sch 1 s 45-110; 45-112): (1) quarterly instalments based on GDP-adjusted notional tax — this is, basically, the amount notified to the fund by the Commissioner as being the amount of the instalment (2) quarterly instalments calculated as: applicable instalment rate × instalment income for the quarter. The applicable instalment rate means whichever of the following is applicable: • the latest instalment rate notified to the fund by the Commissioner before the end of the quarter • where the fund has chosen to use a different instalment rate for the current quarter — the rate chosen by the fund, or • if the fund has chosen in a previous quarter in the current income year to use a rate other than the one notified by the Commissioner — the rate previously chosen by the fund. In subsequent years, the fund must use the most recent rate given by the Commissioner or may choose another instalment rate (TAA Sch 1 s 45-205). The GDP-adjusted notional tax option is the default method for calculating quarterly PAYG instalments for all superannuation funds that have: • $2m or less in base assessment instalment income for the previous year, or • more than $2m in base assessment instalment income for the previous year and are eligible to pay

annual PAYG instalments but have chosen not to do so. Superannuation funds can elect to pay using the instalment rate option if they so choose. Annual PAYG instalments The amount of an annual PAYG instalment for a superannuation fund is whichever of the following the fund chooses (TAA Sch 1 s 45-115): • the amount worked out using the formula: instalment rate × fund’s instalment income for the year • the notional tax amount most recently notified to the fund by the Commissioner before the end of the income year • the amount the fund estimates will be the benchmark tax amount for the income year. Monthly PAYG instalments Where a superannuation fund is a monthly payer (see ¶11-190), it can work out its monthly PAYG instalment using the following formula (TAA Sch 1 s 45-114): applicable instalment rate × instalment income for that instalment month. The applicable instalment rate means whichever of the following is applicable: • the latest instalment rate notified to the fund by the Commissioner before the end of that month • where the fund has chosen to use a different instalment rate for that month — the rate chosen by the fund, or • if the fund has chosen in an earlier instalment month in the current income year to use a rate other than the one notified by the Commissioner — the rate previously chosen by the fund. In subsequent years, the fund must use the most recent rate given by the Commissioner or may choose another instalment rate (TAA Sch 1 s 45-205). Additional methods for calculating the monthly instalment may be determined by the Commissioner making a legislative instrument. Eligible monthly payers may choose to use an additional method or calculate their instalment income under the general provisions. It can change the method it uses for any month unless it is prohibited from doing so by the Commissioner in the relevant instrument. In determining an additional method, the Commissioner may restrict the eligibility of a certain method to a specified class of entity or circumstance and he may specify the period in which an entity is required to use the additional method. Legislative Instrument F2013L01933 prescribes such a method. Under this instrument, monthly payers can make a reasonable estimate of their instalment income for the first two months of an instalment quarter and then the instalment for the third month of the quarter is the instalment rate times the instalment income for the quarter less the instalment income used for the first two months (where this is negative, the third instalment is nil and the taxpayer can revise the instalment income in the second and, if necessary, the first instalment month). Instalment income is, generally, so much of an entity’s ordinary income derived in a period as will be assessable income of the income year that includes that period. Instalment income does not include any GST charged by the entity. Some examples of ordinary income are assessable contributions, gross rent, interest or dividends received, and royalties. For superannuation entities, instalment income includes capital gains (TAA Sch 1 s 45-120). Instalment income does not include exempt income. [FTR ¶977-145; SLP ¶46-760]

Superannuation and the PAYG Withholding System ¶11-300 Superannuation-related withholding payments

Under the PAYG withholding system, various obligations are imposed on a superannuation entity or an employer when they make payments to fund members or employees. Under TAA Sch 1 Div 12, tax must be withheld at prescribed rates from certain payments and transactions (withholding payments). Amounts must also be remitted to the ATO where a non-cash benefit is provided for a supply, with a right of recovery (or offset) for the amount remitted against the person to whom the non-cash benefit is provided (TAA Sch 1 Div 14). An entity required to pay an amount to the Commissioner under PAYG withholding must apply to be registered with the Commissioner (TAA Sch 1 s 16-140). The entity must apply in the approved form by the first day on which it is required to withhold an amount (or pay an amount in respect of a non-cash benefit), although the Commissioner may grant an extension of time to apply. [FTR ¶976-518, ¶976-860]

¶11-310 Determining the amount to be withheld An entity making a “withholding payment” must withhold and pay an amount to the Commissioner (TAA Sch 1 s 10-5). The most common withholding payments for employers and superannuation entities are: • salary or wages to an employee • a payment covered by a voluntary agreement • a payment under a labour hire arrangement • a superannuation income stream or an annuity • a superannuation lump sum • an employment termination payment • a payment for unused leave on an individual’s retirement or on termination of employment • a departing Australia superannuation payment • an excess untaxed roll-over amount, and • a payment for a supply where the supplier does not quote an ABN (TAA Sch 1 Div 12). Non-cash benefits may also be treated as withholding payments (TAA Sch 1 Div 14), as may payments made by personal services entities to a personal services provider (TAA Sch 1 Div 13). The amount required to be withheld from these payments is worked out under the withholding schedules released by the Commissioner or, if regulations prescribe how the amount is to be worked out, under those regulations (TAA Sch 1 s 15-10). The Commissioner may vary the amount to be withheld to meet the special circumstances of a case (TAA Sch 1 s 15-15). Special circumstances usually only arise where the taxpayer’s final liability for all income derived during the year does not justify the standard withholding rate. If an entity is required to withhold an amount from a cash payment, it must do so when making the payment (TAA Sch 1 s 16-5). The provider of a non-cash benefit must pay the required amount to the Commissioner before providing the benefit (TAA Sch 1 s 14-5). The AAT does not have jurisdiction to review the amount of PAYG withholding tax payable or to vary the amount required to be withheld (Flack 2005 ATC 2016). Penalties for failure to withhold An entity that fails to withhold the required amount is liable to a penalty of 10 penalty units (TAA Sch 1 s 16-25). The entity is also liable to pay a penalty equal to the amount that should have been withheld (TAA Sch 1 s 16-30).

[FTR ¶976-518, ¶976-795, ¶976-825]

¶11-320 Withholding tax from unused leave payments Where an employee’s employment is terminated, holiday pay, 5% of pay in respect of long service leave attributable to the period to 15 August 1978, and all pay in respect of long service leave and unused annual leave attributable to the period after that date are subject to tax (¶8-890, ¶8-900) and PAYG amounts must be withheld (TAA Sch 1 s 12-90). Leave amounts accruing after 15 August 1978 and before 18 August 1993 are included in full in assessable income and amounts withheld at normal marginal rates (worked out under the withholding schedules), but up to a maximum rate of 30%. For amounts accruing after 17 August 1993, normal progressive rates of tax apply unless the amounts are received as part of an approved early retirement scheme or by reason of invalidity or genuine redundancy, in which case the normal rates only apply up to a maximum rate of 30%. Where the taxpayer has not provided a TFN declaration, 47% of a payment should be withheld. Tax tables for withholding For the tax table for unused leave payments on termination of employment paid in 2018/19 and 2019/20, see Schedule 7 – Tax table for unused leave payments on termination of employment (NAT 3351). [FTR ¶976-585]

¶11-330 Withholding tax from superannuation lump sums and employment termination payments Tax must be withheld from a superannuation lump sum and from an employment termination payment (TAA Sch 1 s 12-85). There are two types of employment termination payment from which tax must be withheld: (i) a life benefit termination payment, discussed below; and (ii) a death benefit termination payment, discussed at ¶11-335. Both a superannuation lump sum and an employment termination payment are made up of two components: the tax free component and the taxable component. The tax free component of a superannuation lump sum is basically the undeducted contributions (including spouse contributions, government co-contributions and contributions for a child, trustee contributions, payments by a member spouse and contributions for a temporary resident) and the value of certain components crystallised at 30 June 2007 (eg the pre-July 83 component and the post-June 1994 invalidity component) (¶8-170). The tax free component of an employment termination payment is the invalidity segment and the pre-July 83 segment (¶8-850, ¶8-860). Tax does not have to be withheld from the tax free component unless the taxpayer fails to provide a TFN. Tax also does not have to be withheld from the tax-free amount of an early retirement scheme payment (¶8-870), a genuine redundancy payment (¶8-880), or a payment made to a recipient with a terminal medical condition of a lump sum superannuation member benefit. A payer is not required to withhold tax from an amount that is exempt income or non-assessable nonexempt income (TAA Sch 1 s 12-1). An amount that is released by a superannuation fund in connection with the payment of Division 293 tax (¶6-400) or the payment of an amount determined in an excess concessional contributions determination (¶6-640 ) is non-assessable non-exempt income. Tax tables for withholding For the tax table for superannuation lump sums paid in 2018/19 and 2019/20, see Schedule 12 – Tax table for superannuation lump sums (NAT 70981); for employment termination payments, see Schedule 11 – Tax table for employment termination payments (NAT 70980). Superannuation lump sums For a superannuation lump sum, the withholding rate depends on the recipient’s age, the amount of the element taxed in the fund and of the element untaxed in the fund, and whether the recipient has quoted a

TFN. The following table shows the PAYG withholding rates (including Medicare levy) for 2018/19 and 2019/20 for superannuation lump sums (other than death benefits) paid from an element taxed in the fund or an element untaxed in the fund. In all cases, the tax free component is non-assessable non-exempt income. Amounts less than $200 are also tax-free. Age

Element taxed in the fund

Element untaxed in the fund

60 and over

Tax-free

• 17% up to untaxed plan cap ($1.480m for 2018/19 and $1,515m for 2019/20) • 47% on amounts above the untaxed plan cap

Preservation age to 59

• 0% up to low rate cap ($205,000 for 2018/19 and $210,000 for 2019/20) • 17% on amounts above low rate cap

• 17% tax up to the low rate cap • 32% on amounts above low rate cap up to untaxed plan cap • 47% on amounts above untaxed plan cap

Below preservation age

22%

• 32% on amounts up to untaxed plan cap • 47% on amounts above untaxed plan cap

Lump sum payments to members with a terminal medical condition Members who have a terminal medical condition and who are under the age of 60 are allowed access to their superannuation member benefits tax-free (¶8-260; ITAA97 s 303-10). PAYG withholding is not required from payments made to recipients with a terminal medical condition of lump sum superannuation member benefits where the payment will not be subject to income tax in accordance with ITAA97. A member will be taken to have a terminal medical condition if it is certified by two registered medical practitioners that the member is suffering from an illness or injury that is likely to result in the member’s death within 24 months (F2015L00968). A payment summary (¶11-365) is also not required to be given in such cases (Legislative Instrument F2008L01999). Departing Australia superannuation payments Because a departing Australia superannuation payment (¶8-400) is non-assessable non-exempt income, no PAYG tax is withheld. The recipient is, however, liable to final withholding tax on the payment (ITAA97 s 301-175). A departing Australia superannuation payment includes, with some exceptions, a superannuation lump sum paid by the Commissioner under the SUMLMA s 20H (ITAA97 s 301-170(2), (3), (4)). The withholding tax imposed by the Superannuation (Departing Australia Superannuation Payments Tax) Act 2007 is nil on the tax free component, 35% on the element taxed in the fund and 45% on the element untaxed in the fund. A departing Australia superannuation payment that is a roll-over superannuation benefit paid to a former temporary resident is taxed at 45% if the amount is not an excess untaxed rollover amount; if the amount is an excess untaxed roll-over amount, the rate is nil. Working holiday makers are subject to a tax rate of 65% on the element untaxed in the fund, the element taxed in the fund, and any roll-over benefit to the extent that it is not an excess untaxed roll-over amount. Employment termination payments An employment termination payment (¶8-810) is made up of two components — the tax free component and the taxable component. No tax is withheld from the tax free component as it is non-assessable nonexempt income (ITAA97 s 82-10(1)). The taxable component of an employment termination payment (other than a death benefit: ¶11-335) is taxed at marginal rates but the recipient may be entitled to a tax offset that puts a ceiling on the tax rate that may apply (¶8-820). The tax rate depends on the age of the recipient and the amount received, with the tax offset ensuring that, as a general rule for 2018/19 and 2019/20: • tax does not exceed 17% on the amount up to the $180,000 whole of income cap amount if the

taxpayer has reached preservation age (¶3-280) on the last day of the income year, and • tax does not exceed 32% up to the $180,000 whole of income cap amount if the taxpayer is below preservation age. Regardless of age, tax is payable at 47% on the amount in excess of $180,000. Failure to quote TFN Where the recipient of a superannuation lump sum or employment termination payment fails to quote a TFN to the payer, tax must be withheld at 47%. No withholding is required where no TFN is quoted if the payment is non-assessable non-exempt income (Legislative Instrument F2017L01280). Roll-overs Generally, no amount is required to be withheld from a roll-over superannuation benefit (¶8-600). As an exception, if the benefit consists of an amount paid from an element untaxed in the fund, this amount is tax-free up to the person’s untaxed plan cap amount ($1.480m for 2018/19 and $1.515m for 2019/20) and the excess is taxed. Tax at the rate of 47% is imposed by the Superannuation (Excess Untaxed Roll-over Amounts Tax) Act 2007 on the person on whose behalf the roll-over is made. The originating superannuation fund must withhold tax from an excess untaxed roll-over amount (TAA Sch 1 s 12-312). The general rule is that employment termination payments cannot be rolled into a superannuation fund but must instead be taken as cash. [FITR ¶130-225; FTR ¶976-580; SLP ¶1-790]

¶11-335 Withholding tax from death benefits When a death benefit is paid from a superannuation entity or from an employer, withholding obligations vary according to whether payment is made to a dependant of the deceased, to a non-dependant or to the trustee of the deceased’s estate. A dependant for this purpose is a surviving spouse or former spouse (including a person who, although not legally married to the person, lived with that person on a genuine domestic basis in a relationship as a couple, and a person (whether of the same sex or of a different sex) with whom the deceased person was in a relationship that is registered under a law of a state or territory) and a child of the deceased under the age of 18 (including an adopted child, step-child, ex-nuptial child and a child of the person within the meaning of the Family Law Act 1975 with the effect that a person in a same-sex relationship and a child of a person in a same-sex relationship are, for superannuation purposes, treated the same as other spouses and children). A dependant is also any person who is financially dependent on the deceased member at the time of the member’s death or at the time of the payment of the death benefit. It may also include a person in an interdependency relationship with the deceased (¶8-310). The taxation of death benefits from a superannuation entity is discussed at ¶8-300 and following. The taxation of death benefits from an employer is discussed at ¶8-840. Superannuation death benefit The PAYG to be withheld from a superannuation death benefit depends on whether it is paid as a lump sum or as an income stream. A lump sum death benefit to a dependant is tax-free. The tax free component of a superannuation lump sum paid to a non-dependant is not subject to PAYG withholding. The taxable component from the element taxed is subject to PAYG withholding at the rate of 17% and the rate on the element untaxed in the fund is 32%. The element taxed of a superannuation income stream to a dependant is tax-free if either the deceased or the dependant was aged at least 60 at the time of the death. Where both the dependant and the deceased were under age 60 at the time of the death: (i) the tax free component of the income stream is tax-free; and (ii) the taxable component from the taxed element is assessable income, but the dependant is entitled to a 15% tax offset. Where the taxable component includes an element untaxed in the fund,

that element is included in the dependant’s assessable income and taxed at marginal rates. If either the dependant or the deceased was aged at least 60, the dependant is entitled to an offset of 10% of the element untaxed in the fund. Where the income stream is taxable, PAYG withholding is calculated by applying the appropriate PAYG withholding tax table and subtracting the amount of any applicable tax offset. A non-dependant cannot receive a superannuation income stream. Employment death benefit If a dependant receives a death benefit from an employer, PAYG withholding does not apply to the tax free component or the taxable component up to the ETP cap amount, which is $205,000 for 2018/19 and $210,00 for 2019/20. PAYG withholding applies to the amount in excess of the ETP cap at 47%. If a death benefit is paid to a non-dependant, PAYG withholding does not apply to the tax free component. On the amount of the taxable component up to the ETP cap, PAYG withholding applies at 32%, and applies to the amount in excess of the ETP cap at 47% (¶8-840). [SLP ¶1-740, ¶38-260, ¶38-270, ¶38-270, ¶39-070]

¶11-340 Withholding tax from life benefit superannuation income streams For a life benefit superannuation income stream, the withholding rate depends on the recipient’s age, the amount of the element taxed in the fund and of the element untaxed in the fund, and whether the recipient has quoted a TFN. A superannuation income stream received by a person aged 60 or over is tax-free if from an element taxed in the fund. In other cases, tax must be withheld at marginal tax rates, but an offset may be available to reduce the tax payable (¶8-210, ¶8-240). A 15% offset is available where the payment comes from an element taxed in the fund and the recipient is aged from preservation age to 59 or where the payment is a disability superannuation income stream. A 10% offset is available where the payment comes from an element untaxed in the fund and the recipient is aged 60 or over and the total of such payments is less than $100,000. Tax tables for withholding For the tax tables that apply to superannuation income streams paid in 2018/19 or 2019/20, see Schedule 13 – Tax table for superannuation income streams (NAT 70982). No withholding is required where no TFN is quoted if the payment is non-assessable non-exempt income (Legislative Instrument F2017L01280). [FTR ¶976-575; SLP ¶1-730]

¶11-350 Obligation to pay withheld amounts to the Commissioner An entity that is required to withhold an amount from a payment (¶11-310) must pay the withheld amounts to the Commissioner (TAA Sch 1 s 16-70). The timing of the payment depends on whether the entity is a large, medium or small withholder. Generally, an entity’s status is determined as follows: • a large withholder is an entity that withheld more than $1m in the previous financial year (TAA Sch 1 s 16-95) • a medium withholder is an entity that withheld more than $25,000 but less than $1m in the previous financial year (TAA Sch 1 s 16-100) • a small withholder is an entity that withheld at least one amount during the month and that is neither a large nor a medium withholder (TAA Sch 1 s 16-105). An entity can apply to the Commissioner for a determination varying the entity’s status upwards or downwards (TAA Sch 1 s 16-110; 16-115). When and how amounts must be paid

Amounts withheld should be paid to the Commissioner according to the following table (TAA Sch 1 s 1675; 16-85). Withholder status Large

Due date of payments Method of payment If withholder withholds on:

Withholder must pay by:

Saturday or Sunday

The second Monday after that day

Monday or Tuesday

The first Monday after that day

Wednesday

The second Thursday after that day

Thursday or Friday

The first Thursday after that day

Electronic

Medium

Payment due by the 21st or 28th day after the end of the month in which the amount was withheld (see below)

Electronic or other means approved by the Commissioner

Small

Payment due by the 21st day (for non-deferred BAS payers), or the 28th day (for deferred BAS payers), after the end of the quarter in which the amount was withheld

Electronic or other means approved by the Commissioner

The extended dates (ie to the 28th day) apply to any medium entity that has a Business Activity Statement (BAS) or Instalment Activity Statement quarterly obligation, apart from an entity that has chosen or is required to pay GST monthly. These taxpayers are referred to as “deferred BAS payers”. Medium withholders who do not qualify for the deferral must pay by the 21st day of the next month. Medium withholders who do qualify may pay on the 28th day of the month (or 28 February in relation to amounts withheld in December) only if they are a deferred BAS payer for that month (ie only if they have another quarterly BAS obligation due on that day). This means that, during a year, a medium withholder’s due dates may vary between the 21st and the 28th day of a particular month. Where small withholders who are deferred BAS payers withhold an amount in the quarter ending 31 December, they have until the following 28 February to pay the amount withheld. Where a payment is due on a Saturday, a Sunday or a public holiday, payment can be made on the next business day. No deduction if amount not withheld An income tax deduction is denied for certain payments, such as salary and wage, from 1 July 2019 if the paying entity has not complied with the associated withholding obligations (TAA Sch 1 s 26-105).

¶11-360 Obligation to provide information to the Commissioner An entity that withholds an amount from a withholding payment and is required to pay that amount to the Commissioner must notify the Commissioner of the amount (TAA Sch 1 s 16-150). The notification must be in the approved form and lodged with the Commissioner on or before the day on which the amount is due to be paid. An entity that makes a withholding payment must give an annual report to the Commissioner (TAA Sch 1 s 16-153). The due date for the annual report is 14 August if the report relates to work or services payments, retirement payments, annuities or pensions, benefit or compensation payments, non-cash benefits, reportable fringe benefits amounts or reportable employer superannuation contributions (¶6110). The report must either: (a) be in the approved form, or

(b) consist of: (i) copies of all payment summaries that the entity gave in respect of the financial year for payments, non-cash benefits, alienated personal services payments, reportable fringe benefits amounts and reportable employer superannuation contributions (¶6-110), and (ii) an accompanying statement in the approved form. A payer that commences a relationship with a person under which a person (whether or not the same person) is entitled to receive a payment for work or services, a retirement payment, an annuity, or a pension, must notify the Commissioner about the payment recipient (ITAA36 s 202CF). This notice must be given within 14 days of entering into the relationship, unless the payment recipient has made a TFN declaration by that time. No deduction if Commissioner not notified An income tax deduction is denied for certain payments, such as salary and wage, from 1 July 2019 if the paying entity has not notified the Commissioner as required under the PAYG withholding rules (TAA Sch 1 s 26-105).

¶11-365 Obligation to provide payment summaries Under PAYG withholding, a payer must give a payment summary to the payee if, during the year, the payer made a withholding payment (eg a superannuation income stream, but not including a superannuation lump sum or an employment termination payment) to the payee. When a superannuation entity pays a superannuation lump sum or an employer pays an employment termination payment (ETP), it must, within 14 days, give a payment summary to the recipient covering the payment (and no other payments) and give a copy of the payment summary to the Commissioner (TAA Sch 1 s 16-165). There is a similar requirement when an entity pays a departing Australia superannuation payment (DASP) (TAA Sch 1 s 16-166). Where the payments are covered by single touch payroll reporting (¶11-368), there is no longer an obligation to issue a payment summary or part-year payment summary. Reporting deferral for ETPs and DASPs Legislative Instrument F2012L00584 defers the due date for providing the ATO with copies of payment summaries in respect of ETPs or DASPs until 14 August following the end of the financial year in which the payments are made. Exemptions A payment summary does not have to be given if a superannuation lump sum payment is made to a member with a terminal medical condition who is under the age of 60 (¶11-330). Requirements of a payment summary A “payment summary” is a written statement that: • names the payer and the recipient • states the recipient’s TFN or ABN (if these have been given to the payer) • states the withholding payments that it covers and the amounts withheld from those payments • specifies the financial year in which the withholding payments were made • specifies any reportable fringe benefits amount that it covers • specifies the reportable employer superannuation contributions that it covers • is in the approved form

• includes any other information that the Commissioner requires to be included (TAA Sch 1 s 16-170). Part-year payment summaries Recipients of certain withholding payments (eg a superannuation income stream, but not including a superannuation lump sum or an employment termination payment) can ask in writing for a part-year payment summary covering withholding payments made during the year. The request must be made at least 21 days before the end of a financial year, and the payer must generally comply with the request within 14 days unless the individual requesting the payment summary has a reportable fringe benefits or reportable employer superannuation amount for the year (TAA Sch 1 s 16-160). Reportable employer superannuation contributions Reportable employer superannuation contributions made for an employee must be reported on the employee’s annual or part-year payment summaries (TAA Sch 1 s 16-153; 16-155). Broadly, reportable employer superannuation contributions are contributions made by an employer under a salary sacrifice arrangement or contributions for an employee in addition to the minimum amount required by law (see ¶6110). While they are not taken into account in calculating the employee’s income tax liability for the year, reportable employer superannuation contributions are taken into account in determining entitlement to certain tax concessions and social security benefits or liability to make certain payments.

¶11-368 Single Touch Payroll reporting Single Touch Payroll (STP) is a reporting framework for employers to provide payroll information to the Commissioner at a time earlier than that which applies under the PAYG withholding ordinary provisions. Substantial employers (ie more than 20 employees) entered STP from 1 July 2018 and all other employers apply STP from 1 July 2019. As part of the introduction of STP reporting, changes were also made to the SGA Act, TAA, ITAA36, and SIS Act to allow the ATO and employers to streamline the completion of superannuation choice forms and TFN declarations using the Commissioner’s online service. The ITAA36 was also amended to improve the Commissioner’s ability to validate TFN information. Exemptions By legislative instrument, the Commissioner can grant exemptions from STP reporting on a class basis. Current exemptions are: • for employers with a seasonal workforce (Legislative Instrument F2019L00458) • for employers with a withholding payer number (Legislative Instrument F2019L00437) • for insolvency practitioners and employers subject to their appointment (Legislative Instrument F2019L00440), and • for employers in relation to certain contribution amounts paid by them to a complying superannuation fund or retirement savings account (Legislative Instrument F2019L00121). The Commissioner can also exempt individual entities by written notice to the entity. The exemption can be limited to the extent specified in the notice and can be as a result of an application by the entity or on the Commissioner’s own volition (with rights of objection where the application is refused or issued with limits). Withholding payments covered The withholding payments (including nil amounts) covered by STP are: • A payment that constitutes an employee’s ordinary time earnings or salary or wages, and • The following payments: – under the Seasonal Labour Mobility Program (this will include working holiday makers)

– for work and services, with the exception of payments under voluntary agreements, labour hire arrangements, and those prescribed by regulations – for termination of employment – for unused leave – for parental leave pay, and – for dad and partner pay. The Commissioner may determine additional withholding payments by legislative instrument. Reportable employer superannuation contribution (RESC) and reportable fringe benefit (RFB) amounts are not required to be reported using STP reporting. However, an entity may nonetheless choose to report these amounts to the Commissioner using STP reporting by 14 July. Timing of reporting Payments that constitute an employee’s ordinary time earnings or salary or wages must be notified to the Commissioner on or before the day on which the amount is paid. All other amounts must be notified to the Commissioner on or before the day by which the PAYG withholding amount is required to be withheld from the payment. Method of reporting Under STP reporting, substantial employers must report information to the Commissioner in the approved form. The approved form will be produced by SBR-enabled software. The approved form can only cover the withholding payments covered by STP reporting. Failure to use the approved form would render the employer liable to a failure to lodge penalty under TAA Div 286. Transitional arrangements The Commissioner can allow entities with an ongoing grace period for correcting false or misleading statements made in STP reports without penalty. This could, for example, allow errors made in one STP report to be corrected in a subsequent STP report. However, such corrections need to be made within 14 days after the end of the financial year to which they relate.

Penalties, GIC and SIC ¶11-370 Penalties for failing to meet tax-related obligations Penalties may be imposed on entities that fail to meet their obligations under the tax legislation. The penalty regime is in TAA Sch 1 Pt 4-25 (Sch 1 Div 280 to 298). Penalties may be imposed as flat rate amounts or in penalty units. A penalty unit is equivalent to $210 for offences committed after 1 July 2017. Penalty units are automatically adjusted every three years in line with inflation, commencing 1 July 2020. The purpose of the penalties is to penalise a taxpayer for: • shortfalls of income tax or excess non-concessional contributions tax (Div 280) • making false or misleading statements, taking a position that is not reasonably arguable or entering into a scheme (Div 284) • failing to give a return, statement, notice or other document by the required time (Div 286) • miscellaneous non-compliance with obligations, eg failing to lodge a return electronically as required, failing to keep records, preventing access, failing to register or failing to issue a tax invoice, failure to comply with the superannuation data and payment regulations and/or standards, paying in excess of the amount authorised by a release authority (Div 288), and

• promoting a tax avoidance or tax evasion scheme (Div 290). The “tax shortfall” penalties are flat percentage amounts which relate to the degree of culpability in understating taxable income. Culpability ranges from taking a position on a question of law which is not reasonably arguable or failing to take reasonable care, to recklessness and, at the highest level, deliberate evasion. Generally, taxpayers who exercise reasonable care and have a reasonably arguable position are not subject to tax shortfall penalties. Penalty tax is reduced where a taxpayer voluntarily discloses a tax shortfall, and the reduction is much greater if the disclosure is made before the taxpayer is notified of any audit action. The administrative penalty for failing to lodge a return by the due date in the approved form does not apply where the taxpayer provided a registered tax agent or BAS agent with the relevant information for lodging a return and the agent failed to do so by the due date and in the approved form. However, the agent’s failure to lodge the return must not result from an intentional disregard of, or recklessness as to the operation of, a taxation law on the part of the agent (TAA Sch 1 s 286-75(1A)). Late lodgment of a return, or making a false or misleading statement, may also constitute an offence for which the taxpayer may be prosecuted. If the taxpayer is prosecuted, the liability to pay a penalty ceases. An administrative penalty may be payable in relation to various release authorities issued by the Commissioner where: • A superannuation provider fails to give a release authority for excess non-concessional contributions tax (¶6-560) or fails to comply with the release authority (TAA Sch 1 s 288-90; 288-95) (¶6-640). • A superannuation provider does not comply with a release authority (¶6-520) in respect of an amount specified by the Commissioner in an excess concessional contributions determination (¶6-515) (TAA Sch 1 s 288-95). • A superannuation provider fails to comply with a release authority to allow money to be released from a superannuation plan to pay assessed Division 293 tax on the concessional contributions of certain high income earners (¶6-400) that is due and payable, to make voluntary payments in reduction of a debt account or to pay debt account discharge liability (TAA Sch 1 s 288-95). A liability for an administrative penalty may arise for RSA providers or superannuation entities who contravene the superannuation data and payment regulations and/or standards with which the entity is required to comply when reporting to the Commissioner. The amount of the penalty is four penalty units. Liability for an administrative penalty may also arise where the Regulator gives a direction to an RSA provider or a trustee of a superannuation entity that requires the RSA provider or trustee to either do a specified act to rectify the contravention of the superannuation data and payment regulations and/or standards, or refrain from doing an act to rectify the contravention, and the RSA provider or trustee fails to comply with the direction within the specified time. The amount of the penalty in this case is ten penalty units (TAA Sch 1 s 288-110). If a taxpayer does not pay the correct amount of tax on time or fails to pay a penalty on time, GIC may be imposed on the taxpayer (¶11-380). Penalties relating to false or misleading statements An administrative penalty may be imposed where a taxpayer makes a false or misleading statement, treats an income tax law as applying in a way that is not reasonably arguable, or the Commissioner determines a tax-related liability of the taxpayer without documents the taxpayer was required to provide (TAA Sch 1 Div 284-B). Making a false or misleading statement may also constitute an offence for which the taxpayer may be prosecuted. Subject to certain exceptions, the penalty applies if a taxpayer makes a false or misleading statement or if the taxpayer’s agent makes the statement for the taxpayer. It also applies to statements that are made neither to the Commissioner nor to another entity exercising a power or performing a function under a taxation law provided the statements are required to be made or are permitted to be made by the tax law. For example, such statements would include statements the tax law requires the trustee of a superannuation fund to provide to the fund’s members or declarations that employees may opt to give to

their employers to reduce the amount of tax withheld from their wages (TAA Sch 1 s 284-25; 284-75). A taxpayer is not liable for the penalty if the taxpayer and the taxpayer’s agent (if relevant) took reasonable care in connection with the making of the statement. The penalty also does not apply where the taxpayer uses the services of a tax agent (as defined in the Tax Agent Services Act 2009) who makes a false or misleading statement, the taxpayer provided the tax agent with all relevant information and the tax agent did not make the statement with intentional disregard of, or recklessness as to the operation of, a taxation law (TAA Sch 1 s 284-75(5), (6)). The penalty is worked out as a fixed percentage of the amount of tax shortfall that results from the taxpayer’s action. The penalty may be adjusted up or down, after taking into account factors such as whether the taxpayer made a voluntary disclosure or hindered the Commissioner in finding out about the shortfall. The penalty is highest (75% of the shortfall) if the shortfall was caused by intentional disregard of the tax law. In the case of false or misleading statements that do not cause any shortfall amount, the base penalty amount is 20, 40 or 60 penalty units depending on whether the taxpayer did not take reasonable care, was reckless, or intentionally disregarded the law (TAA Sch 1 s 284-90). ATO’s administrative penalty regime for SMSFs The ATO has three regulatory compliance powers to deter and address contraventions of SISA by SMSF trustees (¶3-845), which include the imposition of administrative penalties. Where a trustee contravenes a specific SISA provision, an administrative penalty will automatically be imposed, as set out in SISA s 166. Remission of penalties The Commissioner has the discretion to remit penalties in whole or in part (TAA s 8AAG; Sch 1 s 298-20). In general, late lodgment penalties will be remitted in full where there are exceptional circumstances, eg where records are lost or destroyed through theft, fire or flood, or where common sense dictates that the taxpayer had no control over matters relating to the completion and lodgment of the return. While the Commissioner has the discretion to remit SMSF administrative penalties in part or in full, these will not be remitted in more serious cases, eg where there are indicators of ongoing non-compliance or an unwillingness to recognise the issue and engage with the ATO or if a penalty has been remitted previously. The Commissioner must give the superannuation entity written notice of any decision not to remit the penalty or to remit only part of the penalty. A superannuation entity that is dissatisfied with a notice of penalty or a remission decision may object and, if dissatisfied with the Commissioner’s decision on the objection, may apply to the AAT for a review of the decision or appeal to the Federal Court (¶11-500). In The Trustee for MH Ghali Superannuation Fund 2012 ATC ¶10-266, the AAT found that the superannuation fund was liable for an administrative penalty in accordance with s 284-75 of the TAA. It considered that the correct penalty rate was 25% to reflect the failure to take reasonable care in preparing the income tax returns as statements made by the fund’s tax agent were not reasonably arguable and resulted in a shortfall amount. The AAT further found that the penalty was not unjust or excessive and rejected the agent’s submission that it should be remitted due to his ill health and otherwise good compliance record. In Dixon as Trustee for the Dixon Holdsworth Superannuation Fund 2008 ATC ¶20015, the tax agent lodged an amended BAS, seeking an input tax credit to which the fund was not entitled. The Commissioner detected the error before any money was refunded and imposed an administrative penalty of 50% of the shortfall amount for recklessness. On review, the AAT concluded that the penalty should be reduced to 25% to reflect the fact that no refund had been made and, therefore, no harm had been done. On appeal, the Federal Court held that it was necessary that there be special circumstances before the remission discretion was exercised, and the fact that a refund was never made, or that no harm was done, were irrelevant considerations in the exercise of the discretion. On further appeal, the Full Federal Court held that it was wrong to say that there must be special circumstances before the discretion to remit can be exercised. If the AAT concluded that the penalty was harsh in the circumstances simply because no harm was done, then that was an error of law. However, as it was by no means clear that the Federal Court had correctly construed the AAT’s reasoning, the most appropriate course of action was to remit the decision to the AAT for redetermination. The taxpayer in Vuong 2014 ATC ¶10-367 was successful in obtaining a full remission of penalties. He had requested a roll-over of his superannuation fund to a new fund, and in the process became the

unwitting victim of a scam as the fund was non-existent and the money was transferred into a bank account created using identity theft. Following an audit, the Commissioner included the entire roll-over amount in the taxpayer’s assessable income and imposed a penalty of 25% of the shortfall amount for failure to take reasonable care in preparing his tax return. The AAT found that the 25% penalty was appropriate as a reasonable person, even with limited knowledge of taxation affairs, should have done more to ensure compliance with his tax obligations. However, the AAT said that the Commissioner should remit the penalty in full and the taxpayer at all times acted with honest, albeit naive, intent. He did intend to access his superannuation early but did not intend to do so unlawfully and was led to believe that a rollover of his superannuation from one fund to another meant he had lawful entitlement to access it. Commissioner’s practice statements Practice Statement PS LA 2012/4 explains how the Commissioner administers the penalty for making a false or misleading statement, where the statement does not result in a shortfall amount. Practice Statement PS LA 2012/5 explains how the Commissioner administers the penalty for making a false or misleading statement where the statement does result in a shortfall amount. In both PS LA 2012/4 and PS LA 2012/5, the Commissioner discusses: • when such a statement will give rise to the administrative penalty, and • how penalty amounts are assessed, including determining any remission of the penalty under TAA Sch 1 s 298-20. Both of the above practice statements point out that the administration of penalties in TAA Sch 1 Div 284B involve three main steps: • Step 1 — Determine if a penalty is imposed by law • Step 2 — Assess the amount of the penalty: – determine the shortfall amount (relevant for PS LA 2012/5 only) – determine the base penalty amount (BPA) – increase and/or reduce the BPA – determine if remission is appropriate • Step 3 — Notify the entity of the liability to pay the penalty. Practice Statements PS LA 2012/4 and PS LA 2012/5 provide guidance on each of the three steps above in the order they occur in the administrative process. The steps must normally be completed in the order they appear above. This means that a decision about remission of penalty will normally be made in the course of assessing the amount of any penalty. However, a decision about remission of penalty can also be made after an entity has been notified of its liability to penalty in an assessment. PS LA 2012/4 states that the Commissioner has adopted a practical approach to administering the penalty. This means a penalty will not be assessed for every statement encountered which may be false or misleading in a material particular. An administrative penalty may also be imposed if a taxpayer enters into a tax avoidance scheme with the sole or dominant purpose of obtaining a tax benefit and a shortfall amount arises as a result of the taxpayer’s participation in the scheme. Broadly, the base penalty is 50% of the shortfall amount (TAA Sch 1 Div 284-C). Remission of penalty Both PS LA 2012/4 and PS LA 2012/5 state that tax officers must consider the question of remission in each case based on all of the relevant facts and circumstances, and having regard to the purpose of the provision. Relevant matters to consider in approaching the issue of remission of penalty include: • that the purpose of the penalty regime is to encourage entities to take reasonable care in complying with their tax obligations

• remission decisions need to consider that a major objective of the penalty regime is to promote consistent treatment by reference to specified rates of penalty. The Commissioner notes in both the above practice statements that the remission discretion should be approached in a fair and reasonable way, including ensuring that prescribed penalty rates do not cause unintended or unjust results. Although a remission decision must be made this does not imply that remission will be given. A remission decision may result in no remission, partial remission or remission of the entire penalty. The Commissioner will generally consider remission whenever an entity is liable to an administrative penalty where, apart from a provision of a taxation law, the entity gets a scheme benefit from a scheme (TAA Sch 1 s 284-145(1)). PS LA 2011/30 provides guidance to tax officers on the remission of this penalty. Generally, in this context, remission decisions should consider: • whether the entity made a genuine attempt to comply with his/her/its obligations considering the personal circumstances, that is, the entity took all reasonable and sensible steps to avoid entering into a tax avoidance scheme where the risks of an adverse tax outcome under an audit are likely to be high, and • whether the entity has a good compliance history. Guidelines on the remission by the Commissioner of the penalties referred to above in relation to a release authority for excess non-concessional contributions tax are contained in Practice Statement PS LA 2011/24. In determining whether remission is appropriate, the Commissioner will consider in each case the level at which the individual or superannuation provider has attempted to comply with the obligations. As a general rule, if the individual or superannuation provider has made: • a genuine attempt to comply (ie action was taken to understand the obligations and corrective action was immediately taken when the need to do so became evident) — remission in full may be warranted • a moderate attempt to comply (ie corrective action was taken that fell short of a genuine attempt to comply, but was not a deliberate delaying of compliance) — partial remission may be warranted, and • no attempt to satisfy the obligations (ie no action was taken to comply or compliance was deliberately delayed) — no remission. Penalties relating to the superannuation guarantee scheme For details of the penalties that may be imposed on employers for breaches of their SG obligations, see ¶12-550. Directors of a company may be personally liable for a company’s unpaid SG charge under the director penalty regime (¶12-395). [FTR ¶978-065, ¶978-095; ASP ¶46-790]

¶11-380 General interest charge GIC may be payable by a taxpayer in various circumstances. These include: • where an assessment is amended to increase a tax liability • where a fund lodges its annual tax return late and fails to pay the late lodgment penalty on time • where tax is not paid on time • where a PAYG withholder fails to remit withheld amounts to the Commissioner by the due date • where a taxpayer uses a varied rate to work out the amount of a PAYG instalment and the varied rate results in a significant underpayment of tax.

The GIC provisions are contained in TAA Pt IIA (TAA s 8AAA to 8AAH). GIC is worked out daily on a compounding basis (s 8AAC; 8AAD). It applies on each day in the period starting on the day on which the tax was due for payment to the day on which any of the tax remains unpaid. The GIC rate for a day is worked out by dividing the base interest rate plus 7% by the number of days in the calendar year. The base interest rate is determined by reference to the monthly average yield of 90day Bank Accepted Bills. Example The Indu Superannuation Fund (Indu) has outstanding tax of $10,000. It became due and payable on 16 July 2019 but was not paid until 16 August 2019 (ie 31 days overdue). GIC is payable on the $10,000 for each day in the period from the beginning of 16 July (ie the day the tax was due to be paid) to the end of 15 August (ie the last day on which any tax or GIC remains unpaid). Indu is liable to pay GIC for 31 days. The applicable daily GIC rate is 0.02339726%. Indu’s total debt, made up of the outstanding tax and GIC, is: $10,000 × (1.0.02339726)31 = $10,072.79

The Commissioner may remit the whole or any part of the GIC imposed on a taxpayer if satisfied that there are special circumstances that warrant remission or that it is appropriate to do so (s 8AAG). GIC payable in respect of late lodgment, late payment and underpayment, as well as for failure to withhold PAYG amounts, is deductible (ITAA97 s 25-5), and can be claimed as a tax deduction in the income year it is incurred or paid. [FTR ¶962-935, ¶962-940, ¶962-945; SLP ¶46-820]

¶11-390 Shortfall interest charge Where there has been a “tax shortfall”, ie an increase in the tax payable based on the original return, an interest charge is imposed on the tax shortfall, called the SIC. SIC applies to the shortfall amount from the due date of the original assessment to the day before the issue date of the notice of amended assessment. The annual rate of the SIC is four percentage points lower than the GIC rate. The Commissioner must give a notice to the taxpayer specifying the amount of the SIC liability, and the due date for payment of the tax shortfall and any SIC is 21 days from when the taxpayer is given notice (ITAA97 s 5-5(7); 5-10). Once this due date has passed, the GIC will apply to any unpaid tax and SIC (ITAA97 s 5-15). The Commissioner has the discretion to remit the SIC in full or in part.

Objections ¶11-500 Objections against assessments A taxpayer who is dissatisfied with an assessment can object to the Commissioner and, if not satisfied with the Commissioner’s decision on the objection, can either apply to the AAT for review of the decision or appeal to the Federal Court against the decision. For example, an individual can object against an excess contributions tax (¶6-600) assessment on the ground that he/she is dissatisfied with the Commissioner’s determination or the Commissioner’s decision not to make such a determination (Ward 2015 ATC ¶10-385). The procedures for exercising these rights are the same for dissatisfied superannuation entities as for other dissatisfied taxpayers. The procedures apply, for instance, where a superannuation fund is dissatisfied with the inclusion of a capital gain in its assessable income, a superannuation fund member is dissatisfied with a decision to disallow a deduction claim, or a fund is dissatisfied with a private ruling. A taxpayer’s objection against an assessment must set out the grounds on which the person relies. An objection can be lodged against an assessment even though the assessment was made under the “self-

assessment” system solely in reliance on the information contained in the taxpayer’s return. For instance, a superannuation fund, wishing to avoid the risk of penalty tax, may file a return on the basis of the Commissioner’s view of the law as expressed in a private or public ruling, but then seeks to challenge that view. Superannuation entities must lodge the objection within four years after the deemed service of assessment. The objection, review and appeal procedures are set out in TAA Pt IVC (s 14ZL to 14ZZS). Review of objection decision by AAT or Federal Court A taxpayer who is dissatisfied with the Commissioner’s objection decision may apply to the AAT for a review of the decision or appeal to the Federal Court. In either case, the taxpayer has the burden of proving that the assessment is excessive and is generally limited to the grounds stated in the objection. Costs associated with a review or appeal are generally deductible. AAT hearings are generally held in private and the published decision does not generally reveal the taxpayer’s identity. AAT proceedings are generally less formal than a court’s. The AAT need not apply the laws of evidence, may exercise all of the Commissioner’s powers and discretions, and may confirm, vary or set aside the Commissioner’s objection decision. A court, on the other hand, cannot interfere with the exercise of a discretion by the Commissioner unless the discretion was not exercised in accordance with law. Judicial review of Commissioner’s decisions If the law does not specifically give a person the right to object against a decision of the Commissioner, the further rights of review by the AAT and appeal to the Federal Court are not available. Some of these decisions may, however, be reviewable by the Federal Court under the Administrative Decisions (Judicial Review) Act 1977. A breach of natural justice, an improper exercise of power or an error of law would be grounds for review of a decision. A refusal to grant an extension of time to pay tax is a decision open to this form of administrative review. [FTR ¶972-540, ¶972-680, ¶972-940; SLP ¶46-610]

Australian Business Numbers ¶11-600 Superannuation funds and ABNs The ABN is a unique identifier which is used by businesses in their dealings with government (A New Tax System (Australian Business Number) Act 1999). Any entity that is carrying on an enterprise in Australia and that has a GST turnover of $75,000 or more must apply for an ABN. Those that are carrying on an enterprise may apply for an ABN even if their GST turnover is less than $75,000. Superannuation funds and PSTs are generally considered by the ATO to be carrying on an enterprise but, because the receipt of contributions, dividends or interest is not taken into account when calculating GST turnover (because they are financial supplies), most superannuation funds would not pass the $75,000 GST turnover threshold. Nevertheless, many superannuation funds will find it advantageous to apply for an ABN. This is because an entity without an ABN: (a) cannot charge GST when it supplies goods or services (b) cannot claim input tax credits for the GST it pays on its business inputs, and (c) may have 47% tax deducted from payments made to it by another business. In the longer term, it is intended that superannuation fund numbers will be replaced by the ABN, making it necessary at that time for superannuation funds to apply for an ABN. The impact of GST on superannuation funds is discussed at ¶7-830. ABN and GST registration by

superannuation funds is discussed at ¶7-840. [FTR ¶958-000; SLP ¶46-880]

Tax File Numbers ¶11-700 The TFN system The TFN is a unique number issued by the ATO for each taxpayer. The purpose of the TFN system is to detect non-disclosure of income and to enable the ATO to match the details of income disclosed in a taxpayer’s return with details it received from other sources (ITAA36 s 202). The TFN laws apply to trustees of regulated superannuation funds, ADFs, RSAs, certain exempt public sector superannuation schemes (¶3-010) and employers. However, these TFN laws do not apply to state insurance that does not extend beyond the limits of the state concerned (SISA s 299X; RSA Act s 146). The TFN laws authorise the use of TFNs in the superannuation industry and protect the privacy of individuals by restricting the use of TFNs to particular circumstances. In some cases, the laws require superannuation trustees and RSA providers to seek, store and pass on TFNs. Exempt public sector superannuation schemes are not entitled to use TFNs for superannuation purposes unless they have a corporate trustee or have the provision of pensions as a sole or primary purpose. The rules relating to TFNs and superannuation are contained in SISA Pt 25A. APRA shares administration of Pt 25A with the ATO. Under SISA s 6, APRA has the general administration of Pt 25A, other than Div 1 (quotation of an employee’s TFN) and Div 3A (incorrect quotation of TFN) which are the responsibility of the ATO. Generally, APRA administers these provisions in relation to superannuation entities other than SMSFs. The Privacy Commissioner investigates acts that may breach privacy responsibilities, conducts audits of records of TFNs and evaluates compliance by the superannuation industry. TFN guidelines made by the Privacy Commissioner require that individuals be informed of the legal basis for the collection of their TFN, that declining to quote a TFN is not an offence and the consequences of not quoting a TFN. [FTR ¶689-580; SLP ¶3-800]

¶11-720 Use of TFNs for taxation purposes Where a member quotes a TFN for superannuation purposes, the TFN is also taken to have been quoted for the purpose of calculating the tax to be deducted from a superannuation benefit. The effect is that the fund, scheme or RSA provider will deduct tax from the benefit at normal concessional rates. Where appropriate, the TFN will also be disclosed on the beneficiary’s or RSA holder’s payment summary. Failure to quote a TFN has, since the inception of the TFN scheme, resulted in a taxpayer being liable to tax at the top marginal rate on a lump sum payment from a superannuation fund or from an employer. Two additional measures encourage the quotation of TFNs to superannuation funds. 1. No-TFN contributions income. Additional tax of 32% is imposed on contributions paid to a complying fund where a TFN has not been “quoted (for superannuation purposes)” (ITAA97 s 295-605; 295-610). For non-complying funds, the rate is 2%. A TFN is “quoted (for superannuation purposes)” if a person quotes his/her TFN to the fund, is taken by SIS Act, the RSA Act or tax legislation to have quoted his/her TFN to the fund, or if the ATO gives notice of a person’s TFN to the fund at that time (ITAA97 s 295-615). If a person makes a TFN declaration to an employer who makes a superannuation contribution for the person to a fund, the person is taken to have authorised the employer to inform the fund of the person’s TFN (ITAA36 s 202DHA). 2. Member contributions may not be accepted. A fund cannot accept member contributions if a TFN has not been “quoted (for superannuation purposes)” to the trustee of the fund (SISR reg 7.04(2)). The interaction of TFNs and the rules on superannuation contributions is discussed at ¶6-680 and

following. [FTR ¶690-026; SLP ¶3-800]

¶11-750 TFN rules affecting superannuation The TFN arrangements affecting superannuation entities, beneficiaries and RSA holders (contained in SISA Pt 25A and RSA Act Pt 11; ITAA36 Pt VA) are outlined below. Quotation of TFN A beneficiary or RSA holder may quote his/her TFN to the fund, scheme or RSA provider either directly or indirectly through his/her employer. An employer who is provided with the TFN must provide that TFN to the trustee of the fund or scheme or to the RSA provider when the next contribution is made (SISA s 299A to 299D; RSA Act s 131 to 134). An employer who fails to pass on the TFN to the fund is guilty of an offence (SISA s 299C; RSA Act s 133). A beneficiary or RSA holder is not obliged to provide a TFN. Request for TFN Trustees of funds are required to seek the TFNs of existing and new members (where these have not already been made available to the trustees for superannuation purposes) within a prescribed time (SISA s 299E; 299F; 299G). RSA providers must request a person becoming a holder of an RSA to quote a TFN (unless the person has already quoted a TFN to the RSA provider) within a prescribed time (RSA Act s 136). The prescribed time is generally 30 days from the time the person becomes a member or RSA holder. The manner in which a trustee of a superannuation entity governed under the SIS Act should request a TFN is set out in Legislative Instrument F2017L01262; for entities governed under the RSA Act, it is set out in Legislative Instrument F2017L01270. The approved manner broadly requires the trustee to advise that it is authorised under the relevant Act to collect the individual’s TFN, that the TFN will only be used for lawful purposes and that the trustee may disclose the individual’s TFN to another superannuation provider, when his/her benefits are being transferred, unless the individual requests in writing that the TFN not be disclosed to another superannuation provider. The trustee must inform the individual that, while it is not an offence not to quote a TFN, there are certain advantages from quoting the TFN, eg no additional tax will be deducted when he/she starts drawing down the superannuation benefit and it makes it easier to find different superannuation accounts in the individual’s name. A person may not request another person to supply a TFN unless the request is authorised by law. The penalty for an unauthorised request is $10,000 or imprisonment for two years, or both (TAA s 8WA). Employees, members and RSA holders who supply their TFN to an employer, trustee or RSA provider are generally treated as having supplied their TFN for taxation and superannuation purposes (SISA s 299Z; RSA Act s 139; 147A; ITAA36 s 202DJ). A TFN of a person which is quoted for superannuation purposes is deemed to be also quoted for the purpose of calculating the tax to be withheld from a superannuation payment made to that person (ITAA36 s 202DH; 202DHA; 202DI). Responsibility to accept and record TFNs If a member or RSA holder quotes his/her TFN to the trustee or RSA provider in connection with the operation of superannuation legislation, the trustee or RSA provider must, as soon as is reasonably practicable, make a record of the TFN. The record must be retained until the person ceases to be a member or RSA holder and then must be destroyed (SISA s 299H; 299J; 299K; 299L; RSA Act s 137). A trustee or RSA provider who contravenes these requirements is guilty of an offence and is liable to a penalty of 100 units. The trustee of an exempt public sector superannuation scheme may retain a member’s TFN only as long as the scheme is a regulated exempt scheme for these purposes (SISA s 299Y). Use of TFN to locate amounts

Trustees and RSA providers can use a person’s TFN to locate, in the records or accounts of the superannuation fund or RSA, amounts held for the benefit of the person, but it is not compulsory for them to do so (SISA s 299LA; RSA Act s 137A). To improve the quality of information in the superannuation system and facilitate fully effective ecommerce, the Commissioner must keep a register containing information provided by certain superannuation funds, schemes and RSA providers. The information contained on the register will enable superannuation entities, RSA providers and employers to transmit information and payments electronically. As part of these improvements to the efficiency and data quality of the superannuation system, superannuation fund trustees, RSA providers and employers may use the TFN of a member, RSA holder or employee in a manner connecting it with the person’s identity for the purpose of asking the Commissioner to validate information about the person by way of an electronic validation service (SISA s 299CA; 299LB; RSA Act s 133A; 137B). Use of TFN to consolidate accounts Trustees and RSA providers can use TFNs to facilitate the consolidation of multiple accounts held by the same person in the same fund and across multiple funds, provided the requirements of the regulations are met. The SIS Regulations and RSAR contain rules which trustees of superannuation entities (¶3-340) and RSA providers (¶10-350) must comply with when using a member’s TFN to locate accounts, and where they use TFNs in order to facilitate account consolidation. The rules safeguard member information and privacy, as they restrict the use of individuals’ TFNs to situations where consent has been provided, and are intended to place appropriate limitations on the ability of trustees and RSA providers to search for member accounts. For using TFNs to facilitate consolidation or roll-over, the SIS Regulations set out the definitions of beneficiary, RSA provider or superannuation entity, and trustee (SISR reg 6.47). The RSAR set out the definitions of RSA holder and RSA provider or superannuation entity (RSAR reg 4.44). The regulations explain how the conditions for the use of TFNs are structured within the regulations (SISR reg 6.48; RSAR reg 4.45). They also explain that a trustee must obtain consent to use the member’s TFN, to seek superannuation information relating to the member from the ATO or to contact an RSA provider or superannuation entity to seek superannuation information relating to the member (SISR reg 6.49). There are also rules about the procedure that trustees must follow where they search for amounts held for the member by another RSA provider or superannuation entity. The trustee may seek information through a facility provided by the ATO, or contact an RSA provider or superannuation entity as nominated by the member. As the search carried out by the trustee of the superannuation entity is being undertaken at the request of the member, the trustee is acting as the agent of the member. Thus, the superannuation fund or RSA provider from whom the information is requested is required to respond to the trustee’s request and provide details of any accounts held for the member (SISR reg 6.50). Similar rules about consent (RSAR reg 4.46) and the procedure to be followed when searching for amounts held by another RSA provider or superannuation entity also apply in connection with RSAs (RSAR reg 4.47). Passing on TFNs Funds and RSA providers are required to provide a member’s or RSA holder’s TFN to a transferee fund, scheme or RSA provider when transferring the member’s or RSA holder’s benefit unless the member or RSA holder requests otherwise (SISA s 299M; 299N; RSA Act s 138). The manner in which a trustee of a superannuation entity should inform another superannuation provider of an individual’s TFN is set out in Superannuation Industry (Supervision) Tax File Number approval No 1 of 2007. Where a trustee provides another trustee with an individual’s TFN, the trustee must do so in writing (including by electronic transfer) but may subsequently give the TFN orally to clarify or complete a TFN given in writing. The trustee must also give all information in its possession that could reasonably help in the location or identification of the individual and that the individual would reasonably expect to be disclosed. The trustee is not obliged to give any information that the individual has requested the trustee not to divulge. The ATO may give the trustee of a superannuation fund notice of a member’s TFN if the trustee has made a record of a number that the trustee believes to be the member’s TFN and the ATO is satisfied the TFN is wrong but is also satisfied that the member has a TFN (SISA s 299TA). If the trustee has made a

record of a number that the trustee believes to be the member’s TFN and the ATO is satisfied the TFN is wrong but is not satisfied that the member has a TFN, the ATO may give the trustee a notice (and must give a copy to the member) stating that the ATO is not satisfied that the member has a TFN (SISA s 299TB). The Commissioner may give a superannuation fund trustee or RSA provider notice of the TFN of a person if the Commissioner is satisfied that the person is a member of the superannuation fund or the holder of an RSA provided by the RSA provider and the person has quoted for superannuation purposes his/her TFN to another person. However, if, before the time the Commissioner gives the notice, the person specifically requests the trustee or RSA provider not to record the person’s TFN, the notice is to be disregarded and the person cannot be deemed to have quoted the TFN to the trustee or RSA provider when the notice was given. As a consequence, provisions that require or permit a trustee or RSA provider to record or use a validly quoted TFN do not apply (SISA s 299TC; RSA Act s 143C). A superannuation fund, RSA provider or employer can give the Commissioner specified information, including the TFN, it believes identifies a member, RSA holder or employee for the purpose of obtaining a notice from the Commissioner validating that information. The Commissioner may use an electronic interface to receive such information and give notices (SISA s 299TF; RSA Act s 143F). The Commissioner may give the notice provided he is satisfied that the person is a member of the relevant superannuation fund or an employee of the relevant employer and the information is given in connection with the operation of the fund. In the case of information given by an employer, the Commissioner must also be satisfied that the use by the employer of the TFN complies with s 299CA. In addition, the Commissioner must be satisfied that it is reasonable to give the validation notice having regard to the information (if any) that he has for the TFN. The notice must state whether or not the Commissioner is able to validate the information given (SISA s 299TD; 299TE). Similar provisions are made under the RSA Act for the Commissioner to give a validation notice to an RSA provider or an employer of an employee for whose benefit a contribution to an RSA is to be made (RSA Act s 143D; 143E). Portability of superannuation benefits The SIS Regulations and RSAR may prescribe a scheme for the portability of superannuation benefits administered by the Commissioner under which a member of a regulated superannuation fund or ADF, or an RSA holder, gives the Commissioner a request for his/her benefits to be rolled over or transferred and the Commissioner may pass the request on to the trustee of the fund or the RSA provider (SISA s 34A; RSA Act s 39A). The Commissioner has general administration of the prescribed scheme and related TFN provisions. APRA retains general administration of the portability arrangements. The Commissioner may request a member of a regulated superannuation fund or ADF, or an RSA holder, for his/her TFN for the purposes of the prescribed scheme. The member or RSA holder need not comply with the request but the regulations may provide that failure to comply affects whether the Commissioner may pass a request on to the fund trustee or RSA provider under the prescribed scheme. The Commissioner may inform the fund trustee or RSA provider of the member’s or RSA holder’s TFN as part of the Commissioner passing on a request made by the fund member or RSA holder for the purposes of the prescribed scheme. If the Commissioner does so, the fund member or RSA holder is taken to have quoted his/her TFN to the fund trustee or RSA provider for the purposes of the superannuation legislation. The fund member or RSA holder is also taken to have quoted it at the time the Commissioner informs the fund trustee or RSA provider about the relevant TFN (SISA s 299NA; RSA Act s 138A). The approved form of request for the purposes of the prescribed scheme referred to in SISA s 34A or RSA Act s 39A may require the TFN of the relevant fund member or RSA holder to be set out in the request (SISA s 299U; RSA Act s 144). Regulations have been made prescribing the details of the electronic portability request scheme. They are intended to simplify and streamline the process for fund members and RSA holders to initiate a roll-over or transfer of their benefits, to locate and consolidate their benefits, and to avoid paying unnecessary fees and charges on multiple accounts (SISR Pt 6A; RSAR Pt 4AA). [SLP ¶3-805, ¶3-810]

12 SUPERANNUATION GUARANTEE SCHEME OUTLINE OF SG SCHEME The superannuation guarantee scheme

¶12-000

CONSTITUTIONAL CHALLENGE TO THE SG LAWS Constitutional challenge to the SGAA

¶12-005

SUPERANNUATION CLEARING HOUSE Contributions to a superannuation clearing house

¶12-010

PAYMENT AND DATA STANDARDS FOR EMPLOYER CONTRIBUTIONS How employers should make contributions

¶12-015

INTERACTION WITH WORKPLACE LAWS Interaction of SG scheme with awards

¶12-020

Potential conflict between award and SG obligations

¶12-025

Federal industrial regulation and superannuation

¶12-030

CHOICE OF FUND Choice of fund by employees

¶12-040

Choice of fund initiated by employee

¶12-044

Choice of fund initiated by employer

¶12-046

Use of default fund when employee does not choose

¶12-048

Transition of default funds to MySuper products

¶12-050

Default funds in modern awards

¶12-051

Trustees prohibited from offering incentives to employers

¶12-052

Penalties for breaches of choice rules

¶12-055

APPLICATION OF SG SCHEME Meaning of “employee”

¶12-060

Independent contractors

¶12-065

Workers in the “gig” economy

¶12-067

Salary or wages of certain employees is excluded

¶12-070

Employment arranged through labour hire firm

¶12-075

Salary or wages

¶12-080

Excluded salary or wages

¶12-100

Bilateral social security agreements

¶12-120

LIABILITY OF EMPLOYERS TO SG CHARGE SG charge payable by an employer

¶12-150

Employer superannuation support reduces charge percentage

¶12-180

Charge percentage — the minimum SG contribution

¶12-200

Ordinary time earnings

¶12-215

Checklist: “ordinary time earnings” and “salary or wages”

¶12-217

Maximum contribution base

¶12-220

Timing of contributions

¶12-230

Consequences of late payment of contributions

¶12-235

SALARY SACRIFICE ARRANGEMENTS Sacrifice into superannuation

¶12-250

CALCULATION OF SG CHARGE Calculation of SG charge

¶12-300

ASSESSMENT AND PAYMENT OF SG CHARGE Lodgment of SG statement and assessment of SG charge

¶12-350

Late contributions offset against SG charge

¶12-360

Payment of SG charge

¶12-370

Collection of SG charge debt by Commonwealth

¶12-390

Personal liability of directors for unpaid SG charge

¶12-395

Action against directors engaged in illegal phoenix activity

¶12-397

Recovery when a corporate employer becomes insolvent

¶12-400

ATO garnishee notice to third parties

¶12-410

PROPOSED AMNESTY FOR NON-COMPLIANT EMPLOYERS Proposed amnesty for non-compliant employers

¶12-415

ACTION AGAINST EMPLOYERS WHO FAIL TO MEET THEIR SG OBLIGATIONS ATO action against employers

¶12-420

Recovery by employees of unpaid SG contributions

¶12-440

DISTRIBUTION OF SHORTFALL COMPONENT Payment of shortfall component

¶12-500

RECORD-KEEPING AND REPORTING OBLIGATIONS Record-keeping

¶12-510

Reporting by employers to employees and to the ATO

¶12-520

Single Touch Payroll reporting by employers

¶12-525

Reporting by superannuation providers

¶12-530

PENALTIES, PROSECUTION AND GENERAL INTEREST CHARGE Penalties

¶12-550

Liability to general interest charge

¶12-570

SUPERANNUATION HOLDING ACCOUNTS SPECIAL ACCOUNT The SHASA scheme

¶12-600

Operation of the SHASA

¶12-620

Outline of SG Scheme ¶12-000 The superannuation guarantee scheme The superannuation guarantee (SG) scheme, which is administered by the ATO, penalises employers who do not provide a prescribed minimum level of superannuation support in each quarter for their employees. Employers who fail to make sufficient contributions are liable to pay an SG charge, made up of the amount of the contributions shortfall plus an interest and an administration component. The contributions shortfall and the interest component of the SG charge are distributed by the ATO for the benefit of the employees in respect of whom the charge was paid (¶12-500). The legislation governing the scheme is the Superannuation Guarantee (Administration) Act 1992 (SGAA) and its Regulations (SGAR) and the Superannuation Guarantee Charge Act 1992. Employees for whom contributions must be made Employers are generally required to make SG contributions for workers who are “employees” within the ordinary meaning or who are deemed to be employees because, for example, they work under a contract that is principally for their labour (¶12-060). Funds to which SG contributions may be made Employer SG contributions may generally be made to any complying superannuation fund or RSA for the benefit of an employee (¶12-180). Employers with fewer than 20 employees (or with an annual aggregated turnover of no more than $10m) can make SG contributions to an approved clearing house which will forward the contributions to the appropriate superannuation funds (¶12-010). Employees must be allowed to choose their fund Employers are generally required to offer employees a choice as to which fund will receive their SG contributions (¶12-040). If an employee fails to make a choice, contributions may be made to the employer’s default fund (¶12-048). Only superannuation funds that offer a MySuper product (see Chapter 9) can be an employer’s default fund. Employers who do not comply with the choice of fund requirements incur a “choice penalty” (¶12-055), which effectively increases the employer’s SG charge liability. SG contributions Contributions by an employer that may be counted for SG purposes (¶12-180) are: (1) compulsory contributions made under the SG legislation, an award or an industrial law (2) additional voluntary contributions, and (3) employer contributions after an employee enters into an effective salary sacrifice arrangement. Employer SG contributions for the benefit of employees are tax deductible (¶6-100), but the SG charge is not (ITAA97 s 26-95). If an employee gives their tax file number (TFN) to their employer, or if the Commissioner gives the TFN to the employer after receiving it from the employee, the employer must pass the TFN to the fund when a superannuation contribution is made for the employee. Significant consequences arise for the employer if the TFN is not passed to the fund or for the fund if it accepts contributions where a TFN has not been quoted (¶6-680). Amount of contributions required For 2019/20, the required minimum superannuation contribution is 9.5% of an employee’s ordinary time earnings, the same as it was for 2018/19 (¶12-215). This will increase to 12% by 2025/26 (¶12-200). The actual level of superannuation support provided in respect of an employee is measured on a quarterly basis, ie for the three-month periods commencing 1 July, 1 October, 1 January and 1 April (¶12-

230). To avoid incurring a liability for the SG charge, SG contributions for a quarter must be made by the 28th day after the end of the quarter. Liability to SG charge is based on the amount of an employer’s SG shortfall for a quarter (¶12-150). In some cases, contributions made after the due date may be offset against the SG charge for a quarter (¶12-360). How employers should make contributions Employers must make superannuation contributions on behalf of their employees according to the SuperStream data and payment standards discussed at ¶12-015. Administration of the scheme The SG scheme is administered on a self-assessment basis. An employer with an SG shortfall for a quarter is required to lodge a statement with the ATO together with payment of the SG charge by the 28th day of the second month following the end of the quarter (¶12-350). The shortfall component of the SG charge is generally paid by the ATO to a superannuation fund for the employee or in some cases directly to the employee (¶12-500) or to the Superannuation Holding Accounts Special Account (¶12-600). Recovery of unpaid SG contributions An SG charge debt payable by an employer is a debt due to the Commonwealth and may be recovered by the Commissioner by direct action against the employer (¶12-390) or by recovery from a third party who owes money to the employer (¶12-410). Recovery when an employer company becomes insolvent is subject to priority rules that rank the entitlements of various creditors (¶12-400). Directors may be personally liable for their company’s unpaid SG liabilities (¶12-395). Although employees cannot, under the SGA Act, directly sue for unpaid SG contributions, there are various avenues for recovery available to employees seeking redress when the required contributions have not been made (¶12-420). Proposed 12-month amnesty for employers A one-off 12-month amnesty proposed to apply from 24 May 2018 would have allowed employers to pay unpaid amounts of SG contributions without incurring additional penalties that would normally apply. An employer would be required to pay all SG shortfall amounts owing to their employees, including the nominal interest and general interest charge and could claim a deduction for SG payments made during the amnesty period. The amnesty provisions were included in a Bill that lapsed when parliament was prorogued for the May 2019 Federal election but had been dropped from the Bill that was reintroduced after the election (¶12-415). Record-keeping and reporting obligations Employers must maintain adequate records to demonstrate compliance with the SG scheme (¶12-510). Employers are generally required to keep a record of superannuation contributions they make for an employee and to report the contributions on the employee’s pay slip (¶12-520). Superannuation providers are required to provide information to the ATO about contributions that have been made for a member during the year. Superannuation providers are also required to make regular reports to members about contributions received on their behalf (¶12-530). Penalties for breach of SG obligations Employers who fail to comply with their SG obligations may be liable to SG charge (¶12-350), to an administrative penalty or imprisonment (¶12-550) or to general interest charge if the SG charge is not paid by the due date (¶12-570). In serious cases, prosecution action may be taken by the ATO against an employer. [FTR ¶794-600; SLP ¶50-100]

Constitutional Challenge to the SG Laws ¶12-005 Constitutional challenge to the SGAA

The constitutional validity of the superannuation (SG) guarantee legislation has been unsuccessfully challenged by a taxpayer carrying on a market research business. The taxpayer had argued in a series of court cases that it should not be liable to SG charge when it failed to make SG contributions for its market research interviewers because they were not its “employees” (¶12-060), but were instead independent contractors. After this argument failed in the various cases, the taxpayer contended that, regardless of the status of its workers, it could not be liable to SG charge as the legislation itself — the Superannuation Guarantee (Administration) Act 1992 and the Superannuation Guarantee Charge Act 1992 — was invalid. After the Full Federal Court dismissed the taxpayer’s constitutional challenge to the validity of the Act (Roy Morgan Research 2010 ATC ¶20-184), the taxpayer took its fight to the High Court. There were two main grounds for the taxpayer’s challenge to the legislation. (1) The only relevant head of power in the Constitution for imposition of the SG charge is s 51(ii) which empowers the Commonwealth to make laws “with respect to taxation”. The taxpayer submitted that the SG charge is not a “tax” within the meaning of s 51(ii) because, even though it might be characterised as an exaction imposed in the public interest, it was not for a public purpose as it conferred a private benefit on employees. The fact that the SG shortfall component is paid by employers into the Consolidated Revenue Fund for the benefit of employees means that it is a private liability rather than being a tax and the imposition of the SG charge is not therefore supported by any Commonwealth power. (2) Part 8 of the SGAA, which authorises the Commissioner to distribute the shortfall component to the benefiting employee (¶12-500), is not supported by any Commonwealth power and, as Pt 8 is an inseverable part of the scheme, the SG legislation is invalid. High Court upholds the validity of the SG scheme The High Court dismissed the taxpayer’s appeal (Roy Morgan Research 2011 ATC ¶20-282, 28 September 2011). Significant points from the High Court’s decision were: (1) that the imposition of the SG charge and its payment into the Consolidated Revenue Fund was for a public purpose and the SG charge was therefore a valid tax (2) the usual description of a tax encompassed its compulsory nature, being intended to raise money for governmental purposes, and not constituting payment for services rendered, and the nature of the exaction represented by the SG charge did not take it outside the constitutional concept of a tax (3) there was longstanding authority in revenue law for “public purpose” to mean for the purposes of government, and, in the case of the SG legislation, the public purpose centred on the encouragement of employers to contribute to superannuation funds to reduce the pension burden that would otherwise have to be funded by government, and (4) once the SG charge is paid by an employer and is deposited in the Consolidated Revenue Fund, it cannot be said that employees receive a private benefit because the identity of the amount is lost and it cannot be traced through the fund to a particular employee; rather, the funds are available for an appropriation to be spent on any purpose for which the Commonwealth may lawfully spend money.

Superannuation Clearing House ¶12-010 Contributions to a superannuation clearing house Since 1 July 2010, certain employers have been able to send superannuation guarantee (SG) contributions to an approved clearing house — the Small Business Superannuation Clearing House — instead of being required to send them to the various superannuation funds chosen by their employees. The clearing house facility is designed to reduce red tape and compliance costs for small businesses when meeting their SG obligations. Employers are eligible to use the clearing house facility if they have

fewer than 20 employees or have an annual aggregated turnover of no more than $10m. The clearing house distributes contributions to the relevant fund as selected by each employee or to the employer’s default fund and manages the employer’s superannuation choice obligations (¶12-040). Use of the clearing house — which is optional — discharges an employer’s legal obligation to make contributions to specific funds. A contribution by an employer for the benefit of an employee is made in compliance with the choice requirements if SGAA s 79A applies to the contribution, and various other conditions set out in SGAA s 32C(2B) (¶12-040) are complied with. For s 79A to apply, the employer must pay an amount to an “approved clearing house”, which is defined as a body specified in the regulations. SGAR s 24 specifies the Australian Taxation Office (ATO) for these purposes. This means that small businesses can choose to make SG superannuation contributions to the ATO, which is the agency that receives their PAYG payments, and the ATO then distributes the contributions to employees’ superannuation accounts. Timing of contribution to an approved clearing house The time when an employer contribution is made is important for determining: 1. if the employer has satisfied its SG obligations by the due date (¶12-230) 2. when the employer is entitled to a deduction for the contributions (¶6-123), and 3. whether the employee for whom the contributions are made is liable to excess contributions tax (¶6500). For SG purposes, the time when an employer contribution is made to an approved clearing house is set out in SGAA s 23B which provides that: • a contribution at a particular time by an employer to an approved clearing house for the benefit of an employee is treated as being a contribution of the same amount to a complying superannuation fund or an RSA for the employee at that time, if the approved clearing house accepts the payment, and • any contribution made by the approved clearing house to a complying superannuation fund or RSA as a result of the payment is disregarded (this ensures that a payment to the clearing house is not counted twice for SG purposes). Section 23B applies for the purposes of: (a) SGAA s 23, under which an employer can reduce its SG charge percentage for a quarter by making contributions to a complying superannuation fund by the 28th day following the end of the quarter (¶12-180); and (b) SGAA s 23A, which allows late payments to be offset against the SG charge (¶12-360). Section 23B only applies where contributions are made to an approved clearing house. SG contributions to a clearing house that is not an approved clearing house are not taken to be made to the fund until they are actually received by the trustee of the fund (Superannuation Guarantee Determination SGD 2005/2). The timing of contributions for income tax purposes when an employer contributes to a clearing house which then transfers the contributions to a superannuation fund is discussed at ¶6-123.

Payment and Data Standards for Employer Contributions ¶12-015 How employers should make contributions Employer superannuation guarantee (SG) or salary sacrifice contributions for employees must be made according to the SuperStream payment and data standards. SuperStream requires contributions to be made electronically and also sets out the information that must be provided to the receiving superannuation fund. The purpose of SuperStream is to ensure employer contributions are paid in a consistent, timely and efficient manner to a member’s account. It also aims to remove many of the complexities employers face

when they are dealing with a number of funds that have different arrangements for accepting contributions. SuperStream is mandatory for all employers making superannuation contributions. Employer contributions for an employee are generally made: • to a fund chosen by the employee (¶12-044), or • to a fund which the employer uses as a default fund for employees who do not choose a fund (¶12048). An employer may have different default funds for different classes of employee. Since 1 January 2014, only a fund that offers a MySuper product (¶12-048) can be a default fund. Under SISA s 34K, the Commissioner has power to determine standards relating to superannuation data and payment matters applicable to trustees of superannuation funds and to employers when they make contributions to superannuation funds (¶9-790). The standards for employers are contained in SISR reg 7.07E and 7.07EA. Contributions data An employer that makes a superannuation contribution to a fund on behalf of an employee is required to give the fund particular information about the employee and must assign a payment reference number to the contribution and include that number with the contribution (reg 7.07E). The information to be given is the employee’s full name, residential address, tax file number and telephone number. An employer is excused from giving this information if: (a) the employee has not given the information to the employer and the employer has made reasonable efforts to obtain the information from the employee; or (b) the fund is a self managed superannuation fund and the employer is a related party (¶3-470) of the fund. The trustee of a superannuation fund must generally allocate a contribution to a member’s account within three days of the contribution and the necessary contributions data being received (SISR reg 7.07H). If a contribution is not accompanied by all the necessary information, the trustee must, within five days, request further information from the employer (SISR reg 7.07G). An employer must comply with the request within 10 days, and the trustee must refund the contribution within 20 days if sufficient information has not been provided and the contribution cannot be allocated to a member. The standards determine the format in which contributions data must be given. The contribution flows separately through the payment and banking system and the fund reconciles it with the corresponding contributions data. Contributions data may be passed through a default fund to other funds If an employer’s employees belong to many different funds, an employer often has to provide contributions data to each of those funds. Regulation 7.07EA relieves the burden on an employer in such a case by providing that, if the employer gives to a fund that is a default fund for the employer information that would otherwise be required to be given to any other superannuation fund, the default fund must pass the information on to the other fund. The effect of reg 7.07EA is that an employer will be able to deliver all of its contributions data to a single location and be certain that it will be forwarded to the right destination for the employer’s employees, whether that is another default fund or any other superannuation fund. Penalty for non-compliance An employer who fails to comply with the data and payment standards may be liable to a penalty under SISA s 34N and 34Q and under TAA Sch 1 s 288-110. A summary of the data to be provided to a superannuation fund when making employer contributions for an employee can be found at: www.ato.gov.au/Super/SuperStream.

Interaction with Workplace Laws ¶12-020 Interaction of SG scheme with awards

Award or productivity superannuation, which existed in Australia before the introduction of the SG scheme in 1992, arose from an approach by the Australian Council of Trade Unions (ACTU) to the National Wage case in 1986. Because compulsory superannuation was believed to be in the long-term interests of its members, the ACTU argued (successfully) for a 3% wage rise to be paid as contributions to a superannuation fund rather than in cash. In 1987, the Australian Industrial Relations Commission (AIRC) agreed to certify agreements and make consent orders relating to award superannuation and also, where necessary, to arbitrate on industrial disputes involving superannuation matters. Three years later, the ACTU, supported by the government, argued for another 3% to be paid as award contributions to superannuation. Before the matter was settled, the federal government announced that it proposed to introduce a superannuation guarantee (SG) levy to ensure that all employees benefited from compulsory superannuation, whether or not they were covered by an award. The National Wage Case handed down by the AIRC in April 1991 set out the procedure for incorporating into an award an order that employers make superannuation contributions on behalf of their employees. Basically, the parties (generally, union and employer) needed to reach an agreement on the nomination or establishment of a superannuation fund and the amount (not greater than 3% of ordinary time earnings) that should be contributed. If the parties failed to reach agreement, the AIRC could be asked to arbitrate. Since its commencement on 1 July 1992, the SG scheme has operated independently of, but alongside, the award superannuation system. Generally, the SG scheme is designed to operate as a minimum requirement in conjunction with existing superannuation arrangements, so that any superannuation contributions by an employer in accordance with an industrial award (¶12-030) may be counted towards the prescribed minimum level of superannuation support required of the employer under SGA Act. As long as the employer’s total superannuation contributions made to one or more complying superannuation funds or RSAs in respect of a particular employee reaches the prescribed minimum level required for SG purposes, the employer will not have a liability to the SG charge. Example In 2019/20, Trimble Ltd is required under the SGA Act to provide 9.5% superannuation support for an employee. In accordance with an industrial award, Trimble already provides 3% productivity contributions to an industry superannuation fund which is a complying superannuation fund. Trimble’s SG obligations are to provide a further 6.5% superannuation support for the employee. When the further 6.5% is provided, Trimble has satisfied the requirements of both the industrial award and the SGA Act in respect of that employee.

Although the SG scheme and the award superannuation system operate concurrently, the SG legislation does not alter award provisions or the Commonwealth or state industrial relations commissions’ jurisdiction to deal with industrial disputes involving superannuation issues (SGAA s 5B). An employer who is liable under both the SG scheme and the award system must comply with the requirements of both. The taxpayer in McNevin Cessnock 98 ATC 2154 satisfied the award, but not the SG legislation, in relation to its casual employees. The AAT upheld the Commissioner’s decision to impose an SG charge, a late payment penalty and a penalty for failure to lodge an SG statement. Award modernisation — default superannuation funds On 19 December 2008, the Full Bench of the AIRC, acting under the Workplace Relations Act 1996, handed down a decision dealing with award modernisation and the making of priority modern awards (Award Modernisation decision — Request from the Minister for Employment and Workplace Relations [2008] AIRCFB 1000). The decision applied from 1 January 2010 when the awards came into effect (¶12030). In its decision, the AIRC included superannuation provisions in most awards, with the standard superannuation clause requiring an employer to use as a default fund one of the superannuation funds specified by the AIRC. The AIRC created 17 new awards for “priority” industries and occupations (eg mining, general retail, clerks and fast food), and in 14 of them it nominated the specific fund that would be an employer’s default superannuation fund if an employee failed to choose a fund (¶12-048). The AIRC

also allowed as a default fund for an employer any fund to which the employer was contributing for the benefit of employees before 12 September 2008, provided it was an eligible choice fund. The Full Bench of the Fair Work Commission issued determinations on 30 December 2013 ([2013] FWCFB 10016) varying all modern awards with effect from 1 January 2014 to give effect to the legislative requirement that employers make SG contributions on behalf of default fund employees (those who have not chosen a fund) to a specified superannuation fund or to any superannuation fund to which the employer was making contributions for the benefit of its employees before 12 September 2008, provided the fund is an eligible choice fund. A low cost and simple superannuation product called “MySuper” is the standard default fund from 1 January 2014 (¶12-050). There are currently 122 modern awards. Most industries have a modern award covering all employers and employees in that sector. Example Clause 23 of the Legal Services Award states that, unless an employee has chosen another fund, the employer must make superannuation contributions to one of six funds. These funds are: legalsuper, AustralianSuper, Tasplan, CareSuper, Statewide Superannuation Trust, Law Employees Superannuation Fund, a superannuation fund or scheme of which the employee is a defined benefit member, and a fund to which the employer was contributing before 12 September 2008 provided the fund or its successor is an eligible choice fund and is a fund that offers a MySuper product or is an exempt public sector scheme. The award applies unless a superior statutory instrument, like a collective enterprise agreement, is operating.

¶12-025 Potential conflict between award and SG obligations It is not always the case that an employer who has satisfied its SG obligations will also have complied with an industrial award to which it is a party. This is because there are some important practical points of difference between the SG scheme and the award system. • An employer who pays the SG charge instead of making superannuation contributions will not be discharged from the obligation to provide superannuation contributions under the award. • An award may contain exemptions from coverage for certain types of employees but the earnings of those employees may not be exempt for SG purposes; conversely, the SG legislation may not require contributions for certain employees (eg those earning less than $450 per month) but the award may require the contributions. • An award may require contributions to be based on flat dollar amounts rather than a percentage of ordinary time earnings as required under the SG scheme; there may also be differences in the treatment of overtime, eg whether overtime forms part of ordinary time earnings of casuals. • The frequency of payments may vary, with quarterly payments currently being sufficient for SG purposes, but monthly payments may be required under an award. Fund nominated in award An employer that is not required to make SG contributions in compliance with the choice of fund rules (¶12-040) may be required to make contributions to a superannuation fund set out in an award to which the employer is bound. In the absence of such a direction in the award itself, the employer may be able to apply to the industrial authority to have a particular fund approved. For SG purposes, the ATO has stated (Superannuation Guarantee Determination SGD 94/6) that it will only accept a contribution made into a fund, other than those nominated in an award, as being in accordance with the award if: • the award does not require contributions into a nominated fund, or • a court decision has held that the particular award cannot specify the fund into which the contributions should be made. Presumably, the ATO would also accept a contribution into a fund, other than that nominated in an award, if the employer was taking advantage of a right offered by legislation. New South Wales, Queensland and

Western Australia specifically provide that employers can fulfil their award requirements even if they make contributions to a fund other than that nominated in the award. The state industrial laws provide as follows. • Industrial Relations Act 1996 (NSW), s 124 provides that, even if an award requires an employer to pay contributions to a specified superannuation fund, the contributions may be paid to another complying superannuation fund which is nominated by the employee and approved by the employer. • Industrial Relations Act 1999 (Qld), s 405 allows an employer to pay contributions to a complying superannuation fund other than that nominated in an industrial instrument if an agreement to that effect is signed by both the employer and the employee. • The Western Australian Industrial Relations (Superannuation) Regulations 1997 allow employers who are bound by awards specifying a superannuation fund to make contributions to a fund nominated by employees. The Industrial Relations Act 1979 (WA), s 49C restrains the WA Industrial Commission from making an award which requires contributions to a particular superannuation fund unless the award requires the employer to notify the employee of the right to nominate another complying fund. Victorian employees not covered by federal awards or formal agreements can select a fund of their choice. There are no laws in either South Australia or Tasmania to allow an employee to nominate a fund other than that specified in the relevant award or industrial agreement. In the Northern Territory and the ACT, employees are effectively covered by federal awards and, as such, are not able to choose their superannuation fund. Non-union members Even if an employer is bound by an award and the award nominates a particular fund as the recipient of the employer’s superannuation contributions, for non-union members the employer may be allowed to pay award contributions to a fund other than that specified in the award. In Re Finance Sector Union of Australia; Ex Parte Financial Clinic (Vic) Pty Ltd (1993) 178 CLR 352, the High Court decided that an award had invalidly required superannuation contributions made for non-union employees to be paid into the same fund as the contributions for union members. The Australian Insurance Employees’ Union had wanted employers of non-union employees to pay award superannuation contributions into an insurance industry fund nominated in the award. A majority of the High Court held that the AIRC did not have jurisdiction to make the award, basically because the identity of the fund was not an “industrial matter” over which the commission had jurisdiction. The court added, however, that “special circumstances” could make the identity of the fund, in an industrial sense, important and thus give the commission jurisdiction to incorporate such a clause in an award. A Full Bench of the commission used the special circumstances exception when it upheld a bid by building and plumbing unions to enforce contributions for all workers in the industry — both unionists and non-unionists — into the building industry superannuation scheme or a scheme that is at least as favourable as the industry scheme (National Building and Construction Industry Award 1990, 16 June 2000, Sydney). The special circumstances in this case were the fact that non-unionists would be employed on terms and conditions less favourable to them, and less onerous to the employer, than those applying to unionists if contributions were made on their behalf to a fund whose rules differed from the rules of the building industry fund. [SLP ¶50-170]

¶12-030 Federal industrial regulation and superannuation Federal regulation under Work Choices — generally to 30 June 2009 The laws governing workplaces around Australia were fundamentally altered on 27 March 2006 when the Workplace Relations Amendment (Work Choices) Act 2005 commenced. The Act covered all private sector employers in Victoria, Northern Territory and Australian Capital

Territory and, in the other states, employers who were “constitutional corporations”. The term “constitutional corporation” covers companies such as: (i) bodies incorporated under the Corporations Act 2001 that are classified as a trading or financial corporation because their trading or financial activities are significant; and (ii) foreign corporations. Under Work Choices, employers who were constitutional corporations were covered by federal (rather than state) industrial law. Where a constitutional corporation was bound by a state award at 27 March 2006, the award was given new effect as a “notional agreement”. Notional agreements generally preserved state industrial law provisions that regulated employment conditions. Sole traders, partnerships and family trusts are not constitutional corporations. When Work Choices commenced, superannuation was made one of the matters that was not an allowable matter in a federal award. Superannuation provisions in federal awards and preserved state awards (notional agreements) in effect at 27 March 2006 continued to operate, but only until 1 July 2008 (Workplace Relations Act 1996, s 527). No federal award provision on superannuation could be made from 27 March 2006. Effective from 1 July 2008, all superannuation provisions (eg prescribing the amount of contributions or the fund to which those contributions must be paid) in federal awards and notional agreements were to become inoperative. The Work Choices provisions relating to superannuation meant that minimum superannuation coverage would have increasingly been governed solely by the SGA Act. Benefits in excess of those provided by the SGA Act would have to be provided by workplace agreements, employer-sponsored arrangements with trustees of superannuation funds, or under common law employment contracts. These benefits could, for example, be contributions in excess of the minimum prescribed for superannuation guarantee (SG) purposes or contributions being made more frequently than at the end of each quarter. The Workplace Relations Amendment (Transition to Forward with Fairness) Act 2008 repealed the Work Choices provision (s 527(5)) that prevented superannuation from being an allowable matter in a federal award. Superannuation could therefore continue to be included in federal awards beyond 30 June 2008. The reinstatement of superannuation as an allowable award matter from 1 July 2008 meant that employees could continue to receive benefits under a federal award that are not provided by the SGA Act. This is shown in the “Award modernisation” decision of the AIRC handed down on 19 December 2008 (¶12-020). Federal regulation under the Fair Work Act 2009 The Workplace Relations Act 1996 was replaced by the Fair Work Act 2009 (FW Act) from 1 July 2009. Most of the provisions of the Fair Work legislation started on that day, although some important elements (eg the modern awards, which include superannuation provisions) did not commence until 1 January 2010. The Fair Work legislation covers: • people employed by a constitutional corporation • people employed in Victoria, the Northern Territory or the ACT • people employed by the Commonwealth or a Commonwealth authority • waterside employees, maritime employees or flight crew officers employed in connection with interstate or overseas trade or commerce, and • people employed by sole traders, partnerships, other unincorporated entities and non-trading corporations in New South Wales, Queensland, South Australia and Tasmania. The AIRC was replaced by the Fair Work Authority and the Fair Work Ombudsman on 31 December 2009. Modern awards — from 1 January 2010 Section 139(1)(i) of the FW Act provides that terms about superannuation may be included in modern

awards. Modern awards commenced on 1 January 2010. In its first decision on their content, the Full Bench of the Australian Industrial Relations Commission (AIRC) indicated that it would include superannuation provisions in most modern awards ([2008] AIRCFB 1000). The AIRC decision: • ruled on the default superannuation fund to be used by employers under choice of fund (¶12-020), and • stated that the standard superannuation clause in modern awards would deal with the superannuation rights and obligations of employers and employees, employer contributions under the SG scheme, and voluntary employee contributions from post-tax income. Example Clause 22 of the General Retail Industry Award 2010 is an example of a standard superannuation clause. The key obligation is set out in cl 22.2 which states that an “employer must make such superannuation contributions to a superannuation fund for the benefit of an employee as will avoid the employer being required to pay the SG charge under superannuation legislation with respect to that employee”.

The superannuation clause in a modern award may require an employer to make superannuation contributions in circumstances where the SG legislation does not require contributions to be made. An employer’s obligations may be affected, for example, by: (i) a wider span of hours, eg hours paid at overtime rates being taken into account when calculating “ordinary time earnings”; or (ii) contributions being required even if an employee earns less than $450 in a month, or when an employee is away from work and receiving workers’ compensation. As an example, the Hospitality Industrial (General) Award 2010 requires contributions to be made on wages of $350 or more in a calendar month. Employees who are not entitled to superannuation under the SGA Act may therefore be entitled under a modern award. Since 1 January 2014, modern awards must include a term that an employer covered by the award must make contributions to a superannuation fund for the benefit of an employee covered by the award so as to avoid liability to pay SG charge in relation to that employee (FW Act s 149B). A modern award also includes a “default fund term” requiring the employer, where an employee has not chosen a fund, to contribute to a superannuation fund that offers a MySuper product and that is specified in the default fund term of the award (¶12-051) (FW Act s 149C; 149D). The Full Bench of the Fair Work Commission issued determinations on 30 December 2013 ([2013] FWCFB 10016) varying all modern awards with effect from 1 January 2014 to give effect to these requirements. A modern award does not apply to a “high income earner”, defined as a person who has a guarantee of annual earnings that exceed the “high income threshold” which is $145,400 per annum from 1 July 2018. Arrangements not covered by modern awards Industrial agreements in force at 1 January 2010 remain unaffected by modern awards, and State Enterprise Agreements continue until their termination. Although state awards (rather than modern awards) applied to most employers who are not constitutional corporations, all the states except Western Australia have agreed to refer their industrial relations power over private sector employers to the Commonwealth. State awards generally continue to apply for 12 months from the referral date (eg from 1 January 2010 in the case of New South Wales). The important exclusion from the referral process is government, including local government, employees.

Choice of Fund ¶12-040 Choice of fund by employees The choice of fund rules, contained in SGAA Pt 3A (s 32A to 32ZAA), have applied since 1 July 2005. Under choice of fund, employers must generally allow employees to choose the fund into which their SG contributions will be paid. Penalties in the form of an increased SG charge (¶12-055) are imposed for non-

compliance. Compliance with choice of fund An employer will most commonly comply with the choice of fund rules by making SG contributions in one of the following ways (s 32C(1) and (2)): • to a particular fund after an employee initiates the choice process by giving written notice to the employer proposing the fund (¶12-044) • to a fund chosen by an employee after the employer initiates the choice process by giving a standard choice form to the employee (s 32C(1)) (¶12-046), or • to a default fund chosen by the employer — generally, this fallback arrangement will arise after the employee fails to make a choice under either of the above two options (¶12-048). Compliance using an approved clearing house Since 1 July 2010, businesses with fewer than 20 employees or, from 1 July 2016, that have an aggregated turnover of no more than $10m have been able to comply with their choice of fund obligations by making SG contributions to an approved clearing house which will forward the contributions to the employee’s chosen fund or to the employer’s default fund. The Small Business Superannuation Clearing House (¶12-010) has been established and approved for this purpose. A contribution by an employer complies with the choice of fund rules if: • the contribution is to an “approved clearing house” as defined in s 79A, ie a body specified in the regulations — the ATO is specified for these purposes (SGAR s 24) • the employee or, from 1 January 2017, the Commissioner gives the employer written notice of the employee’s choice of fund • the employer passes the information contained in the written notice to the approved clearing house within 21 days after receiving it and no later than when the contribution is made, and • the approved clearing house accepts the information (s 32C(2B)). If an employee does not choose a fund, the employer can make contributions through an approved clearing house and instruct that the contributions be sent to a particular default fund selected by the employer. The contribution is treated as having been made on the employer’s behalf by the approved clearing house as the employer’s agent. The requirement that the approved clearing house accept the information ensures that only eligible businesses that are registered with an approved clearing house can use this facility to comply with their choice obligations. Employer contributions deemed to be in compliance with choice rules A contribution to a fund by an employer for the benefit of an employee is deemed to be in compliance with the choice rules if the contribution is made under a state industrial award, a preserved state agreement or a federal industrial agreement such as an Australian workplace agreement, a collective agreement, a workplace determination and an enterprise agreement (s 32C(6) to (8)). These awards, agreements or determinations may specify a superannuation fund, or funds, that an employer may contribute to for the benefit of an employee, and the employer is not required to offer choice to the employee by providing a standard choice form as set out in s 32N (¶12-046). Example Li works in a factory and her employment conditions are set out in an enterprise agreement between her union and her employer. The enterprise agreement nominates a particular industry superannuation fund to receive employer superannuation contributions made on her behalf. Li is not eligible to choose a fund for the receipt of her employer’s SG contributions.

Despite s 32C, a contribution fund by an employer for the benefit of an employee does not comply with the choice of fund requirements if the employer imposes a direct cost or charge on the employee as a consequence of having to contribute to that fund (SGAA s 32CA). If, however, an employee is left financially disadvantaged as a result of the choice rules, but the financial disadvantage is not related to any action by the employer (eg if the fund chosen by the employee increases its fees), this will not come within s 32CA. Employees covered by enterprise agreements and workplace determinations Currently, where an employer makes SG contributions for an employee under an enterprise agreement or workplace determination, the employer is deemed to satisfy the choice of fund requirements (s 32C(6)) and does not have to give a standard choice form to the employee. The employee is not therefore given the opportunity to choose their own superannuation fund. The Financial System Inquiry Final Report (Treasury, November 2014) recommended the removal of provisions in the SGA Act that deny some employees the ability to choose the fund that receives their SG contributions. These provisions exclude employees whose employment is governed by enterprise agreements, workplace determinations and some awards. The report noted that, in principle, this recommendation should apply to all employees but, for Constitutional reasons, the Commonwealth cannot instruct changes to state agreements and awards. State governments were, however, encouraged to extend choice to all employees. The Final Report of the Royal Commission into Trade Union Governance and Corruption, released on 28 December 2015, recommended that enterprise bargains should no longer specify a mandatory superannuation default fund. Recommendation 51 of the final report was for s 32C(6), (6A), (6B), (7) and (8) to be repealed “and all other necessary amendments be adopted to ensure all employees have freedom of choice of superannuation fund”. In response, the government agreed to extend choice to employees covered by enterprise agreements and workplace determinations. The Superannuation Legislation Amendment (Choice of Fund) Bill 2016 proposed that s 32C(6) be amended so that, where an enterprise agreement or workplace determination is made on or after 1 July 2016, an employer would need to allow employees to choose their own superannuation fund, unless other circumstances exempt the employer from doing this. The employer would be required to give a standard choice form to an employee as set out in s 32N (¶12-046), including on commencement of employment and on written request from the employee, and to respond if an employee initiated choice of fund. If an employee did not choose a fund, the employer could continue to make SG contributions for the employee to the same fund as it was using under an enterprise agreement or workplace determination made before 1 July 2016 (proposed s 32C(6AA)). An employer who made contributions in respect of an employee who is a member of a defined benefit scheme (¶12-046) would be relieved of liability for not complying with these provisions if the employee’s benefit in the scheme would not be affected if contributions were made to another fund (proposed s 20(3A)). The Superannuation Legislation Amendment (Choice of Fund) Bill 2016 lapsed when parliament was prorogued for the Federal election on 2 July 2016. A Bill introduced into parliament on 14 September 2017 — the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 2) Bill 2017 — proposed substantially the same changes as were contained in the 2016 Bill. The 2017 Bill was proposed to apply to enterprise agreements and workplace determinations made on or after 1 July 2018. The Bill lapsed when parliament was prorogued for the May 2019 Federal election. The enterprise bargaining provisions have not been reintroduced into parliament since the election.

¶12-044 Choice of fund initiated by employee An eligible employee may initiate the choice process by giving their employer a written notice proposing a particular complying superannuation fund, scheme or RSA as the employee’s chosen fund (SGAA s 32F(1)). From 1 January 2017, an employee may give their choice of fund to the Commissioner (through the online service ATO Online available on myGov), rather than to the employer.

The fund becomes the employee’s chosen fund two months after the employee (or, from 1 January 2017, the Commissioner) gives the notice to the employer or such earlier time as the employer determines (s 32F(2)). If an employee notifies their choice to the Commissioner from 1 January 2017, the Commissioner may disclose the employee’s TFN and certain protected information to their employer for the purposes of informing the employer of the employee’s choice of fund (s 32W). Circumstances in which employer may reject employee’s choice In two circumstances, an employer may reject a fund chosen by an employee under s 32F. In neither case, however, is the employer required to reject the fund. (1) Employee fails to provide certain information. An employer may refuse to accept the fund chosen by an employee if the employee does not provide: (a) a written statement setting out contact details for the fund and any other prescribed information, or (b) written evidence that the fund will accept contributions made by the employer for the benefit of the employee (SGAA s 32FA(1)). An employee will have to give an employer a written statement from the trustee of the fund that the fund is complying. If the employee chooses a self managed superannuation fund, the employee must provide documentation from the ATO confirming that the fund is regulated. This written statement allows the employer to presume the fund is complying and protects the employer from being penalised for contributing to a non-complying fund. (2) Employee has chosen a fund in previous 12 months. An employer may refuse to accept a fund chosen by the employee if the employee has chosen another fund in the previous 12 months. The employee’s right to initiate the choice process may, therefore, at the employer’s discretion, be limited to once every 12 months (s 32FA(2)). Limitations on employee’s choice of fund There are two limitations on the fund that may be chosen by the employee under s 32F. (1) Fund must be an eligible choice fund. An employee can only choose a fund that is an eligible choice fund for the employer at the time the choice is made (SGAA s 32G(1)). A fund is an eligible choice fund for an employer at a particular time if: (a) it is a complying superannuation fund or scheme at that time (b) it is an RSA (c) at that time, a benefit certificate in relation to the fund is conclusively presumed under SGAA s 24, in relation to the employer, to be a certificate in relation to a complying superannuation scheme (¶12-230), or (d) contributions made by the employer to the fund at that time are conclusively presumed under SGAA s 25 to be contributions to a complying superannuation fund (SGAA s 32D) (¶12-230). (2) A fund to which the employer can contribute. The fund chosen by the employee must be a fund to which the employer can make contributions for the benefit of the employee at the time the choice is made (s 32G(2)). Public offer funds are not allowed to require an employer to sign a participating employer agreement before accepting contributions on behalf of an existing fund member. The acceptance of contributions from a new employer for an existing member must not be conditional on the new employer becoming a standard employer-sponsor of the fund (SISR reg 7.04A). This is intended to allow employees to remain in a fund when they commence work with a new employer (¶3-220).

Fund is subject to APRA direction or ASIC stop order If a fund chosen by an employee has been identified by APRA as a fund that is not meeting its obligations, APRA can make a direction to freeze the fund’s assets. ASIC may also place a stop order on a fund’s investments if it is concerned that product disclosure statements may be defective. If such an order or direction is made, the fund cannot receive employer contributions. If an employee’s chosen fund becomes subject to an APRA direction or an ASIC stop order, the employer must send the employee’s SG contributions to the employer’s default fund (¶12-048) by the cut-off date for the quarter. An employer who sends the SG contributions to a fund before becoming aware of an APRA direction or ASIC order would need to cancel the payment and send the contributions to an alternative fund by the cut-off date for the quarter. The employer must give affected employees a new standard choice form (¶12-046) within 28 days of becoming aware of the direction or order being made. Fund may cease to be an employee’s chosen fund A fund ceases to be an employee’s chosen fund where the employee chooses another fund and neither the employee nor the Commissioner gives the employer written notice stating that the old fund continues to be a chosen fund for the employee (s 32H(1)). From 1 January 2017, an employee may give their employer or the Commissioner a written notice stating that the old fund continues to be a chosen fund for the employee (s 32H(1A)). A fund also ceases to be an employee’s chosen fund if: (a) the employee requests a standard choice form from the employer (s 32N(3)) and the employer does not comply within 28 days (unless the employer has given the employee a standard choice form within the last 12 months) (b) it is impossible for the employer to contribute on behalf of the employee to the chosen fund, eg because the chosen fund ceases to accept contributions, or (c) the fund ceases to be an eligible choice fund for the employer, eg because it is no longer a complying fund (s 32H(2) to (4)).

¶12-046 Choice of fund initiated by employer An employer is required to give a standard choice form to an employee, and in that way initiate the choice of fund process, unless the employee has chosen a fund under SGAA s 32F (¶12-044) by the time the employer would otherwise be required to give a standard choice form. When employer must provide standard choice form An employer must provide a standard choice form: • within 28 days of the employee first commencing employment with the employer — during this 28-day period, if the employee does not choose a fund, the employer can satisfy the choice obligations by paying to an eligible choice fund (¶12-048) • within 28 days of an employee request for a standard choice form (but not if the employee has been given such a form within the last 12 months) • within 28 days of the employer becoming aware that there ceased to be a chosen fund for the employee because of the employer being unable to contribute to a particular fund or because the fund has ceased to be an eligible choice fund, and • where the employer is contributing to a fund for the benefit of the employee, not being a fund chosen by the employee, and the employer changes the fund to which contributions are made, within 28 days after the change (SGAA s 32N).

An employer must also give an updated standard choice form to an employee if the employer discovers that the fund specified in the original standard choice form is a fund to which the employer cannot contribute for the benefit of the employee (s 32N(5A)). The updated standard choice form must be given within 28 days of the employer becoming aware that the employer cannot contribute to the fund first specified. This may be the case, for example, if the assets of the employee’s chosen fund are frozen by APRA (¶12-044). An employer may also give a standard choice form at any time (s 32N(6)). A standard choice form must contain the following information: (a) a statement that the employee may choose any eligible choice fund for the employer as a chosen fund; (b) the name of the fund that the employer will contribute to if the employee does not make a choice; (c) other information that is required by the regulations to be included in the form; and (d) if the employee is a member of a defined benefits scheme, information about that scheme as is required by the regulations to be included (SGAA s 32P). SGAR s 17 states that, for these purposes, the standard choice form is the form approved under TAA Sch 1 s 388-50. When employer does not have to provide standard choice form An employer does not have to provide a standard choice form to an employee who has chosen a fund before the employer’s obligation to provide the form arises (SGAA s 32NA(1)). An employer is also not required to give an employee a standard choice form if the employer is satisfying the choice of fund requirements by making contributions of a kind mentioned in SGAA s 32C(3) to (9) for the benefit of the employee (s 32NA(2)). This includes contributions to the CSS or PSS or under the Superannuation (Productivity Benefit) Act 1988, contributions under certain agreements and workplace determinations such as AWAs, collective agreements and enterprise agreements, contributions under notional agreements preserving state awards and under preserved state agreements, contributions under state awards and contributions made under prescribed legislation as set out in SGAR s 15 (reg 9B before 15 September 2018). Contributions for employees covered by enterprise agreements and workplace determinations are discussed at ¶12-040. An employer is also not required to provide an employee with a standard choice form: • where the employee chose a fund prior to 1 July 2005 and that fund is taken to be the chosen fund (s 32NA(3)) • if an employee is a member of an unfunded public sector scheme and is not a Commonwealth employee who is a member of the CSS or the PSS (s 32NA(4)) • if an employee leaves employment before the time the employer would be required to give the employee a form (s 32NA(5)), and • generally from 1 July 2015, if an employee is, within the meaning of s 30(2) of the Migration Act 1958, the holder of a “temporary visa” (s 32NA(11)), ie a visa to remain in Australia during a specified period, until a specified event happens or while the holder has a specified status. A temporary resident under the Migration Act includes New Zealand citizens even though New Zealand citizens can generally stay indefinitely in Australia. If superannuation benefits are transferred on or after 1 July 2015 from a chosen fund or a default fund to a successor fund without the consent of the member, eg as a result of a superannuation fund merger, the successor fund will be taken to be the chosen fund or the “successor default fund” (s 32C(2AB)) for the employee. Contributions by the employer to the successor fund for the benefit of the employee will satisfy the choice of fund requirements and the employer will not need to give a standard choice form (s 32NA(1A)). An employer is not required to give an employee a standard choice form if it is a condition of the employment that the employee chooses a fund from funds that include all funds that are eligible choice funds for the employer at the time the choice is made (s 32NA(6)). This exemption only applies where the

employer does not have an arrangement to make contributions to a fund for the benefit of an employee in the event that an employee fails to choose a fund. Defined benefit member of a defined benefit scheme If the employee is a defined benefit member of a defined benefit scheme, the employer does not have to provide a standard choice form if the defined benefit scheme is certified by an actuary to be in surplus under SGAA s 20(2) (s 32NA(7)). One of the requirements for a defined benefit fund to be considered to be in surplus is for an actuary to provide a certificate stating that, in their opinion, at all times for the relevant period, the assets of the fund are, and will be, equal to or greater than 110% of the fund’s liabilities. In recognition of the fact that it would be extremely difficult for an actuary to certify that this condition holds and will continue to hold at all times during a quarter, a fund will be taken to be in surplus if an actuary certifies that there is “a high probability” that the assets of the fund are, and will be, equal to or greater than 110% of the fund’s liabilities (s 20(2)). An employer is also not required to provide a standard choice form to a defined benefit member of a defined benefit scheme where: (a) SGAA s 20(3) is satisfied in relation to the defined benefit member because the member has accrued their maximum benefit in the scheme (s 32NA(8)), or (b) on the termination of their employment, the member would be entitled to the same amount of benefit from the defined benefit scheme whether or not they chose a new fund (s 32NA(9)).

¶12-048 Use of default fund when employee does not choose If an employee does not choose a fund, either by giving written notice of choice to the employer or in response to the employer giving a standard choice form, the employer will contribute to a default fund of the employer’s choice. This default fund mechanism is very important because approximately 80% of individuals who hold a superannuation account have their SG contributions paid into a default superannuation account. Since 1 January 2014, it is generally only funds offering a MySuper product that are eligible to be an employer’s default fund and to accept default contributions. The transition of default funds to MySuper products is discussed at ¶12-050. An employer’s choice of default fund may also be limited by the fact that the employer may have to use a default fund specified in a modern award (¶12-020). The selection of default funds for modern awards is discussed at ¶12-051. Contributions to a default fund Since 1 July 2015, employer contributions have qualified as contributions to a default fund in compliance with the choice of fund rules if, when the contributions are made, they satisfy the following conditions in SGAA s 32C(2): (1) there is no chosen fund for the employee (s 32C(2)(a)) (2) the fund is an eligible choice fund (¶12-044) for the employer (s 32C(2)(b)) (3) the fund: (i) is specified in the standard choice form provided to the employee (¶12-046) as the fund to which the employer will contribute if the employee does not make a choice, or will be specified within the time required for a standard choice fund to be provided, or (ii) if the employer has not contributed, and cannot contribute, to a fund that was first specified by the employer — will be specified within 28 days of the employer becoming aware that the employer cannot contribute to the first specified fund, or

(iii) meets the requirements to be a successor default fund under s 32C(2AB), ie the employee’s interest in an original fund is transferred to a new fund without the member’s consent, the original fund satisfied the conditions to be a default fund in (i) or (ii) above, and the new fund is a “successor fund” (¶3-360) (s 32C(2)(ba)) (4) a class of beneficial interest in the fund is a MySuper product (s 32C(2)(c)) (5) the fund complies with requirements in the regulations relating to the provision of a benefit in respect of MySuper members that is payable only in the event of the death of the member (s 32C(2) (d)), and (6) the fund complies with requirements in the regulations relating to offering a benefit in respect of nonMySuper members that is payable only in the event of the death of the member (s 32C)(2)(e)). These conditions in s 32C(2) mean that the default fund used by an employer must satisfy the MySuper requirements set out in the SIS Act and SIS Regulations (Chapter 9). Contributions do not satisfy s 32C(2) if the employer is required under SGAA s 32N to give the employee a standard choice form (¶12-046) and the employer has not done this by the required time, but can do so once the employer gives the form to the employee (s 32C(2A)). Section 32C(2)(ba) does not apply from 1 July 2015 if the employee is the holder of a temporary visa within the meaning of the Migration Act 1958, ie a visa to remain in Australia during a specified period, until a specified event happens or while the holder has a specified status (s 32C(2AA)). An employer may be required to use an alternative default fund if an APRA direction or ASIC stop order affects the default fund chosen by the employer (¶12-044).

¶12-050 Transition of default funds to MySuper products There is a two-stage process for the transition of default funds to MySuper products. Stage 1 From 1 January 2014, default contributions (¶12-048) by employers covered by a modern award (¶12020) could only be made to a default fund specified in the award. In order for a superannuation fund to be named in a modern award, it must offer a MySuper product. The Fair Work Commission is responsible for the default superannuation fund process (¶12-051). Stage 2 By 1 July 2017, trustees of superannuation funds offering MySuper products needed to have transferred the existing balances of their default members to a MySuper product. This period could be extended in limited circumstances where existing obligations affected a trustee’s ability to transfer balances. Trustees did not have to transfer existing member balances that relate to an entitlement to a defined benefit or to certain legacy products. A fund that determined it did not have sufficient scale to offer a MySuper product was required to transfer their members’ accrued default amounts to a fund offering a MySuper product by 1 July 2017. Broadly, the “accrued default amount” is the entire balance of a member’s account where an investment choice has not been exercised or if it is held in a default investment option of the fund (¶9-150). A complying superannuation fund that was required to transfer a member’s accrued default amount to a MySuper product in another complying fund may be entitled to transfer realised capital and tax losses and to defer income tax liabilities by electing for asset roll-over relief (¶7-130). Key elements of MySuper products MySuper product must meet core criteria set out in the fund’s trust deed and SIS Act, and trustees of funds providing these products are required to meet additional prudential requirements under the SIS Act (see Chapter 9). MySuper products have a single investment option and restrictions on financial advice.

¶12-051 Default funds in modern awards Since 1 January 2014, it is generally only funds that offer a MySuper product (see Chapter 9) that can accept default contributions and be listed as a default fund in modern awards. The Fair Work Act 2009 (FW Act) provides the process for the selection and ongoing assessment of superannuation funds eligible for nomination as default funds in modern awards. Default fund process Modern awards specify particular funds to which employers are required to make compulsory superannuation contributions for the benefit of employees who are covered by the award and have not chosen a fund (default fund employees). A failure to make contributions for such employees to a default fund specified in the award constitutes a contravention of the award and exposes the employer to civil penalties under the FW Act. The Full Bench of the Fair Work Commission issued determinations on 30 December 2013 ([2013] FWCFB 10016) varying all modern awards with effect from 1 January 2014 to give effect to these requirements (¶12-030). The key features of the default fund process in the FW Act are as follows. (1) Modern awards must include a term requiring an employer covered by the award to make contributions to a superannuation fund for the benefit of an employee covered by the award so as to avoid SG charge in relation to the employee (FW Act s 149B). (2) A modern award must include a “default fund term”, defined as a term that requires, permits or prohibits an employer covered by the award to make contributions to a superannuation fund for the benefit of an employee who is covered by the award and has no chosen fund (FW Act s 149C). (3) A default fund term of a modern award must require an employer covered by the award to make contributions to a superannuation fund that: (a) offers a standard MySuper product (see (5) below); and (b) is specified in the default fund term of the award in relation to that product. This requirement only applies if the employer would be liable to SG charge in relation to the employee if the employer fails to make contributions and the employer is not already making contributions to a superannuation fund: (i) that offers an employer MySuper product that is on the Schedule of Approved Employer MySuper Products (see below); (ii) of which the employee is a defined benefit member; (iii) that is an exempt public sector superannuation scheme; (iv) that is a public sector superannuation scheme; or (v) where a law of a state requires the employer to make contributions for the benefit of the employee. (4) The Fair Work Commission (FWC) must conduct four yearly reviews of default fund terms in modern awards (FW Act s 156A). (5) In the first stage of a four-yearly review, an Expert Panel of the FWC makes and publishes the Default Superannuation List — the list must specify each “standard MySuper product” (ie a MySuper product that is not an employer MySuper product (FW Act s 23A)) that the FWC has determined under FW Act s 156E to be included on the list (FW Act s 156B). (6) Before the Default Superannuation List is made, the FWC publishes a notice inviting superannuation funds that offer a standard MySuper product to apply to have the product included on the list (FW Act s 156C) — all funds with a standard MySuper product may apply to have the product included on the list. (7) In relation to applications to have a product included on the list: (i) the FWC must ensure that all persons and bodies have a reasonable opportunity to make written submissions to the FWC about an application; (ii) a person or body that makes a written submission must disclose any interest they have in the superannuation fund that made the application or that is referred to in the submission; and (iii) the FWC must publish any submission that is made (FW Act s 156D).

(8) The Expert Panel compiles the Default Superannuation List by determining the standard MySuper products that it considers are in the best interests of default fund employees covered by modern awards, having regard to the criteria set out in the legislation (FW Act s 156E). (9) The criteria to be taken into account by the Expert Panel are: (i) the appropriateness of a MySuper product’s long-term investment return target and risk profile; (ii) a superannuation fund’s expected ability to deliver on the MySuper product’s long-term investment return target, given its risk profile; (iii) the appropriateness of the fees and costs associated with the product; (iv) the net returns on contributions invested in the product; (v) the superannuation fund’s governance practices; (vi) insurance offered in relation to the product; (vii) the quality of member advice; (viii) the administrative efficiency of the fund; and (ix) any other matters the FWC considers relevant (FW Act s 156F). (10) In the second stage of the four-yearly review, a Full Bench of the FWC must, as soon as practicable after the Default Superannuation List is made, review the default fund term of each modern award (FW Act s 156G). (11) After reviewing the default fund term of a modern award, the FWC must make a determination varying the term: (i) to remove every superannuation fund that is specified in the term in relation to a standard MySuper product; and (ii) to specify instead at least two, but not more than fifteen, superannuation funds in relation to standard MySuper products (unless the FWC is satisfied that particular circumstances relating to the range of occupations covered by the award warrant the inclusion of more than fifteen funds). A product can only be specified in the default fund term if it is on the Default Superannuation List and the FWC is satisfied that it would be in the best interests of the default fund employees to whom the modern award applies (FW Act s 156H). (12) A Full Bench of the FWC reviews the default fund term in each modern award and determines which funds from the Default Superannuation List best meet the interests of employees to whom the particular award applies. Only employers and employees and their representative organisations are entitled to make submissions to the Full Bench. The FW Act does not entitle superannuation funds to appear before the Full Bench, but the Full Bench can inform itself in any manner it considers appropriate, which does not preclude it from seeking input or agreeing to hear submissions from superannuation funds. “Employer MySuper products” A similar approval process applies for the inclusion of “employer MySuper products” on a Schedule of Approved Employer MySuper Products. An employer MySuper product (FW Act s 23A) is: (a) a tailored MySuper product, ie a MySuper product that is offered by a public offer superannuation fund to one large employer (and its associates) with at least 500 employees who are members of the fund; or (b) a corporate MySuper product, ie a MySuper product offered by a non-public offer fund with a single employer-sponsor (or associated employer-sponsors) and administered in-house by the employer. Both a superannuation fund that offers an employer MySuper product and an employer to which the product relates can apply to the FWC to have the product included on the Schedule of Approved Employer MySuper Products (FW Act s 156N). The FWC (constituted as an Expert Panel) will make the Schedule (FW Act s 156L) specifying any employer MySuper products that satisfy the criteria for inclusion and whose inclusion would be in the interests of default fund employees to which a product relates. If an employer MySuper product is on the Schedule, an employer covered by a modern award can make contributions, for the benefit of a default fund employee, to a superannuation fund that offers the product. Applications to have products listed The FWC released a statement on 11 March 2014 ([2014] FWCFB 1146) finalising the notices, forms and timetable for its 2014 review of default fund terms in modern awards. The FWC invited superannuation funds offering MySuper products to apply to have their products listed on the Default Superannuation List and the Schedule of Approved Employer MySuper Products. Applications had to be lodged with the FWC by 28 April 2014 with further submissions due by 10 June 2014. The FWC would then consider whether to call for further submissions and/or conduct hearings in relation to the applications and submissions received. Information about future proceedings would be advised to those who have lodged an application

or submission and will also be published on the FWC website. In 2014, the Financial Services Council successfully applied for the FWC’s expert panel to be dismissed on the ground that it was not sufficiently independent. A new expert panel needs to be appointed before the FWC can restart its role in overseeing default fund selection, but this has not so far happened. For further details of the FWC processes, see the FWC website at www.fwc.gov.au/awards-andagreements/modern-award-reviews/superannuation-fund-reviews. Changes to the default fund system recommended The Financial System Inquiry Final Report (Treasury, November 2014) recommended the introduction of a formal competitive process to allocate new default fund members to MySuper products, unless a Productivity Commission review by 2020 concludes that the Stronger Super reforms have led to significant improvement in competition and efficiency in the superannuation industry. The competitive process could be an auction or tender in which each fund would be required to compete for new workforce entrants to be allocated to the fund’s MySuper product. Successful funds would be required to provide the same product to their existing default members. Employers would no longer be required to select default funds for employees and there would generally be no need to specify default funds in employment contracts and awards. Responding to the recommendation, the government asked the Productivity Commission to develop alternative models for a process for allocating default fund members to products. The final report of the Productivity Commission (“Superannuation: Assessing Efficiency and Competitiveness”) released on 10 January 2019 called for a new mechanism for default funds. Members would only ever be allocated to a default fund once, when they entered the workforce. New employees would be given a choice from a “best in show” shortlist of up to 10 superannuation products set by a competitive and independent process. Any member who did not have an existing account and who failed to choose a fund within 60 days would be defaulted to one of the products on the shortlist selected by sequential allocation. The shortlist should be in place by the end of June 2021 with the new default fund process fully in place by the end of December 2021. The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released on 1 February 2019 agreed with the Productivity Commission that default superannuation accounts should only be created for new workers or workers who do not already have a superannuation account. Default accounts should be carried over by members when they move jobs. The Royal Commission recommended that machinery be developed for “stapling” a person to a single default account. The government has said that it agrees with the recommendation that a person should have only one default account, but no further action has been taken to implement the recommendation.

¶12-052 Trustees prohibited from offering incentives to employers Subject to certain exceptions, a trustee of a superannuation fund must not use goods or services to influence employers (SISA s 68A). A trustee of a superannuation fund, or an associate of a trustee, is prohibited from: • supplying, or offering to supply, goods or services to an employer, or a relative or associate of an employer • supplying, or offering to supply, goods or services to any of those persons at a particular price, or • giving or allowing, or offering to give or allow, a discount, allowance, rebate or credit in relation to the supply of goods or services to such persons, if that action could reasonably be expected to: • influence the choice of the fund into which the person pays superannuation contributions for employees of the person who have no chosen fund, or

• influence the person to encourage one or more of the person’s employees to remain, or apply or agree to be, a member of the fund (SISA s 68A(1)). Trustees and their associates are also prohibited from refusing to provide goods or services to employers or their associates where it is reasonable to conclude that the refusal is done because the employer has not chosen the fund as the default fund or the employer did not encourage their employees to stay with or become a member of the fund (s 68A(2)). Exceptions to the prohibitions Despite these prohibitions, a trustee may, without penalty (SISR reg 13.18A): • supply a business loan on a commercial arm’s length basis to an employer where only the employer is required to be a member of the fund • supply a clearing house service to an employer which forwards the contributions and related information made by the employer on behalf of their employees to their chosen funds • provide an employer or the employer’s employees with advice or administrative services, or • supply goods or services to an employer where the supply is also available to all of the employer’s employees who are members of the fund on terms not less favourable than the terms offered to the employer (eg low cost health insurance). Civil liability of the trustee Contravention of s 68A is a civil offence which is punishable by a fine up to 2,000 penalty units (where the value of a penalty unit is $210) (s 68A(4A)). A victim who suffers loss or damage as a result of a trustee breaching the prohibitions in s 68A may recover the amount of the loss or damage by action against the offending trustee. The action must be commenced within six years after the cause of action arose (s 68A(5), (6)). No recovery of loss or damage against an employer Section 68A does not give a victim the right to recover against an employer who may have benefited from the trustee’s contravention.

¶12-055 Penalties for breaches of choice rules Employers not liable to compensate for loss or damage Employers are protected from liability to compensate a person for loss or damage arising from anything done by the employer in complying with choice of fund rules (SGAA s 32ZA). If, for example, an employee selects a fund from material provided by a superannuation trustee and the fund subsequently performs badly, the employer would not be liable to compensate the employee. Employers liable to penalties for non-compliance Penalties apply where an employer contravenes the choice of fund requirements. The penalty depends on whether contributions are, or are not, made to a defined benefit scheme. The key sections are SGAA s 19(2A) and (2B) which potentially give rise to an increase in the amount of an employer’s SG shortfall for a quarter determined under SGAA s 19(1) (¶12-150). Section 19(2A) applies when an employer makes contributions to an RSA or superannuation fund (other than a defined benefit scheme) which are not in compliance with choice of fund. Section 19(2B) applies where the contributions are paid to a defined benefit scheme. In both cases the “choice penalty” is paid by the ATO to the employee. $500 cap on choice penalty for an employee There is a $500 cap on the amount of choice penalty for an employee (SGAA s 19A). There may be a cap for either: (a) a particular quarter; or (b) a notice period, which can consist of multiple quarters.

A notice period started on 1 July 2005, the day on which the employee is first employed by the employer, or once the preceding notice period has ended. A notice period will end once the Commissioner gives the employer written notice that the notice period has ended (SGAA s 19A(4)). Once a new notice period has begun, an employer can accumulate shortfall liabilities to the maximum $500 cap, if the employer breaches choice again. Example In respect of a particular employee, an employer is liable for a $300 shortfall in a quarter because of breach of choice. The employer also breaches choice in the next quarter and is liable for an additional shortfall of $300. Under s 19A(2), the shortfall for the first quarter will be $300 and for the second quarter it will be the difference between the amount for the previous quarter and $500, being $200. All subsequent quarters within the same notice period in which the employer breaches choice will not accumulate a penalty, as the $500 cap has been reached. A new penalty may start to accumulate once the Commissioner gives notice that the first notice period has ended.

An increase in SG shortfall includes an increase from a nil amount (s 19(2D)). The Commissioner may reduce any increase in an employer’s shortfall (s 19(2E)), and has issued guidelines on matters that will be taken into account (Practice Statement PS LA 2006/6). Contributions to complying superannuation fund or RSA If an employer contributes to a complying superannuation fund or RSA (other than a defined benefit superannuation scheme) for the benefit of an employee during a quarter and the contributions do not comply with the choice of fund requirements, the employer’s individual SG shortfall (¶12-150) for the employee for the quarter is increased. The increase is calculated using the formula in s 19(2A): 25% × (notional quarterly shortfall − amount worked out under s 19(1)) where: notional quarterly shortfall is the amount that would have been worked out under s 19(1) if the no choice contributions had not been made. Any increase in an employer’s quarterly shortfall will also lead to an increase in the nominal interest component (SGAA s 31(1)). Three steps need to be taken to determine whether any increase in SG shortfall arises in respect of an employee. • Step 1: Determine the quarterly shortfall for the employee. • Step 2: Determine any increase in the quarterly shortfall. • Step 3: Impose a $500 ceiling on the amount of the increase. Example Lucille is the only employee of Roger. Lucille has chosen a superannuation fund in compliance with the choice of fund requirements. Her salary is $36,000 (ie $9,000 per quarter) and this is also her ordinary time earnings. For 2019/20, the applicable SG charge percentage is 9.5%. Situation 1 — Employer makes no SG contribution Roger does not make any superannuation contributions for the quarter for Lucille. Since the prescribed SG charge percentage has not been reduced by any amount, the charge percentage remains at 9.5% and the quarterly shortfall under s 19(1) in respect of Lucille is $855 (ie 9.5% × $9,000). Since Roger does not make any contributions in respect of Lucille, s 19(2A) does not apply. Roger is not subject to any increase in the SG charge. The overall situation is: • liability to SG charge, made up of $855 individual SG shortfall, plus nominal interest and administration component (¶12-300) • no tax deduction for SG charge, and • no liability to choice penalty. Situation 2 — Employer makes sufficient SG contribution but to the wrong fund

Roger makes a $855 superannuation contribution for the quarter on behalf of Lucille but the contribution is not made to the fund chosen by Lucille. Since the contribution represents 9.5% of Lucille’s notional earnings base, the charge percentage is reduced to nil. The quarterly shortfall (Step 1) under s 19(1) in respect of Lucille is $0. Since the contributions are not made in compliance with the choice of fund requirements, the quarterly shortfall under s 19(1) is increased by the formula in s 19(2A) up to a maximum increase of $500, as follows: 25% × (notional quarterly shortfall − amount worked out under s 19(1)) where: notional quarterly shortfall is 9.5% × $9,000 = $855 (this is what the quarterly shortfall would be if Roger had not made any contributions), and amount worked out under s 19(1) is $0, ie the amount worked out under Step 1. The increase is therefore 25% × ($855 − $0) = $214. The overall situation is: • cost of $855 contribution after tax deduction (assuming 30% tax rate) is $599 • no SG charge, and • choice penalty of $214.

Defined benefit scheme Where an employer provides superannuation support for an employee using a defined benefit superannuation scheme and the choice of fund requirements are not complied with (tested by reference to notional contributions to the scheme as set out in a benefit certificate), the employer is liable to pay an increase in SG shortfall in respect of the employee. The increase is calculated using the formula in s 19(2B): 25%

×

notional quarterly shortfall

−

amount worked × out under s 19(1)

number of breach of condition days  relevant days in quarter 

where: notional quarterly shortfall is the amount that would have been worked out under s 19(1) if no reduction in the charge percentage was made in respect of the scheme (ie assuming that none of the notional contributions are in compliance with the employee’s choice of fund). The SG shortfall is not increased where a defined benefit scheme is in surplus (only in respect of persons who were employees of the employer immediately before the commencement of the choice of fund rules and who have not ceased to be employees), or where a defined benefit member of a defined benefit superannuation scheme has achieved his or her maximum benefit accrual (SGAA s 20). Example Assume that Ben is an employee of ABC. His salary for the quarter is $10,000 and he is an employee for the whole of the quarter. For 2019/20, ABC provides superannuation support for its employees in a defined benefit scheme which has a benefit certificate specifying a notional employer contribution rate (NECR) of 9.5% that has effect for the quarter. Ben is a member of the scheme for the whole of the quarter. The scheme is not in surplus. The SG charge percentage is 9.5%. Ben chooses a different complying superannuation fund in accordance with the choice of fund rules, and that fund becomes Ben’s chosen fund 60 days into the quarter, ie there are 30 days which are in breach of the choice of fund requirements. Step 1: Since ABC has a benefit certificate with an NECR of 9.5% covering the whole of the quarter, the charge percentage is reduced to 0% and the SG shortfall in respect of Ben under s 19(1) for the quarter is $0. Step 2: Since there is a breach of the choice of fund requirements in the relevant quarter (for 30 days), ABC’s quarterly shortfall under s 19(1) will be increased using the formula in s 19(2B). For the purposes of the formula, the notional quarterly shortfall is $950 (ie 9.5% × $10,000), ie the shortfall is worked out as if no reduction in the charge percentage was made in respect of the scheme and none of the notional contributions are in compliance with the employee’s choice of fund. The increase is as follows:

25%×($950 − $0)×

30 =$102  70 

Application of SG Scheme ¶12-060 Meaning of “employee” The SG scheme applies to all employers in respect of their full-time, part-time and casual employees, with only limited exceptions (¶12-070). In SGAA s 12, the terms “employer” and “employee” have their ordinary meanings, but are also extended to include other persons who may not come within the ordinary meaning. Employer An employer is generally the person who is liable to pay the employee for work carried out or services provided. Payment is usually in the form of salary or wages but may by agreement be in another form. Employee for SG purposes A person is an employee for SG purposes if they come within the meaning of employee in SGAA s 12. The effect of s 12 is that a person is an employee: (1) if they come within the ordinary meaning of employee, or (2) if they come within the meaning as expanded by s 12(2) to (10). Where a relationship between the parties to a contract is not that of employer/employee within the ordinary meaning or there is doubt about a person’s status, the expanded meaning of employee must be considered. There are some individuals who are employees for SG purposes but are nevertheless excluded from the calculation of an employer’s SG obligations. These include employees who receive salary or wages of less than $450 in a month or who are part-time employees under 18 years of age (¶12-070). Employee within the ordinary meaning SGR 2005/1 sets out the Commissioner’s views on when an individual is an employee within the ordinary meaning. The ruling also considers the meaning as extended by s 12. In most cases, it is clear whether an employer/employee relationship (in contrast to a principal/independent contractor relationship) exists. However, it is sometimes difficult to discern the true character of the relationship as the intentions of the parties may be unclear or ambiguous. Because of these difficulties, the ordinary meaning of employee has been the subject of much judicial consideration, for example, in Hollis v Vabu 2001 ATC 4508 (¶12-065), where the High Court adopted a “multi-factorial” approach and said the “totality of the relationship” must be considered. Contract “of service” (an employee) or “for services” (an independent contractor) — key indicators There is no single factor that determines the character of a relationship, and the totality of the relationship must be considered to determine whether, on balance, the worker is an employee working under a contract “of service” or an independent contractor working under a contract “for services” (SGR 2005/1). Nevertheless, as the Federal Court said in On Call Interpreters and Translators Agency (No 3) 2011 ATC ¶20-258, some factors will be more useful than others due to the diversity of modern work arrangements and the ingenuity of those fostering “disguised employment practices”. The following have been treated by the courts as key indicators of whether an individual is an employee or independent contractor. • Control — the “classic test” for determining the nature of a relationship was the degree of control exercised, that is, the degree to which an employee was told not only what work was to be done but also how and when it was to be done. The High Court stated the significance of control in an employment relationship in Zuijs v Wirth Brothers Pty Ltd (1955) 93 CLR 561 in the following way: “What matters is lawful authority to command so far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters”. With the increasing use of skilled labour and consequential reduction in supervisory functions, the

importance of control lies not so much in its actual exercise as in the right to exercise it: Hollis v Vabu. • Payment for a result — where the substance of a contract is to achieve a specified result, this is a strong but not conclusive indicator that the contract is one “for services” rather than “of service”. Sheller JA said in World Book (Australia) 92 ATC 4327 that “undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor”. Indicators of a results contract are where an individual is free to employ their own means, eg plant and equipment, to complete the outcome and is entitled to a fixed sum consideration on completion of the job. The AAT found in Associated Translators & Linguists Pty Ltd 10 ESL 03 that individuals providing interpreting and translating services were not paid for a result because they were paid for their time rather than for completed assignments, and sometimes they were paid even when circumstances outside their control prevented them from carrying out their assignments at all. • Is there a business and whose business is it? Does the worker operate on his or her own account or in the business of the payer? (sometimes referred to as the integration or organisation test) — in Hollis v Vabu, the High Court considered this fundamental question of whether the worker was operating their own business or was operating within Vabu’s business. • Terms and circumstances of the formation of the contract — although the parties to a contract cannot deem the relationship between themselves to be something that it is not by simply giving it a different label, such a clause may help overcome any ambiguity as to the true nature of the relationship. • Goodwill — if the goodwill created by the performance of the work overwhelmingly attaches to the business of the payer rather than to the worker, it is more likely an employment relationship, as the Federal Court found in the case of the goodwill created from the work of interpreters in On Call Interpreters and Translators Agency. • Whether the work can be delegated or subcontracted — if a person is contractually required to personally perform the work and does not therefore have the right to delegate the work, this is an indication that the person is an employee. • Risk — where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. • Whether the worker also performs work for others — if an individual works for others or has a genuine and practical entitlement to do so, this may suggest the worker is an independent contractor. • Provision of tools and equipment and payment of business expenses — it was held by the NSW Court of Appeal in Vabu Pty Ltd 96 ATC 4898 that the provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor. However, the provision of tools, etc, is not necessarily inconsistent with an employment relationship, and the High Court in Hollis v Vabu stated that the provision and maintenance of tools and equipment and payment of business expenses should be significant for the individual to be considered an independent contractor on that ground. According to the ATO, pizza delivery drivers are employees within the ordinary meaning even if they are required to provide and maintain their own motor vehicles in performing their deliveries (Interpretative DecisionID 2014/28). • Requirement to wear uniform — the requirement that a worker wear a company uniform is indicative of an employment relationship. In Hollis v Vabu, the fact that the workers were presented to the public as emanations of Vabu (by wearing uniforms bearing Vabu’s logo) was an important factor in the court’s decision that the couriers were employees. • Other indicators — other indicators suggesting an employer–employee relationship include the right to

suspend or dismiss the person, provision of benefits such as annual, sick and long service leave, payment of SG contributions and the provision of other benefits prescribed under an award. Example — whether interviewers were employees within the ordinary meaning and/or the expanded SGA Act meaning In Roy Morgan Research 2010 ATC ¶20-184 (2010) (the latest in a series of cases on the status of persons paid to interview members of the public), interviewers were held to be employees within both the ordinary and expanded meaning in s 12(3). The AAT had characterised the interviewers as employees in Roy Morgan Research 2009 ATC ¶10-106 (2009) and the Full Federal Court upheld that characterisation. The AAT had found the following factors to be relevant: • the interviewers had little independent control over their work and were required to carry out the work personally • the interviewers carried identification cards linking them to the company for whom they carried out the work, and • the company reimbursed the interviewers for their expenses and bore the risks associated with the operation. The Full Federal Court said that, as no error was established in the AAT’s characterisation of the interviewers as employees within the ordinary meaning, there was no need to rely on the expanded meaning of employee in s 12(3). If, however, the interviewers’ provision of equipment such as clip boards and pens, and sometimes motor vehicles, took them outside the ordinary meaning of employees, s 12(3) would bring them back into the SGA Act regime as employees.

The fact that a person does or does not quote an Australian Business Number or a tax file number is not a determining factor. In all cases, the employer’s conduct in relation to a worker is only one factor to be considered. The fact that the employer does not make SG contributions for a worker, for example, does not mean that the worker is not an employee. The employer may simply be “getting it wrong”. The application of the factors in particular cases is discussed at ¶12-065. Employee within the expanded meaning in the SGA Act For SG purposes, an employee includes not only people who come within the ordinary meaning, but also anyone who comes within the expanded meaning set out in SGA Act. Under the expanded meaning, a person is an “employee” in the following circumstances. (1) Members of a board of directors or executive body of a company A person who is “entitled to be paid” for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is an employee of the body corporate (s 12(2)). In Kelly (No 2) 2012 ATC ¶20-329, the Federal Court considered whether the fact that a director of a trustee company was paid a superannuation benefit by the trustee company meant that he was “entitled to be paid” within s 12(2). Dismissing the director’s argument that actual payment was evidence of entitlement to payment, the court held that a director of a company is not entitled to be paid unless this is specifically provided for in the company’s constitution or approved by shareholders. In this case, the constitution of the trustee company provided that remuneration of the directors was such amount as was voted to them by resolution of the company in general meeting, but there was no evidence of such a resolution and therefore it could not be said that the director was entitled to be paid. The Full Federal Court dismissed the taxpayer’s appeal (Kelly 2013 ATC ¶20-408), holding that entitlement to be paid is the key issue and that the fact that payments had been made did not necessarily prove that entitlement. The decision in Kelly affirms the ATO view on the circumstances in which a director is deemed to be an employee under s 12(2) as stated in para 238 to 243 of Taxation Ruling TR 2010/1. A director who is a partner in a professional partnership, and who must pass on any directors’ fees to the partnership, does not come within s 12(2). The partner/company director would, however, be an employee of the company if the appointment as director is unrelated to the membership of the partnership (SGD 97/1). (2) Persons working under a contract that is wholly or principally for their labour A person who works under a contract that is wholly or principally for their labour is an employee of the

other party to the contract (s 12(3)). In determining if a contract is “wholly or principally” for labour, if the contract under which a person works does not specify the value of the labour component, market value and industry practice are used to allocate the value of the labour component. In the World Book case, agents who were contracted to sell encyclopaedias could either do so themselves or engage others to do so on their behalf. The court held that payments to the agents were payments under a contract whereby the contractor had undertaken to produce a given result rather than under a contract for labour and that the agents were not, therefore, employees within the ordinary meaning. The court also considered that the contract under which the agents worked was outside the scope of the description “a contract that is wholly or principally for the labour of the person” because these words implicitly exclude a person who is paid to produce a result rather than being paid for their labour. In On Call Interpreters and Translators Agency, Bromberg J said that s 12(3) should not be interpreted as excluding a contract for a given result. The focus upon the single criterion of whether the contract is for an outcome or result is inconsistent with the modern day multi-factorial approach to the totality test and the distinction between a contract for labour and a contract for the product of that labour is illusory in all but the most obvious cases. In its response to the On Call Interpreters and Translators Agency decision, the ATO stated that the court’s interpretation of s 12(3) differed from the view expressed in SGR 2005/1 that a contract for a result falls outside the scope of that section, and that the Commissioner will therefore continue to administer s 12(3) as stated in SGR 2005/1. The Commissioner states in SGR 2005/1 (at para 11) that a contract is considered to be wholly or principally for the labour of the individual engaged and that he/she will be an employee under s 12(3) if: • the individual is remunerated either wholly or principally for their personal labour and skills • the individual must perform the contractual work personally, and • the individual is not paid to achieve a result. Where a medical practitioner who works for a medical clinic receives a set percentage of the billings and the distributions received are conditional on the completion of client consultations, this is a results-based agreement and s 12(3) would have no application (Interpretative DecisionID 2011/87). In Superannuation Guarantee Ruling SGR 2005/1, the Commissioner states that it is clear from cases such as World Book that a person who has a right to delegate does not work under a contract wholly or principally for their labour. The court in De Luxe Red and Yellow Cabs Co-operative (Trading) Society Ltd 98 ATC 4466 said that whether a contract is wholly or principally for the labour of a person largely depends on whether the contract is for the production of a result (as in World Book) or for the performance of labour. The distinction between a person who is an employee because they work under a contract that is wholly or principally for their labour and a person who is truly an independent contractor is considered at ¶12070. (3) Members of parliament A Member of the Commonwealth Parliament, a state parliament or a territory Legislative Assembly is an employee of the Commonwealth, state or territory (s 12(4) to (7)). (4) Artists, musicians, sportspersons, etc An employee includes: (a) a person who is paid to perform or present, or to participate in the performance or presentation of, any music, play, dance, entertainment, sport, display or promotional activity, or any similar activity involving the exercise of intellectual, artistic, musical, physical or other personal skill (b) a person who is paid to provide services in connection with any of the activities referred to in (a), and

(c) a person who is paid to perform services in connection with the making of any film, tape or disc or of any television or radio broadcast (s 12(8)). According to the ATO, whether an entertainer (or other persons engaged by an entertainer, such as the crew) is an employee must be determined using the principles for determining whether a person is an employee for SGA Act purposes (whether at common law or under the extended definition of employee) as set out in SGR 2005/1 (see above). For example, this will depend on the specific terms of the agreement such as direct engagement door deal, commission agency arrangement between the parties in each situation. SGR 2009/1 sets out the Commissioner’s views on when sportspersons and persons providing services in connection with sporting activities are employees for SG purposes. In Racing Queensland Board 2019 ATC ¶20-692, the Federal Court held that jockeys were not employees of the Racing Queensland Board and that the ATO had misunderstood the source of the legal liability to pay fees to the jockeys. The court held that the person who was legally liable to pay a jockey a riding fee for participating in the sport of thoroughbred racing was the owner or trainer who had employed or engaged the jockey to ride in a particular case. Section 12(8)(a) did not apply to make the jockeys employees of the Racing Queensland Board. The employer in General Aviation Maintenance 2012 ATC ¶10-235 paid a “tandem master” to pack parachutes, to do tandem parachute jumps with customers and to make video recordings of the descents. According to the AAT, providing an activity that gives amusement or enjoyment is entertainment within s 12(8) and this was sufficient to make the tandem master an employee under s 12(8)(a). The tandem master was also an employee within s 12(8)(b) or (c) when he was paid for his services in making a film. (5) Commonwealth, state and territory employees A person who holds, or performs the duties of, an appointment, office or position under the Constitution or under a law of the Commonwealth or of a state or territory (including service as a member of the Defence or Police Forces), other than a person holding an office as a member of a local government council, is an employee of the Commonwealth, state or territory (s 12(9)). (6) Local government councillors A person who is a member of an eligible local governing body (Taxation Administration Act 1953 (TAA) Sch 1 s 12-45(1)(e)) is an employee of the eligible local governing body (s 12(10)). This generally covers a member of a local government council which has unanimously passed a resolution and notified the ATO that they should be treated as employees for PAYG and SG purposes. A person who holds office as a member of a local government council is not an employee if they are not subject to PAYG withholding (s 12(9A)). Commonwealth and Commonwealth authorities The Commonwealth and Commonwealth authorities are employers for the purposes of the SGA Act. Generally, the Act is taken to apply to them in all operational aspects (like any other employer), other than the provisions imposing liability to pay the charge and penalties and allowing appeal and review rights (SGAA s 5). A Commonwealth authority whose enabling legislation otherwise exempts it from Commonwealth taxation is liable for the SG charge unless the enabling legislation expressly exempts it from liability to pay the charge (SGAA s 5A). Territory residents The SGA Act extends to the Territories of Cocos (Keeling) Islands and Christmas Island and has effect as if those territories were part of Australia (SGAA s 4). Accordingly, although the Act does not apply to salary or wages paid by a Norfolk Island resident employer to a Norfolk Island resident employee for work done in Norfolk Island, Norfolk Island residents who are employers or employees within the territorial limits of Australia are covered by SGA Act (Superannuation Guarantee Determination SGD 94/3). Person paid to do domestic or private work A person who receives payment to do work wholly or principally of a domestic or private nature for not more than 30 hours per week is not, in relation to that work, an employee of the person for whom the

work is done (s 12(11)), and SG contributions do not therefore need to be made on their behalf. The Commissioner’s view is that work of a domestic or private nature ordinarily means work relating personally to the individual making payment for the work or to the person’s home, household affairs or family organisation. For example, an individual employed to clean someone’s home, to mind their children, to effect repairs or maintenance of their home, or to tend their home garden would be engaged in domestic or private work. If they worked for that person for 30 hours or less a week, they would not be that person’s employee for SG purposes (SGR 2005/1). In contrast to the approach of the Commissioner, the AAT in Care Provider 10 ESL 11 said that s 12(11) requires an examination of the nature of the work, not the identity or attributes of the person who pays for the work, nor the relationship between the payer and the worker. The taxpayer, whose business provided domestic support for disabled, infirm and elderly clients, had argued that it was not required to make SG contributions for its 21 workers because their duties consisted entirely of domestic care and they worked less than 30 hours in a week. The Commissioner argued that, even though the work could objectively be viewed to be of a domestic nature, from the payer’s point of view it was labour provided in the course of the payer’s business and not in relation to domestic affairs. The AAT held that it was not relevant that the work was performed for someone other than the payer: “To suggest that the work that the workers do, and for which they are paid, changes from work of a domestic nature to work of some other nature, simply because the work is not performed in the home of the taxpayer, but in the home of some other person in what is obviously a domestic setting, is, in my view, wrong.” (para 19) Although the AAT ruled that the workers were paid to do domestic or private work, it was unable to determine whether the workers worked for not more than 30 hours per week, and remitted the objection decision back to the Commissioner for reconsideration. When the Commissioner did not oppose the taxpayer’s contention that the workers worked for not more than 30 hours per week, the AAT determined the matter in favour of the taxpayer and effectively held that the workers were excluded from the SG regime (Newton (Trading as Combined Care for the Elderly) 10 ESL 21). Appealing to the Federal Court, the Commissioner argued that s 12(11) was only intended to exclude householders who pay for occasional domestic work, and was not intended to exclude a labour hire business that provided domestic services for clients. The court upheld the appeal, ruling that s 12(11) only applies where a worker is paid by a person (and not a labour hire business) to do work of a domestic or private nature in respect of that person (Newton 2010 ATC ¶20-234). According to the court, the policy of the SGA Act might not be served by an exemption for a taxpayer whose worker is employed by the taxpayer to do work for more than 30 hours in a week but does not work for any one client for more than 30 hours. The Federal Court remitted the matter back to the AAT which upheld the Commissioner’s arguments. The taxpayer had failed to demonstrate that its workers were not employees within the ordinary meaning, and, in any event, there were strong indications that the workers were employees under SGAA s 12(3) because they were working under a contract wholly or principally for their labour (Newton (Trading as Combined Care for the Elderly) 2011 ATC ¶10-226). A person who provides home-based child care is generally not an employee, unless the carer provides the child care in the parent’s own home (Superannuation Guarantee Determination SGD 94/4). Educational institution A university does not have an obligation to make SG contributions on “industry based learning scholarships” it pays to students because there is not an employer–employee relationship between the university and the students. The payments relate solely to the student’s course of study and do not constitute salary or wages (Interpretative DecisionID 2005/53). [FTR ¶794-628; SLP ¶50-210]

¶12-065 Independent contractors Employers who use “contractors” are not required to make SG contributions for them as long as the

contractor is not, in fact, an employee for SG purposes either within the ordinary meaning or because the contractor is deemed to be an employee within the expanded meaning (¶12-060). While the “control test” has traditionally been used to distinguish between an employee and an independent contractor, in recent times, as it has become common for businesses to outsource work to independent contractors, it is often difficult to distinguish between the two categories of workers. In 2001, the High Court in Hollis v Vabu Pty Ltd 2001 ATC 4508 partially removed the effect of the 1996 decision of the NSW Court of Appeal in Vabu Pty Limited 96 ATC 4898 in which it was held that couriers were independent contractors and not employees. Although the High Court decision seems to have restored the status of the control test, and thereby made a clear statement in relation to a particular group of workers, ascertaining the implications of that decision for other workers required a rethink of a number of recent decisions. Contractor or employee? In Vabu Pty Ltd v FC of T, the Vabu company had sought a declaration that it was not an “employer” for SG purposes. It did this to avoid having to lodge an SG statement in respect of its couriers and to avoid liability for a shortfall in SG payments. The NSW Court of Appeal held that there was no employer– employee relationship at common law. Relying on the High Court decision in Stevens v Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16, Meagher JA stated that the control test “is now superseded by something more flexible”. The court labelled all of Vabu’s couriers, including its bicycle couriers, as independent contractors on the grounds that they: • supplied their own vehicles and bore the expense of maintaining them • were taxed as independent contractors under the Prescribed Payments System • provided their own street directories, telephone books, trolleys, ropes, blankets and tarpaulins, and • were paid by result, at a prescribed rate for the number of successful deliveries. According to the court, these factors outweighed the considerable control to which the couriers were subject (eg dress regulations, displaying a company sign on vehicles, restrictions on leave, prescribed working hours and an obligation to accept allocated jobs). This case was influential in a number of later decisions. This can be seen, for example, in: • Transport Workers Union of Australia v Action Couriers Pty Ltd and Ors — an application by the Transport Workers Union to extend federal award coverage to certain couriers was refused because the AIRC was unable to distinguish the method of engagement and control of the workers from the work conditions of Vabu’s couriers • De Luxe Red and Yellow Cabs Co-operative (Trading) Society 98 ATC 4466 — various taxi operators, taxi cooperatives and taxi plate owners and their drivers were found not to be in an employment relationship (Hill J reinforced his findings by express reference to Vabu) • Richard Bowerman v Sinclair Halvorsen Pty Ltd — a truck driver’s application for relief from unfair dismissal was dismissed because he was an independent contractor rather than an employee — Commissioner Bishop of the Industrial Relations Commission found it “impossible to go past Vabu’s case” • Personalised Transport Services v AMP Superannuation Ltd & Anor 06 ESL 12 — a superannuation fund was required to repay contributions to a freight courier company that had made the contributions in the mistaken belief that courier drivers were employees rather than contractors. The court was satisfied, on the basis of Vabu and in light of the work done and the circumstances in which it was done, that the courier drivers were not employees. Hollis v Vabu Pty Ltd In 2001, the High Court was asked to reconsider the status of a courier working for Vabu Pty Ltd after the

cyclist courier negligently struck a pedestrian. Hollis, the pedestrian, sued Vabu for the injuries he sustained, claiming that the company was vicariously liable for the courier’s action. The trial judge found that, while the cyclist’s riding caused the accident, Vabu was not vicariously liable because the courier was an independent contractor. In arriving at this decision, the trial judge considered he was constrained by the NSW Court of Appeal decision in Vabu Pty Ltd v FC of T. When the matter went on appeal, the Court of Appeal also addressed the vicarious liability issue on the footing that the courier was an independent contractor. The High Court held that the relationship between Vabu Pty Ltd and the couriers was properly characterised as employer/employee rather than principal/contractor. The court highlighted several indicators of an employment relationship: • the couriers had little control over the manner of performing their work and there was considerable scope for the actual exercise of control by Vabu • the couriers were not providing skilled labour such as would be consistent with running one’s own enterprise • the couriers were presented to the public as emanations of Vabu • Vabu superintended the couriers’ finances, and • the couriers’ tools and equipment required only a relatively small capital outlay. The High Court in Hollis v Vabu effectively overruled the Court of Appeal decision in Vabu Pty Ltd v FC of T, but only in relation to bicycle couriers in similar circumstances. The High Court decision was a significant step towards reinstating the importance of the control test in determining the employment relationship, relative to factors such as ownership and supply of equipment and the method of taxation of income. The case is a shift in favour of finding an employment relationship where the degree of actual control, or the ability to control, is substantial. It also provides renewed scope for scrutiny of outsourcing practices which purport to engage independent contractors but which retain any employer-style degree of control over the work to be performed. As McHugh J warned in the High Court, the decision has a flow-on effect for employers engaging workers in similar situations. It raises the “spectre of retrospective liability” for taxation, pay-roll tax, superannuation, workers compensation and other obligations. For SG purposes, the case suggests that there may be workers, currently being treated as independent contractors, who are in fact employees entitled to the benefit of SG contributions. Avenues for redress by workers in such a situation are discussed at ¶12-420. The reasoning of the High Court in Hollis v Vabu has been the basis of numerous cases where the issue is the distinction between an employee and a contractor. In OEM Supplies Pty Ltd 2015 ATC ¶10-400, the AAT held that an individual engaged by a company to provide website services over a number of years was not an employee either within the ordinary meaning or within SGAA s 12(3). Various features of the relationship between the company and the individual suggested that there was not an employer–employee relationship. These included the company’s lack of control over how the individual carried out the agreed work, the limited integration of the individual into the company’s business, the flexibility of times and manner of working by the individual, and his ability to employ others to assist him. Workers in the “gig” economy are discussed at ¶12-067. Independent contractor may be an employee under s 12(3) SGR 2005/1 leaves open the possibility that the extended definition of employee in SGAA s 12(3) may apply to independent contractors. The Commissioner’s view is that, where a particular individual engaged under a contract is an independent contractor at common law and the terms of the contract in light of the subsequent conduct of the parties indicate that the contractor: • is remunerated wholly or principally for their personal labour and skills

• must perform the contractual work personally, and • is paid by reference to hours worked, rather than for the amount of work performed, the contract is considered to be wholly or principally for the labour of the contractor and he/she will be an employee under s 12(3) (¶12-060). Company as employee The ATO view is that a company cannot be a common law or deemed employee for SG purposes: “Where an individual performs work for another party through an entity such as a company or trust, there is no employer–employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual.” (SGR 2005/1 at para 13) Incorporation of a contractor, by itself, would not necessarily take a worker outside the scope of the SG regime if they would be caught for other reasons. In Roy Morgan Research Pty Ltd (2011), interviewers who were engaged under the name of a company were nevertheless employees because the company’s role was merely to receive fees and pay expenses. The incorporation of an individual interviewer was a factor to be taken into account, but the fact that the interviewer was the entity who was required to provide services was, in the circumstances, more significant. Refund of contributions mistakenly paid for contractors A freight courier company that subcontracted its work to independent subcontractors was held to be entitled to a refund of superannuation contributions mistakenly paid to a superannuation fund in Personalised Transport. The taxpayer had paid $133,000 to the superannuation fund on behalf of the subcontractors, and sought a refund when it received advice that it did not have to make contributions. The court ruled that the taxpayer was entitled to a refund as the subcontractors were not employees and the payments were not required. The superannuation fund had to repay the agreed amount because it had been paid by mistake and had not been on-paid to a third party. Superannuation funds are generally prohibited from repaying an amount out of the fund to an employersponsor who has made contributions to the fund (¶3-350). In Personalised Transport, it was the fact that the money had been paid by mistake and had not been on-paid to a third party that made the repayment possible. The refund of employer contributions made by mistake is discussed further at ¶6-670. ATO online support — employee or contractor? The ATO online “Employee or contractor?” contains a range of information to help businesses determine if their workers are employees or contractors. The online support includes an employee/contractor decision tool for reviewing the status of workers to ensure that employer taxation and superannuation responsibilities are met (www.ato.gov.au/business/employee-or-contractor/?2016sbn_shortterm).

¶12-067 Workers in the “gig” economy The “gig” economy refers to the increasingly common use of short-term contracts and ad hoc work engagements, such as by Uber, Airtasker and Deliveroo. Participants provide their skills, services or other assets directly to others, and this is organised through software applications and other digital tools. Whether workers in the gig economy are employees or independent contractors is unclear and is unlikely to be settled without legislation or ATO or Fair Work Commission rulings. In the meantime, a multifactor approach is generally adopted (¶12-060), with no single factor being decisive, to determine whether a particular relationship is one of employment or independent contractor. A misclassification may have significant repercussions. As McHugh J pointed out in the High Court in Hollis v Vabu [2001] ATC 4508 (¶12-065), a finding that a worker’s status has been misclassified “raises the spectre of retrospective liability” for taxation, pay-roll tax, superannuation, workers compensation and other obligations.

Uber driver found to be an independent contractor The application of traditional employment tests to relationships in the gig economy was considered in the Fair Work Commission (FWC) decision Kaseris v Rasier Pacific [2017] FWC 6610. An Uber driver (Kaseris) had brought a claim for unfair dismissal when his service agreement with Uber was terminated because of poor passenger ratings. Uber is the trademark name for a software application that connects passengers to drivers for the purpose of providing transport services. The unfair dismissal claim could only be successful if Kaseris could establish he was an employee rather than an independent contractor. The FWC said that the traditional tests of employment should be applied even though they were developed before the start of the gig or sharing economy. Although these traditional tests take little or no account of revenue generation and sharing between participants or relative bargaining power, they still need to be applied, as well as possible, unless legislation changes the tests. On the basis of the traditional tests, Kaseris was found to be an independent contractor because: (i) he had a high degree of control over his hours of work, (ii) he could choose when to turn on the app and therefore take up jobs offered, (iii) he was free to work on other digital platforms and could charge less than Uber’s recommended rate, (iv) he used his own car and phone to perform the service, and (v) he was registered for GST. Uber’s role was as a lead generator, payment collection agent and technology provider rather than as an employer. The Fair Work Ombudsman subsequently carried out a two-year investigation and found that Uber did not have an employment relationship with its drivers. For such a relationship to exist, the Ombudsman said on 7 June 2019, an employee must at least be obliged to perform work when it is demanded by an employer and that was not the case with Uber drivers. They were not subject to any formal or operational obligation to perform work and instead they had control over whether, when and for how long they worked. The Ombudsman emphasised that its investigation related solely to Uber and not the gig economy more generally. Foodora rider was an employee A Foodora rider was found to be an employee rather than a contractor in Klooger v Foodora Australia [2018] FWC 6836 and he was therefore entitled to compensation when his dismissal was held to be unfair. The worker performed work as a bicycle courier in accordance with shifts that were offered and selected via an app. The Fair Work Commission said there were various factors that pointed to the worker’s status being that of an employee including the following. • Foodora had considerable capacity to control the manner in which the worker performed his work, and fixed the place and the start and finish times of each engagement. • Foodora’s “batch system”, which ranked workers’ performance and rewarded or punished them based on their ranking, operated as a level of control and performance management equivalent to that often exercised in employment situations. • The fact that the worker did limited work for other delivery companies at other times did not mean he could not be an employee of both — this was similar to cases where a worker has two or more casual jobs as a waiter in two restaurants. • In accordance with the service contract, the worker dressed in Foodora branded attire and used equipment displaying the Foodora brand. The Fair Work Ombudsman subsequently commenced legal action against Foodora but discontinued the legal action when the company’s business in Australia was terminated in late 2018. The Ombudsman said the question whether Foodora delivery workers were employees or independent contractors was an important matter for a court to consider but Foodora’s exit from Australia meant that court action was unlikely to result in extra payments for workers or financial penalties against the company. ATO approach

For the ATO’s approach, see “the sharing economy and tax” at www.ato.gov.au.

¶12-070 Salary or wages of certain employees is excluded There are various categories of employees for whom an employer is not required to make SG contributions. Although these individuals may be employees for SG purposes, their salary or wages are excluded when an employer calculates whether sufficient SG contributions have been made to avoid liability to SG charge. The salary or wages (¶12-080) of the following employees are not taken into account when an employer calculates the contributions they are required to make. (1) Salary or wages paid to an employee who is not a resident of Australia for work done outside Australia (s 27(1)(b)) except to the extent that the salary or wages relate to employment covered by a certificate under s 15C (see “Bilateral social security agreements” at ¶12-120) (s 27(1)(b)). According to Interpretative DecisionID 2012/75, salary or wages paid to an employee would be for “work done outside Australia” if the work was done at sea more than 12 nautical miles from the territorial sea baseline of Australia, of Christmas Island and of Cocos (Keeling) Islands and not done in the Joint Petroleum Development Area (within the meaning of the Petroleum (Timor Sea Treaty) Act 2003). The employee carrying out the work would be an excluded employee within s 27(1)(b) if a non-resident, or within s 27(1)(c) if a resident but employed by a non-resident employer. (2) Salary or wages paid by an employer who is not a resident of Australia to an employee who is a resident of Australia for work done outside Australia (s 27(1)(c)). (3) Non-resident employees for work done in the Joint Petroleum Development Area (within the meaning of the Petroleum (Timor Sea Treaty) Act 2003) (s 27(1)(ca)). (4) Salary or wages paid to prescribed employees (s 27(1)(d)). A person is a prescribed employee for these purposes if they hold one of the following visas and the conditions of their employment in Australia comply with SGAR s 11 (reg 7 before 15 September 2018): (i) a Subclass 456 (Business (Short Stay)) visa (ii) a Subclass 400 (Temporary Work (Short Stay Specialist)) visa (iii) a Subclass 482 (Temporary Skill Shortage) visa, or (iv) a Subclass 457 (Temporary Work (Skilled)) visa. (5) Persons who receive salary or wages that has been prescribed for this purpose (s 27(1)(e)). The following types of salary or wages are prescribed (SGAR s 12; reg 7AC and 7AD before 15 September 2018): • salary or wages paid to an employee for a period of ‘parental leave’, which is defined in SGAR s 5 (reg 2 before 15 September 2018) as including maternity leave, early paid leave for an expectant mother if the employer is unable to transfer her to a safe job, paternity leave, pre-adoption leave, and adoption leave • salary or wages paid to an employee by their usual employer while the employee is absent from their usual employment and engaged in an “eligible community service activity”, which is defined as jury service, a voluntary emergency management activity or another activity that is prescribed for this purpose (SGAR s 5 or reg 2 before 15 September 2018; Fair Work Act 2009 s 109(1)) • salary or wages paid to an employee by their usual employer while the employee is absent from their usual employment and undertaking service, other than continuous full time service (SGAA s 29), as a member of the Defence Force Reserves • salary or wages consisting of a payment of green army allowance, and

• salary or wages where a “scheduled international social security agreement” provides that the employer is not subject to the SG legislation in respect of the work for which the payment is made (¶12-120). Payments to an employee engaged in an eligible community service activity or undertaking service with the Australian Defence Force are not prescribed for this purpose if they relate to annual, sick or long service leave that is paid in respect of the period when the employee is engaged in the relevant activity. Employees receiving salary or wages of less than $450 per month If an employer pays an employee less than $450 of salary or wages in a calendar month, the salary or wages are not taken into account when calculating under s 19 the amount of the employer’s “individual superannuation guarantee shortfall” (¶12-150) for the employee (s 27(2)). This exemption is based on the salary or wages actually paid to the employee in the month, not on the amount to which the employee is entitled to be paid. The ATO reminded businesses on 1 May 2019 that backpackers on working holidays are entitled to employer SG support if they are paid $450 or more before tax in a calendar month (www.ato.gov.au/Newsroom/smallbusiness/Super/Paying-super-to-backpackers/?sbnews20190508). Part-time employees under 18 years of age Salary or wages paid to a “part-time employee” who is under 18 are not taken into account for the purpose of calculating under s 19 the amount of an employer’s “individual superannuation guarantee shortfall” (¶12-150) for the employee (SGAA s 28). A part-time employee means a person who is employed to work not more than 30 hours per week (SGAA s 6(1)). The ATO considers that the term “employed to work” means actual hours worked and, therefore, a person who actually works for more than 30 hours per week is not a part-time employee even if there is a written document that stipulates the employee is to work fewer hours (Superannuation Guarantee Determination SGD 93/1). In North Adelaide Service Partnership v Retail Employees Superannuation Fund Pty Ltd [2019] SASC 5, the Court ruled that an employer was prima facie entitled to recover SG contributions paid by mistake when contributions were made in respect of all their employees. These included employees earning less than $450 per month and part-time employees under 18 years of age, Refund of the contributions was subject to any defences and time limitations yet to be determined. The circumstances in which contributions made by an employer by mistake may be refunded are discussed at ¶6-670. Relevance of an employee’s age Before 2013/14, the salary or wages of certain employees were excluded because of the age of the employee. For 2012/13, this applied to an employee who was aged 70 and over (former SGAA s 27(1) (a)). This meant that, in determining whether an employer was required to make SG contributions for an employee, salary or wages paid to an employee who was aged 70 or over were ignored. This rule changed from 1 July 2013 and salary or wages are taken into account from that date regardless of the age of the employee. This means that, in calculating an employer’s SG obligations, the age of an employee is no longer, except in the case of employees aged under 18 and working part-time, relevant. Contributions for an employee whose salary or wages are excluded Even if a person’s salary or wages are excluded from the SG calculation, the person may still be an “employee” (¶12-060) for SG purposes. This is important for the employer because, if the employer chooses to make contributions for the person (although not required to do so), the employer is entitled to a deduction for the contributions if the person for whom the contributions are made is an employee of the employer (¶6-140). A deduction is not allowed if the person is not an employee. Example Jess, aged 17, works part-time at a bakery while she is also a school student. As she is aged under 18 and works only part-time, her employer is not required to make SG contributions for her and her wages are ignored when her employer calculates its SG liability.

The consequences that may follow are: • if the employer chooses to contribute for Jess, the contributions are deductible if the deduction conditions are satisfied (¶6-115) and Jess may be entitled to a low income superannuation tax offset to compensate her for the 15% tax on the employer contributions (¶6-770) • if the employer chooses not to contribute, this does not lead to an SG shortfall or SG charge because the employer is not obliged to make SG contributions for Jess • if Jess makes personal contributions, she may be entitled to a tax deduction for her contributions (¶6-340), and • if Jess does not claim a tax deduction for her personal contributions, she may be entitled to a government co-contribution (¶6700).

Work performed on Norfolk Island Before 1 July 2016, there was a general exemption in the income tax law for salary and wages paid to Norfolk Island resident employees for work done in Norfolk Island, and for salary and wages paid by Norfolk Island resident employers for work done in Norfolk Island. The removal of the exemptions means that such salary and wages come within the SG scheme and employers are required to make superannuation contributions to an appropriate superannuation fund on behalf of employees. The removal of the exemption applies generally for quarters starting on or after 1 July 2016, but the SG obligation itself and the calculation of any SG shortfall will be gradually phased in over the period 1 July 2016 to 30 June 2026 (¶12-200). Employees electing not to receive SG support Before 1 July 2007, an employee could in some circumstances give their employer a statement in writing electing that the employer not be liable to SG charge. The statement had to be accompanied by documents showing that the employee’s superannuation interest already exceeded the pension RBL for the year in which the statement was given (former s 19(4) to (7)). An employee’s election that the employer was not liable to SG charge was irrevocable. The effect of the election was that the employer’s individual SG shortfall (¶12-150) for the employee for the quarter in which the election was made, and for all later quarters, was nil. With the abolition of RBLs from 1 July 2007, s 19(4) to (7) were repealed as the rationale for an election not to have SG contributions had been removed. Despite this, an employer who received an election from an employee before 1 July 2007 is protected from SG charge for the quarter in which the election was made and all later quarters. This protection lasts until the employee’s employment contract with the employer ends (Interpretative DecisionID 2007/199). An employee who wishes an employer to again make contributions could negotiate that outside the SG regime. Although this election for an employer to not be liable to SG charge cannot be made from 1 July 2007, the maximum contribution base continues to limit the amount of an employer’s SG liability (¶12-220). Proposal for certain high income employees to be able to opt out The government proposed in the 2018 Federal Budget that from 1 July 2018 individuals whose income exceeds $263,157 from multiple employers would be able to nominate that their income from certain of the employers would not be subject to SG. As SG contributions are counted as concessional contributions and the concessional contributions cap is $25,000 (¶6-505), high income earners with multiple employers may otherwise inadvertently breach the cap. Contributions on their behalf at the rate of 9.5% of ordinary time earnings (¶12-215) would exceed the $25,000 cap unless the required contributions were limited to $263,157 ($263,157 x 9.5% = $25,000), and the individual would then be penalised for the excess contributions. The proposal is contained in the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2019 which was introduced into parliament on 24 July 2019 and is intended to apply from 1 July 2018. The Bill allows individuals with multiple employers to apply for the Commissioner to issue them with one or more employer shortfall exemption certificates. The Commissioner may only issue a certificate if satisfied that if it is not issued the employee is likely to have excess concessional contributions for the financial year. An employer covered by a certificate would have a maximum contribution base of nil in

relation to an employee for the quarter to which the certificate relates and would not need to make SG contributions, although they may choose to do so. According to the explanatory memorandum, the intent is to provide a mechanism for employees with multiple employers who are likely to breach their annual concessional contributions cap to partially opt out of the SG system. This would allow those employees to choose to negotiate with their employer to receive additional cash or non-cash remuneration. Because employees with higher incomes are likely to be in a strong bargaining position with their employers and have voluntarily opted out of SG payments, there is no requirement to evidence that the foregone contributions are actually substituted for higher wages.

¶12-075 Employment arranged through labour hire firm Superannuation Guarantee Ruling SGR 2005/2 discusses tripartite employment arrangements, commonly involving an entity requiring services to be performed (the end user), a labour hire firm and an individual performing the work. SGR 2005/2 considers who, if anyone, is the employer that must satisfy the SG requirements in respect of the individual performing the work. The ATO’s view is that it is necessary to look beyond the form of the contractual relationship and the labels used by the parties to identify the true nature of the relationship for SG purposes. To establish whether the individual is an employee of the labour hire firm or of the end user, it is necessary to determine whether a contract (written, oral or implied) exists between any of the parties. A contract will not be inferred between the worker and end user merely because the end user exercises day-to-day or practical control over the worker. It is the ultimate or legal control over the worker which is relevant. On the basis of SGR 2005/2, it would be expected that, unless the arrangement is exceptional, where a labour hire firm provides, for example, a security guard or a temporary typist to a client, the labour hire firm would be the employer of the worker and would have SG obligations arising from that relationship. This generally accords with the treatment of labour hire arrangements under PAYG withholding. Under TAA Sch 1 s 12-60, an entity that carries on a business of arranging for persons to perform work or services for clients is liable to withhold an amount from payments it makes to an individual in the course of the business. [FTR ¶794-630, ¶794-631; SLP ¶50-250]

¶12-080 Salary or wages The meaning of “salary or wages” is important because salary or wages are used to determine: (a) whether recipients of certain payments are employees (¶12-060) for whom SG contributions must be made, and (b) if relevant, the amount of an individual SG shortfall for an employee and SG charge payable by the employer (¶12-300). “Salary or wages” is defined inclusively in SGAA s 11. Unless specifically excluded (¶12-100), payments are included in the definition of salary or wages: • if they satisfy the ordinary meaning of salary or wages, or • if they fall within the extended definition in s 11(1). Ordinary meaning of salary or wages The ordinary meaning of salary or wages is remuneration paid to employees for their services “as employees” (¶12-060). The Commissioner’s view is that “salary” means a fixed periodical payment paid to a person for regular

work or service. A “wage” or “wages” is an amount paid for work or services whether paid by the day or the week or on any other basis (Penrowse 2013 ATC ¶10-292). In Mutual Acceptance [1944] HCA 34; (1944) 69 CLR 389, Latham CJ, at [396], said that “wages” were: “… payments made to an employee in connection with and by reason of his service as an employee or in respect of some incident of his service. Thus a merely personal gift by an employer to a person who happened to be an employee would not be included within ‘wages’, though a bonus paid to employees because they were employees would be so included.” According to the Commissioner, ordinary income includes not only fixed payments made periodically for work performed, but also lump sum payments, bonuses and allowances that are part of a worker’s remuneration (Superannuation Guarantee Ruling SGR 2009/2). Payments to an employee that are not given as a reward for their services are not salary or wages, eg a payment to reimburse an employee’s out of pocket expenses. SGR 2009/2 states that the following payments to employees would be salary or wages: • all allowances, unless they are a living-away-from-home allowance fringe benefit • a bonus paid to an employee for their services as an employee • leave payments • workers’ compensation payments (either paid by an employer or on behalf of an employer, eg by an insurance company) received by an injured employee where they perform work or are required to attend work — but not if the employment has ended or if the employee is paid workers’ compensation for hours not worked • lump sum payments for unused annual leave, long service leave and sick leave, whether paid on termination of employment or otherwise • unpaid salary or wages recovered in settlement of a debt, where the settlement contains an identifiable and quantifiable amount of unpaid salary or wages, and • a sign-on bonus, unless the payment is clearly referable to a separate restrictive covenant entered into by the employee. The issue in Penrowse was whether allowances paid to delivery drivers for motor vehicle expenses were ordinary wages or, as the employer argued, reimbursement of expenses. The agreement governing the drivers’ remuneration provided for 80% to be paid as allowances and 20% as wages. The employer treated the “allowances” as reimbursements for private motor vehicle expenses, and calculated SG contributions only on the “wages” component. The AAT was not satisfied that there was any basis for regarding the amounts as reimbursements as there was no process for an employee to vouch for or substantiate expenses actually incurred. The AAT accepted the Commissioner’s submission that the 80%:20% division of the amount paid was arbitrary and not based on an actual determination of expenses. Rather than being reimbursements of actual employee expenses, the amounts satisfied the legal definition of wages as set down by the High Court in Mutual Acceptance. Extended meaning of salary or wages The following amounts are specifically stated to be salary or wages: • commissions, eg a payment made to a salesperson on the basis of the volume of sales achieved in a period (s 11(1)(a)) • payments for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate (s 11(1)(b)) • payments for the labour of a person working under a contract that is wholly or principally for their labour as referred to in s 12(3) (¶12-060) (s 11(1)(ba))

• remuneration for members of the Commonwealth, state or territory parliaments (s 11(1)(c)) • payments to artists, musicians, sportspersons, etc, for work referred to in s 12(8) (¶12-060) (s 11(1) (d)), and • remuneration for public office holders in the service of the Commonwealth, a state or a territory (including service as a member of the Defence Force or of a police force) or for members of a local government council that has elected to be an eligible local governing body (¶12-060) (SGAA s 11(1) (e)). The salary or wages of an employee do not necessarily have to be paid by the employee’s employer — they may also be paid on behalf of the employer by another party (SGAA s 6(3)). The payment is also considered salary or wages if an employee is directed by the employer to perform services for another party, eg where a labour hire firm directs the employee to provide services to a client (SGR 2005/2 at para 66–68). Salary or wages of a person working under a contract for their labour Where a person is not an employee within the ordinary meaning but is an employee for SG purposes under s 12(3) because they work under a contract that is wholly or principally for their labour (¶12-060), the salary or wages of the employee is the labour component of the contract (s 11(1)(ba)). If the labour component of a contract is clearly identifiable (eg the labour and non-labour components are expressed as separate parts of the contract), that labour component will be the employee’s salary or wages, although the Commissioner will not automatically accept the parties’ costings. If the labour component cannot be worked out, an employer can use a reasonable market value of the labour component of the contract to represent the salary or wages of an employee. Employers must keep records which show how the value of the labour component has been worked out (Superannuation Guarantee Determination SGD 96/2). Safety net payments to former employees of a company in liquidation Payments under the Fair Entitlements Guarantee (¶12-400) to former employees of a company in liquidation, eg payments for unpaid wages and unpaid leave, constitute salary or wages for the employees. This is because the payment is made in consideration of the services rendered by the former employees to the company before it entered into liquidation. Former employees are covered by the SG scheme because of SGAA s 15B, and payments of financial assistance to former employees in respect of unpaid entitlements due to the insolvency or bankruptcy of their employer are made “on behalf of” the employer within the scope of SGAA s 6(3). Whether payment is by the liquidator or by a third party such as the Department of Employment, the company in liquidation, but not the liquidator, is liable to SG charge on the gross amount of the advance (including PAYG tax withheld) if insufficient SG contributions are made on the relevant payment. There is no personal liability under the SGA Act for a liquidator or other external administrator to pay the SG charge out of their own funds (Superannuation Guarantee Determination SGD 2017/1). Personal services income Personal services income that is attributed to an individual by a personal services entity such as a company or trust will not generally give rise to an SG obligation. This is because the attributed personal services income is generally not paid to the individual who has provided personal services and the obligation to provide superannuation support under the SGA Act hinges upon the notion of receipt of payment for work. The normal SG obligations will, however, arise if salary or wages are paid to the individual in the income year and are reported as attributed personal services income under ITAA97 s 86-15(4) because they are paid more than 14 days after the end of the relevant PAYG payment (Interpretative DecisionID 2015/9). “Salary or wages” and “ordinary time earnings” checklist A checklist of the payments which are included in, or excluded from, salary or wages is set out at ¶12217.

The checklist also indicates whether the payments are included in ordinary time earnings. It is important to note the difference between salary or wages and ordinary time earnings, because salary or wages is used when calculating an employer’s SG shortfall for a quarter (¶12-150). Ordinary time earnings, which may be a lower amount, are used to calculate an employer’s minimum SG contributions (¶12-215) but not for calculating an employer’s SG shortfall. [FTR ¶794-626; SLP ¶50-350]

¶12-100 Excluded salary or wages Certain payments are excluded from being treated as salary or wages in the calculation of an employer’s SG charge liability (¶12-150). This is achieved by: • excluding certain payments, and • excluding salary or wages derived by certain persons. Payments specifically excluded from salary or wages Two payments are specifically excluded from being salary or wages for SG purposes: • remuneration under a contract for the employment of a person, for not more than 30 hours per week, in work that is wholly or principally of a private or domestic nature (¶12-060) (SGAA s 11(2)), and • fringe benefits (SGAA s 11(3)). The exclusion of fringe benefits extends not only to fringe benefits that are subject to fringe benefits tax (eg a low interest loan from an employer) but also to fringe benefits that are exempt from fringe benefits tax (eg certain child care benefits, work-related items and remote area housing). The Commissioner takes the view in Superannuation Guarantee Ruling SGR 2009/2 that other “benefits” that are neither fringe benefits nor salary or wages are not salary or wages for SG purposes. The ruling gives as examples employer contributions to a complying superannuation fund for an employee (¶6-190) and the acquisition of a share or of a right to acquire a share under an employee share scheme. The Commissioner’s view of the ordinary meaning of salary or wages, expressed in SGR 2009/2, implicitly excludes the following payments from being salary or wages: • an expense allowance paid to an employee with a reasonable expectation that the employee will fully expend the money in the course of providing services (in contrast to an allowance which is only an estimate of the employee’s expenses) • a reimbursement that compensates an employee for an expense they have incurred on behalf of the employer • a redundancy payment made on termination of employment • compensation for unfair dismissal, and • workers’ compensation payments where the employee is not required to attend work because of incapacity or because employment has been terminated. Salary or wages of “excluded employees” There are some individuals who may be employees for SG purposes but whose salary or wages are excluded when an employer calculates the minimum SG contributions required for a quarter. Excluded employees include an employee who is paid less than $450 in a month, a part-time employee aged under 18 years and an employee receiving parental leave payments (¶12-070).

¶12-120 Bilateral social security agreements

A “scheduled international social security agreement” — or a bilateral social security agreement — may provide that an employer is not required to make superannuation contributions in respect of work for which certain salary or wages are paid (SGAR s 12). Australia has entered into bilateral social security agreements with a number of countries. These agreements address the issue of double superannuation coverage, which arises where an employee is sent to work temporarily (not exceeding five years) in another country and the employer or employee is required to make superannuation (or equivalent) contributions under the laws of both countries for the same work. In general, under these agreements, the employer or employee is exempted from the need to make contributions in the country to which the employee has been temporarily sent, provided the employee remains covered in Australia by the SG system. Australian employers need to apply to the ATO for a Certificate of Coverage as evidence that the employee is covered by a bilateral agreement. The Certificate of Coverage is accepted as proof by the relevant country that the employer or employee is subject to Australia’s SG legislation and will remain so while the employee is on secondment in the other country. If the ATO issues a Certificate of Coverage under s 15C, the employer is required to make SG contributions in Australia, but not in the country where the work is being performed. Example If Stefan’s Australian employer sent him to the United States to work for a year, the employer would be required to make compulsory social security (including superannuation) contributions for Stefan under US law, and also make SG contributions for Stefan in Australia. To overcome this double liability, before Stefan leaves for overseas his employer could request a Certificate of Coverage, which certifies that the agreement between the US and Australia applies. Both Stefan and his employer would then be exempt from making contributions under US law, but contributions would still need to be made for Stefan in Australia.

If work is performed overseas and a Certificate of Coverage under s 15C has not been issued, the salary or wages is excluded in the calculation of the employer’s SG obligations if the worker is a non-resident (s 27(1)(b)). For a list of countries with which Australia has entered into a bilateral social security agreement, see: www.dss.gov.au/about-the-department/international/international-social-security-agreements/currentinternational-social-security-agreements. [FTR ¶794-648, ¶794-668; SLP ¶50-300]

Liability of Employers to SG Charge ¶12-150 SG charge payable by an employer SG charge is payable by an employer that has an SG shortfall for a quarter (SGAA s 16). The amount of SG charge is the amount of the shortfall for the quarter (Superannuation Guarantee Charge Act 1992, s 6). Calculation of the SG charge is discussed at ¶12-300. SG shortfall An employer has an SG shortfall for a quarter if the employer has one or more individual SG shortfalls for the quarter. The employer’s SG shortfall is worked out by adding together: • the total of the employer’s individual SG shortfalls for the quarter • the employer’s nominal interest component for the quarter, and • the employer’s administration component for the quarter (SGAA s 17). Individual SG shortfall An employer’s individual SG shortfall for an employee for a quarter is basically the amount of the

employer’s underpayment of SG contributions. This is calculated as the difference between the employer’s actual contributions and the amount that is required by the SGA Act to be contributed. Under s 19(1) the amount of an employer’s individual SG shortfall for an employee for a quarter is worked out using the formula: Total salary or wages paid by the  employer to the employee for the quarter 

×

Charge percentage for the employer for the quarter  100 

Salary or wages in the formula is as defined in s 11 (see ¶12-080). For these purposes, the total salary or wages paid to the employee does not include payments to excluded employees (¶12-070) or payments of excluded salary or wages (¶12-100). This could arise where an employee is paid less than $450 per month for some of the months in the quarter. If the total salary or wages paid by an employer to an employee in a quarter exceeds the maximum contribution base (SGAA s 15) (¶12-220) for the quarter, the total salary or wages to be taken into account for the purposes of the formula is the amount equal to the maximum contribution base (s 19(3)). The maximum contribution base is $55,270 for each quarter in 2019/20 ($54,030 for 2018/19). Charge percentage for an employer for a quarter in 2019/20 means 9.5% (s 19(2)), unless the 9.5% is reduced: • by the percentage level of employer contributions made to a complying superannuation fund, or • by the notional employer contribution rate where the employee is a member of a defined benefit superannuation scheme (¶12-180). Reduction of the charge percentage for an employee for a quarter is discussed at ¶12-180. Example 1 Wendy is employed as a nurse with a salary of $15,000 in the September 2019 quarter. Wendy’s employer makes no SG contributions for her, so the charge percentage is not reduced and is 9.5%. The formula in s 19(1) is applied to calculate the employer’s individual SG shortfall for Wendy for the quarter:

$15,000 ×

9.5 = $1,425   100 

Assuming the employer has no other individual SG shortfalls for the quarter, the SG charge payable by the employer is the sum of $1,425, the nominal interest component for the quarter and the administration component for the quarter (¶12-300).

Example 2 Barry’s ordinary time earnings in the December 2019 quarter is $60,000 and his employer makes contributions to a complying superannuation fund on Barry’s behalf equivalent to 5% of his ordinary time earnings. The employer’s charge percentage, after being reduced for the 5% contributions, is 4.5%. The employer’s individual SG shortfall for Barry for the quarter is (as calculated using the maximum contribution base):

$55,270 ×

4.5 = $2,487   100 

In this example, the employer’s individual SG shortfall is based on the maximum contribution base ($55,270 for 2019/20: ¶12-220), which is lower than the employee’s total salary or wages for the quarter.

An employer’s individual SG shortfall for an employee may be increased if the employer fails to make SG contributions in compliance with choice of fund rules (¶12-055). The employer in Wrexgold [2006] AATA 192 was found by the AAT not to have an SG shortfall because workers for whom there had been insufficient SG contributions were no longer employees of that employer. An informal service company arrangement under which the workers had worked for the employer had been terminated by the relevant time.

Contributions for former employees SG contributions are payable on salary or wages paid not only to current employees, but also to former employees. Former employees are treated as if they are employees of the employer making the payment (SGAA s 15B). There may therefore be an individual SG shortfall if an employer makes a back payment but fails to also make SG contributions on that back pay. Example After Sunny finished his employment on 14 May 2019, his employer was ordered to make up for an underpayment of wages during the period of his employment. On 1 August 2019, the employer paid Sunny $500 back pay for the period 23 August 2018 to 14 May 2019. SG contributions must be paid on the back pay for the quarter that corresponds to the date of payment, ie the September 2019 quarter. If sufficient SG contributions are not paid by the due date for the quarter, ie by 28 October 2019, there will be an individual SG shortfall for Sunny.

A former employee includes a deceased employee, and a superannuation fund may accept a contribution for an employee after the employee’s death (¶12-180). If an amount of salary or wages owing to an employee at the time of their death is paid by the employer to the estate of the deceased employee and the employer does not make sufficient superannuation contributions in respect of the payment by the relevant date, the employer will have an individual SG shortfall (Interpretative DecisionID 2014/31). Payments to former employees of a company in liquidation, eg payments for unpaid wages and unpaid leave, make the company liable to SG charge if insufficient SG contributions are made on the payments. Whether payment is by the liquidator or by a third party such as a government department, the company in liquidation is liable to SG charge on the gross amount of the payment (including PAYG tax withheld). Neither the liquidator nor an external administrator is liable to pay the SG charge out of their own funds (Superannuation Guarantee Determination SGD 2017/1). Agreement with employee does not negate SG obligations Interpretative DecisionID 2006/6 discusses the situation where an employer failed to pay the required SG contributions and the employee later agreed to accept a lump sum in full discharge of all entitlements. According to the ATO, the employer remains liable to the SG charge because it is a debt due to the Commonwealth, not to the employee (¶12-390). Even if a settlement between the employer and the employee waives any rights the employee may have (or compensates the employee in some way), the SG charge must still be paid to the ATO. This interpretation of an employer’s SG obligations was affirmed in Griffiths 09 ESL 07 where the AAT ruled that the fact that there was an agreement between an employer and an employee for the employer not to make SG contributions was not relevant. The employer had argued that the employee had agreed, as a term of his engagement, that he would not receive superannuation. The obligation to pay superannuation is not, the AAT said, an obligation that the parties can contract out of. [FTR ¶794-640, ¶794-648; SLP ¶50-800]

¶12-180 Employer superannuation support reduces charge percentage An employer is required to measure the superannuation support that is provided for an employee for a quarter to determine whether there is an individual SG shortfall in respect of that employee (¶12-150). The employer superannuation support reduces the “charge percentage” (9.5% in 2018/19) as specified in s 19(2): (a) by the percentage level of employer contribution where contributions are made to a complying superannuation fund or RSA (s 23), or (b) by the notional employer contribution rate worked out by a formula in s 22 where the employee is a member of a defined benefit superannuation scheme.

Example The percentage level of an employer’s contribution for an employee for 2019/20 is 8%, and this reduces the charge percentage to 1.5%. The employer’s individual SG shortfall for the employee for the quarter, as calculated under s 19(1), is then 1.5% of the employee’s total salary or wages for the quarter (¶12-150).

A complying superannuation fund for SG purposes is a fund or scheme that is a complying superannuation fund for the purposes of ITAA97 (¶3-010), and an “RSA” has the same meaning as in the RSA Act (¶10-030). Employers can check if a fund is a complying superannuation fund at: superfundlookup.gov.au. Calculation of the reduction of the charge percentage If an employer contributes for the benefit of an employee to a complying superannuation fund or an RSA, the charge percentage for the employer for the employee for the quarter is reduced by the number worked out using the following formula in s 23(2): Contribution  Ordinary time earnings 

× 100

where: contribution is the number of dollars in the amount of the contribution, and ordinary time earnings is the number of dollars in the ordinary time earnings of the employee for the quarter in respect of the employer. A reduction under s 23(2) is in addition to any other reduction under s 23(2) in respect of any other contribution and any other reduction under s 22 (s 23(3)). Before 1 July 2008, the formula in s 23 for reducing an employer’s charge percentage for an employee was based on an employee’s “notional earnings base”, rather than on ordinary time earnings. Small businesses can make SG contributions to a superannuation clearing house which will forward the contributions to the appropriate superannuation funds. The superannuation clearing house facility is discussed at ¶12-010. What contributions are counted? Contributions made by an employer include contributions made on behalf of the employer (SGAA s 6(2)). It also includes contributions made by an employer after an employee enters into an effective salary sacrifice arrangement (¶12-250). The circumstances in which a “contribution” is made are discussed at ¶6-120. To reduce an employer’s charge percentage for an employee for a quarter, contributions must generally be paid by the 28th day after the end of a quarter. The timing of contributions is discussed at ¶12-230. The employer in Weston (a sole trader conducting a very small rural business) stated that, acting on advice, he increased his employee’s wages by 10% and that this should count towards compliance with his SG obligations. The Commissioner determined that the employer had not satisfied its SG obligations and was liable to SG charge of $14,558 and a penalty under SGAA s 59 (¶12-550) equal to double the SG charge payable (the penalty was then remitted to 10% of the SG charge payable). According to the AAT, although the employer may have understood that he was meeting his obligations by paying an additional 10% as wages, the obligation on the employer was to make contributions to a complying superannuation fund. The employer was therefore liable to SG charge and the Commissioner had no discretion to waive the liability. The AAT did, however, remit the s 59 penalty in full. The ATO has stated in a decision impact statement that it accepts the full remission of the penalty because the remission was based on the employer having made an honest mistake. Third party payments made by an employer on behalf of a superannuation fund to meet expenses incurred by the fund may reduce the employer’s charge percentage in the same way as a direct cash contribution would (Taxation Ruling TR 2010/1). The employer must be able to show that the purpose of the payment is to contribute for a particular employee. Although the ATO’s preferred approach is for all

superannuation fund expenses to be paid directly out of the fund and for superannuation contributions to be made directly to the fund, it recognises that the practice of an employer paying an expense on behalf of the fund is common. The practice involves the making of journal entries after the expense is paid that re-classifies the expense payment as a superannuation contribution and, in the accounts of the fund, recognises the making of the contribution and payment of the expense. In some cases, an employer may be able to offset a late payment of contributions for a quarter against their SG charge liability for the quarter (s 23A). A contribution to a complying superannuation fund or an RSA made by an employer for the benefit of an employee may be offset against their SG charge liability if the contribution is made later than 28 days after the end of the relevant quarter and the employer elects for the contribution to be offset (¶12-235). A superannuation fund may accept a delayed contribution for an employee after the employee’s death (SISR reg 7.04(6)). Where a fund is unwilling or unable to accept contributions after the death of an employee, for example because the member account has been closed, the employer may make a payment, equal to the amount of the contribution, directly to the deceased employee’s legal personal representative, and the amount is treated as a contribution to a complying superannuation fund for the benefit of the employee (s 23(9A)). This prevents an employer from being liable to the SG charge due to the inability to find a superannuation fund willing to accept contributions for a deceased employee. An employer contribution is conclusively presumed to be made to a complying superannuation fund for the purposes of s 23 if, at or before the time the contribution is made, the employer obtains a written trustee statement that the fund is a resident regulated superannuation fund and is not subject to a direction under SISA s 63 not to accept employer contributions (¶3-220). This presumption does not always apply, eg if the employer is the fund trustee and has reasonable grounds for believing that the fund is operating in breach of a regulatory provision (SGAA s 25). In Payne 2016 ATC ¶10-421, the employer unsuccessfully argued that he had fulfilled his SG obligations by including superannuation contributions in an employee’s wages and leaving it to her to forward the contributions to her own self-managed superannuation fund. The AAT found the employer’s argument to be without merit as: (i) employers must ensure that SG contributions are paid directly into an account of a complying superannuation fund; and (ii) even if it were accepted that the employer made “superannuation” payments direct to the employee, they could not reduce his SG charge liability for particular quarters because they were not made by the due dates for the quarters, and they could not count as late payments for the purposes of s 23A and entitle the employer to an offset against his SG charge liability because they were not paid within the time required by the section. In Coreta 09 ESL 01, the AAT held that the trustee of a trust had not made contributions for its employee and, even if it had, the contributions would not reduce the taxpayer’s SG charge liability because the fund into which payments were made was not a complying superannuation fund. Although the taxpayer argued that contributions were made to a self managed superannuation fund, the AAT said this was not the case as the fund did not satisfy the conditions in SISA s 17A (¶5-200). Ordinary time earnings The ordinary time earnings of an employee is defined in s 6(1) as the lesser of: • the total of the employee’s earnings in respect of ordinary hours of work and earnings consisting of over-award payments, shift loading or commission but not including lump sum payments made on termination of employment in lieu of unused annual leave, long service leave or sick leave, and • the maximum contribution base (¶12-220) for the quarter. Regardless of an employee’s earnings for a quarter, their ordinary time earnings for SG purposes cannot exceed the maximum contribution base for the quarter (¶12-220). Ordinary time earnings are discussed at ¶12-215. A checklist indicating whether certain payments constitute ordinary time earnings, derived from Superannuation Guarantee Ruling SGR 2009/2, is set out at ¶12-217. Example In the September 2019 quarter, Candy has ordinary time earnings of $8,000 and her employer contributes $300 on her behalf to an

industry fund, which is a complying superannuation fund. The percentage level of employer support is 3.75% ($300/$8,000 × 100 = 3.75%). The employer’s charge percentage for the quarter (9.5%) is reduced by 3.75% to 5.75%. For the September 2019 quarter, the employer has an individual SG shortfall for Candy (¶12-150), calculated as 5.75% of Candy’s total salary or wages (¶12-080) for the quarter. The amount of Candy’s salary or wages may be different from the amount of her ordinary time earnings, as shown by the checklist at ¶12-217.

Contributions to a defined benefit superannuation scheme Where an employer provides superannuation support using a defined benefit superannuation scheme (or a superannuation fund which has elected to be treated as one (s 6A; 6B)), the employer is required to obtain a benefit certificate from an actuary. The certificate will state the percentage level of support being provided by the employer (ie the notional employer contribution rate) for each class of employees in the scheme (SGAA s 10). The notional employer contribution rate is then used to reduce the charge percentage in respect of each employee within that class (SGAA s 22). If an employee is not included in a class of employees specified in a benefit certificate for a defined benefit superannuation scheme, the employer cannot use that scheme to satisfy the employer’s SG obligations for that employee (Interpretative DecisionID 2015/18). The trustee of a fund other than a defined benefit fund can elect that the fund be treated as a defined benefit superannuation scheme. Affected employers must obtain a benefit certificate from an actuary specifying the notional employer contribution rate (NECR) in relation to the employees specified in the certificate. The NECR in respect of a class of employees is calculated in accordance with SGAR s 8, 9, and 10 (reg 4, 5, and 6 before 15 September 2018) and is explained in Superannuation Guarantee Determinations SGD 2003/3 and SGD 2003/4. The NECR must be adjusted to reflect any period when the employee was employed (excluding any period when the employee was on leave without pay) but was not a member of the scheme or was not covered by the benefit certificate. This adjustment is calculated by multiplying the NECR by the lesser fraction of: (a) the proportion of the employee’s fund membership period over the employee’s period of employment in the quarter, or (b) the proportion of the period that the certificate is effective over the employee’s period of employment in the quarter. Example (1) Albert was employed for the whole of the first quarter in the year (ie from 1 July to 30 September = 92 days). (2) Albert was enrolled in a defined benefit fund on 1 September (ie from 1 September to 30 September = 30 days). The proportion of fund membership period to employment period is:

Fund membership period =  Employment period in quarter 

30  92 

(3) A benefit certificate was in effect from 1 August (ie from 1 August to 30 September = 61 days). The proportion of effective period of certificate to employment period is:

Benefit certificate effective period =  Employment period in quarter 

61  92 

(4) The benefit certificate specified a NECR of 7%. (5) Apportionment of NECR:

Notional employer contribution rate in benefit certificate

×

Lower fraction of (2) and (3)

=

7%

= 2.283%

×

30  92 

The employer’s NECR for Albert in the quarter is 2.283%. This amount reduces the employer’s charge percentage under s 19(1) (¶12-200).

Proposal that salary sacrifice contributions cannot reduce an employer’s charge percentage The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 2) Bill 2017 proposed amendments to the SGAA to prevent employers from using their employees’ salary sacrificed superannuation contributions to reduce the amount of SG contributions the employer is required to make. The Bill lapsed when parliament was prorogued for the May 2019 Federal election, but the salary sacrifice proposals have been reintroduced in the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Bill 2019.

If the proposals become law: • amounts that an employee salary sacrifices to superannuation will not reduce their employer’s SG charge (¶12-150) • salary sacrificed amounts will not form part of any late contributions an employer makes that are eligible to be offset (¶12-360) against the SG charge • to calculate if an employer has a shortfall (¶12-150), an employee’s ordinary time earnings base (¶12215) will be calculated as comprising the sum of their ordinary time earnings and any amounts sacrificed into superannuation that would have been ordinary time earnings but for the salary sacrifice arrangement, and • if an employer has a shortfall, it will be calculated by reference to an employee’s salary and wages (¶12-080) and any amounts sacrificed into superannuation that would have been salary or wages but for the salary sacrifice arrangement. The salary sacrifice proposals are intended to apply from 1 July 2020. [FTR ¶794-654, ¶794-656; SLP ¶50-610, ¶50-650]

¶12-200 Charge percentage — the minimum SG contribution An employer is liable to SG charge (¶12-150) if they fail to make sufficient SG contributions for an employee for a quarter. This is ascertained by comparing the employer’s contributions as a percentage of the employee’s total salary or wages for the quarter with the charge percentage for the quarter. The charge percentage for a particular employee is either the percentage stated in s 19(2) or that number as reduced in respect of the employee by s 22 or 23 (¶12-180). The charge percentage for 2019/20 is 9.5%. Charge percentage to increase to 12% The SG charge percentage was 9% for 2012/13. The Minerals Resource Rent Tax Repeal and Other Measures Act 2014 amended s 19(2) to increase the SG charge percentage to 9.25% for 2013/14 and then in increments of 0.5% until it reaches 12% for 2025/26. The charge percentage has been legislated to be as follows. Year commencing

Minimum SG contribution

1 July 2012

9%

1 July 2013

9.25%

1 July 2014

9.5%

1 July 2015

9.5%

1 July 2016

9.5%

1 July 2017

9.5%

1 July 2018

9.5%

1 July 2019

9.5%

1 July 2020

9.5%

1 July 2021

10%

1 July 2022

10.5%

1 July 2023

11%

1 July 2024

11.5%

Year starting on or after 1 July 2025

12%

Phase-in of SG charge for work on Norfolk Island Before 1 July 2016, SG exemptions applied to employers and employees in relation to work performed on Norfolk Island (¶12-070). Although the Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Act 2015 removed these exemptions for quarters starting on or after 1 July 2016, the application of the SG charge will be phased in over a number of years. A Norfolk Island transitional SG charge rate will apply, starting at 1% for 2016/17 and increasing by 1% each year until it reaches 12% from 2027/28. The transitional rate will only apply to salary and wages that were previously exempt from SG charge, and the general SG charge rate (ie 9.5% of ordinary time earnings for 2018/19) will apply to salary and wages that were not previously exempt. Employers will need to apportion the salary and wages they pay between the two categories and apply the correct rate to the salary and wages in each category. [FTR ¶794-650, ¶794-651; SLP ¶50-400]

¶12-215 Ordinary time earnings An employer’s obligation to make SG contributions for an employee for a quarter is based on the employee’s ordinary time earnings for the quarter (¶12-080). The SG charge that is imposed if the employer fails to make sufficient SG contributions is based on the employee’s salary or wages for the quarter (¶12-150). “Ordinary time earnings”, in relation to an employee, is defined in SGAA s 6(1) as meaning: (a) the total of: (i) earnings in respect of ordinary hours of work other than earnings consisting of a lump sum payment in lieu of unused sick leave, unused annual leave or unused long service leave made to the employee on the termination of their employment, and (ii) earnings consisting of over-award payments, shift-loading or commission, or (b) if the total ascertained in accordance with (a) would be greater than the maximum contribution base for the quarter (¶12-220) — the maximum contribution base. “Earnings in respect of ordinary hours of work” carries with it the notion of receipt. The word “earnings”, for the purpose of the definition of ordinary time earnings, is defined in SGR 2009/2 (para 12) as “the remuneration paid to the employee as a reward for the employee’s services. The practical effect for superannuation guarantee purposes is that the expression ’earnings’ means ’salary or wages’.” Superannuation Guarantee Ruling SGR 2009/2 The Commissioner’s views on the meaning of ordinary time earnings are set out in Superannuation Guarantee Ruling SGR 2009/2, which replaced Superannuation Guarantee Ruling SGR 94/4 from 1 July 2009. SGR 2009/2 contains an extensive discussion of the various amounts that may be included in ordinary time earnings. It also contains a table (reproduced at ¶12-217) showing the amounts that, in the Commissioner’s view, are ordinary time earnings. Payments considered in the ruling include the following: • Overtime payments — payments for work performed outside an employee’s “ordinary hours of work” are not ordinary time earnings • Commission payments — payments to an employee on the basis of sales or other performance criteria are ordinary time earnings except in the unusual case where they can be shown to be wholly referable to overtime hours worked

• Allowances and loadings to compensate employees for employment conditions, eg casual loading, dirt allowance or site allowance, are ordinary time earnings • Bonuses paid as a reward for good performance are ordinary time earnings, and • Leave payments for annual leave, public holidays or long service leave are ordinary time earnings, but not if they are paid in a lump sum on termination of employment or if they are paid in respect of parental leave or in respect of community service. Earnings in respect of “ordinary hours of work” The phrase “ordinary hours of work” in SGAA s 6 must be construed in the context of the SGAA and in a way that best promotes the underlying object or purposes of the Act. According to the Federal Court in Australian Workers’ Union v BlueScope Steel (AIS) Pty Ltd 18 ESL 02, the Act is designed to provide a system under which employers are encouraged to make superannuation contributions for the benefit of their employees and a construction of ordinary hours of work that favours the underlying object of benefiting employees should be preferred to any that does not. An employee’s “ordinary hours of work” in SGAA s 6 are the hours specified as their ordinary hours under the award or agreement that governs the employee’s conditions of employment. Any hours worked in excess of, or outside the span of, those specified ordinary hours of work are not part of the employee’s ordinary hours of work (SGR 2009/2). If the ordinary hours are not specified, the ordinary hours of work are the normal, regular, usual or customary hours worked by the employee. When it is not possible to determine the normal or regular hours of work (such as with casual workers), the actual hours of work should be taken as the ordinary hours of work. Even if the actual hours worked exceed what is considered to be standard full-time hours, the total actual hours worked should nevertheless be used to calculate ordinary time earnings. The meaning of “ordinary hours of work” was considered by the Federal Court in Australian Workers’ Union v BlueScope Steel (AIS) Pty Ltd 18 ESL 02 in the context of a dispute between a union representing six workers and their employer. The union argued the employer had contravened s 50 of the Fair Work Act 2009 and had breached its obligations under the SG scheme by failing to make sufficient SG contributions for the six employees. The enterprise agreements which set out the terms of the employees’ employment required them to work “additional hours” and they were routinely called in to work those hours. Employees also regularly worked on public holidays as required by the agreements. SG contributions made by the employer for the employees were calculated as if the additional hours and public holidays fell outside the employees’ ordinary hours of work. The Federal Court held that the employer erred in not making superannuation contributions in respect of these hours because they were “ordinary hours of work” for the employees. Given the manner in which the work was required to be performed, and was in fact performed during the additional hours, there was no real or practical distinction between: (i) the standard or ordinary hours of work, and (ii) the total number of hours, including the additional hours, actually worked. Neither was there a real distinction between work on a public holiday and work on any other day. The Full Federal Court allowed BlueScope’s appeal and ruled that the employer only needed to pay superannuation on the employees’ standard hours at ordinary rates of pay as fixed in the enterprise agreement (BlueScope Steel (AIS) Pty Ltd v Australian Workers’ Union 19 ESL 04). The ordinary time earnings of the employees did not include payments for additional hours or public holiday payments. This conclusion derived from the High Court statement in Catlow v Accident Compensation Commission [1989] HCA 43 that ordinary time earnings meant “ordinary time rate of pay for the worker’s standard or ordinary hours per week as fixed by award, agreement or contract”. The SGAA was not intended to give superannuation benefits for the whole salary and, while this could produce a less favourable financial outcome for the employees, it was a consequence of the proper construction of the legislation. The Fair Work Act 2009 (s 20(1) and (2)) contains its own definition of ordinary hours of work. The definition states the ordinary hours of work in a week for workers not under an award or agreement to be the hours agreed by the employer and employee or, if there is no agreement, 38 hours for a full-time employee. This definition does not override ordinary time earnings as defined for SG purposes. If an employee, such as a manager, receives a single undissected annual salary within a remuneration

package that recognises that the employee may be expected to work more than the ordinary hours of work, the whole amount payable is ordinary time earnings unless overtime amounts are distinctly identifiable and expressly referable to overtime hours. Overtime payments for work performed during hours that are outside an employee’s ordinary hours of work are not ordinary time earnings and do not, therefore, have to be taken into account in calculating the employer’s minimum SG contributions for the employee. A payment in lieu of a flex credit under the terms of a certified agreement is not in respect of the employees’ ordinary hours of work if the flex credit only accumulates once the employee has worked their normal working hours for the settlement period. A flex credit paid to an employee would not be ordinary time earnings (Interpretative DecisionID 2010/113). Ordinary time earnings of casuals For the purpose of calculating the ordinary time earnings of a casual employee, the ordinary hours of work may be the actual hours worked, rather than only the minimum hours stipulated in the employment contract. In Quest Personnel Temping, the employer was obliged to make contributions based on the higher number of hours (and was penalised for failing to do so) because it was customary for the casual employees to work more than the minimum number of shifts and the actual hours worked had become their ordinary hours of work. According to the court, this conclusion promotes the underlying purpose of the SG legislation, and it would defeat that purpose if an employer, by engaging employees on the basis that they would work for a low specified minimum, could avoid the obligation to pay superannuation contributions in respect of much greater hours habitually worked by the employees. The court also said that hours actually worked on a habitual basis should be regarded as ordinary, even if some of those hours are remunerated at overtime rates. In Australian Communication Exchange 2001 ATC 4730 (2001), the Full Federal Court held that the ordinary time earnings of a casual is based on the actual number of hours worked. It is not based merely on ordinary working hours (eg eight hours in any one day or 38 hours in any one week). Ordinary time earnings do not, however, include overtime payments. On this basis, a provider of telephone services for people with hearing impairments had to pay superannuation contributions for its 100 casual workers based on all their earnings (excluding overtime), not just those hours worked within “ordinary hours”, as defined in the Clerical Employees Award (State) (Qld). The High Court upheld the taxpayer’s appeal and overturned the Full Federal Court decision (Australian Communication Exchange 2003 ATC 4894). A majority of the court said that “ordinary time earnings” in the award should be read as the earnings for work done in ordinary time at the ordinary (not overtime) rate of pay. Even though this could mean that casual employees who worked a significant number of hours in a week, but outside the norm of 6.30 am to 6.30 pm, may, under the award, have no “ordinary time earnings”, the wording of the award should be strictly applied. According to the majority, the SG legislation defers to the award and it was not unreasonable to assume that the makers of the award were aware of the effect of the legislation. If ordinary hours of work are stipulated in the award, contributions are not required for amounts paid to casual employees for work done outside those hours. Annual leave loading The ATO’s view is that annual leave loading is ordinary time earnings unless it is “demonstrably referable to a notional loss of opportunity to work overtime” (SGR 2009/2 para 238). Overtime payments are not ordinary time earnings. Explaining its compliance approach to annual leave loading on 15 March 2019, the ATO said that it would be satisfied that an entitlement to the loading is “demonstrably referable” to a lost opportunity to work overtime if there is written evidence related to the entitlement. This could be if wording in the relevant award or agreement clarifies the reason for the entitlement or if other written evidence, eg a documented policy, reflects the understanding of both parties that gives rise to the entitlement. If employers do not have this evidence, they should obtain it as soon as practicable or should assess future entitlements on the basis that the loading was ordinary time earnings. If employers obtain the evidence as soon as practicable, the ATO will not scrutinise the purpose of the leave loading for quarters before the evidence is obtained.

The ATO will not scrutinise why annual leave loading was paid pre-15 March 2019 where: (a) the employer had self-assessed that the loading was not ordinary time earnings, with the reasonable position that the loading was for a notional loss of opportunity to work overtime, and (b) no evidence that is less than five years old suggests the entitlement was for something other than overtime. This basically means that if there is nothing in the last five years that shows an employer’s workers were paid the loading for something other than loss of overtime, the ATO will accept there is no SG shortfall for that period. The ATO’s view is set out at: www.ato.gov.au/Business/Super-for-employers/In-detail/Ordinary-timeearnings/Ordinary-time-earnings---annual-leave-loading/. Over-award payments In Falcote, the award provided for employer superannuation contributions to be based on ordinary time earnings exclusive of overtime, allowances and bonuses. The employer’s practice was to negotiate wage rates with its employees before employment commenced, with any negotiated amount in excess of the award wage being treated as an “attendance bonus”. The over-award amounts, which were not recorded by the employer’s pay-roll as bonuses, were paid even while an employee was on leave. The AAT held that the employer’s SG contributions should have been calculated on the basis of ordinary time earnings, which included the over-award amounts. The attendance bonuses were wages for SG purposes because they were paid for attending work and were not at the discretion of the employer. Bonuses Payments under a profit share bonus scheme were part of an employee’s ordinary time earnings in Prushka Fast Debt Recovery Pty Ltd 08 ESL 05, even though the payment of the bonuses was argued to be entirely discretionary and therefore made on an ex gratia basis. The AAT held that the payments were directly related to the employee’s work efficiency, that the employer’s discretion to make the payments did not convert them into ex gratia payments and that the payments were ordinary time earnings to be taken into consideration when calculating the employer SG charge liability. The table which is reproduced at ¶12-217 shows the bonuses that the Commissioner considers to be ordinary time earnings. Payments in lieu of notice In Peter Willis v Health Communications Network Ltd [2007] NSWCA 313, the NSW Court of Appeal held that an employer was required to make superannuation contributions when it paid an employee a lump sum in lieu of notice. The employer was obliged under the contract of employment to pay the superannuation contribution because it was a right of the employee as part of his salary package. It was not argued in Peter Willis that the employer’s liability arose under the SGA Act and, if such an argument had been made, it is unlikely to have succeeded as payments in lieu of notice were not counted in ordinary time earnings. SGR 94/4, which applied before 1 July 2009, excluded payments in lieu of notice from ordinary time earnings. SGR 2009/2, which replaced SGR 94/4 from 1 July 2009, includes payments in lieu of notice in ordinary time earnings (see the checklist at ¶12-217). Paid leave Payments made to an employee while on parental leave or other ancillary types of leave and “top-up payments” made while on jury service, defence reserve service or the like are not ordinary time earnings as these types of leave payments are excluded from being salary or wages in the SGAA by SGAR s 12 (¶12-070). Casual employees are usually not entitled to paid leave or paid public holidays. Instead they receive a higher rate of pay (a “casual loading”) which is referable to their ordinary hours of work and is ordinary time earnings, unless paid in respect of overtime hours worked. As an exception, an annual leave loading that is payable under some awards and industrial agreements is not ordinary time earnings if it is demonstrably referable to a notional loss of opportunity to work overtime. Unused long service leave paid as a lump sum on termination of employment is specifically excluded from ordinary time earnings by its definition in SGAA s 6(1). A payment for unused long service leave while an

employee is still employed is included in ordinary time earnings. Payments to long distance drivers The Commissioner’s advice to employers in the transport industry on the calculation of SG contributions (“Super guarantee for long distance drivers” at www.ato.gov.au) is as follows: • if an award stipulates a minimum guaranteed wage payment regardless of actual hours worked, the minimum wage is used to calculate ordinary time earnings • if a driver’s pay is based on an hourly driving rate made up of two components, one of which is an overtime allowance, the overtime allowance component of the hourly rate is excluded from the calculation of ordinary time earnings, and • all payments to a driver on a piece rate basis, such as cents per kilometre, are included in the driver’s ordinary time earnings unless the driver is subject to an award or agreement that specifies the ordinary hours of work — if the driver is paid piece rates totalling less than the guaranteed minimum wage, ordinary time earnings is calculated using the guaranteed minimum wage, and if the piece rate payment is more than the guaranteed minimum wage, ordinary time earnings is calculated using the piece rate basis less any overtime allowances. Checklist — payments included in, or excluded from, ordinary time earnings SGR 2009/2 gives a checklist of payments that are included in, or excluded from, ordinary time earnings (¶12-217).

¶12-217 Checklist: “ordinary time earnings” and “salary or wages” The following checklist indicates whether payments constitute: • ordinary time earnings (OTE) (¶12-215), or • “salary or wages” (¶12-080) for SG purposes. The checklist is taken from Superannuation Guarantee Ruling SGR 2009/2. Salary or wages?

Ordinary time earnings?

Simple overtime situation

Yes

No

Overtime hours — agreement prevailing over-award

Yes

No

Agreement supplanting award removes distinction between ordinary hours and other hours

Yes

Yes

No ordinary hours of work stipulated

Yes

Yes

• shift loadings

Yes

Yes

• overtime payments

Yes

No

Casual employee whose hours are paid at overtime rates due Yes to a “bandwidth” clause

No

Piece rates — no ordinary hours of work stipulated

Yes

Yes

Overtime component of earnings based on “hourly driving rate” formula stipulated in award

Yes

No

Payment to an employee in relation to … Awards and agreements

Casual employee —

Allowances

Allowance by way of unconditional extra payment

Yes

Yes

Expense allowance expected to be fully expended

No

No

Danger allowance

Yes

Yes

Retention allowance

Yes

Yes

Hourly on-call allowance in relation to ordinary hours of work of doctors

Yes

Yes

Reimbursement

No

No

Petty cash

No

No

Reimbursement of travel costs

No

No

Payments for unfair dismissal

No

No

• returned to work

Yes

Yes

• not working

No

No

Annual leave

Yes

Yes

Parental leave

No

No

Top-up pay while on jury or defence reserve service

No

No

• in lieu of notice

Yes

Yes

• unused annual leave

Yes

No

Yes

Yes

Bonus labelled as ex-gratia but in respect of ordinary hours of Yes work

Yes

Christmas bonus

Yes

Yes

Bonus in respect of overtime only

Yes

No

Payment of expenses

Workers’ compensation —

Leave payments

Termination payments Termination payments —

Bonuses Performance bonus

¶12-220 Maximum contribution base The total salary or wages paid by an employer to an employee in a quarter is used in the calculation of the employer’s individual SG shortfall for that employee. The total of the employer’s individual SG shortfalls is then used in the calculation of the employer’s liability to SG charge for the quarter (¶12-150). If the total salary or wages paid by an employer to an employee in a quarter exceeds the maximum contribution base for the quarter, the total salary or wages to be taken into account for these purposes is the amount equal to the maximum contribution base (s 19(3)). For 2019/20, the maximum contribution base is $55,270 for each quarter ($54,030 in 2018/19). The quarters commence 1 July, 1 October, 1 January and 1 April (SGAA s 6(1)). Examples

(1) Pedro earns $18,000 in each of the first three quarters of 2019/20. During the fourth quarter he receives $18,000 again but he also receives an incentive payment of $38,000. Despite Pedro being paid $56,000 in the fourth quarter, his employer’s minimum SG contributions are based on $55,270, rather than on $53,000. (2) Ivan, the finance controller of Bridge Resources, has ordinary time earnings of $60,000 for each quarter in 2019/20. The maximum SG contribution that Bridge Resources is required to make for Ivan for each quarter is $5,251, which is 9.5% of $55,270.

The quarterly maximum contribution base of $55,270 for 2019/20 represents an annual salary of $221,080. The ceiling of $55,270 per quarter means that, if an employer makes an SG contribution of 9.5% of $55,270 for each of the quarters of 2019/20, SG contributions of $21,004 will have been made for the year. Even if an employee earns in excess of $221,080 from one employer, the concessional contributions cap ($25,000 for 2019/20: ¶6-505) will not be exceeded if the employer only makes the required SG contributions. $21,004 of the cap will, however, have been used and this will limit the scope for the employer to make additional contributions for the employee or for the employee to make deductible personal contributions without exceeding the concessional contributions cap. Maximum contribution base tied to concessional contributions cap The maximum contribution base is indexed from year to year (s 15(3)). If indexation of the base for a quarter would effectively require contributions to be made that, if paid over a year, would result in an employee’s concessional contributions exceeding the basic concessional contributions cap for the year (¶6-505), the maximum contribution base is, from 1 July 2017, reduced to the amount that would not result in excess concessional contributions (s 15(5), (6)). This means an employer will not, from 1 July 2017, be subject to SG charge for failing to make contributions that would be excess concessional contributions for an employee. With the concessional contributions cap being $25,000 from 1 July 2017 and the charge percentage 9.5%, this would occur if the maximum contribution base for a quarter were greater than $65,789. This change only affects whether an employer is subject to SG charge if insufficient SG contributions are made for an employee. It does not limit an employer’s contributions or alter the terms of an employee’s remuneration. High income employees with multiple employers The government has proposed that individuals with income from multiple employers could nominate that income from certain of the employers would not be subject to SG. If an employee has multiple employers, the maximum contribution base may not limit the total amount of SG contributions that are made for the employee in a year. As SG contributions are counted as concessional contributions and the concessional contributions cap is $25,000 (¶6-505), high income earners with multiple employers could, in the absence of a remedial provision, breach the cap. Contributions on their behalf at the rate of 9.5% of ordinary time earnings (¶12-215) would exceed the $25,000 cap unless the required contributions were limited and the individual would then be penalised for the excess contributions. The government’s proposal is contained in the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2019 which was introduced into parliament on 24 July 2019 and is intended to apply from 1 July 2018. The Bill allows individuals with multiple employers to apply for the Commissioner to issue them with one or more employer shortfall exemption certificates. The Commissioner could only issue a certificate if satisfied that if it is not issued the employee is likely to have excess concessional contributions for the financial year. An employer covered by a certificate would have a maximum contribution base of nil in relation to an employee for the quarter to which the certificate relates and would not need to make SG contributions, although they may choose to do so. [FTR ¶794-633, ¶794-637; SLP ¶50-510, ¶50-560]

¶12-230 Timing of contributions Employer SG contributions are required to be made by the 28th day after the end of a quarter. The four quarters of the year commence on 1 July, 1 October, 1 January and 1 April.

To avoid incurring liability for the SG charge (¶12-150) for a quarter, the required contributions may be paid to a complying superannuation fund or an RSA at any time during the quarter or by the 28th day after the end of the quarter (s 23(6)). Contributions that are not made by this date would not count to reduce the employer’s charge percentage for the quarter (¶12-180). A contribution may be taken into account as having been made in a particular quarter if it is made not more than 12 months before the beginning of the quarter (s 23(7)). Unless an employer specifies how to allocate an advance payment, the Commissioner will assume it is a contribution for any quarter which ended within the previous 28 days. The remainder of the payment would be allocated as a contribution to the current quarter to the extent necessary, then to the next quarter. Any remaining payment would be allocated to the last quarter which starts within 12 months of the payment being made (former Practice Statement PS LA 2006/5). Contributions that are taken into account in one quarter cannot be taken into account in another quarter (s 23(8)). An SG contribution at a particular time by an employer to an approved clearing house for the benefit of an employee is treated as being a contribution of the same amount to a complying superannuation fund or an RSA for the employee at that time (SGAA s 23B). If s 23B is not satisfied, eg because the employer does not have fewer than 20 employees and the approved clearing house does not accept the payment, the contribution would only be made when the fund actually receives the amount (¶12-010). A contribution to a fund by cheque is made when the cheque is received by the trustee of the fund. If, however, the cheque is subsequently dishonoured, the contribution will not have been made at all (Taxation Ruling TR 2010/1). The time that a contribution is received by a fund is discussed at ¶6-123. In limited cases, the transfer of money from an accumulation fund’s reserve account or surplus to a member’s account in the fund at the direction of an employer may be treated as a contribution by that employer for SG purposes (Superannuation Guarantee Determination SGD 94/8). Where the last day for making superannuation contributions for a quarter falls on a weekend, public holiday or bank holiday, contributions for the quarter may be made on the next working day (Superannuation Guarantee Determination SGD 2003/2). Employers wishing to claim a tax deduction in a particular year (¶6-115) must make the contributions by 30 June in that year. Contributions made later could only be claimed in the following year.

¶12-235 Consequences of late payment of contributions SG charge is payable by an employer if SG contributions are not paid by the 28th day after the end of a quarter (¶12-230). The Commissioner has no discretion to overlook a failure to pay contributions by the due date. Accordingly, the employer in Jarra Hills 97 ATC 2132 was issued with an SG shortfall assessment after making SG contributions two months after the 28 July deadline. The AAT held that the SG legislation did not provide for any extension of time to make superannuation contributions, nor was any discretion given to the Commissioner, or the AAT, to overlook a failure to make required levels of superannuation contributions by the relevant date. Senior Member Pascoe (at p 2,134) said: “The legislation is quite clear in providing a deadline for contributions to superannuation … There is no provision in the legislation which allows for any extension of time beyond that date nor any discretion given to … this Tribunal to overlook a failure to make required levels of superannuation contributions by that date.” Jarra Hills has been considered and followed in various court and AAT decisions, eg Pye 2004 ATC 2029, Kancroft 2004 ATC 2126, Benross 2005 ATC 2054 and Pyke 2007 ATC 2564. In Williams 2005 ATC 2058, which also concerned superannuation contributions paid after the due date, the AAT noted the “unfortunate legislative lacuna raised by the facts” of the case where the applicant paid superannuation contributions to the trustee (albeit late), yet still incurred an SG charge liability. The AAT suggested that the ATO reconsider the working of the SGA Act in this respect, in particular “whether some legislative or administrative variation of the SG charge liability regime is necessitated where a liable

employer makes late superannuation contributions direct to the trustee”. In Rathner 04 ESL 16, the administrator of an insolvent company was ordered to accept the ATO’s proof of debt in relation to an SG charge liability, despite the fact that the employer company had subsequently (but after the due date) paid the relevant superannuation contributions on behalf of its employees. Late payment treated as contribution for future quarter In practice, a late payment, leading to an individual SG shortfall and the imposition of an SG charge (¶12150), need not mean that the employer pays both the contributions and the charge for an employee for the one quarter. As long as the employee is still employed by the employer, the employer can take the late contributions into account as having been made in a subsequent quarter, as long as the beginning of that quarter is not more than 12 months after the day the contributions are made (SGAA s 23(7)). Example An employer fails to make sufficient superannuation contributions for its employees by 28 July 2019 in respect of salaries paid during the quarter ended 30 June 2019. The employer makes the contributions two months late, on 28 September 2019. The employer is issued with an SG charge assessment and is required to pay the equivalent of the contributions that should have been made by 28 July 2019, plus penalties (¶12-300). As long as the employees are still employed by the employer, the employer can specify that the contributions made late (ie on 28 September 2019) are to be allocated to a subsequent quarter for those employees.

An employer’s late contributions cannot be used as an advance payment for a future quarter if the employee for whom the contributions are made is no longer employed by the employer. In that case, the employer may have to pay twice — once for the late contribution, and again for the SG charge. Late payment may be offset against SG charge liability An option for an employer who pays SG contributions late is to offset the late contributions against the employer’s SG charge liability that arose from the failure to contribute on time. The rules on offsetting a late contribution against an SG charge liability are discussed at ¶12-360. [FTR ¶794-656; SLP ¶50-700]

Salary Sacrifice Arrangements ¶12-250 Sacrifice into superannuation Because the SG legislation does not prescribe how the minimum level of employer contributions for employees is to be funded, contributions made by an employer after an employee enters into a salary sacrifice arrangement may be an acceptable way for an employer to fulfil its obligations. A salary sacrifice arrangement is where employees agree contractually to give up part of the remuneration that they would otherwise receive as salary in return for their employer providing benefits of a similar value. The employees would be taxed only on the reduced salary and the employer is liable to pay FBT, if any, on the benefits. Commissioner’s view — Taxation Ruling TR 2001/10 The Commissioner’s attitude to salary sacrifice arrangements, as set out in Taxation Ruling TR 2001/10, depends on whether they are “effective” or “ineffective”. Only an “effective” salary sacrifice arrangement, which involves employees giving up a future entitlement to salary, can produce the desired tax effect. An employee becomes entitled to salary when the work is performed; the date of payment is irrelevant. An “ineffective” salary sacrifice arrangement, which involves employees directing that salary to which they are already entitled (because the work has already been performed) should be paid in a form other than salary, cannot produce the desired tax effect. The Commissioner’s view is that, once an employee has completed the relevant qualifying period of employment and has an entitlement to take annual leave, long service leave or sick leave, the employee has an entitlement to be paid salary and an attempt to exchange that entitlement for benefits would be ineffective. Whether the conditions necessary for the taking of leave have been met may be affected by

statute, awards, individual contracts or enterprise agreements. Where there is a lengthy qualifying period which must be completed before any entitlement to leave accrues (eg with long service leave), the conditions are not met until the qualifying period has been completed. An arrangement exchanging an expected entitlement to leave that would accrue for future services rendered would be effective. Employer contributions under an effective salary sacrifice arrangement are considered to be employer contributions to the superannuation fund for the purposes of the SGA Act. TR 2001/10 states (at para 118) that “as benefits provided under an effective SSA are not paid as salary or wages, superannuation contributions made by an employer to a complying superannuation fund under an effective SSA count towards the employer’s obligation to provide a minimum level of superannuation support for the employee under the SGAA”. Consequences of an effective salary sacrifice arrangement Benefits paid under effective salary sacrifice arrangements are not assessable income of the employee, and the employee pays tax only on the reduced salary. Generally, the employer is liable to FBT on the taxable value of the benefit paid to the employee in lieu of salary. If the employee sacrifices salary into an employer contribution to a complying superannuation fund, this is excluded from being a fringe benefit (Fringe Benefits Tax Assessment Act 1986, s 136(1), definition of “fringe benefit”) and the employer would not be liable to FBT on the contribution. Such payments can be counted as SG contributions and also allow the employer to claim a deduction for the contribution (¶6120). Contributions to non-complying superannuation funds and contributions to a complying superannuation fund for a person who is not an employee (eg for a spouse of an employee) are not excluded from being fringe benefits and the employer would, therefore, be liable to FBT on the value of the contributions (¶6-190). Salary sacrifice into superannuation The consequences of an effective salary sacrifice into superannuation are: • the employer may be entitled to a deduction for the contributions (¶6-120) • unless the employment contract provides otherwise, the employer can count the salary sacrificed into superannuation as SG contributions • the employer’s liability to make SG contributions may be measured against the employee’s earnings after reduction for the sacrificed salary — in contrast, an industrial award or occupational superannuation arrangement that permits salary sacrifice may require the employer to continue to make superannuation contributions based upon the earnings base that existed prior to the salary sacrifice arrangement being entered into • the sacrificed salary is not assessable income of the employee • the employer contributions resulting from the salary sacrifice are assessable contributions for the fund and 15% (or sometimes 30% (¶6-400)) tax is payable • the employer contributions must be reported on the employee’s payment summary as “reportable employer superannuation contributions” and are take into account in calculating the employee’s entitlement to a tax deduction for personal contributions, to a government co-contribution or to a low income superannuation contribution (¶6-110) • the reportable employer superannuation contributions are also taken into account in determining the employee’s entitlement to other concessions such as family tax benefit and seniors and pensions tax offset • the employer contributions are concessional contributions and if they, together with other concessional contributions made for or by the employee, exceed the concessional contributions cap for the year, the excess contributions are included in the employee’s assessable income and taxed at marginal rates, and are also liable to excess concessional contributions charge (¶6-515), and

• fringe benefits tax is not payable on the contributions as long as they are to a complying superannuation fund on behalf of an employee (¶6-190). Ineffective salary sacrifice arrangements Benefits paid under ineffective salary sacrifice arrangements, eg where the employee has already earned the salary, are assessable income of the employee. Superannuation contributions made by an employer under such an arrangement cannot be counted by the employer as being in compliance with its SG obligations. The taxpayer in Wood 2003 ATC 2006 failed to enter into an effective salary sacrifice arrangement when he directed his employer to pay his accrued performance-related bonuses and long service leave entitlement to a superannuation fund. The taxpayer had merely directed that his entitlement to salary that had already been earned be paid in a form other than salary and he remained assessable on that amount. In Heinrich 2011 ATC ¶10-169, an employee’s entitlement to unused annual leave and long service leave payments on the termination of his employment could not be the subject of an effective salary sacrifice agreement. The AAT held that, once the conditions for the taxpayer’s entitlement to the payments had been satisfied, the amounts were the taxpayer’s assessable income as unused leave payments. In Yip 2011 ATC ¶10-214, a salary sacrifice arrangement under which an employer made contributions to an employee share trust out of an employee’s salary, where the trustee of the trust had a discretion to make loans to the employee for use in the purchase of units in the trust, was not effective to relieve the employee from tax on the sacrificed salary. The AAT held that the contribution using the sacrificed salary was ordinary income of the employee because she would have asked her employer to deal with it on her behalf and, under the constructive receipt rule in ITAA97 s 6-5(4), she would be taken to have derived the amount as income. The AAT also found that ITAA36 s 23L could not protect the employee from tax liability (s 23L provides that an amount is not assessable income if it is a fringe benefit), because she had not gained any right or privilege under the arrangement and had not therefore received a fringe benefit as defined for fringe benefits tax purposes. The AAT found that, even if the amount were not assessable income, it would be caught under ITAA36 Pt IVA as a tax benefit derived from entering into a scheme (¶6220). Interaction with industrial law A salary sacrifice arrangement may be “effective” even if it provides that an employee’s entitlement to salary is reduced below the minimum entitlement under industrial law. Benefits provided under such an arrangement are not taxable income of the employee. However, as employees may (notwithstanding the salary sacrifice arrangement) retain their minimum entitlement to salary under industrial law, any balance of that entitlement would, if later derived, be assessable income of the employee. The Commissioner’s views on the interaction of salary sacrifice agreements and industrial law are expressed in TR 2001/10 (para 58): “If the employment agreement provides that salary or wages entitlements are below the minimum entitlements under the relevant industrial law, award or workplace agreement, and non-cash payments are made, the employee may retain a legal entitlement to receipt of the minimum level of salary or wages. Where an employer and an employee enter into a SSA that so provides, we accept that the income tax law takes the factual situation that exists between the two parties as it finds it. However, the employee may have rights to enforce payment of an underpayment of salary or wages under industrial law. For example, the Federal Court of Australia in Poletti v Ecob (No 2) (1989) 31 IR 321 gave a direction for the payment of an under payment of wages where the appellant (employer) had provided the respondent (employee) a package of benefits rather than the salary or wages as required by the relevant award. Where a Court gives an order concerning payment of under paid wages, the amounts awarded are assessable income of the employee under either section 6-5 or 610 of the ITAA 1997.” The industrial tribunal Fair Work Australia upheld, on 25 October 2010, an employee’s right to enter into a salary sacrifice arrangement that reduced her salary to below the minimum wage in her award (Casey Grammar School v Independent Education Union of Australia [2010] FWA 8218). The Tribunal ruled that

the employee could sacrifice half of her salary into superannuation as an employer contribution, even though her salary was then below the minimum set out in the Education Services (Teachers) Award 2010. According to the Tribunal, the Fair Work Act 2009 took precedence over the award and, as a deduction in accordance with the employee’s salary sacrifice arrangement was permitted under that Act, nothing in the award could have the effect of making it unlawful. This interpretation of the interaction between the Act and the award means that: (i) the employee receives the taxation and superannuation benefits of having entered into the arrangement; and (ii) the employer is not required to make up an underpayment of salary (as was required in Poletti v Ecob (No 2) above) after having already made superannuation contributions of an equivalent amount for the employee. Impact on superannuation benefit entitlements Awards and workplace agreements vary in the way superannuation benefit entitlements are calculated. Some base the calculation on the gross salary package, others on the gross take home amount. In the latter case, an employee may, despite the tax advantages, overall be in a worse position when income is sacrificed to a superannuation fund. This could be the case, for example, if an employee’s defined benefit entitlement is based on the employee’s reduced salary after salary sacrifice. The impact of reduced employer contributions, on actuarial advice, to a defined benefit fund was considered in East Gippsland Shire Council v Strong 01 ESL 18. In that case, an employee who was remunerated on a total employment cost basis was entitled to damages because he had not been advised that the cash component of the package would not be adjusted upwards if the actual employer superannuation contribution was adjusted downwards. The amount of damages was the increased cash salary he should have received from the time his employer reduced the superannuation contributions. Salary sacrifice by contractors who are SG employees The Commissioner accepts (Superannuation Guarantee Determination SGD 2006/2) that an effective salary sacrifice arrangement can be entered into by a person who is an employee for SG purposes but is not an employee within the ordinary meaning (¶12-060). This would apply to an individual who is an employee for SG purposes because of SGAA s 12(3) (ie a person who works under a contract wholly or principally for their labour) or s 12(8) (ie artists, musicians, sportspersons, etc). This does not apply to a contractor who is not deemed to be an employee for SG purposes. Salary sacrifice and transition to retirement pensions Since 1 July 2005, people aged between their preservation age and age 65 have been able to access their superannuation benefits as a “transition to retirement” pension without needing to retire (¶3-280). These non-commutable income streams were introduced to encourage people to stay in the workforce longer. The ATO has given limited approval to the strategy of combining salary sacrifice and a transition to retirement pension. The idea is to draw an income from a transition to retirement pension and at the same time make additional salary sacrifice contributions back into superannuation while continuing to work. Proposal that salary sacrifice contributions not count for SG purposes On 2 May 2017, the Senate Economics References Committee released its report into SG non-payment (“Superbad — Wage theft and non-compliance of the Superannuation Guarantee”). One of its recommendations was that salary sacrificed contributions cannot count towards an employer’s compulsory SG obligations or reduce the earnings base upon which SG obligations are calculated. The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 2) Bill 2017 proposed amendments to implement this recommendation. The Bill lapsed when parliament was prorogued for the May 2019 Federal election, but the salary sacrifice proposals have been reintroduced in the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Bill 2019 which was introduced into parliament on 24 July 2019. The Bill proposes amendments to the SGAA to prevent employers from using their employees’ salary sacrifice superannuation contributions to reduce the amount of SG contributions the employer is required to make. If implemented, the proposals would have the following effect for quarters commencing on or after 1 July

2020. 1. The definition of ordinary time earnings in SGAA s 23(2) would be replaced by a definition of “ordinary time earnings base” which is made up of: (i) the ordinary time earnings of the employee for the quarter, and (ii) any “sacrificed ordinary time earnings amounts” of the employee for the quarter. A sacrificed ordinary time earnings amount is the amount by which an employee agrees their ordinary time earnings be reduced for a quarter under a salary sacrifice arrangement. This does not include amounts that would have been excluded salary and wages (¶12-100) if they had been paid to the employee (proposed SGAA s 15A). 2. An employer’s SG charge percentage (¶12-180) in relation to an employee would be reduced if the employer “makes a contribution (other than a sacrificed contribution)” for the employee’s benefit (proposed SGAA s 23). A sacrificed contribution is one made to a complying superannuation fund or RSA under a salary sacrifice arrangement. This ensures that sacrificed contributions are not treated as contributions that can reduce an employer’s SG charge. Mandatory employer contributions that reduce the SG charge would be calculated on a pre-salary sacrifice base. 3. To avoid an SG shortfall (¶12-150), an employer would be required to contribute at least 9.5% of an employee’s “ordinary time earnings base” to a complying superannuation fund or RSA for a quarter (s 23(2)). See ¶12-200 for the increase in the charge percentage from 9.5% for 2018/19 to 12% by 2025/26. 4. If an employer has an SG shortfall (¶12-150), the amount of the shortfall is calculated by reference to their employee’s “quarterly salary or wages base” (SGAA s 19). The quarterly salary or wages base is the sum of: (i) the total salary or wages paid by the employer to the employee for the quarter, and (ii) any salary or wages amounts of the employee for the quarter that have been sacrificed into superannuation. This is where contributions are made because the employee agrees for them to be made in return for the employee’s salary or wages for the quarter being reduced (s 15A). 5. Where an employer makes a late contribution (SGAA s 23A) for their employee and seeks to offset it against the SG charge they have incurred (¶12-235), sacrificed amounts would not form part of the late contribution. Proposal for reporting of sacrificed amounts by employers The Treasury Laws Amendment (2018 Measures No 4) Bill 2018 proposed that employers be required to report “sacrificed ordinary time earnings amounts” and “sacrificed salary or wages amounts” (¶12-520). These are amounts by which an employee’s ordinary time earnings or salary or wages are reduced for a quarter under a salary sacrifice agreement when salary sacrificed amounts are paid into superannuation. This proposal was tied to the salary sacrifice amendments discussed above (see “Proposal that salary sacrifice contributions not count for SG purposes”). As those amendments have not yet been passed by parliament, the additional reporting by employers has not come into effect. [SLP ¶50-750]

Calculation of SG Charge ¶12-300 Calculation of SG charge SG charge is payable by an employer who has an SG shortfall (¶12-150) for a quarter (SGAA s 16). The charge is imposed by s 5 of the Superannuation Guarantee Charge Act 1992 (SGCA) and the amount of the SG charge is the amount of the SG shortfall for the quarter (SGCA s 6). The SG charge is calculated as the sum of: (a) the total of the employer’s individual SG shortfalls for the quarter (¶12-150) (b) the employer’s nominal interest component for the quarter, and

(c) the employer’s administration component for the quarter (SGAA s 17). The SG charge is calculated at the end of each quarter and is based on the employer’s non-compliance for the quarter just ended. In working out the amount of SG charge payable by an employer, the amount of late contributions offset (¶12-360) is disregarded (s 62A). Nominal interest component The employer’s nominal interest component for a quarter is a substitute for fund earnings that would have accrued if the employer had provided the prescribed minimum SG support during the quarter. This component is calculated by multiplying the total of the employer’s individual SG shortfalls for the quarter by the interest rate of 10% pa (SGAR s 13). Interest is imposed “from the beginning of the quarter in question until the date on which superannuation guarantee charge in relation to the total would be payable under this Act” (SGAA s 31). This would normally be the later of the 28th day of the second month following the end of the quarter and the date of lodgment of the SG statement (¶12-350). If an employer fails to lodge an SG statement and the Commissioner makes a default assessment for the quarter, SG charge is payable on the day the default assessment is made (SGAA s 36), and interest would then be payable until that date. In Australian Medical Services 2012 ATC ¶10-281, the employer made SG contributions 128 days late and failed to lodge an SG statement. The Commissioner issued a default SG assessment roughly three years later and calculated nominal interest to that date. The AAT held that the nominal interest had been correctly calculated as the method as set out in s 31 was unambiguous and clear and the Commissioner did not have discretion to remit any part of the SG charge. The AAT held in Rane Haulage Trust 14 ESL 19 that, although s 37 authorises the Commissioner to amend an assessment by making any alterations or additions that the Commissioner thinks necessary, it does not authorise the Commissioner to amend an assessment so that it is no longer in alignment with the facts and the law. The taxpayer had lodged SG statements over two years late and the nominal interest component of the resulting SG charge was calculated for a period of over two years. The taxpayer’s request for the nominal interest component to be reduced because of the unfairness of the calculation was refused. The nominal interest component is calculated from the beginning of the quarter in question on the total shortfall amount for the quarter — even if the employee’s employment commenced part-way through the quarter and regardless of the time in the quarter in which the contribution underpayment arose. Example XYZ Ltd has total individual SG shortfalls of $5,400 for a particular quarter. It lodges an SG statement by the due date, ie by the 28th day of the second month following the end of the quarter. The rate for calculation of the nominal interest component is 10% pa. The number of days from the beginning of the quarter to the date SG charge is payable is 151, and the number of days in the quarter is 92. The interest component for the quarter is calculated as follows.

$5,400×

151 days ×10%=$223  365 days 

Administration component An employer’s administration component for a quarter is $20 for each employee for whom there is an SG shortfall (SGAA s 32). SG charge acts as a penalty There is a considerable “penalty” component in the calculation of the SG charge. Far from being simply a mechanism to compensate the employee for the under-contribution, the SG charge may comprise a number of separate penalties:

(1) an administration fee of $20 for each employee for whom there has been an underpayment of contributions (2) “salary and wages” being the basis of calculation of the SG charge, rather than the generally lower ordinary time earnings (3) 10% pa interest calculated from the start of the relevant quarter, rather than from the date the contributions should have been made, until the date the SG charge is payable (4) the SG charge is not deductible (ITAA97 s 26-95), whereas the superannuation contribution may have been (¶6-120), and (5) further penalties may be imposed for failure to keep records and other offences (¶12-370). The first four penalties are automatic and apply even if the contributions are made shortly after the due date. Only the fifth is at the Commissioner’s discretion. [FTR ¶794-640, ¶794-672, ¶794-674; SLP ¶50-910]

Assessment and Payment of SG Charge ¶12-350 Lodgment of SG statement and assessment of SG charge Employers are required to self-assess their liability to the SG charge. If an employer has an SG shortfall for a quarter, the employer must lodge an SG statement and pay the SG charge by the due date. An employer is not entitled to a deduction for any payment of SG charge (ITAA97 s 26-95). Lodgment of SG statement An employer who has an SG shortfall for a quarter (¶12-150) must lodge an SG statement on or before the 28th day of the second month after the end of the quarter (SGAA s 33), ie on or before: • for a quarter beginning on 1 January — 28 May in the next quarter • for a quarter beginning on 1 April — 28 August in the next quarter • for a quarter beginning on 1 July — 28 November in the next quarter • for a quarter beginning on 1 October — 28 February in the next quarter. Where the last day for lodging an SG statement falls on a weekend, public holiday or bank holiday, the statement may be lodged on the next working day (TAA Sch 1 s 388-52). The Commissioner may allow an employer to lodge an SG statement on a later day (TAA Sch 1 s 38855). The Commissioner may also require an employer to lodge a statement stating whether the employer has an SG shortfall (SGAA s 34), and may issue default assessments or amend assessments where necessary (SGAA s 36; 37). An employer’s SG statement must set out: • the name and postal address of the employer • the name, postal address and TFN (if known) of each employee for whom the employer has an individual SG shortfall for the quarter • the amount of each such shortfall • the employer’s nominal interest component for the quarter

• the employer’s administration component for the quarter • the total of the employer’s individual SG shortfalls for the quarter • the amount of the employer’s SG charge for the quarter (SGAA s 33(2)). Under s 8C of the Taxation Administration Act 1953 it is an offence to fail to provide any information or document to the Commissioner as required under a taxation law. This would include a failure to lodge an SG statement. An administrative penalty is payable for breach of s 8C (¶12-550). Assessment of SG charge liability Where an employer lodges an SG statement for a quarter (and no previous statement for the quarter has been lodged and no previous assessment raised), the Commissioner is taken to have made an assessment of the employer’s SG shortfall and of the SG charge payable on the shortfall as specified in the statement (SGAA s 35). The assessment is taken to have been made on the later of: (a) the day the statement was lodged, and (b) the day the SG statement was required to be lodged for the quarter (see above). The SG statement has effect as if it were a notice of assessment signed by the Commissioner and given to the employer on the day the assessment is taken to have been made. An employer who is dissatisfied with an assessment may object against the assessment (SGAA s 42). The objection procedure is discussed at ¶11-500. In some cases, an employer’s SG charge liability may be reduced by the employer offsetting late contributions against that liability (¶12-360). Leniency by the ATO The ATO may choose not to assess an employer for SG charge if there is evidence the employer has done all they could reasonably be expected to do to comply with the law (Practice Statement PS LA 2007/1 (GA)). This could be where: • the employer has posted a cheque to a fund within 28 days after the end of the quarter to meet their SG obligations • the employer has, within 28 days after the end of the quarter, sent a payment to a fund that the employer reasonably believed held an active account for the member, or • the employer provided a clearing house, that is not an agent of the employer, with funds to meet the employer’s SG liability before 28 days after the end of the quarter. If an employer’s default fund or the fund chosen by an employee (¶12-044) is subject to an APRA direction or an ASIC stop order, the fund is not allowed to accept superannuation contributions and the employer will need to find an alternative fund to accept the contributions before the cut-off date for the quarter (¶12-230). An employer that fails to make the cut-off date may be liable for the SG charge, although account may be taken of the fact that an employer has taken “all reasonable steps” to comply. Default SG assessments If an employer fails to lodge an SG statement for a quarter and the Commissioner is of the opinion that the employer is liable to pay SG charge, the Commissioner may make a default assessment of the employer’s SG shortfall and of the SG charge payable (SGAA s 36). Practice Statement PS LA 2007/10 sets out the factors the Commissioner will consider before making a default assessment: • where an employer has provided an SG statement that indicates that the employer has an SG shortfall for a quarter, a default assessment will not be made but, subject to the time limits in SGAA s 37 (generally, four years from the assessment date), the Commissioner may amend any assessment by making appropriate alterations or additions

• with very limited exceptions, an employer would be informed of the Commissioner’s intention to make a default assessment, as well as the basis upon which it would be calculated, before the assessment is made, and • a default assessment would not be made if an employer lodges an SG statement after being advised of the Commissioner’s intention to make a default assessment. Unsuccessful attempt to force ATO action In Kronen 12 ESL 27, an employee attempted to have the Commissioner enforce a claim for unpaid employer superannuation contributions. The employee argued that, as his employer had failed to comply with the SGA Act, the employee had a right to have the Commissioner enforce the payment of the contributions, and that the Commissioner had a duty to take appropriate action to do so. Dismissing the claim, the Federal Court said the employee’s insuperable difficulty was that the SGA Act did not give him a right to impose a duty on the Commissioner. The words in SGAA s 36 (and s 37 if that were relevant) are wholly permissive, and no section provided a trigger to an obligation on the Commissioner to hear and decide a claim by an employee that their employer was not making superannuation contributions according to law.

¶12-360 Late contributions offset against SG charge Employers who make contributions for an employee to a complying superannuation fund or RSA after the due date, ie after the 28th day following the end of the relevant quarter (¶12-180), may be able to offset the late payment against their SG charge liability (SGAA s 23A). Purpose of the offset The purpose of the offset is to reduce the likelihood of an employer paying SG contributions twice for the same employee for the same quarter, once to the fund and once to the ATO. Late contributions by an employer can be counted as advance contributions for a future quarter if that quarter commences no more than 12 months after the contributions are made (SGAA s 23(7)) (¶12-150). An employer’s late contributions cannot, however, be used as an advance payment for a future quarter if the employee for whom the contributions were made is no longer employed by the employer. In that case, the employer might pay twice — once for the late contribution and again for the SG charge. The purpose of the offset rule in s 23A, which applies to all late contributions covered by an election made by an employer on or after 24 June 2008, is to overcome this double payment problem. Eligibility to use the offset An employer can offset late contributions against SG charge liability for a quarter for an employee if: • the contribution is made into an employee’s complying superannuation fund after the 28th day after the end of the quarter (it would not otherwise be a late contribution) • the contribution is made before the employer’s original assessment for the quarter is made • the employer elects in the approved form that the contribution be offset against their SG charge for the quarter for the employee, and • the election is made within four years after the employer’s original assessment for the quarter is made (s 23A(1), (2)). An employer’s original assessment for a quarter is made at the earlier of: (a) the day the Commissioner receives an SG statement from the employer for the quarter, where the employer has not previously lodged an SG statement for that quarter and the Commissioner has not assessed an SG charge for the employer for that quarter; and (b) the day the Commissioner makes a default assessment for the employer for the quarter (¶12-350). Example

Proxi Ltd is required to make a $1,500 contribution for the September 2019 quarter for Jamie. Proxi fails to make the contribution by the due date of 28 October 2019, but makes a late contribution into Jamie’s superannuation fund on 1 January 2020. Proxi is assessed on 3 February 2020 with SG charge liability for the September 2019 quarter for Jamie. Proxi is eligible to use the contribution made to Jamie’s fund on 1 January 2020 to offset its SG charge liability for Jamie for the September 2019 quarter, as long as an election is given in the approved form to the Commissioner by 3 February 2024. As Jamie is still an employee of Proxi, the contribution for Jamie could instead have been counted by Proxi as part of its contribution for the December 2019 quarter rather than it being used to reduce Proxi’s SG charge liability for the September 2019 quarter.

For the purposes of s 23A, an employer contribution at a particular time to an approved clearing house for an employee is treated as a contribution to a complying superannuation fund or an RSA for the employee at the same time if the approved clearing house accepts the payment (¶12-010). In Coreta 09 ESL 01, the taxpayer was not entitled to the offset because: (a) a contribution had not been made to a complying superannuation fund; and (b) the election to offset the amount was not made within four years after the SG charge became payable. If the election is made after the SG charge for the quarter has been assessed, the assessment must be amended before the employer’s liability can be reduced (s 23A(4A)). A contribution can only be offset against an SG charge which relates to the same quarter and to the same employee. An election to use a contribution as an offset cannot be revoked (s 23A(2)). Contributions that are offset against an employer’s SG charge liability are not tax deductible (ITAA97 s 290-95). Amounts against which late contributions are offset A late contribution is offset against the employer’s liability to pay SG charge to the extent that the liability relates to: • the part of the employer’s nominal interest component (¶12-300) for the quarter that relates to the employee, or • the employer’s individual SG shortfall (¶12-150) for the employee for the quarter (s 23A(3)). The contribution is offset against that part of the employer’s nominal interest component for the quarter that relates to the employee before any remainder is offset against the employer’s individual SG shortfall for the employee for the quarter (s 23A(4)). Penalties under Pt 7 (¶12-550) apply to the full amount of the SG charge, before the effect of any offset under s 23A is taken into account (s 62A). Example For the March 2020 quarter, Millars Ltd contributes $1,200 for its employee, Sandy, after the due date (ie after 28 April 2020). Millars Ltd is liable for SG charge for the March 2020 quarter because of failure to contribute for Sandy by the due date, but can offset the late contribution against its SG charge for the quarter. Assume: • the SG charge for the quarter is $1,300, and • the portion of the SG charge that relates to Sandy’s entitlements is made up of a shortfall of $1,200 and nominal interest of $80. Millars Ltd can offset the SG charge by $1,200. This is made up of $80 for the nominal interest, then the remaining $1,120 can be used to offset part of the individual SG shortfall for Sandy. Millars Ltd would still be required to pay the remainder of the SG charge, ie the remaining individual SG shortfall of $80 and $20 administration component. The ATO would deposit the $80 individual SG shortfall in Sandy’s fund and retain the $20 administration component.

If the amount of the late contribution exceeds the employee’s individual SG shortfall and nominal interest component for the relevant quarter, the excess amount can be applied to the current quarter or to a future quarter that commences within 12 months (s 23(7)).

Example In the example above, if Millars Ltd’s late contribution had been $1,400, $1,280 could be used to offset its SG charge for the quarter. The remaining $120 of the late contribution could be used as a contribution for the June 2020 quarter, or for any quarter beginning within 12 months of the contribution date. Millars Ltd would still be required to pay the $20 administration charge to the ATO.

The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Bill 2019 proposes that, from 1 July 2020, salary that is sacrificed into superannuation would not form part of any late contributions an employer makes that are eligible to be offset against the SG charge (¶12-180). Liability to general interest charge An employer that fails to pay the SG charge when it becomes payable is liable to pay the general interest charge (GIC) (¶12-570) that accrues from the SG charge payable date to when both the SG charge and the GIC have been fully paid. When an election is made under s 23A, the GIC accrues on the remaining shortfall component of the unpaid SG charge amount (after the offset is applied) from the original SG assessment date for the quarter (s 49). Example An employer makes a late contribution of $1,000 for an employee and elects that this be offset against the employer’s SG charge liability for the employee for the quarter. After the $1,000 is offset against the employer’s SG charge liability, the remaining shortfall component is $110. The employer is liable to GIC on the $110 from the SG assessment date for the quarter to when both the SG charge and the GIC are fully paid.

¶12-370 Payment of SG charge SG charge for a quarter is payable: • if, on or before the “lodgment day” for the quarter, the employer lodges an SG statement, or a statement under s 34 in response to the Commissioner’s request for information about whether the employer has an SG shortfall for the quarter — on the lodgment day, or • if, after the lodgment day, the employer lodges an SG statement or a statement under s 34 indicating an SG shortfall for the quarter — on the day the statement is lodged (SGAA s 46). Lodgment day for a quarter means the 28th day of the second month after the end of the quarter. If the Commissioner makes a default assessment of the employer’s liability to SG charge, the SG charge is payable on the day the assessment is made (s 36). Where the last day for paying SG charge falls on a weekend, public holiday or bank holiday, the charge may be paid on the next working day (SGD 2003/2). Extension of time to pay SG charge The Commissioner can defer the time by which the SG charge is due and payable (TAA Sch 1 s 255-10). If the Commissioner defers the time for payment of the SG charge, GIC begins to accrue from the time as varied. The Commissioner can also permit an employer to pay the SG charge in instalments, but this does not alter the time at which the full SG charge is due and payable (TAA Sch 1 s 255-15). Despite an arrangement between an employer and the Commissioner for payment by instalments, GIC for any unpaid amount begins to accrue when the SG charge is due and payable or at that time as varied under s 255-10 (ie when the Commissioner defers the payment due date). Additional SG charge An employer who fails to provide, when and as required, an SG statement or information relevant to assessing the employer’s liability to pay SG charge, is liable to pay additional SG charge equal to double the amount of the SG charge payable by the employer for the quarter. The minimum additional SG charge payable is $20 (SGAA s 59).

The employer may also be guilty of an offence under TAA s 8C, punishable by a fine not exceeding 20 penalty units (more for subsequent offences) (TAA s 8E). A penalty unit is $210 from 1 July 2017, and was $180 from 1 July 2015 to 30 June 2017 (Crimes Act 1914). The Commissioner may remit all or part of the additional SG charge (SGAA s 62(3)). Challenges to SG charge assessments There have been a number of cases in which employers have challenged SG charge assessments. As can be seen from the following cases, the challenges are rarely successful. The employer in Pye made superannuation contributions to his employees in cash payments rather than as payments to a superannuation fund account. He argued that he should be relieved of SG charge, SGAA Pt 7 penalty charge and GIC because his business had suffered from the long-running drought and he should not be penalised for a mistake made in ignorance of the law. The AAT said it had jurisdiction to review the assessment of the SG charge and the penalty charge, but not the GIC. Although sympathising with the plight of the employer, the AAT found the SG charge to have been correctly imposed and held that the Pt 7 penalty of 10% (a maximum penalty of 200% of the SG charge could have been levied) was appropriate in the circumstances. In Jarra Hills and other cases discussed at ¶12-180, SG charge assessments were made after the taxpayer made SG contributions after the due date. The AAT in these cases said that it had no discretion to overlook the late payment of the contributions when a challenge was made to the imposition of the SG charge. The grievance apparently suffered in these types of cases may, since 1 January 2006, be ameliorated by the ability to offset late contributions against SG charge liability (¶12-360). In Pyke, the proprietor of a hairdressing business that was sold after it ran into financial difficulties unsuccessfully sought to have the AAT overturn SG charge assessments that effectively resulted in double contributions being made for certain employees. While not disputing that the superannuation contributions were no longer owing, the Commissioner contended that the legislation did not allow the exercise of a discretion that would permit the setting aside of the assessments. The AAT found nevertheless that there had been a troubling delay between the receipt of an audit questionnaire from the taxpayer and the subsequent assessment, and in these circumstances recommended some form of ex gratia payment by way of refund of contributions due as assessed.

¶12-390 Collection of SG charge debt by Commonwealth Generally, an SG charge debt (including penalties) payable by an employer is a debt due to the Commonwealth and must be paid to the Commissioner of Taxation. The Commissioner has authority to sue for recovery (TAA Sch 1 s 255-5). Recovery of the debt is in the hands of the Commissioner rather than in the hands of the employee for whom the superannuation contributions should have been paid. An employee cannot, therefore, agree to give up the entitlement to receive SG contributions (Interpretative DecisionID 2006/6). Even if the employee agrees to accept a lump sum in full discharge of their entitlements or an increase in their remuneration, the employer remains liable to the SG charge because it is a debt due to the Commonwealth, not to the employee (as illustrated in Weston at ¶12-180). Recovery of SG debt on death of employer If an employer has died, and no SG charge has been assessed or paid, the trustee of the deceased employer’s estate is required to lodge any information which the Commissioner may require in order to determine the deceased employer’s outstanding SG charge. The SG charge payable by the trustee is a charge on the employer’s estate in the trustee’s hands in priority to other debts. The Commissioner is able to recover the SG charge owed by a deceased employer if, within six months after the death of the employer, neither probate of the employer’s will nor letters of administration of the employer’s estate have been granted (TAA Sch 1 s 260-145). In such a case, the Commissioner can effectively make a default assessment of the amount of the SG charge up to the date of death. A person may be authorised to seize and dispose of property of the deceased person to recover outstanding tax liabilities (TAA Sch 1 s 260-150).

Recovery from third parties The Commissioner is empowered to collect the SG charge owing by an employer from any person who owes money to the employer, without having to resort to recovery proceedings through a court, by using the garnishee provisions in TAA Sch 1 s 260-5 to 260-20. Recovery from third parties is discussed at ¶12410. Recovery from insolvent employer Recovery of unpaid superannuation and of SG charge when a corporate employer becomes insolvent is governed by the Corporations Act 2001, and recovery from an individual employer is governed by the Bankruptcy Act 1966. See ¶12-400. [FTR ¶794-724; SLP ¶51-310]

¶12-395 Personal liability of directors for unpaid SG charge A director penalty regime applies when a company breaches its obligations relating to payment of SG charge and estimates of SG charge, and directors may be personally liable when a company fails to comply with its obligations. The ATO has power to commence recovery action against a director for SG liabilities that remain unpaid 21 days after the Commissioner has issued a director penalty notice to the director or to the director’s registered tax agent. The director penalty regime is contained in Div 268 and 269 in Sch 1 of TAA and applies generally from 1 July 2012. Penalty regime for unpaid SG amounts A company is liable to pay SG charge at the time it must lodge an SG statement (s 269-10(3)). The “due day” for SG charge for a quarter is the 28th day of the second month after the quarter ends. The Commissioner can make an estimate of an overdue and unpaid SG charge that has not been assessed (s 268-10), and companies are obliged to pay the amount of the estimate. The amount of the estimate is due and payable at the time the notice is given (s 268-15, 268-20). General interest charge will accrue on any assessment of the SG charge that is made after an estimate (s 268-75(1)). Directors must ensure a company pays SG charge or estimates of SG charge as required, and this continues until the company complies with its obligation, an administrator is appointed or the company begins to be wound up. If a company fails to meet its obligations to pay SG charge or estimates of SG charge by the due day, the directors are personally liable to pay a penalty equal to the unpaid amount of the company’s liability. Imposition of director penalties A director may be liable for the company’s obligation to pay SG charge or an estimate of SG charge. This could arise if, for example, an employer incorrectly classifies a worker as a contractor rather than as an employee, miscalculates the ordinary time earnings of an employee or fails to send SG contributions to the ATO by the due date. The director penalty is the amount of the company’s SG charge either: (i) as assessed by the employer through the lodgment of an SG statement (ii) as assessed by the Commissioner through a default assessment, or (iii) as estimated by the Commissioner and notified in a notice of an estimate issued by the Commissioner (TAA Sch 1 s 269-10). The liability to unpaid SG amounts is a parallel liability for the company and the directors, and allows the ATO to garnishee a director’s personal bank accounts where appropriate. Amounts collected from directors are distributed by the ATO in the same way as SG charge amounts are distributed (¶12-500).

Timing of obligation to pay Before 1 July 2018, there were timing differences between: • when the director obligation to ensure the company pays its SG charge arose — SG charge (and PAYG withholding liabilities) are referred to in Div 269 as “underlying liabilities”, and • when the director obligation to ensure the company paid an estimate of those unpaid underlying liabilities arose. If the company’s SG charge liability remains unpaid after the due date, the Commissioner may issue a director penalty notice but must then wait until the end of 21 days after issuing the notice before commencing proceedings (s 269-25). For these purposes, a company’s SG charge is treated as due on the day the employer is due to report their SG shortfall for the quarter to the Commissioner (s 269-10). This is either lodgment day (generally the 28th day of the second month after the quarter ends) or a later day as allowed by the Commissioner (¶12-350). In the case of an estimate of SG charge, a director is under an obligation to ensure the company complies with its obligations in respect of the estimate from the day the company is given a notice of the estimate (s 268-20). An estimate of an SG charge creates a separate and distinct liability from the underlying liability and, as a consequence, a separate and distinct director obligation to ensure the company pays the estimate (s 269-20(2)). A new director, ie a person who becomes a director after the company fails to meet its obligations by the due date, can only be liable if the company’s obligations have still not been met 30 days after the person became a director (s 269-20). The fact that there were timing differences in the application of the director penalty provisions depending on whether a company failed to pay SG charge or an estimate of SG charge could create an opportunity for liability to be delayed or even avoided. These timing differences were removed by the Treasury Laws Amendment (2018 Measures No 4) Act 2019 which applies in relation to an estimate made on or after 1 July 2018. From 1 July 2018, the date a director commences being under an obligation to ensure their company complies with its obligations to pay an estimate or enter into administration or liquidation is backdated to the day the “underlying liability” arose but before the obligation to pay the corresponding estimate becomes due. A liability to pay a director penalty based on an estimate applies even if the underlying liability never existed or has been discharged in full, and even if the director penalty is larger than the underlying liability. Remission of penalties A director penalty may be remitted if, before the penalty notice is given to the director or within 21 days after the notice is given, any of the following happen: (i) the company pays the SG charge or estimate of SG charge (ii) an administrator of the company is appointed, or (iii) the company begins to be wound up (TAA Sch 1 s 269-30). Before 1 July 2018, the appointment of an administrator or the winding up of a company did not provide grounds for a director penalty to be remitted if: • where the company’s obligation is to pay SG charge — three months from the due date have passed and the company has failed to lodge an SG statement with the Commissioner, or • if the company’s obligation is to pay an estimate of SG charge — three months have passed from the day the company was under an obligation to pay the underlying liability, ie the SG charge, to which the estimate relates. In either case, there was a three-month period before a director was required to put a company into

administration or liquidation and it was only at the end of the three months that the director could be liable for a director penalty. The circumstances in which a director penalty could be remitted were tightened from 1 July 2018 by the Treasury Laws Amendment (2018 Measures No 4) Act 2019. From that date, the appointment of an administrator or the winding up of a company does not provide grounds for a penalty to be remitted if: • where the company has an obligation to pay SG charge — the company does not lodge an SG statement with the Commissioner on or before the due date, or • where the company has an obligation to pay an estimate of SG charge — the day by which the company was required to pay the underlying liability to which the estimate relates has passed. This means that liability to the penalty arises as soon as the SG charge liability is incurred, rather than three months later. Defences available to directors for failure to pay SG charge or estimate of SG charge The defences against imposition of a director penalty for failure to pay SG charge, as set out in TAA Sch 1 s 269-35, require the director to prove that: (i) they were not involved in the management of the company for a good reason such as illness and it was reasonable for them not to be involved (s 269-35(1)), or (ii) they took all “reasonable steps” to ensure the directors caused the company to meet its obligation to pay the SG charge, to appoint an administrator or to be wound up, or there were no reasonable steps they could have taken to ensure that any of those things happened (s 269-35(2)), or (iii) the director penalty resulted from the company treating the SGA Act as applying to a matter in a particular way that was “reasonably arguable” and that the company took “reasonable care” in its application of the law (s 269-35(3A)). From 1 July 2018, a director who is issued with a director penalty notice for an estimate of SG charge must show that during their time as director they took all reasonable steps to ensure that they caused the company to comply with its obligation to pay not only the estimate but also the underlying liability to which the estimate relates, ie the SG charge (s 269-35(3AA)). A director’s obligation with regard to an estimate is deemed to arise from the end of the quarter relevant to the underlying SG charge liability, not from the day the estimate is due. Any defence raised by a director against liability would apply from the day the underlying liability arises. In determining whether a director has taken “reasonable steps”, regard must be had to all relevant circumstances, including when and for how long they were a director and took part in the management of the company (s 269-35(3)). A matter is reasonably arguable “if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect” (TAA Sch 1 s 284-15). To exercise reasonable care, the effort made by a company must be commensurate with all the company’s circumstances, including its knowledge, experience and skill. This would be relevant, for example, if the company is making a decision about whether a worker is a contractor or an employee. The meaning of “reasonably arguable” is considered in Miscellaneous Taxation Ruling MT 2008/2 and the meaning of “reasonable care” in MT 2008/1. Example A company owns and operates a call centre business with 33 workers. Four workers are employed full-time and the others work on a casual basis. The individual employed by the company to ensure the company’s SG obligations are satisfied relies on ATO material to determine which workers are employees and which are independent contractors. The individual checks the ATO website for information on who is eligible for superannuation and follows a checklist provided online by the ATO to help determine each worker’s status for superannuation purposes. According to the explanatory memorandum to the Tax Laws Amendment (2012 Measures No 2) Act 2012, this would constitute the

exercise of reasonable care.

In DC of T v Arora [2017] NSWSC 1016, a director of two companies had received several directors’ penalty notices before being taken to court for recovery of $1.9m unpaid withholding tax and SG charge. The director unsuccessfully argued that he was not liable for the unpaid amounts because: (i) his application to a bank for finance to fund the companies’ tax liabilities amounted to “reasonable steps”, (ii) he had become ill because of ATO pressure, and (iii) the liquidators of the companies had sold assets and would be able to meet at least part of the ATO’s claim. The Supreme Court said it did not consider that one unsuccessful application to a bank for finance to meet the director’s obligations one or two years after the obligation arose amounted to reasonable steps. It also rejected the taxpayer’s arguments on the basis that they were vague and imprecise in time and did not contain any admissible evidence. In DC of T v Lawson [2017] VSC 789, the sole director of a company was served director penalty notices when the company failed to pay SG charge amounts totalling just over $550,000 for a number of quarters between July 2013 and March 2015. The director argued that he was protected by the defences in s 26935 and was not personally liable for the unpaid SG charge amounts. The Victorian Supreme Court found that none of the defences were available for the following reasons. 1. Although the director provided evidence that he currently suffered mental health problems, there was no evidence that these problems affected him during the period that he was a director and the company breached its SG obligations. For the “illness” defence to be available, the reason for nonparticipation in the management must be a “good reason” and the director failed to establish this. 2. Although the director submitted that he had not participated in the management of the company, this was contradicted by the fact that he attended four meetings with the ATO at which the company’s superannuation obligations were discussed, he signed documents and attended the offices of the company and its accountants. 3. In any event, the director’s evidence that he signed blank SG charge forms exemplified his reckless indifference to the discharge of his duties as director. If the Commissioner collects amounts from third parties (¶12-410) in order to discharge a director penalty, the director can still avail themselves of these defences. To do so, the director must, within 60 days of receiving notice that the recovery has occurred or receiving a copy of a notice issued to a third party, provide information to satisfy the Commissioner that one of the defences has been made out. [FTR ¶794-724; SLP ¶51-310]

¶12-397 Action against directors engaged in illegal phoenix activity Illegal phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its liabilities such as taxes and employee entitlements. According to the ATO, the activity is particularly prevalent in major centres in building and construction, labour hire, payroll services and security services. In regional Australia, it is particularly prevalent in mining, agriculture, horticulture and transport (Media release 29 March 2019). Illegal phoenix activity may have an impact on various groups including the business community, employees and contractors. This impact may include: • non-payment of wages, superannuation and accrued employee entitlements • getting an unfair competitive advantage over other businesses • non-payment of suppliers, and • avoidance of regulatory obligations. The ATO announced in a media release on 8 January 2015 that it had used new powers to recover workers’ superannuation entitlements from the operators of labour hire companies in South Australia and

Victoria who had engaged in phoenix behaviour. The network of companies provided labour hire services such as seasonal fruit picking and meat packing. The ATO said that its new powers, known as Superannuation Guarantee Estimates, allow it to step in, where it sees likely phoenix activity, to protect workers’ superannuation entitlements before a company tries to liquidate and avoid their responsibilities. The ATO can also issue director penalty notices (¶12395) which make directors personally liable for the company’s unpaid superannuation obligations. The ATO’s views on phoenix activity, including warning signs for employees and business owners and where to go for help, are set out at: ato.gov.au/phoenix. Reforms to address illegal phoenix activity A Bill introduced into parliament on 13 February 2019 — the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 — proposes reforms to the Corporations Act 2001 to make directors accountable for illegal phoenixing activity. (1) New criminal and civil phoenix offences will be created. These will include where: (i) company directors transfer company assets to prevent, hinder, or significantly delay creditors’ access to the assets, or (ii) other persons procure, incite, induce or encourage a company to transfer assets to defeat creditors. (2) Directors will be prevented from backdating their resignations to avoid personal liability, and sole directors will be prevented from resigning and leaving a company as an empty corporate shell. (3) Directors will be made personally liable for GST liabilities. (4) Restrictions will be placed on the voting rights of related creditors of a phoenix company at meetings where the appointment or removal and replacement of a liquidator are discussed. (5) The ATO’s existing power to retain refunds where there are outstanding tax lodgments will be extended. The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 lapsed when parliament was prorogued for the May 2019 Federal election but was reintroduced into parliament on 4 July 2019.

¶12-400 Recovery when a corporate employer becomes insolvent Superannuation contributions and the SG charge have the same priority under the Corporations Act 2001 as other employee entitlements when companies go into liquidation, administration or receivership (CA s 556(1)). SG charge is deemed to be a debt payable to the employee in respect of services rendered to the company, notwithstanding that the SG charge is payable to the Commonwealth. Superannuation ranks equally with employee entitlements such as unpaid wages and annual leave. Outstanding superannuation contributions and SG charge are paid to employees after priority creditors’ and liquidators’ fees are paid and before payments to ordinary unsecured creditors. SG charge in respect of excluded employees, such as directors and their relatives, is a priority to the extent of the first $2,000 claimed; amounts exceeding $2,000 rank with unsecured creditors. In JD Thompson Personnel Pty Ltd v Asgard Capital Management Pty Ltd [2011] NSWSC 60, a liquidator brought an action against a superannuation fund to recover superannuation contributions. The plaintiff (a labour hire company) had failed to make SG contributions for its employees and, as part of the winding up of the company, its liquidator admitted the Commissioner’s proof of debt for $1.8m SG charge. The company had, however, by this time already made corresponding payments to the superannuation fund, and the liquidator sought restitution for these “double contributions”. The NSW Supreme Court said the proceedings should not go to trial with only the fund trustee as defendant and a representative employee must be joined as a defendant. This was because the dispute was between the plaintiff (now in liquidation) and the relevant fund members (that is, the employees of the company in relation to whom the “double contributions” came into the trustee’s hands). The case was not one in which the trustee alone could satisfactorily represent the interests of the beneficiaries, and they, as persons whose claims upon

the trust fund would be diminished if the plaintiff succeeded, were entitled to an opportunity to contest the plaintiff’s claim. Practice Statement PS LA 2011/16 provides guidelines on factors considered by the ATO in determining whether to initiate bankruptcy or liquidation action against companies. The Commissioner’s attempted use of a third party notice to recover amounts in advance of creditors who preceded the ATO in priority under the Corporations Act 2001 was considered in Bruton Holdings (¶12410). Compromise arrangements with creditors When a company enters voluntary administration and proposes a deed of company arrangement as a compromise to its creditors, this same priority must be given to superannuation entitlements (CA s 444DA). A company may only vary this priority regime with the consent of a majority of employee creditors, or by proving in court that employee creditors are treated at least as favourably under the arrangement as they would have been under the Act. Although there is no legislative requirement for the SG charge to be afforded priority in arrangements made pursuant to Pt IX and X of the Bankruptcy Act 1966, the trust deed may include a clause that gives the SG charge a similar priority to that which it would have received in bankruptcy. The Commissioner may vote against a deed that does not give priority for SG charge if bankruptcy would yield a greater return. Bankruptcy SG charge (and GIC in respect of non-payment of the SG charge) receives priority in bankruptcy under s 109 of the Bankruptcy Act 1966. SG charge is included in the category of employee entitlements that includes salary, wages and commission. In Lane (Trustee), in the matter of Lee (Bankrupt) [2017] FCA 953, the ATO was one of a bankrupt’s creditors in the bankrupt’s capacity as trustee of a family trust that operated a business. The amounts owed included $128,574 for unpaid superannuation contributions in respect of employees. This claim was the subject of an SG charge with the result that the ATO was entitled to the payment of that amount as a priority under the Bankruptcy Act 1966 s 109(1)(e). However, reg 6.02 of the Bankruptcy Regulations 1996 limits the amount of any such priority at a set amount per employee with the consequence that the ATO’s priority amount was capped at $100,969.52. This meant there was a $27,605 shortfall in relation to recovery of the SG charge amount. The court ruled that the ATO was not entitled to priority over the other trust creditors in recovering the $27,605 from the personal estate of the bankrupt trustee and that each of the trust creditors should be paid a proportionate amount. Fair Entitlements Guarantee scheme Although the Corporations Act 2001 ranks superannuation contributions payable to workers in the same priority as unpaid wages when a company is in liquidation, the costs of the liquidation are paid first, and there are often insufficient assets to pay employees’ entitlements. Employees may then look to the federal government safety net scheme to recover at least some of their entitlements. For liquidations occurring after 5 December 2012, the safety net scheme is the Fair Entitlements Guarantee, which replaced the General Employee Entitlement and Redundancy Scheme (GEERS). The Fair Entitlements Guarantee (and previously GEERS) makes advances to employees of insolvent employers in relation to wages, leave payments and redundancy entitlements. An employer’s superannuation contributions are not covered by the Fair Entitlements Guarantee (nor were they by GEERS). Three months of an employee’s personal contributions were covered by GEERS but they are not covered by the Fair Entitlements Guarantee. Payments under the Fair Entitlements Guarantee to former employees of a company in liquidation constitute salary or wages (¶12-080) for the employees. This is so whether payment is by the liquidator or by a third party provider on behalf of the former employer. In either case, the company in liquidation, but not the liquidator, is liable to SG charge if insufficient SG contributions are made on the relevant payment (Superannuation Guarantee Determination SGD 2017/1). Taking action against misuse of the Fair Entitlements Guarantee scheme

The Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019, which became law on 5 April 2019, aims to strengthen enforcement and deter misuse of the Fair Entitlements Guarantee scheme and to facilitate recovery of unpaid employee entitlements. The Act amends the Corporations Act 2001 to: • penalise company directors and other persons who engage in, or facilitate, transactions directed at preventing, avoiding or reducing employer liability for employee entitlements in insolvency • recover employee entitlements from related entities if that entity benefited from work performed even if it did not employ the employees directly, and • strengthen sanctions for directors and company officers with a track record of corporate contraventions and insolvencies where the Fair Entitlements Guarantee scheme is repeatedly and inappropriately relied upon. Pre-1 January 2008 liquidations If a company went into liquidation before 1 January 2008, s 556(1)(e) gave priority over secured debts to “superannuation contributions payable by the company in respect of services rendered to the company by employees before the relevant date”. The priority in s 556(1)(e) was held in Rathner not to apply to SG charge. This was because SG charge is a statutory tax liability owed to the Commonwealth, rather than being, like a superannuation contribution, a debt owed to the private individual’s fund. Although SGAA s 52 formerly gave priority equal to that of a debt referred to in s 556(1) to any SG charge payable on a winding up, the section was held in DP Excavation & Haulage Pty Limited [2005] NSWSC 533 not to confer the same priority status on SG charge as on superannuation contributions.

¶12-410 ATO garnishee notice to third parties A third party who owes, or may later owe, money to a “debtor” who has a “tax-related liability” may be directed by the Commissioner to pay all or some of the money to the Commissioner (TAA Sch 1 s 260-5). A copy of the Commissioner’s notice to the third party must be sent to the debtor. A “tax-related liability” is defined for these purposes (TAA Sch 1 s 250-10) as including: • SG charge or additional SG charge • general interest charge • administrative penalties, and • a fine, or costs, imposed by a court. Third party taken to owe money A third party is taken to owe money to a debtor where: • money is due or accruing by the third party to the debtor • the third party holds money for or on account of the debtor • the third party holds money on account of some other person for payment to the debtor, or • the third party has authority from some other person to pay money to the debtor. Notices issued to a third party were considered in Elsinora Global 2006 ATC 4061, where the Federal Court found that notices issued under s 260-5 were ineffective because the third parties did not, at the time the notices were issued, have control or disposal of money belonging to the debtor. Consequences for third party A third party who fails to comply with a notice may be liable to a fine of 20 penalty units (ie from 1 July

2017, $4,200 for an individual and $21,000 for a corporation). If a person is convicted of refusing or failing to comply with the Commissioner’s notice, the court may, in addition to imposing a penalty, order the person to pay the Commissioner an amount up to the amount involved in the contravention (TAA Sch 1 s 260-20). Any payment made by a third party to the Commissioner in compliance with a notice is taken to have been made with the authority of the debtor and any other person entitled to all or part of the amount, and the third party is indemnified for the payment (TAA Sch 1 s 260-15). If an entity other than the third party pays an amount to the Commissioner that satisfies all or part of the debt, the Commissioner must notify the third party of that fact and any amount that the third party is required to pay under the notice is reduced by the amount so paid (s 260-5(7)). Challenge to third party notice In Bruton Holdings 2008 ATC ¶20-073 (2008), the Commissioner had issued a notice under s 260-5 to the solicitors of a company, Bruton Holdings, that had been put into liquidation. The notice related to the $400,000 that the solicitors held on trust for Bruton Holdings, and required the solicitors to pay the amount directly to the Commissioner rather than to the Bruton Holdings liquidator who would then make distributions to creditors in the order set down in the Corporations Act 2001. The Full Federal Court upheld the validity of the s 260-5 notice. Bruton Holdings had unsuccessfully argued that its entitlement to call for the amount owed by the solicitors was property that could not be intercepted by the Commissioner by means of the s 260-5 notice. A consequence of the decision was that, although superannuation contributions and the SG charge have the same priority as other employee entitlements when companies go into liquidation (¶12-400), a s 260-5 notice could mean that there is little for the liquidators to distribute. If the Commissioner’s notice pre-empted payment by a debtor to a liquidator, the priority rules might be of little value to employees seeking to recover their entitlements. The High Court unanimously allowed the appeal by Bruton Holdings and held that the Commissioner did not have the power to issue a s 260-5 notice to a debtor of a company after the company had been put into liquidation (Bruton Holdings 2009 ATC ¶20-125 (2009)). This is because there is a specific and separate regime in s 260-45 that obliges a liquidator to set aside sufficient assets to meet the company’s notified tax-related liabilities, and this specific regime overrode the more general provisions of s 260-5. The Federal Court held in Bell Group Limited (in Liq) 2015 ATC ¶20-528 that garnishee notices relating to a disputed $298m tax debt of The Bell Group Limited (in liq) and its liquidator were void. The notices were issued to a bank under s 260-5 for amounts of assessed debts owed by the company and the liquidator to the Commissioner. The Federal Court held the garnishee notices void for two reasons: (i) in accordance with Bruton Holdings, the Commissioner did not have power to issue a notice under s 260-5 in relation to a company that was being wound up, at least with respect to the company’s pre-liquidation tax liabilities; and (ii) such a notice in relation to a company in liquidation was an attachment against the property of the company and void because of s 468(4) of the Corporations Act 2001. In a Decision Impact Statement on the decision in Bell Group Limited (in liq), the ATO stated: • following the decision in Bruton Holdings, the Commissioner ceased to issue notices under s 260-5 in respect of pre-liquidation tax liabilities of companies in liquidation • the Commissioner remains of the view that notices under s 260-5 can be validly issued in a limited range of circumstances involving post-liquidation tax liabilities, and that the High Court decision in Bruton Holdings is not determinative in the context of post-liquidation liabilities because that situation was not before the court, and • the Commissioner aims to test these issues before an appeal court when there is an appropriate method of doing so.

Proposed amnesty for non-compliant employers ¶12-415 Proposed amnesty for non-compliant employers

Employers were offered a 12-month amnesty in 2018 to enable them to self-correct historical underpayments of SG amounts without incurring additional penalties that would normally apply. The offer was contained in the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018 which lapsed when parliament was prorogued for the May 2019 Federal election. The Bill has been reintroduced into parliament since the election but without the amnesty proposal. The government had not, at the time of writing, indicated whether it intends to proceed with the proposal. Current treatment of non-compliant employers Employers are currently liable to SG charge (¶12-150) if they fail to contribute a minimum percentage (9.5% for 2018/19 and 2019/20) of their employees’ ordinary time earnings into superannuation. The SG charge is equal to an employer’s SG shortfall for a quarter, and comprises three elements: • the total of the employer’s individual SG shortfalls, ie any amounts by which the employer has fallen short of contributing the minimum percentage for a particular employee • the employer’s nominal interest component, ie the amount of interest on the total of the employer’s individual SG shortfalls for the quarter, and • the employer’s administration component, ie $20 for each employee for whom the employer has an individual SG shortfall for the quarter. SG charge is not deductible for an employer, and neither are late contributions that are offset (¶12-360) against an employer’s SG charge liability under SGAA s 23A. An employer who fails to contribute the minimum percentage for the benefit of an employee by the due date can be liable to pay not only SG charge but also: • Part 7 penalties (¶12-550) for failing to provide a statement or information as required, and this can be up to double the underlying SG charge, and • general interest charge (¶12-570) where SG charge or Part 7 penalties are not paid by the due date. The Commissioner is generally required to pay to the relevant employee’s superannuation account (¶12500) the individual SG shortfall for the employee for the quarter and any nominal interest component and general interest charge for the quarter. Proposed 12-month amnesty from 24 May 2018 to 24 May 2019 The 12-month amnesty was proposed to run from 24 May 2018 to 24 May 2019 and applied to SG shortfalls from 1 July 1992 when the SG scheme commenced up to and including the March 2018 quarter. The amnesty applied only to historical non-compliance and an employer could not benefit for SG shortfalls relating to the quarter starting 1 April 2018 or later quarters. The amnesty allowed employers to voluntarily self-correct their SG non-compliance. An employer that took part in the amnesty would be required to pay all SG shortfall amounts owing to their employees, including the nominal interest and general interest charge. Qualifying for the amnesty An employer could qualify for the beneficial treatment under the amnesty if: • during the amnesty period, ie from 24 May 2018 to 24 May 2019, the employer disclosed to the Commissioner, in the approved form, information that related to the amount of their SG shortfall and that had not previously been disclosed, and • the Commissioner had not, before the disclosure, informed the employer that the Commissioner was examining (or intended to examine) the employer’s SG non-compliance. An employer would not benefit from the amnesty by disclosing an amount of SG shortfall that had previously been disclosed to the Commissioner, eg an amount included in an existing SG charge assessment. The employer could however benefit to the extent that information was given about additional amounts of SG shortfall not previously disclosed.

Where an employer had the capacity to pay the SG charge on the day they made the disclosure and did not have an existing SG charge assessment for the quarter, the employer could choose to make the contributions directly into the employee’s superannuation account and elect to offset the amounts against their liability for SG charge in accordance with SGAA s 23A (¶12-360). Employers who were unable to contribute directly into the employee’s superannuation account or who had an existing SG charge assessment for the quarter would need to pay the SG charge amounts to the Commissioner. The Commissioner would then deal with the amounts for the benefit of the relevant employees (¶12-500). The Commissioner could, by written notice, disqualify an employer from beneficial treatment under the amnesty if the employer failed to pay the SG charge by the day it was due to be paid, failed to enter into a payment arrangement for the amount, or failed to comply with such a payment arrangement. In such a case, the Commissioner could make amended assessments to unwind benefits such as tax deductions that had accrued to the employer from the amnesty. Beneficial treatment under the amnesty An employer that qualified for the amnesty would benefit in three ways. (1) The employer’s SG shortfall amount would have no administrative component to the extent the amount qualified under the amnesty. (2) The employer would not be liable to Part 7 penalties for failure to provide an SG statement by the due date in respect of an amount of SG shortfall covered by the amnesty. (3) A deduction would be allowed for payments of SG charge imposed on SG shortfall disclosed under the amnesty and for contributions made during the amnesty period to offset SG charge. If the Commissioner identified that an employer had an SG shortfall after the amnesty ended, the Commissioner would take into account the employer’s ability to access the amnesty when determining any remission of the Part 7 penalty. The particular circumstances of each case would be considered, but generally a minimum penalty of 50% would be applied to employers who could have come forward during the amnesty but did not do so. Amendments to ensure employees were not disadvantaged Late payments of SG charge to an employee’s superannuation account under the amnesty would be concessional contributions (¶6-505) and could cause employees to exceed their annual concessional contributions cap. To prevent an employee being liable to pay excess concessional contributions charge on the excess contributions (¶6-515), the Commissioner could make a determination to disregard or reallocate a contribution (¶6-665). An amendment to ITAA97 s 291-465 would allow the Commissioner to make the determination on the Commissioner’s own initiative rather than, as in the usual case, the employee needing to ask for the determination to be made. This would only apply if the Commissioner had paid the SG charge amounts to the employee’s superannuation account for the employee’s benefit. It would not apply if the employer made the contribution directly to an employee’s fund, although in that case the employee could request that the Commissioner make the determination to disregard or reallocate the contribution. An amendment would also be made to the Division 293 tax rules (¶6-400) to ensure that contributions of SG charge made as a result of the amnesty were excluded from the calculation of an employee’s “low tax contributed amounts”. This would ensure that such contributions did not attract Division 293 tax or cause other low tax contributed amounts to attract Division 293 tax. ATO approach after the amnesty Bill failed to become law Because the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018 had not been enacted when parliament was prorogued for the May 2019 Federal election, the ATO has said that it must continue to apply the existing law. At a Senate Economics Legislation Committee hearing on 10 April 2019, ATO Deputy Commissioner Superannuation, Mr James O’Halloran, said that employers who make a voluntary disclosure of historical SG non-compliance will not be entitled to the concessional treatment under the amnesty unless and until

the Bill is enacted into law. If the Bill is eventually enacted, the ATO will apply the new law retrospectively to voluntary disclosures made during the amnesty period (ie, during the period 24 May 2018 to 23 May 2019). In the absence of law to implement the amnesty, Mr O’Halloran said that no one can claim a deduction for payments relating to historical underpayments of SG amounts and the ATO cannot waive the $20 administration fee. The ATO does, however, have discretion to remit the additional Part 7 penalty as part of its normal practice for voluntary disclosures under the current law.

Action against employers who fail to meet their SG obligations ¶12-420 ATO action against employers Compliance by employers with their SG obligations is clearly an important issue for employees and for the ATO. Action after employee complaint If an employee complains to the ATO on an SG matter, it is likely to be about the employer not making sufficient contributions, or the employer not making contributions in compliance with the choice of fund rules. Even if an employee makes a complaint to the ATO, the employee cannot force the ATO to act on the complaint. In Kronen 12 ESL 27, an employee attempted to have the Commissioner enforce a claim for unpaid superannuation contributions relating to commission income the employee had been paid. The employee was employed under an industrial award that required his employer to make superannuation contributions based on his ordinary time earnings (¶12-215). The employee argued that he had the right to have the Commissioner enforce the payment of the contributions, and that the Commissioner had a duty to take action to do so. The Federal Court dismissed the claim on the ground that the relevant provisions of the SGA Act (in particular, s 36 which allowed the Commissioner to make default assessments and s 37 which allowed the Commissioner to amend assessments (¶12-350)) were wholly permissive and did not impose a duty on the Commissioner to act. The Federal Court decision in Kronen was the culmination of a series of unsuccessful actions brought by the employee to force his employer to contribute $4,850 to a fund on his behalf. Previously: • the Industrial Relations Court of South Australia had decided the commissions were not included in his remuneration for SG purposes • the Full Federal Court found that, at that time, the Industrial Relations Court only had jurisdiction to deal with complaints about payments made directly to employees, not about payments made to a fund on behalf of an employee, and • the Federal Magistrates Court twice dismissed the employee’s application for the award to be interpreted, holding that the employee did not have standing to bring the proceedings. Informing employees about their employer’s SG compliance Since 1 July 2007, the ATO has been able to inform an employee about its investigation following an employee complaint or about the employer’s compliance with SG obligations (SGAA s 45A). The ATO may provide information to the employee about steps taken to investigate the complaint and to recover any SG charge from the employer. Provision of such information does not breach taxation laws that prohibit taxation officers from disclosing information. Section 45A does not authorise the provision of information about the general financial affairs of the employer, eg the employer’s overall financial position or other SG shortfall amounts that are not subject to the employee’s complaint. Before 1 July 2007, tax officers were generally not allowed to disclose information to employees about their employer’s compliance with SG obligations. From 1 July 2018, the ATO can also give employees information about their employer’s SG noncompliance even if the employees have not complained to the ATO. Information can be disclosed to

current or former employees relating to their employer’s failure to comply with their SG obligations or where the Commissioner reasonably suspects there has been such a failure, and any actions taken by the Commissioner relating to such failure or suspected failure (TAA Sch 1, item 7.4 to the table in s 35565(3)). This applies whether the failure or suspected failure to comply with the SG obligations occurred before, on or after 1 July 2018. The ATO has released guidance for employees who think their employer is not paying their superannuation — www.ato.gov.au/Individuals/Super/In-detail/Growing/Unpaid-super. Options available to an employee who seeks to recover unpaid SG contributions are discussed at ¶12440. ATO approach to enforcing compliance by employers The ATO’s approach to enforcing compliance by employers with their SG obligations is set out at: www.ato.gov.au/Business/Super-for-employers/Paying-super-contributions/Missed-and-latepayments/Our-compliance-approach/. The ATO applies a different compliance approach according to the circumstances of an employer and their history of engagement with the ATO. This includes assessing whether employers are actively engaging with the ATO, are experiencing difficulty meeting their obligations or are able but unwilling to meet their obligations. An employer is treated as actively engaging with the ATO if they maintain regular contact, provide all information as requested and take any required corrective action. The ATO is unlikely to impose additional penalties for employers who engage with the ATO and have a compliance history that demonstrates they have been generally compliant with their superannuation obligations. Employers who are experiencing difficulty meeting their obligations are encouraged to contact the ATO as soon as possible if they need assistance. The Commissioner has discretion to consider partial or full remission of the Pt 7 penalty (¶12-550), with remission based on the circumstances of the case, the degree that an employer has attempted to comply and the employer’s compliance history. The ATO will take firm compliance action where employers are able but unwilling to meet their obligations, eg if an employer repeatedly fails to pay the correct amount of SG, attempts to obstruct the ATO’s ability to determine an SG charge liability, repeatedly fails to keep appointments or to supply information without an acceptable reason, or engages in any culpable behaviour to delay the provision of information. ATO action may include: (i) collecting amounts owed directly from an employer’s bank or other third parties that owe them money, (ii) collecting amounts owed directly from company directors, or (iii) action that may result in bankruptcy or liquidation. In addition to the SG charge (¶12-350), any of the following penalties (¶12-550) may be imposed if an employer fails to meet their SG obligations: • a Pt 7 penalty if an employer lodges their SG statement late, or fails to provide a statement or information when requested — the penalty may be up to 200% of the amount of the charge payable • an administrative penalty where an employer makes a false or misleading statement in order to pay less SG charge than they should — the base penalty amount can be up to 75% of the shortfall • additional penalty if an employer fails to keep adequate records, fails to pass on an eligible employee’s TFN to their superannuation fund by the due date or enters into an arrangement to avoid their SG obligations, and • a choice penalty when an employer does not comply with the various choice of fund obligations (¶12055). The ATO receives data from a range of sources and validates this against its own information to identify where businesses may not be fully up to date with their superannuation obligations. Sophisticated data analytical models are applied to identify employers considered at high risk of not meeting their obligations

or suspected of having not met their obligations. The ATO has relationships with other regulators including Treasury, APRA, ASIC and the Fair Work Ombudsman. The ATO is able to draw on the expertise of each agency, to regularly exchange information and to develop collaborative strategies. Company directors may be personally liable for a company’s unpaid SG amounts (¶12-395). For issues that arise when an employer is insolvent or bankrupt, see ¶12-400. ATO estimate of the SG gap From time to time, the ATO releases its estimate of the SG gap, which is the difference between the theoretical amount payable by employers to be fully compliant with their SG obligations and actual contributions received by funds. See: www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Taxgap/Superannuation-guarantee-gap/?page=2. ATO may issue directions to non-compliant employers The Commissioner has power to issue two types of written directions to employers applicable to SG liabilities becoming payable from 1 July 2018. The provisions giving the Commissioner power to issue directions were enacted by the Treasury Laws Amendment (2018 Measures No 4) Act 2019. 1. Direction to pay SG charge The Commissioner may issue written directions to an employer who has outstanding SG charge amounts or estimated amounts (TAA Sch 1 Subdiv 265-C). In deciding whether to issue a formal direction, the Commissioner must have regard to various matters including the taxpayer’s history of compliance with the SG legislation, whether the taxpayer’s SG liability is substantial and any steps taken to discharge the liability. The direction would generally require that the SG liability is satisfied within 21 days after the direction is given. An employer commits an offence if they fail to comply with a direction within the specified time. The maximum penalty is $10,500, imprisonment for 12 months or both. A failure to comply with a direction is an offence of strict liability, which means it is not necessary to establish fault. An employer can only avoid penalties for a failure to comply with a direction by showing they took all reasonable steps within the required time both to comply with the direction and to ensure that the original SG liability was discharged before the direction was given. Practice Statement LA 2011/18 (Annexure G) gives an overview of the Commissioner’s power to direct an employer to pay SG charge and lists the factors that the Commissioner must take into account in deciding whether to issue a direction. These include the employer’s history of compliance with SG and other tax obligations, any steps taken to discharge the unpaid liability or to dispute it, and the size of the liability, having regard to the size and nature of the business. 2. Education directions The Commissioner may issue an education direction to an employer if the Commissioner reasonably believes the employer has failed to comply with one of various obligations under the SG legislation. These include failing to pay an SG liability, to give a statement or information as required or to keep records (TAA Sch 1 Div 384). The direction can be made to an individual or, as appropriate, to a director or public officer of a company, to a member of the committee of management of an association or body or to a partner in a partnership. The recipient of a direction is required to undertake a specified approved course of education provided by the Commissioner or another entity within a reasonable time and provide the Commissioner with evidence of completion of the course. Course fees are payable by the employer and are likely to be deductible as they are necessarily incurred in carrying on a business. The penalty for not complying within the specified time is an administrative penalty of five penalty units. The purpose of the directions is to address knowledge gaps and reduce future cases of non-compliance through employers gaining a better understanding of their ongoing superannuation obligations.

¶12-440 Recovery by employees of unpaid SG contributions

The SGA Act does not provide an avenue for employees to directly sue for unpaid SG contributions, and an employee’s success is usually dependent on assistance from the ATO. Direct recovery by employees is an area of the law that is still developing and, generally, an employee’s options are more limited if there is neither an award nor a contractual entitlement to superannuation to fall back on. An employee’s options may include any of the following, as appropriate in the circumstances. 1. Private right of action under SGA Act The employee may have a private right of action against the employer under SGA Act although, in Woodford v Landline Investments [2000] QDC 258, the Queensland District Court said that, given the Commissioner’s right to recover SG charge, the balance was against the existence of a private right of action under SGA Act. The plaintiff in the case was executrix of the estate of her late husband. She alleged that she had lost $45,000 which would have been payable to her as a death benefit if her husband’s employer had correctly paid superannuation contributions on his behalf. 2. Private right of action under contract A private right of action may exist at common law to enforce a contractual superannuation entitlement. The court in Woodford v Landline Investments recognised the possibility of employees recovering contributions through a common law breach of contract claim. Success for the employee would, it seems, be dependent on the employee establishing that the employment contract specifically: (a) included a term stating that the employer was required to make contributions, or (b) referred to the employer’s obligation under SGA Act or an industrial instrument. An employee could seek specific performance of the contract or damages. In Peter Willis v Health Communications Network Ltd, a company executive successfully argued that he was contractually entitled to a superannuation contribution of 9% of the lump sum he received in lieu of six months’ notice when he was dismissed. Tobias J, in the leading judgment in the NSW Court of Appeal, said the taxpayer was entitled to the 9% payment on his base salary of $209,000 and was entitled to receive the benefit of that contribution where the employer had not required him to work out his notice but had availed itself of its contractual right to make payment in lieu of notice. The court noted that the taxpayer had salary sacrificed into superannuation by accepting less cash in hand and that, if he had worked out the six months, he would have received the superannuation contribution under the terms of his contract. The court rejected the employer’s contention that it was only required to comply with the minimum SG requirements. Success on this point may have excused the employer from liability as a lump sum in lieu of notice is not included in ordinary time earnings (see ¶12-215). 3. Recovery under the Fair Work Act 2009 Individuals who are employed under the national workplace relations system can seek an order from an eligible court under the Fair Work Act 2009. This would cover workers who are employed in the ACT or any state or territory other than Western Australia, and workers who are employed by a company in Western Australia or under a federal award or agreement. The Fair Work Ombudsman may assist an employee to recover their superannuation entitlements by inspecting workplaces and workplace records and issuing compliance notices to employers. The Ombudsman cannot force an employer to comply with an obligation under the SGA Act, but it can require compliance with superannuation obligations that are set out in a relevant industrial instrument or contract. Prosecutions may be launched against employers for breaches of the Fair Work Act 2009. Prosecutions may go before the Federal Court, Federal Circuit Court or other “eligible court”, which may order the employer to pay the amount to which an employee is entitled. Proceedings may be commenced by the Industrial Registrar, Fair Work Ombudsman, an inspector, any relevant trade union or employer organisation, any member of an organisation who is affected by the breach or any individual party to the award or agreement. An order cannot be made if it relates to an underpayment that occurred more than six years before the proceedings commenced. 4. Action for unfair, harsh or unconscionable contract

Employees may seek redress under legislation which allows contracts to be voided in whole or in part if they are considered unfair, harsh or unconscionable or against the public interest, such as the Industrial Relations Act 1996 (NSW), s 105 and 106 and the Industrial Relations Act 1999 (Qld), s 276. Redress under this legislation is not available to all employees. The NSW legislation gives the Industrial Relations Commission a broad discretion in determining appropriate remedies — it can make any order it considers “just in the circumstances”. In Cornell v Titley [2002] NSWIR Comm 326; (2002) 119 IR 334, an employer was ordered to pay an exemployee superannuation contributions which had been promised but never eventuated. The Industrial Relations Commission (NSW) varied the employee’s contract of employment to achieve this under s 106. The employer had failed to make superannuation contributions on behalf of the employee even though he conceded to the employee that he had an obligation to do so and had represented that he would make the payments. The employee commenced proceedings under s 106 claiming that the employment contract was unfair and arguing for recovery of the unpaid superannuation contributions. The Commission (Haylen J) stated that SGA Act provided no mechanism for an employee to either enforce the minimum superannuation contributions or to recover contributions due. Consequently, employees were “left to the remedies provided by the general law”. Haylen J was satisfied that the contract of employment “was unfair, harsh and, considering the fact that it essentially concerns superannuation contributions, was against the public interest”. It was therefore appropriate to make the following orders: • a declaration that the contract was harsh, unfair and against the public interest • a declaration that the contract was void from its commencement, except as to wages and any superannuation contributions paid to the employee for work performed • the employer was to pay $13,330, by way of superannuation contributions to the employee’s nominated superannuation account • the employer was to pay the employee’s $12,000 costs. 5. Breach of implied term of mutual trust and confidence In the United Kingdom, an employee may be able to sue an employer for breach of the implied term of mutual trust and confidence. The concept of mutual trust and confidence has its roots in Malik v BCCI [1997] 3 All ER 1 where the House of Lords ruled that an employer could not, without reasonable and proper cause, conduct itself in a manner “calculated and likely to destroy or seriously damage the relationship of confidence and trust” between it and the employee. The mutual trust and confidence term is now well established in the United Kingdom where such a term is implied into every employment contract. Whether the term of mutual trust and confidence is implied by law into contracts of employment in Australia has been a moot point since the Malik decision. The High Court was asked to rule on this in McDonald v The State of South Australia [2010] HCATrans 25, where a teacher sought special leave to appeal against the decision of the South Australia Supreme Court that the statutory and regulatory context of the teacher’s employment made the implication of the term unnecessary. The High Court declined to grant special leave to appeal because it considered that the statutory structure overlaying the teacher’s employment made the Supreme Court decision not appropriate for the High Court’s consideration. In Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104, the NSW Court of Appeal found that a contract of employment had implied into it a duty of good faith and a duty that the employer would not, without proper and reasonable cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence between the employer and the employee. By their very nature, such implied terms cannot be contracted out of because they are fundamental to the employment relationship. The issue in Russell was whether the dismissal of the employee was in breach of the employer’s implied duties and was therefore unfair. The Federal Magistrates Court ruled in Rogers v Millennium Inorganic Chemicals Limited & Anor [2009]

FMCA 1 that, although an employer owed a worker an implied duty of trust and confidence, the duty had not been breached. In response to the worker’s argument that the employer’s behaviour had been flawed, the court said the duty of trust and confidence did not mean the employer’s conduct had to be “perfect”. The issue was considered by the High Court in Commonwealth Bank v Barker [2014] HCA 32 where an employee argued that his former employer breached the implied duty of mutual trust and confidence when it failed to follow its own redundancy policies when his position became redundant. This failure led to the employee not being informed of other employment opportunities and ultimately his employment being terminated. The High Court held that implying a term of mutual trust and confidence into every employment contract went beyond the proper function of courts and that the term should not therefore be implied. The High Court said that, in the case of an implied term, its existence must be determined by reference to whether it is “necessary”, in the sense of being implicitly required by the nature of the contract itself. The implied term of mutual trust and confidence did not answer this condition of necessity and was a matter more appropriate for the legislature. If the term was enshrined by the legislature in statutory form, the courts could then interpret and apply it. Three members of the court noted that the court had not determined whether there is a general obligation to act in good faith in the performance of contracts or whether contractual powers and discretions may be limited by good faith and reasonableness requirements. These matters remain unresolved until they are considered by a later court. 6. Breach of industrial award or agreement The employee may be able to establish that there has been a breach of an industrial award or agreement. The entitlement to superannuation under such awards and agreements operates alongside obligations imposed by SGA Act. Employees may be able to recover payments due to them under, for example, the Fair Work Act 2009, s 540; Industrial Relations Act 1996 (NSW), s 368; Industrial Relations Act 1990 (Qld), s 408; and Fair Work Act 1994 (SA), s 14. Recovery would, however, be limited to the amount required to be paid under the award or agreement, which may be less than the required SGA Act amount.

Distribution of Shortfall Component ¶12-500 Payment of shortfall component When an employer pays SG charge (¶12-300), the Commissioner must distribute the shortfall component to the employee or employees who are entitled to benefit (SGAA s 63B). Shortfall component for one benefiting employee The shortfall component, if there is only one benefiting employee, is the lesser of: • the amount of the payment, and • the amount of the employee entitlement, calculated at the time the payment is made (SGAA s 64A). The employee entitlement is the sum of the following amounts (but reduced by any previous payments of SG shortfall for the quarter by the employer for the employee): • the individual SG shortfall for the employee for the quarter (¶12-150) • any general interest charge (¶12-570), in respect of non-payment of SG charge on the shortfall, that has been paid or payable at the time, and • any nominal interest component for the quarter that has been paid or is payable. Example An employer pays the ATO SG charge relating to an underpayment of SG contributions for an employee. If the SG charge comprised $3,000 individual SG shortfall for the employee, a nominal interest component of $150 and $20 administration component, the employee’s entitlement would be the $3,000 shortfall plus the $150 interest. The $20 would be retained by the ATO.

Shortfall component for more than one benefiting employee If an SG charge payment is made for more than one benefiting employee, the shortfall component for each employee must be calculated (SGAA s 64B). The shortfall component for a particular employee is the employee’s proportion of the lesser of the amount of the payment and the amount of the total employee entitlement when the payment is made. In working out the amount to be allocated to each benefiting employee for whom SG charge has been paid, the Commissioner can take account of special circumstances such as the $2,000 limit that applies in the case of excluded employees (directors and their relatives) under s 556(1A) of the Corporations Act 2001 and s 109(1) of the Bankruptcy Act 1966 (¶12-400). Before 1 January 2008, the amount worked out under s 64B had to be strictly allocated on a pro rata basis. Employee to be notified and shortfall component to be paid On receipt of an SG charge payment, the Commissioner must notify each benefiting employee in writing that a shortfall component is due to him/her, and must provide the name of the employer who paid the SG charge. Notification is optional if the shortfall component is $20 or less. The notice may specify a complying ADF, a complying superannuation fund or an RSA (SGAR s 18). If the Commissioner’s notice specifies a fund, the employee may lodge a written nomination of another fund, or do nothing (SGAR s 19). If the employee does not nominate another relevant fund within 28 days after the date of the notice, the employee is taken to have nominated the fund specified in the notice (SGAR s 21). The Commissioner must then pay the shortfall component to the nominated fund for the benefit of the employee (SGAA s 65(1)(a)). If the Commissioner’s notice does not specify a fund, the employee may request a particular fund to collect the shortfall component from the Commissioner (SGAR s 19). Within 14 days of receiving a request from an employee, the fund must give the employee written notice of receipt of the request, specifying in the notice the date of its receipt. The fund can either: • decline to comply with the request and notify the employee accordingly, in which case the employee may then request another fund to collect the shortfall component, or • lodge the request with the Commissioner who will then pay the shortfall component to the fund (s 65(1)(b); SGAR s 20). Whether or not the Commissioner has given an employee a notice, the employee may request a fund to collect the employee’s shortfall component from the Commissioner, or lodge a written nomination of a fund with the Commissioner (SGAR s 22). This allows funds to approach the Commissioner, with the employee’s consent, to seek payment of any outstanding shortfall amounts directly to the employee’s account. If an employee does not nominate a fund to receive the shortfall component, the Commissioner must credit the amount to an account in the SHASA (¶12-600) for the benefit of the employee (s 65(1)(c)). Exceptional cases In some cases, the Commissioner will not pay the shortfall component according to the distribution procedures set out above. There are five exceptional cases. (1) Where the employee is aged 65 years or more and has requested the Commissioner to pay the amount to him or her, the Commissioner must pay the shortfall component directly to the employee, whether or not they are still an employee (s 65A). (2) If the employee is a former temporary resident (within the meaning of the Superannuation (Unclaimed Money and Lost Members) Act 1999), the Commissioner must treat the shortfall component as if it had been paid to the Commissioner by a superannuation provider under s 20F of that Act (¶8-400) (s 65AA). (3) Where the employee has retired because of permanent incapacity or permanent invalidity and has

lodged with the Commissioner written notice of the retirement or a copy of a certificate signed by two registered medical practitioners certifying that the former employee is unlikely to be able to work again in a capacity for which he/she is reasonably qualified by education, training or experience, the Commissioner must pay the shortfall component directly to the former employee (s 66). (4) An amount for an individual with a “terminal medical condition” (¶8-260) may be paid directly to the individual (s 66A). (5) If the employee has died, the Commissioner must pay the shortfall component directly to the legal personal representative of the employee (s 67).

Record-keeping and Reporting Obligations ¶12-510 Record-keeping An employer must keep records of all transactions and acts in relation to its SG obligations irrespective of whether the employer is liable to SG charge. There is no required form of record-keeping, but the records must be in English and be retained for five years (SGAA s 79). An employer who fails to keep or retain records as required is guilty of an offence punishable on conviction by a fine not exceeding $6,300 for an individual and $31,500 for a corporation (s 79(6)). The employer may also be liable to an administrative penalty (TAA Sch 1 s 288-25). From 1 July 2018, an employer who fails to keep records as required may be subject to an education direction requiring the employer to undertake a specified approved course of education to improve their understanding of their SG obligations. An administrative penalty may be imposed if the education direction is not complied with (¶12-420). Additional record-keeping responsibilities As well as being required to keep records by the SGA Act, an employer who makes SG contributions may be required by the Fair Work Act 2009 to keep records. Only employers covered by the Fair Work legislation (¶12-030) need to comply. Employers who are required to make superannuation contributions must keep the following records (Fair Work Regulations 2009, reg 3.37): • the amount of the contribution • the period over which the contributions were made • the dates on which the contributions were made • the name of any fund to which the contributions were made, and • the basis on which the employer became liable to make the contributions including: (i) a record of any election about fund identity, and (ii) the date of any election. An employer does not have to record contributions to a defined benefit superannuation fund. A record of employer superannuation contributions must be kept for seven years (Fair Work Act 2009, s 535). [FTR ¶794-742, ¶794-786; SLP ¶51-500]

¶12-520 Reporting by employers to employees and to the ATO Reporting to employees on pay slips

The Fair Work Act 2009 and Fair Work Regulations 2009 require employers who are covered by the Fair Work legislation (¶12-030) to include on their employees’ pay slips information about superannuation contributions made on their behalf. Because these reporting requirements are in the Fair Work legislation, they do not apply to: • public sector employers in NSW, Queensland, Western Australia, Tasmania and South Australia, and • some unincorporated private sector employers in Western Australia. An affected employer must give a pay slip to each of its employees within one working day of paying an amount to the employee in relation to work performed (Fair Work Act 2009, s 536). If the employer is required to make superannuation contributions for the benefit of the employee (eg SG contributions or contributions under an award), the pay slip must include the following information (Fair Work Regulations 2009, reg 3.46): (a) the amount of each contribution that the employer actually made during the period to which the pay slip relates, and the name of the fund to which the contribution was made, or (b) the entitlements to superannuation that accrued for the employee during the period, and the name of the fund to which the contributions will be made. This means that employees may not be able to tell from their pay slips whether their superannuation contributions have been made or when they will be made. Although employers have until 28 days after the end of a quarter to make SG contributions, earlier reporting on the pay slip could mislead an employee into thinking that the contribution has actually been paid. The delay in payment also hampers the ATO’s ability to track non-compliance. The Senate Economics References Committee’s report on SG non-compliance (“Superbad — Wage theft and non-compliance of the Superannuation Guarantee”) that was released on 2 May 2017 recommended that the Fair Work Regulations 2009 be amended to require pay slips to display the earnings that the SG is calculated on, any voluntary superannuation contributions due, compulsory SG due and all amounts of superannuation paid into an employee’s superannuation fund, rather than just the amounts accrued. Legislation for this recommendation has not been enacted.

¶12-525 Single Touch Payroll reporting by employers Single Touch Payroll (STP) requires employers to report information to the Commissioner at the same time that certain payroll or superannuation events occur, eg when an amount is withheld from an employee’s salary or from a superannuation lump sum. Employers who provide information as required under STP are exempted from a number of reporting obligations that would otherwise apply at a later time, eg the obligation to notify the Commissioner of amounts withheld from payments or providing annual or part-year payment summaries when superannuation lump sums or superannuation income stream payments are made. Employers are not required to report contributions paid to superannuation funds by the employer as part of STP reporting. The Commissioner will instead receive this information from the funds under eventsbased reporting (¶6-422) from 1 July 2018. Extensive information about STP can be found on the ATO website at: www.ato.gov.au/Business/SingleTouch-Payroll. STP reporting for substantial employers from 1 July 2018 Single Touch Payroll reporting commenced on 1 July 2018 but only for “substantial employers”. An employer is a substantial employer if it has 20 or more employees, or is a member of a wholly-owned group that has 20 or more employees. Whether an employer was a substantial employer from 1 July 2018 is determined on the basis of the number of the employer’s full-time and part-time employees at 1 April 2018 (including those on leave) and casual employees who were on the payroll on 1 April 2018 and worked any time during March 2018. Casual employees who did not work in March 2018 were not included.

STP reporting for all employers from 1 July 2019 Single Touch Payroll reporting is extended to all employers from 1 July 2019 regardless of the number of their employees. The ATO has said it understands that some small employers will require additional time to be ready for STP and that its approach will be “flexible, reasonable and pragmatic” (“Transition to Single Touch Payroll for small employers” at ato.gov.au). Various ATO concessions will be available for small employers: • employers with fewer than five employees will be offered alternative options such as allowing those who rely on a registered tax agent to report quarterly for the first two years • small employers can start STP reporting any time up to 30 September 2019, and deferrals will be granted to small employers who request additional time • for the first year, penalties will not be imposed for mistakes or for missed or late reports, and • employers experiencing hardship or in areas with intermittent or no internet connection will be exempted from STP reporting. The Treasury Laws Amendment (2018 Measures No 4) Act 2018, which extended STP reporting to all employers, also proposes that employers be required to report “sacrificed ordinary time earnings amounts” and “sacrificed salary or wages amounts”. These are amounts by which an employee’s ordinary time earnings or salary or wages are reduced for a quarter under a salary sacrifice agreement when salary sacrificed amounts are paid into superannuation (¶12-250). This provision is tied to the commencement of salary sacrifice amendments in the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 2) Bill 2017. As that Bill has not yet been passed by Parliament, the additional reporting by employers has not come into effect. Single Touch Payroll reporting is discussed further at ¶11-368. From 1 July 2018, employers who fail to make statements or report information as required may be subject to an education direction requiring them to undertake a specified approved course of education to improve their understanding of their SG obligations. An administrative penalty may be imposed if the education direction is not complied with (¶12-420).

¶12-530 Reporting by superannuation providers Reporting to the ATO Superannuation providers must report information to the ATO in the circumstances stated in TAA Sch 1 Div 390. The reporting requirements require a superannuation provider to: • give a member information statement (¶6-050) to the Commissioner for any individual who held a superannuation interest in the fund at any time during the year, with the statement including information about contributions made during the year for the individual or, if there were no such contributions, a statement to that effect (s 390-5) • report a roll-over superannuation benefit (¶8-600) to the fund into which the benefit is rolled and to the individual for whom the benefit is paid (s 390-10) • give a statement to a KiwiSaver scheme provider (¶8-380) to whom a superannuation benefit is paid and to the individual in respect of whom the benefit is paid (s 390-12) • give certain information to an individual in response to a request (s 390-15) • report to the Commissioner payments made under certain release authorities (¶6-640) (s 390-65), and

• inform the Commissioner of a material change or omission in information previously given (s 390115). The information given to the Commissioner is used for various purposes, including administration of the SG scheme. Reporting obligations imposed on superannuation providers, and the penalties for non-compliance, are explained at ¶6-050. Reporting to members The trustee of a regulated superannuation fund is also required to provide certain information to members, former members and other persons such as employer-sponsors in accordance with the product disclosure rules in Corporations Act 2001 (¶3-290).

Penalties, Prosecution and General Interest Charge ¶12-550 Penalties Actions available to the ATO to address non-compliant behaviour by employers (¶12-420) may be the imposition of an administrative penalty or prosecution for a civil or criminal offence that is punishable by a fine or imprisonment. Generally, the Commissioner will impose administrative penalties, and less often prosecute. Only in exceptional cases would it be considered appropriate to both impose an administrative sanction and prosecute. These cases would include raising a default SG assessment as well as a Pt 7 penalty while prosecuting the employer for failing to provide the required information. Part 7 penalties are still payable even if prosecution action is taken for failing to respond to a request for information. Various penalties may be imposed on employers for breaches of their SG obligations, and in some cases a director of a company may be personally liable if a company breaches its SG obligations (¶12-395). The Commissioner may issue directions to non-compliant employers requiring them to pay outstanding SG charge amounts or to undertake an approved course of education (¶12-420). Part 7 additional SG charge Part 7 of the SGAA (s 59 to 62A) imposes, by way of penalty, an additional SG charge where an employer fails to provide when and as required: • an SG statement for a quarter, or • information relevant to assessing the employer’s liability to pay the SG charge for a quarter. The Pt 7 penalty will commonly apply in two situations: • where an employer lodges an SG statement for a quarter and the statement is deemed by SGAA s 35 to be an assessment of liability for SG charge but is lodged after the due date (¶12-350), and • where the Commissioner makes a default assessment for a quarter and assesses the employer’s liability for SG charge under SGAA s 36 (¶12-350). This would be when an employer fails to lodge an SG statement or provide information relevant to the assessment of the SG charge, or when an employer provides information relevant to the SG charge assessment after the due date for lodgment of the SG statement. Under Pt 7, an employer is liable to pay, by way of penalty, additional SG charge equal to double the SG charge payable by the employer for the quarter (s 59(1)). The additional SG charge is worked out without taking into account the entitlement to an offset under SGAA s 23A (ie where an employer’s late contributions are offset against their SG charge liability: ¶12-360) (s 62A). The Commissioner may remit all or part of the additional SG charge (SGAA s 62(3)). Administrative penalties for SG offences An employer may be liable to an administrative penalty for failing to give an SG statement by the due date

(TAA Sch 1 s 286-75). An administrative penalty may also be imposed where an employer fails to lodge an SG statement by the due date and the Commissioner is required to determine the employer’s taxrelated liability (ie the SG charge) without the assistance of the statement (TAA Sch 1 s 284-75(3)). An employer may also be liable under TAA s 8C(1) for failure to lodge an SG statement, with the offence punishable by a fine of up to $2,200 (more for subsequent offences) (TAA s 8E). An employer who enters into a scheme to reduce liability for SG charge may be liable for a penalty if the Commissioner considers that the scheme was solely or principally for the purpose of avoiding payment of the charge. The amount of the penalty is the amount of charge to which the employer would have been liable if the scheme had not been entered into (SGAA s 30). No tax deduction is allowable for penalties imposed as a result of breaches of the law (ITAA97 s 26-5). Remission of penalties Employers have the right to object to an assessment of both the Pt 7 penalty and administrative penalties in the manner set out in TAA Pt IVC. Both penalties may be remitted, in full or in part, in appropriate cases. Practice Statement PS LA 2011/28 outlines the ATO’s approach to the remission of the Pt 7 penalty under SGAA s 59(1). The practice statement is a guide to ATO officers in the exercise of the Commissioner’s discretion to remit any part of the Pt 7 penalty to ensure that employers are treated appropriately having regard to their circumstances. The Guidelines state that, where an employer has made a “genuine attempt to comply”, 100% of the penalty may be remitted, and that other levels of compliance, having regard to the type of corrective action taken, may result in partial remissions from 75% to 87.5%. The compliance history of the employer may cause the penalty remissions to be increased or decreased by between 5% and 15%. Offences in breach of the regulations Penalties may be imposed for offences against SGAR s 22 (reg 10D before 15 September 2018) in the following circumstances: • failure by the trustee of a superannuation fund to acknowledge receipt of a request from an employee to collect the shortfall component of an SG charge from the ATO, or to notify the employee of its refusal to comply with the request, and • if the trustee agrees to comply with an employee’s request, failure by the trustee to lodge the request with the ATO.

¶12-570 Liability to general interest charge If SG charge is not paid, or not paid in full, by the due date for payment (¶12-370), the employer must pay general interest charge (GIC) on the unpaid amount (SGAA s 49). This is so even if the Commissioner has extended the date for payment of the SG charge. GIC is worked out daily on a compounding basis (¶11-380) and is imposed on the unpaid amount of the SG charge (excluding the nominal interest and administration components) from the beginning of the day by which the SG charge was due to be paid to the end of the last day on which any SG charge or GIC on the SG charge remains unpaid. In the usual case (including default and amended assessments), GIC accrues from the 29th day of the second month after the end of a quarter and in exceptional (late lodgment) cases from the day after lodgment. If an employer elects to offset a late contribution against their SG charge liability, the GIC is calculated on the remaining shortfall component of the unpaid SG charge amount after the offset has been applied (¶12-360). The Commissioner may remit all or part of the GIC, but only where special circumstances make that action fair and reasonable. [FTR ¶794-718, ¶794-740; SLP ¶51-100]

Superannuation Holding Accounts Special Account ¶12-600 The SHASA scheme From 1 July 1995 to 30 June 2006 employers were able to make deposits to a collection mechanism established under the Small Superannuation Accounts Act 1995 (SSAA) to meet their SG obligations, instead of making contributions to a complying superannuation fund or an RSA. The mechanism, called the Superannuation Holding Accounts Special Account (SHASA), is administered by the ATO. The SHASA was created to overcome the difficulty encountered by employers in finding a superannuation fund willing to accept small superannuation contributions and by employees in finding a fund to accept payments of the shortfall component of an SG charge, the multiplicity of small accounts of itinerant employees and the erosion of small superannuation balances by fees and charges. The SHASA is not a superannuation fund (SSAA s 9), although employer deposits before 1 July 2006 to the SHASA for the benefit of an employee were deemed to be contributions to a complying superannuation fund for the benefit of the employee (¶12-620). Since 1 July 2006, SHASA simply acts as a facility to accept payments of SG shortfall by the ATO (¶12500). The SHASA credits those payments to individual accounts of employees. Employees may at any time have the balance of their account transferred to a complying superannuation fund or RSA of their choice. In limited circumstances, employees may have direct access to their account balance (¶12-620). The SHASA may also be used to hold government co-contributions (¶6-700) or low income superannuation contributions (¶6-770). An employee’s account in the SHASA may earn interest on balances up to $1,200. The administration costs of the SHASA are met solely out of earnings from the investment of moneys in the SHASA. Any excess earnings after reimbursing the Commonwealth for administration costs may then be credited to employees’ accounts. [SLP ¶55-100]

¶12-620 Operation of the SHASA A separate notional account is kept within the SHASA for each employee for whom an amount is held. The Commissioner must notify an individual of their account balance: (a) as soon as practicable after the first time an amount is credited to the account (b) at the request of an individual (c) annually (only if the balance exceeds nil), and (d) when the account balance first exceeds $1,200 (SSAA s 20 to 23). Credits to accounts Generally, the only amounts that may be credited to an individual’s account are: • payments of the shortfall component of an SG charge by the Commissioner (¶12-500) • a government co-contribution (¶6-700) • a low income superannuation contribution (¶6-770), and • interest. Interest accrues daily on an individual’s account and is credited quarterly. The balance in an individual’s account for these purposes is deemed never to exceed $1,200, so interest is only earned on amounts up

to that limit (SSAA s 49). Debits to accounts An individual’s account may be debited in the following circumstances (SSAA s 14): • transfer of an individual’s account to a regulated superannuation fund, an exempt public sector superannuation scheme or an RSA • direct withdrawal by the individual or the legal personal representative of a deceased individual • transfer of an individual’s account to the Consolidated Revenue Fund • refund to employers or former employers (eg deposits made due to a clerical error or mistake, or a defect or irregularity in a deposit form), and • if an individual is a former temporary resident. An individual may, at any time, request the Commissioner to transfer their account balance to a regulated superannuation fund which is not subject to a direction that prohibits it from accepting contributions from employer-sponsors, to an exempt public sector superannuation scheme or to an RSA (SSAA s 61). Such transfers are not roll-overs. Withdrawals from accounts An application may be made to the Commissioner for a direct withdrawal from an individual’s account if (SSAA s 63 to 68): • the balance of the account is less than $200 and the individual has ceased employment • the individual is in receipt of “Commonwealth income support payments” (as defined in s 23 of the Social Security Act 1991) for a sufficient period • the individual retires due to permanent disability • the individual has a terminal medical condition • the individual turns 65 • the individual is at least 55 years old, is not an Australian resident, and is not employed or is employed but the duties of the employment are performed wholly or principally outside Australia • the individual is receiving a departing Australia superannuation payment (¶8-400), or • the individual dies, and their legal personal representative applies for withdrawal of the account balance. A person is in receipt of Commonwealth income support payments for a sufficient period if the person passes certain tests. The tests depend on the person’s age. A person who is 55 or older must be able to provide to the Commissioner a letter, from the department or agency administering the particular payment, that shows the person has received the payment for 39 weeks since the person turned 55. A person who is aged less than 55 must be able to prove receipt of the payment for a continuous period of at least 26 weeks. The specified Commonwealth payments include social security benefits (but not including Austudy or youth allowance payments), social security pensions, service pensions and Community Development Employment Projects Scheme payments (SSAA s 64(7)). The Commissioner will transfer an individual’s account that is inactive (ie no amount is credited to the account in the last 10 financial years) to the Consolidated Revenue Fund. The individual (or legal personal representative of a deceased individual) may claim such an account balance from the Commissioner (SSAA s 76).

13 RESOLUTION OF COMPLAINTS RESOLUTION OF COMPLAINTS External resolution of superannuation complaints

¶13-000

Lodgment of complaints with the SCT from 1 July 1994 to 31 October 2018

¶13-001

Operation of the SCT from 1 November 2018 to 31 October 2020

¶13-002

Australian Financial Complaints Authority

¶13-005

ASIC has oversight of AFCA

¶13-006

AFCA reporting to ASIC and other authorities

¶13-007

Comparison between AFCA and SCT from a consumer perspective

¶13-008

AFCA powers

¶13-010

AFCA’s statutory responsibilities

¶13-030

Personnel and functions of AFCA

¶13-050

Interaction with superannuation provider’s internal review process

¶13-055

COMPLAINTS TO AFCA Types of superannuation complaints AFCA can hear

¶13-100

Terms commonly used in complaints system

¶13-102

Discretionary or non-discretionary decisions

¶13-105

“Fair and reasonable”

¶13-110

Decisions or conduct complained against

¶13-115

AFCA may decline to hear a superannuation complaint

¶13-116

Complaints relating to death benefit decisions

¶13-117

Time limit to make a complaint to AFCA

¶13-118

Where to make a complaint to AFCA

¶13-120

What information to include in a complaint to AFCA

¶13-130

COMPLAINTS PROCEDURAL MATTERS Representation

¶13-290

Parties to death benefit complaints

¶13-300

Tribunal’s power to obtain information and documents

¶13-330

CONCILIATION OF COMPLAINTS Conciliation of complaints

¶13-400

REVIEW OF DECISIONS OR CONDUCT AFCA’s determination of superannuation complaints

¶13-450

De novo merits review

¶13-460

Referral of question of law to Federal Court

¶13-470

Complaints excluded by AFCA — more appropriate place to deal with complaint ¶13-480

AFCA’s preliminary assessment of complaint

¶13-490

Determinations by AFCA

¶13-500

Matters set out in an AFCA determination

¶13-505

Notification of determination

¶13-510

Effect of AFCA’s determination

¶13-530

Errors in an AFCA determination

¶13-535

Enforcement of determinations

¶13-540

Confidentiality of information provided to AFCA

¶13-560

Appeals

¶13-600

Published AFCA Determinations

¶13-610

Resolution of Complaints ¶13-000 External resolution of superannuation complaints A person who has a complaint about a decision of, or the conduct of, a trustee, insurer or RSA provider can apply for external review of that decision. From 1 November 2018, the complainant lodges their complaint with the Australian Financial Complaints Authority (AFCA) (¶13-005). This is regardless of the time period that the complaint relates to; ie the complaint may relate to a decision made by the superannuation provider prior to 1 November 2018 but the complaint is made on or after 1 November 2018. However, the complaint must be lodged within time limits (¶13-118). From 1 July 1994 to 31 October 2018, a complainant lodged their complaint with the Superannuation Complaints Tribunal (SCT) (¶13-001).

¶13-001 Lodgment of complaints with the SCT from 1 July 1994 to 31 October 2018 The SCT continues to resolve complaints that were lodged with it prior to 1 November 2018, but is unable to receive any new complaints. The Superannuation (Resolution of Complaints) Act 1993 (SRC Act) established the SCT as the basis of a “fair, economical, informal and quick” scheme for the external resolution of complaints made by: • members and beneficiaries of superannuation funds and ADFs • holders of RSAs and persons with an interest in an insurance contract where the premiums are paid from an RSA • holders of superannuation policies issued by insurance companies • persons affected by insurers’ decisions about death and disability benefits, and • persons whose contributions are reported to the Commissioner of Taxation. The SRC Act, which commenced on 1 July 1994, applied to the decisions and conduct of trustees of superannuation funds and ADFs, and of RSA providers and insurers. The Superannuation (Resolution of Complaints) Regulations 1994 prescribe matters that were required or permitted by the SRC Act or necessary for it to be carried out or given effect to. Prior to lodging a complaint with the SCT the complainant needed to first attempt to resolve the dispute by internal dispute resolution arrangements. If unresolved through internal review, complainants could lodge a complaint with the SCT. Complaints could be made about most types of trustee, insurer or RSA

provider decisions, but there are some complaints with which the SCT could not deal with, eg complaints about management as a whole. The primary functions of the SCT were: • to inquire into a complaint and to try to resolve it by conciliation • if the complaint could not be resolved by conciliation — to review the decision of the trustee to which the complaint relates. The SCT would then affirm the decision, remit it to the decision-maker for reconsideration, vary it, or set it aside and substitute another decision. Superannuation Complaints Tribunal and ASIC ASIC was responsible for providing administrative support for the resolution of complaints system and the administration of the SRC Act. Application of the SRC Act The SRC legislation applied to certain exempt public sector superannuation schemes (s 4A; reg 4A). The Act did not apply to schemes that are not deemed to be regulated, or prior to being so deemed. The legislation did not apply to SMSFs which are regulated by the ATO (s 5).

¶13-002 Operation of the SCT from 1 November 2018 to 31 October 2020 The SCT is unable to receive any new complaints from 1 November 2018. All superannuation complaints after this date must be lodged with AFCA. If the SCT receives a new complaint from 1 November 2018, it will direct the complainant to AFCA. Any time limits that apply will apply from the date of lodgment of complaint with the SCT and not the date it is received by AFCA (AFCA rule B.4.5.1). The SCT continues to operate post 1 November 2018 to resolve complaints that it received prior to 1 November 2018 and had not yet resolved. As at 31 March 2019, the SCT still had 1,585 open complaints that it was resolving. As such, the SCT and AFCA will operate together for a period of time. Complaints lodged with the SCT prior to 1 November 2018 will not be transferred to AFCA and will remain with the SCT for resolution. If a complainant decides to withdraw their complaint that they have lodged with the SCT, they are not able to relodge the complaint with AFCA.

¶13-005 Australian Financial Complaints Authority The Australian Financial Complaints Authority (AFCA) commenced hearing superannuation complaints from 1 November 2018. AFCA was established by the Treasury Laws Amendment (Putting Consumers First — Establishment of the Australian Financial Complaints Authority) Act 2018. The rules governing the operation of AFCA are contained in the Corporations Act 2001 Pt 7.10A. AFCA has also published its Operational Guidelines to the Rules. AFCA is required to operate in a way that is accessible, independent, fair, accountable, efficient and effective. AFCA replaces the three existing external dispute resolution schemes of the Superannuation Complaints Tribunal (SCT), Financial Ombudsman Service (FOS), and the Credit and Investments Ombudsman (CIO) so that consumers have a single external dispute resolution framework. AFCA is based on an ombudsman model established by a company that is limited by guarantee. Certain firms that provide financial and credit services were required to be members of AFCA by 21 September 2018. This included regulated superannuation funds, approved deposit funds, retirement savings account providers, annuity providers and life policy funds and insurers (ASIC media release 18275: asic.gov.au/about-asic/news-centre/find-a-media-release/2018-releases/18-275mr-financial-firmsmust-join-afca-now/). Exempt public sector superannuation schemes were not required to be members, but are able to elect to be members. Where an entity fails to become a member of AFCA, ASIC is able to cancel their licence. On 14 and 15 February, ASIC cancelled the licences of two financial service providers where they failed to obtain membership of AFCA (ASIC media release 19-063:

asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-063mr-asic-cancels-thelicences-of-firms-that-failed-to-join-afca/). Membership of AFCA does not include SMSFs. In line with this, a complaint cannot be made to AFCA in relation to a decision made by a trustee of a SMSF (Corporations Act 2001 s 1053(4)). The rationale for this is a key characteristic of a SMSF is that the trustees of a SMSF are also members of the SMSF. For this reason, it would not be appropriate for a SMSF member to make a superannuation complaint to AFCA about a decision made by the SMSF, as the decision of the SMSF trustee is also a decision of the SMSF member. AFCA’s members are required to comply with AFCA’s operating rules, which are included in AFCA’s terms of reference. While ASIC oversees AFCA, AFCA remains independent. ASIC will not intervene in the decision-making process of AFCA. AFCA will have an independent assessor, with their role being to review the service provided to users in the handling of disputes. AFCA will resolve disputes about products and services provided by financial firms and superannuation providers. The powers of AFCA are very similar to the SCT’s. This includes the power to join parties to a dispute, require persons to attend conciliation conferences, and having and exercising all the powers of the original decision-maker when making a determination. Like the SCT, AFCA must affirm a decision if that decision was fair and reasonable in the circumstances. Reporting obligations are placed upon AFCA. In the event of serious breaches or a refusal to give effect to an AFCA determination, AFCA may report the matter to ASIC, APRA or the ATO. This may assist with the identification and resolution of systemic issues (¶13-007).

¶13-006 ASIC has oversight of AFCA ASIC performs three main functions in relation to regulatory oversight of AFCA. These functions are: • to issues regulatory requirements • to consider whether material changes to the AFCA scheme should be approved ,and • to issue directions to AFCA, if necessary While ASIC has an enhanced oversight role over AFCA (as compared to the SCT), AFCA remains independent and responsible for its own internal processes and management of disputes. ASIC does not review the merits of an AFCA decision, has no role in complaints handling, and does not intervene in the decision-making processes of AFCA. Information on the role of ASIC has been provided by ASIC in Consultation Paper 298 (www.asic.gov.au/media/4661726/cp298-published-5-march-2018.pdf).

¶13-007 AFCA reporting to ASIC and other authorities There is increased transparency through AFCA reporting complaint details through to relevant authorities (Corporations Act 2001 s 1052E). Reporting obligations require AFCA to report or refer certain matters to one or more of ASIC, APRA, the Commissioner of Taxation, or the Minister administering the Australian Defence Force Cover Act 2015 or the Minister administering the Public Governance, Performance and Accountability Act 2013. Reporting to authorities may include the systemic cause of complaints made to AFCA, which may then lead into policy decisions (Corporations Act 2001 s 1052E(4)). This increased reporting requirement addresses some of the findings of the Ramsay Review which found there are long-standing problems with the arrangements for resolving superannuation complaints in the SCT.

¶13-008 Comparison between AFCA and SCT from a consumer perspective From a consumer perspective, there appears to be little difference between AFCA and the SCT. Essentially, AFCA has the same powers and obligations as the SCT. This includes the power to join certain parties to a complaint (often the insurer), obtain information and documents from people or

organisations where they are relevant, require a person to attend a conciliation conference, and issue a direction to protect the confidentiality of information. Like the SCT, AFCA is required to refer questions of law to the Federal Court. Both AFCA and the SCT have all the powers, obligations, and discretions conferred upon the original decision-maker. Once a determination is made by AFCA (and previously by the SCT), it comes into effect immediately. However, there are few differences between AFCA and the SCT from a consumer perspective. Two of these differences are the prerequisite that a complainant uses the superannuation provider’s internal review process and how complaints relating to death benefits are managed. Prior to lodging a complaint with the SCT, the complainant needed to utilise the superannuation provider’s internal dispute resolution process. There is not a similar requirement in legislation relating to the operation of AFCA. However, AFCA has the power to refer a matter back to the superannuation provider prior to the commencement of their review process. AFCA has indicated that they will use this refer-back process to ensure that superannuation complaints are progressed through the superannuation provider’s internal dispute resolution process prior to hearing the complaint (AFCA Transitional Superannuation Guide, p 8). The distribution of death benefits was a common complaint brought to the SCT. A death benefit distribution complaint can involve multiple parties with different claims. While the SCT resolved complaints relating to death benefits they were not separately identified in the legislation and subject to specific provisions as is the situation with death benefit complaints to AFCA (¶13-117).

¶13-010 AFCA powers AFCA operates a single external complaints resolution scheme for consumers and small businesses that have a complaint about a financial firm including a superannuation provider. AFCA considers complaints that previously would have been handled by the SCT, Financial Ombudsman Service, or the Credit and Investments Ombudsman. The role of AFCA is to assist parties to reach agreement about how to resolve a consumer’s complaint. AFCA is impartial and does not act for either party to advocate their position. If the complaint is not resolved between the parties, AFCA will decide an appropriate outcome and issue a determination. AFCA can award compensation for losses suffered because of a superannuation provider’s error, but they cannot award compensation to punish the superannuation provider or impose a fine. The issue of compensation for a non-financial loss was discussed by AFCA in its determination AFCASD 610019 (service02.afca.org.au/CaseFiles/FOSSIC/610019.pdf), where it stated, “AFCA is not able to provide compensation for non-financial loss in a superannuation complaint”. AFCA is neither a government department or agency, nor a regulator of the financial services industry. AFCA is a not-for-profit company, limited by guarantee, that is governed by a Board of Directors which includes equal representation of industry and consumer representatives. AFCA has an independent chair as well as a Chief Ombudsman who is responsible for the management of AFCA.

¶13-030 AFCA’s statutory responsibilities AFCA’s statutory responsibilities include: • promoting awareness of the AFCA scheme • resolving complaints submitted to AFCA • identifying systemic issues and working with superannuation funds to resolve them, and • supporting regulators by reporting certain matters to them AFCA is required to operate in a way that is accessible, independent, fair, accountable, efficient and effective.

¶13-050 Personnel and functions of AFCA AFCA is an external dispute resolution scheme to deal with complaints from consumers in the financial and superannuation system. Unlike the SCT which was a statutory tribunal, AFCA is an ombudsman scheme. AFCA is operated by a not-for-profit company limited by guarantee authorised by the responsible minister. AFCA has published a Constitution which governs its operation. As per its Constitution, the Board consists of an independent chair, consumer directors (not less than three but not more than five), industry director (not less than three but not more than five), and any other persons the directors believe would be beneficial to the proper oversight of the company. At the time of its commencement on 1 November 2018, AFCA had five consumer directors and five industry directors. Its independent chair was Helen Coonan, while David Locke was appointed AFCA’s Chief Ombudsman and CEO.

¶13-055 Interaction with superannuation provider’s internal review process If a superannuation provider does not resolve a complaint to the satisfaction of the complainant through their internal review process, they must advise the complainant of the existence of AFCA and the option for the complainant to lodge a complaint with AFCA. This is in accordance with ASIC Regulatory Guide 165, which was re-issued in May 2018 so that it now applies to superannuation providers as well the financial firms it previously applied to. Letters from the superannuation provider to the complainant advising them of the outcome of their complaint need to advise of the external dispute resolution scheme as well as AFCA’s contact details.

Complaints to AFCA ¶13-100 Types of superannuation complaints AFCA can hear Australian Financial Complaints Authority (AFCA) can only hear complaints that: (a) the trustee of a regulated superannuation fund or of an ADF has made a decision that is or was unfair or unreasonable to a member, former member, beneficiary, or former beneficiary (b) a decision, by a trustee maintaining a life policy that covers a member of a life policy fund, to admit the member to the fund was unfair or unreasonable (c) the conduct (including any act, omission, or representation) of an insurer, or of a representative of an insurer, relating to the sale of an annuity policy was unfair or unreasonable (d) a decision of an insurer under an annuity policy is or was unfair or unreasonable (e) a decision of a superannuation provider to set out, in a statement given to the Commissioner of Taxation under various prescribed legislation under Corporations Act 2001 s 1053(2), an amount or amounts person was unfair or unreasonable (f) the conduct (including any act, omission, or representation) of an RSA provider, or of a representative of an RSA provider, relating to the opening of an RSA was unfair or unreasonable (g) a decision of an RSA provider relating to a particular RSA holder or former RSA holder is or was unfair or unreasonable (h) the conduct (including any act, omission, or representation) of an insurer, or of a representative of an insurer, relating to the sale of insurance benefits in relation to a contract of insurance where the premiums are paid from an RSA, was unfair or unreasonable (i) a decision of an insurer relating to a contract of insurance where the premiums are paid from an

RSA is or was unfair or unreasonable, or (j) a decision by a death benefit decision-maker relating to the payment of a death benefit is or was unfair or unreasonable (Corporations Act 2001 s 1053(1)). Complaints that can be heard by AFCA is similar to the wording of the legislation as it applied to the SCT. As such, the case law as it applied previously has application to AFCA and its ability to hear complaints. In all of these cases, a complaint can be made on the ground that the relevant decision or conduct was unfair or unreasonable (¶13-110). A complaint may be made about either a discretionary or a nondiscretionary decision. Complaints received by AFCA AFCA regularly publishes statistics as to number and types of complaints it is receiving. As at 30 June 2019, the most recent published statistics were current to 31 March 2019. As at 31 March 2019, AFCA had received in excess of 61,000 phone calls and received approximately 30,000 complaints. Of these complaints, 9% related to superannuation which equates to approximately 2,700. This is over 500 complaints per month compared to approximately 200 complaints per month received by the predecessor SCT (as per 2017/18 Annual Report which shows a total of 2,255 complaints received during the financial year). Complaints to the SCT focused mainly on death benefit distribution which accounted for approximately one-third of all complaints. There has been a shift since the commencement of AFCA with death benefit distribution only accounting for approximately 6% of all superannuation complaints. Listed below are the most common complaints received by the AFCA as at 31 March 2019. Type of complaint

Number received

Incorrect fees/costs

379

Delay in claim handling

269

Account administration error

198

Denial of claim

179

Death benefit distribution

171

Certain decisions made by AFCA are published on their website (www.afca.org.au). There are 27 published determinations which relate to the superannuation fund (or insurer with a policy issued through the superannuation fund) which are cases determined under AFCA’s superannuation complaints authority. The most common issue in the published determinations is insurance premiums, with nine of the 27 relating to this issue. There are also published determinations on death benefit distribution, fees and payment of income protection benefit. These determinations are discussed in more detail at (¶13610).

¶13-102 Terms commonly used in complaints system There are a number of expressions that are commonly used in the complaints system. An annuity policy is an annuity that is declared to be a superannuation policy for the purposes of the Life Insurance Act 1995. Conduct includes acts, omissions and representations. A death benefit is defined as: (a) a benefit payable by a regulated superannuation fund or an ADF on the death of a member (b) a benefit payable by a life company under an annuity policy on the death of the policy owner, or

(c) a benefit payable by an RSA provider, or by an insurer in relation to a contract of insurance where the premiums are paid from an RSA, on the death of an RSA holder. A decision made by a trustee, insurer or RSA provider is given a wide meaning. A trustee, insurer, RSA provider or other decision-maker makes a decision not only if it actually makes a decision but also if it fails to make a decision (Corporations Act 2001 s 1053(5)). A dependant, in relation to a person, includes the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship (SISA s 10(1)). There are two tests (one of which must be satisfied) for determining if there is an interdependency relationship (SISA s 10A): (1) basic test — two people are in an interdependency relationship if: (a) they have a close personal relationship (b) they live together (c) one or each of them provides the other with financial support, and (d) one or each of them provides the other with domestic support and personal care (2) disability test — two people are in an interdependency relationship if: (a) they have a close personal relationship, and (b) they do not satisfy one or more of the other three elements of the basic test because either or both of them suffer from a physical, intellectual or psychiatric disability. A person is also a dependant of another if financial dependence can be proven. An insurer is either the life insurance company or general insurance company providing the death or disability benefit, the life policy or the annuity policy to which the complaint relates. A representative of an insurer, in relation to an annuity policy, life policy or contract of insurance where the premiums are paid from an RSA, includes an agent of the insurer or any other person (Corporations Act 2001 s 1053). A legal personal representative (LPR) is the executor of a person’s will, or if a person died without a will, the administrator of the person’s deceased estate. A life policy fund is a regulated superannuation fund where the trustee maintains individual life policies, or a single (group) life policy, for at least some of the members. An RSA is a capital guaranteed account or policy which is provided by a bank, building society, credit union, life insurance company or prescribed financial institution which has been approved as an RSA institution, and where the purpose is to provide benefits to the RSA holder in the event of retirement, or to dependants of the RSA holder in the event of the RSA holder’s death (¶10-030). An RSA provider is a person who accepts contributions to an RSA or issues a policy which is an RSA. A representative of an RSA provider includes an agent, employee or officer of the RSA provider, or associate of the RSA provider, who engages in conduct in relation to an RSA (s 3(4)). This definition is intended to ensure that an RSA provider is not made accountable before the AFCA for the sales misconduct of persons who have no formal link to the RSA provider (eg solicitors or accountants in respect of whose advice the RSA provider has no control). A superannuation provider means the trustee of a superannuation fund or of an ADF, an RSA provider or a life assurance company. Total and permanent disablement (TPD) depends on the particular trust deed or insurance policy, but it usually requires the member to be permanently incapacitated from doing any paid work for which the member is reasonably suited by their education, training or experience. Total and temporary disablement (TTD) depends on the particular trust deed or insurance policy, but it usually requires the member to be temporarily incapacitated from doing their usual job. [SLP ¶80-310]

¶13-105 Discretionary or non-discretionary decisions A complaint may be made about both discretionary and non-discretionary decisions (Corporations Act 2001 s 1053(5)). Trustee decisions in respect of death and disability benefits are typically classified as involving nondiscretionary exercises of power by decision-makers.

¶13-110 “Fair and reasonable” There are ten main grounds for complaint that AFCA can deal with (¶13-115). All relate to decisions or conduct that are claimed to be unfair or unreasonable. If, after reviewing the decision or conduct, AFCA finds it to be “fair and reasonable in the circumstances”, the AFCA must affirm the decision or conduct (¶13-500). The published AFCA superannuation determinations reflect this approach, with a recurring question in all published determinations being, “Was the trustee’s decision fair and reasonable” (for example, see AFCASD 601632 (service02.afca.org.au/CaseFiles/FOSSIC/601632.pdf)). Various options are open to AFCA if it finds that the decision or conduct was not fair and reasonable in the circumstances. Meaning of “unfair or unreasonable” The Act offers no general guidance as to what is unfair or unreasonable. Where the Act itself gives insufficient guidance as to what would be unfair or unreasonable, AFCA can turn to the common law, which has established various grounds on which a decision or conduct may be found to be unfair or unreasonable. These include instances where: • a trustee failed to comply with the fund’s governing rules • a trustee or insurer failed to actively exercise its discretion when reaching the decision (eg because only the employer’s administrative staff considered a member’s request rather than the trustee or insurer genuinely considering it) • an insurer failed to comply with the terms of its contract with the complainant • a trustee rejected the opinion of a psychiatrist who was familiar with the member and preferred the opinion of forensic psychiatrists retained by the insurer, even though they were less familiar with the member’s medical history (National Mutual Life Association of Australasia Ltd v Campbell 99 ESL 11) • a trustee or insurer failed to consider relevant evidence or failed to give a member the opportunity to give evidence, eg in Chammas v Harwood Nominees Pty Ltd 93 ESL 2, the court held that a trustee did not act fairly and reasonably in coming to a decision on a member’s claim for a disablement benefit, because it did not independently consider the question of whether the member could perform his employment duties, and did not give the member the opportunity to give additional evidence or answer the adverse report by the doctor • a trustee or insurer acted in bad faith (eg a decision was a capricious or dishonest exercise of power) • a trustee denied a total and permanent disablement (TPD) claim on the basis that the injured applicant could carry out part-time sedentary work and had the experience for, and a liking for, employment as a liaison officer working with Aboriginal people — the trustee decision (which was upheld by the SCT) was not fair and reasonable as there was no evidence that the applicant had education, training or experience to undertake the liaison work, and there was no evidence as to what work such a liaison officer did or that part-time work was available (Smith v Club Plus Superannuation Pty Ltd [2004] FCA 1519) • a trustee considered a TPD claim for less than one hour then rubber stamped the insurer’s decision and failed to give any real or genuine consideration to new material put before it (Nile v Club Plus Superannuation Pty Ltd & Anor 05 ESL 05).

According to Nicholson J in Pope & Ors and Lawler & Ors v Dobrich (1996) 41 ALD 127, the meaning of the words “fair and reasonable” is a question of fact. “Fair” is relevantly defined as “just, unbiased, equitable, impartial”. “Reasonable” is defined as “within the limits of reason, not greatly less or more than might be thought likely or appropriate”. A court’s focus in determining whether a decision was “fair and reasonable” should be on “the consequence or outcome of the decision in its practical operation, rather than upon the process by which the decision under review came to be made” (Lykogiannis v Retail Employees Superannuation Pty Ltd 00 ESL 6). For example, in Gray v United Super Pty Limited as Trustee for the Construction and Building Unions Superannuation Fund 11 ESL 06, the Federal Court held that it was open for the SCT to conclude that it would be fair and reasonable for the entirety of the death benefit to be given to the child of the deceased member and to exclude the deceased member’s de facto spouse from participation in the benefit. A trustee’s failure to give reasons for rejecting a disability claim may influence a court to find that the trustee failed to deal with the matter fairly. This was the court’s finding in Maciejewski v Telstra Super Pty Ltd 99 ESL 8. The trustee then reconsidered the claim and affirmed its earlier decision, and the matter went back for report to Windeyer J (NSW Supreme Court). Although the trustee did not give explicit reasons for its second rejection of the claim, preferring to let its reconsideration and new evidence obtained speak for themselves, his Honour was not critical of this approach and drew no adverse inferences from the absence of reasons. Trustees are not required to give reasons Trustees are not obliged to provide reasons for the exercise of their discretion. According to the Victorian Supreme Court in Karger v Paul [1984] VR 161: • if a trustee is entitled to exercise a broad and unfettered discretion, the exercise will not be examined or reviewed by the court as long as the discretion is exercised in good faith and upon real and genuine considerations • if, however, the trustee chooses to state its reasons for the exercise of the discretion, the validity of the trustee’s reasons may be examined. The High Court in Public Service Board of NSW v Osmond (1985–1986) 159 CLR 656 confirmed this position, Gibbs CJ stating (at p 662): “There is no general rule of the common law, or principle of natural justice, that requires reasons to be given for administrative decisions, even decisions which have been made in the exercise of a statutory discretion and which may adversely affect the interests, or defeat the legitimate or reasonable expectations, of other persons.” But, Gibbs CJ said (at pp 663–664): “… the fact that no reasons are given for a decision does not mean that it cannot be questioned; indeed, if the decision-maker does not give any reason for his decision, the court may be able to infer that he had no good reason.” In Scott v National Trust [1998] 2 All ER 705, Robert Walker J stated that, if a decision taken by trustees is directly attacked in legal proceedings, the trustees may be compelled either legally (through discovery or subpoena) or practically (in order to avoid adverse inferences being drawn) to disclose the substance of the reasons for their decision. In Maciejewski, Young J said that, where a plaintiff puts a prima facie case that the trustee’s discretion has miscarried, the absence of reasons and the absence of any evidence before the court as to what happened will tend to make that prima facie case a virtual certainty. The SCT’s view is that it is helpful to members if trustees give reasons for decisions in which a claimed benefit is denied, and that otherwise members are precluded from properly addressing relevant points at the review process. In the SCT’s Annual Report 2003–2004, the Chairperson stated (at p 7) that an area in which amendment of the SRC Act needs serious consideration is the introduction of a requirement that trustees give written reasons to members when declining the payment of a benefit: “The current law contains no such requirement and was developed at a time when payment of benefits arose as the result of a non-compulsory, non-contributory benefice bestowed by an employer or another third party. The nature of compulsory contributory superannuation gives rise to

entirely different considerations … While many trustees sensibly voluntarily provide reasons, there are a number who continue not to do so. It is these trustees that may need some legislative encouragement.” In Edwards v Postsuper Pty Ltd 2007 FCAFC 83, 5 June 2007, the Full Federal Court considered the adequacy of the Tribunal’s reasons when it dismissed an appeal by the parents of a deceased member against the payment of a death benefit to the de facto spouse and infant daughter of the deceased. The court said that reasons contemplated by s 40 must include findings on material questions of fact and refer to the evidence on which those findings are based. In this case, although the Tribunal’s reasons were “not fulsome” they were adequate. The Tribunal’s findings of fact concerning financial dependence and the relationship between the parties formed the foundation for its conclusion that the decision of the trustee was fair and reasonable in the circumstances and the Tribunal did not, therefore, fail to comply with s 40. However, in Sadleir v Motor Trades Association of Australia Superannuation Fund Pty Ltd 11 ESL 05, the parties were involved in a dispute about a trustee’s decision in relation to the distribution of the death benefit of a deceased member of a superannuation fund. The Federal Court held that the Tribunal’s failure to give reasons for its determination was an error of law. Section 40 required the Tribunal to give written reasons for its determination. It gave no reasons for why it reached the conclusion that the apportionment that the trustee arrived at was fair and reasonable in the circumstances.

¶13-115 Decisions or conduct complained against A person can ground a complaint to AFCA in any of the following ways. Currently, there is no case law that is specific to AFCA. The common law and case examples provided below are from prior to 1 November 2018 when the SCT operated. This case law would be applicable to AFCA and its decisionmaking process. (1) General trustee decision A person may make a complaint to AFCA about a decision of a trustee on the basis that it is, or was, unfair or unreasonable (Corporations Act 2001 s 1053(1)(a)). Example 1 The trustee of a superannuation fund decided to pay a death benefit to a deceased member’s mother as a dependant on the basis of partial financial dependency. The deceased member’s father (the complainant) complained to the Tribunal which determined that the deceased member died without dependants. It followed that the trustee’s decision to pay the mother as a dependant did not operate fairly and reasonably in the circumstances. Therefore, the Tribunal determined to set the decision aside and substitute its own decision. The Tribunal considered that the complainant and the mother each stood effectively on an equal footing in relation to the benefit since neither of them was financially dependent on the deceased member. In these circumstances, the Tribunal considered that the complainant and the mother be treated equally and determined that the benefit was to be divided equally between them (SCT Determination D10-11\057).

Example 2 In 2009 the complainant became aware of the possibility of additional superannuation benefits relating to her first employment period. She made enquiries of her superannuation fund, noting her first period of service. She then requested the trustee to allow her to make a late election to preserve her benefits from her earlier period of employment. The trustee rejected her claims that she be regarded as having completed five years eligible service for the period of the first employment and that her late election for preservation of her superannuation benefits be accepted. The complainant complained to the Tribunal that the trustee’s decision was unfair or unreasonable but the Tribunal rejected the complaint and affirmed the trustee’s decision. The Tribunal said that the key factor was that the governing Act gave the trustee no discretion to modify the five-year eligible employment period (SCT Determination D10-11\098).

In Briffa, the Federal Court held that the SCT could hear a complaint about a matter that arose before the fund became a regulated fund, as long as the decision complained of was made after the fund became a regulated fund. (2) Trustee decision to admit a person to a life policy fund A member of a life policy fund (¶13-102), or a person claiming through a member, may complain that the trustee decision to admit the member to the fund was unfair or unreasonable (Corporations Act 2001 s

1053(1)(b)). In determining whether the trustee’s decision was unfair or unreasonable, AFCA will take into account the actions of the trustee in inducing the person to join the life policy fund, as well as the conduct of the insurer or the insurer’s representative leading up to the person’s admission. AFCA will ascertain whether the trustee exerted undue influence or pressure on the person or made material misrepresentations to the person in admitting him/her to the fund. It may take into account the person’s personal circumstances such as age, physical and mental condition, education, financial means, relative bargaining power, need for the policy, the marketing methods of the trustee and other relevant matters. (3) Conduct of insurer re sale of an annuity policy A person may complain to the Tribunal about the conduct of an insurer, or the insurer’s representative, in relation to the sale of an annuity policy (Corporations Act 2001 s 1053(1)(c)). Such a complaint is based on similar grounds to that of a complaint about a trustee decision to admit a person to a life policy fund and, in considering whether the conduct of the insurer and the insurer’s representative was unfair or unreasonable, the Tribunal will take similar considerations into account (see (2) above). The sale of an annuity policy includes any activity undertaken, or representation made, at the time of, or preliminary to, the complainant’s entry into the policy, or the time when the person through whom the complainant has an interest in the policy enters into the policy. (4) Decision of insurer under an annuity policy A person may complain to AFCA about a decision of the insurer under an annuity policy on the basis that it is, or was, unfair or unreasonable (Corporations Act 2001 s 1053(1)(d)). In its considerations, AFCA must have regard to the seriousness of any failure by the insurer to discharge an obligation under the policy, as well as any action taken by the insurer that is contrary to the best interests of the insured or any other person having an interest in the policy. (5) Statement by superannuation provider A person may complain to AFCA about a notice given to the Commissioner of Taxation by a superannuation provider in relation to certain prescribed matters ( Corporations Act 2001 s 1053((1)(e)). Statements include those provided under s 13 Superannuation Contributions Tax (Assessment and Collection) Act 1997, s 12 Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997, subsection 133-120(2) or 133-140(1) in Sch 1 to the Taxation Administration Act 1953 or section 390-5 or 390-20 in that Sch (Corporations Act s 1035(2)). (6) Conduct of RSA provider concerning opening of RSA The holder, or former holder, of an RSA may complain that the conduct of the RSA provider, or of a representative of the RSA provider, in respect of the opening of the RSA was unfair or unreasonable (Corporations Act 2001 s 1053(1)(f)). Although a complaint is about the conduct of an RSA provider, AFCA may join an insurer and any other person (eg an employer) as parties to the complaint and may then review any conduct of the person joined that may be relevant to the complaint Corporations Act 2001 s 1054). In determining whether the RSA provider’s conduct was unfair or unreasonable, AFCA must ascertain whether the RSA provider exerted undue influence or pressure on the RSA holder or made a material misrepresentation to the RSA holder in relation to the opening of the RSA. It may also take into account the RSA holder’s circumstances such as age, physical and mental condition, education, financial means, relative bargaining power and need for the RSA, and other relevant matters. (7) Decisions of RSA providers A person may complain that a decision of an RSA provider in relation to a particular RSA holder or former RSA holder was unfair or unreasonable (Corporations Act 2001 s 1053(1)(g)). Although a complaint is about a decision of an RSA provider, AFCA may join an insurer and any other person as parties to the complaint and may review any decision of the person joined that may be relevant to the complaint (Corporations Act 2001 s 1054). In determining whether a decision was unfair or unreasonable, AFCA must have regard to:

(a) the seriousness of any failure to discharge an obligation under the terms of the RSA, and (b) any action taken by the RSA provider that is contrary to the best interests of the RSA holder or any other person having an interest under the RSA. Example A complainant received a notice from his RSA provider about his superannuation contributions for each of the 2000/01, 2001/02 and 2002/03 financial years. The notice contained a declaration to be signed by the complainant. When completed and returned, the form would function as an effective notice from the complainant under former s 82AAT of the Income Tax Assessment Act 1936 (ITAA36). In response to the return of the completed notice, the provider sent a further document to the complainant in which it confirmed the amount that the complainant would claim as a personal tax deduction and advised that the information the complainant provided allowed the provider to calculate the amount of contributions tax to deduct from the complainant’s personal contributions. This constituted a notice under former s 82AAT(1A) of the ITAA36. On 30 June 2004, the complainant made a personal contribution to his account of $50,000. The provider did not send a notice to the complainant for the 2003/04 financial year. In August 2004, the complainant completed a withdrawal request. It did not contain any details about contributions or the amount to be claimed as a tax deduction for the relevant year in the space provided. The account was then closed and the money in it was transferred to a superannuation fund. The complainant asserted that the RSA provider should have made inquiry about his deduction intentions for the 2003/04 financial year. The RSA provider denied that it was under any duty to make inquiry of its customers about their deduction intentions, and denied that it was under any duty to provide them with a former s 82AAT form for completion and return. It said that it sent notices to customers for other financial years as a “courtesy” to them. The RSA provider treated the complainant’s contribution of $50,000 on 30 June 2004 as a contribution in respect of which no deduction was claimed. The issue was whether this was fair and reasonable in its operation in relation to the complainant. A number of matters pointed to the conclusion that the complainant had a legitimate expectation that the RSA provider would send a questionnaire as to his deduction intentions for the 2003/04 financial year. The complainant indicated that he was unable to claim a deduction in respect of the $50,000 contribution made during the 2003/04 financial year because of the decision of the RSA provider. He estimated the after tax effect of the lost deduction was $12,200. The complainant also pointed out the possibility that he might be required to pay interest or a penalty to the ATO. The Tribunal was not satisfied that the conduct of the RSA provider, in failing to give a notice to the complainant for the 2003/04 year, was fair and reasonable in the circumstances (SCT Determination D06-07\105).

(8) Conduct of insurers concerning sale of insurance benefits where premiums paid from an RSA An RSA holder or a former RSA holder may complain that the conduct of an insurer, or a representative of an insurer, was unfair or unreasonable in relation to the sale of insurance benefits where the premiums were paid from an RSA (Corporations Act 2001 s 1053(1)(h)). AFCA may also join an RSA provider or any other person as a party to the complaint and review any conduct of the person joined that may be relevant (Corporations Act 2001 s 1054). In determining whether the insurer’s conduct was unfair or unreasonable, AFCA should consider the same matters as are relevant to a complaint about the opening of an RSA (see (6) above). (9) Decisions of insurers where premiums paid from an RSA A person may complain that a decision of an insurer under a contract of insurance where the premiums are paid from an RSA was unfair or unreasonable (Corporations Act 2001 s 1053(1)(i)). AFCA may join an RSA provider or any other person as a party to the complaint and review any decision of the person joined that may be relevant to the complaint Corporations Act 2001 s 1054). In determining whether a decision was unfair or unreasonable, AFCA must take into account matters that would be relevant if the complaint were about a decision of an RSA provider (see (7) above). (10) Decisions of a death benefit decision-maker relating to the payment of a death benefit is or was unfair or unreasonable A person may complain that a decision of a death benefit decision-maker was unfair or unreasonable (Corporations Act 2001 s 1053(1)(j)). Death benefit decision-maker means any of the following persons: (a) the trustee of a regulated superannuation fund or ADF (b) an insurer in relation to a superannuation complaint, or (c) an RSA provider (Corporations Act 2001 s 761A).

¶13-116 AFCA may decline to hear a superannuation complaint AFCA may decline to hear a superannuation complaint on the basis that the complaint is outside jurisdiction or that it is inappropriate for AFCA to consider the complaint. Outside jurisdiction AFCA rule C.1.2 sets out mandatory exclusions where AFCA is unable to hear a complaint. Most exclusions relate to AFCA’s broader role beyond superannuation complaints, including monetary limits which do not apply to superannuation complaints (AFCA rule C.1.2(e)(i)). However, there are a few exclusions within AFCA rule C.1.2 that have direct relevance to superannuation complaints. AFCA cannot deal with a superannuation complaint that has already been dealt with by a court, dispute resolution tribunal established by legislation or a predecessor scheme (AFCA rule C.1.2(d)). AFCA is therefore unable to deal with a superannuation complaint that was previously dealt with by the SCT. AFCA cannot deal with a complaint that raises the same events and facts and is brought by the same complainant as a complaint previously dealt with by AFCA and there is insufficient additional events and facts raised in the new complaint to warrant AFCA considering the new complaint (AFCA rule C.1.2(c)). AFCA will not deal with a complaint that is outside the time limits for lodging a complaint with AFCA (¶13118). If a superannuation fund believes that a complaint falls within a mandatory exclusion, AFCA has indicated that the superannuation fund need not wait for an AFCA assessment and can make a request to AFCA. The superannuation fund may know of circumstances that AFCA would not be aware of, eg the matter has previously been dealt with by the SCT (AFCA Transitional Superannuation Guide, p 19). Despite the exclusion rules, AFCA can hear a complaint if all parties and AFCA agree (AFCA rule 4.7). An example of this is where the complaint is outside time limits (¶13-118). If both parties agree AFCA will consider whether its procedures and resources position it to resolve the complaint fairly and efficiently, and consistent with its underpinning principles. If AFCA hears a complaint under AFCA rule A.4.7 normal AFCA rules apply. Not appropriate to hear complaint Even if a complaint is within jurisdiction AFCA can decline to hear the complaint if it is appropriate in the circumstances to do so. AFCA may decline to hear the complaint if: • complaint does not have merit • no loss has been suffered • complainant has been adequately compensated • no error has been committed, or • superannuation fund could not have made any other decision. Discretion not to consider complaint AFCA has a discretion not to consider a complaint (¶13-480; AFCA rule C.2.1, C.2.2). AFCA has provided examples where it may exercise this discretion. This includes: • there is a more appropriate place (such as a court) to deal with the complaint • the complaint has already been adequately dealt with by the SCT or AFCA • the complaint is frivolous, vexatious, misconceived or lacking in substance, and • if the agent representing the complainant is engaging in inappropriate conduct.

¶13-117 Complaints relating to death benefit decisions

A person may make a complaint to AFCA on any of ten listed decisions or conduct if they believe that decision or conduct was unfair or unreasonable (¶13-115: Corporations Act 2001 s 1053(1)). One of those listed is a decision by a death benefit decision-maker relating to the payment of a death benefit. “Death benefit decision maker” is a newly defined term and is defined as “the trustee of a regulated superannuation fund or approved deposit fund; an insurer in relation to a superannuation complaint; an RSA provider” (Corporations Act 2001 s 761A). Objection to death benefit distribution must be made within 28 days of receiving notification If a person believes that a decision of a death benefit decision-maker in relation to the payment of a death benefit is unfair or unreasonable, they make a complaint with AFCA. However, a person can only make a superannuation complaint if they have an interest in the death benefit (Corporations Act 2001 s 1056(1)). In addition, a person cannot make a complaint with AFCA if they were provided notice from the death benefit decision-maker that the decision-maker was going to make a death benefit payment decision and the person did not object to the decision-maker or AFCA within 28 days of that notice (Corporations Act 2001 s 1056(2)). Effect of no notice of death benefit distribution being issued If a person with an interest in a death benefit has not received a notice from a death benefit decisionmaker of the distribution of the death benefit, that person can make a complaint to AFCA. However, AFCA must be satisfied that the person has an interest in the death benefit and it was unreasonable for the decision-maker not to provide the person with a notice (Corporations Act 2001 s 1056(3)).

¶13-118 Time limit to make a complaint to AFCA AFCA has issued Operational Guidelines which sets out the timelines for lodging a complaint with AFCA (as at the time of writing these time limits appear on p 125 of the Guidelines). Different time limits apply for different types of claims. TPD The time limits surrounding TPD depend on whether the employee ceased employment due to TPD, or for a different reason. Where the cessation of employment was not due to TPD the employee has six years from the date of the superannuation fund’s TPD decision to submit a complaint to AFCA. Where cessation of employment was due to TPD the employee has two years from the date of cessation to make a claim for TPD benefit with the superannuation fund, and four years from the trustee’s decision to submit a complaint to AFCA (AFCA rule B.4.1.1). In practice, an employee may supply additional information after the original TPD decision and ask the superannuation fund to reconsider the TPD decision. In these circumstances, the four and six-year time limits still start from the date of the original TPD decision. This is regardless of whether the original decision is confirmed or varied (AFCA rule B.4.1.2). Death benefits The time limits for submitting a complaint for death benefits is much tighter, as there are different competing beneficiary interests that need to be considered. Time limits are contained within the Corporations Act 2001 s 1056 and AFCA rules. A superannuation fund must provide written notice to an interested person of the proposed distribution of the death benefit. An interested person has 28 days from receiving the written notice to lodge a written objection with the superannuation fund. If an interested person does not lodge an objection with the superannuation fund they are unable to submit a complaint with AFCA. An interested person who has lodged a written objection with the superannuation fund and received a written notice of the superannuation fund’s final decision, has 28 days from the date of the written notice of final decision to submit a complaint with AFCA (AFCA rule B.4.1.3). If a superannuation fund has not advised an interested person of the proposed death benefit distribution, the time period of 28 days to object to the superannuation fund has not commenced. Likewise, if a superannuation fund has not issued a written notice of a final decision, the time period of 28 days to submit a complaint to AFCA has not commenced.

Statements to the ATO If a superannuation fund has notified a superannuation fund member that it has given a contributions statement to the ATO, the superannuation fund member has 12 months from the date of the notice to submit a complaint to AFCA (AFCA rule B.4.1.4). Other matters There are no strict time limits for submitting complaints to AFCA on other matters (AFCA rule B.4.1.5). However, AFCA has stated that superannuation complaints should generally be lodged with AFCA within two years of receiving a response under the superannuation fund’s internal dispute resolution. Complaints outside time limits If a complaint is made outside time limits AFCA is unable to receive and resolve the complaint. However, AFCA rule A.4.7 allows AFCA to receive and resolve complaints outside time limits if both parties and AFCA agree (¶13-116). However, this exception to the rule does not apply to death benefits, where the time limits strictly apply.

¶13-120 Where to make a complaint to AFCA Complaints to AFCA can be submitted online, by telephone, or in writing by letter, email or fax. The online complaint form can be found at ocf.afca.org.au. AFCA contact details Website: www.afca.org.au Email: [email protected] Telephone: 1800 931 678 (free call) Fax: (03) 9613 6399 Postal address: Australian Financial Complaints Authority Limited, GPO Box 3, Melbourne VIC 3001 There is no charge to complainants who elect to use AFCA to resolve their superannuation complaint.

¶13-130 What information to include in a complaint to AFCA The online complaint form is set out in six stages and requires details of the complainant and the superannuation fund, as well as details of the matter being complained about and the resolution being sought. AFCA has issued guidelines stating that the complainant should include the following information in their complaint: • name and contact details of the complainant • details of the complainant’s representative (if any) • name of the superannuation fund being complained about • membership, policy or account number held by the complainant with the superannuation fund • decision or conduct being complained about, and why it is not fair or reasonable • loss or detriment suffered, and the outcome being sought, and • date the complainant lodged a complaint with the superannuation fund. AFCA has suggested additional information should be provided to it depending on the nature of the

complaint. The suggested additional information is outlined below. Death benefit complaints For complaints about the distribution of a death benefit it is beneficial if the complainant also provides: • a copy of the superannuation fund’s letter notifying the complainant how it proposes to pay the death benefit • a copy of complainant’s letter to the superannuation fund objecting to the proposed distribution • a copy of the superannuation fund’s letter notifying the complainant of its final decision, and • an explanation of why the complainant is disputing the proposed distribution. If the complaint is being lodged as the legal personal representative, the legal personal representative should also provide a copy of the will and grant of probate. If the fund member died without a will, the legal personal representative should provide a copy of the letters of administration issued by the court. Disability benefit complaints If the complaint relates to TPD or TTD, it is beneficial if the complainant also provides: • the date the complainant permanently ceased employment • the date the complainant first lodged a claim for a disability benefit with the superannuation fund • a copy of the superannuation fund’s letter notifying its decision to deny the claim • a copy of any letter made by the complainant to the superannuation provider about the denial of the claim and any final response received from the superannuation fund, and • an explanation of why the complainant believes they are entitled to a disability benefit. Contributions statement provided to the ATO If the complaint relates to contribution amounts provided by the superannuation fund in a statement to the ATO (which may have resulted in an ATO assessment for higher tax) it is beneficial if the complainant also provides: • a copy of the notice received from the superannuation fund with a copy of the statement it provided to the ATO • a copy of any complaint the complainant has made to the superannuation fund about the contribution amounts in the statement and any final response received from the superannuation fund, and • an explanation of why the complainant believes the statement is wrong.

Complaints Procedural Matters ¶13-290 Representation Both the complainant and the superannuation fund are entitled to engage legal representation if they wish. However, this will normally be at their own cost. AFCA can also refer disadvantaged complainants to legal aid offices, financial counsellors or other services for assistance. However, AFCA may exclude a complaint if the complainant is represented or assisted by an agent who may receive remuneration and AFCA considers that the agent is engaging in inappropriate conduct that is not in the best interests of the complainant, or the complaint is not accompanied by information required by AFCA (AFCA rule C.2.2(g)). AFCA may also exclude a complaint if a complainant is represented by an agent who has previously had complaints excluded under this rule (AFCA rule C2.2(h)) (¶13-116).

¶13-300 Parties to death benefit complaints If a complaint relates to the payment of a death benefit, there are likely to be other affected parties beyond the complainant. There are specific procedures that apply when joining additional parties to the complaint. A person cannot make a superannuation complaint under the AFCA scheme relating to a decision by a death benefit decision-maker relating to the payment of a death benefit unless the person has an interest in the death benefit (Corporations Act 2001 s 1056). In recent times, the number of parties in death benefit cases is expanding due to modern family arrangements, and as such these cases are becoming more complex. This has been noted by the SCT and will remain the situation for AFCA. If a complaint is made to AFCA about the payment of a death benefit, the trustee, insurer or RSA provider (whichever is applicable) must give written notice to all persons (other than the complainant) whom the trustee, insurer or RSA provider believes, after reasonable inquiry, may have an interest in the outcome of the complaint. The notice must be given within 28 days from the day when the trustee, insurer or RSA provider receives a notice of the complaint from AFCA (Corporations Act 2001 s 1056A). The notice must specify that a complaint has been received by AFCA, provide details of the complaint, and advise that to become a party to the complaint the person must apply within 28 days of the notice (or such further period as allowed by AFCA) to the Tribunal to be made a party to the complaint (Corporations Act 2001 s 1056A(1), (2)). A person who fails to apply within that period cannot be joined as a party unless AFCA decides otherwise (Corporations Act 2001 s 1056A(6)).

¶13-330 Tribunal’s power to obtain information and documents Production of documents on notification of a complaint Previously, with the SCT, there was a legislative requirement on the superannuation provider to produce all relevant documents to the SCT. There is no similar legislative requirement contained within the Corporations Law for production of documents to AFCA. However, AFCA can direct that a person provides information or documents if AFCA believes that this information or document is relevant to a superannuation complaint (Corporations Act 2001 s 1054A(1)). AFCA must make the request in writing (Corporations Act 2001 s 1054A(1)). However, superannuation funds are encouraged to identify all relevant information and provide it to AFCA rather than wait for a specific request from AFCA for that information (AFCA Operational Guidelines to the Rules, p 52). A party to a complaint must comply with an AFCA requirement to provide information unless they satisfy AFCA that: a) Provision of the information would be a breach of confidentiality to a third party b) Provision of the information would breach a court order or would prejudice a current investigation by the police or a law enforcement agency, and c) The information does not or no longer exists or cannot reasonably be obtained (AFCA rule A.9.1) A party to a complaint who relies on one of the above exceptions to not provide a document or information must, if requested by AFCA, provide a statutory declaration to AFCA setting out the steps taken to try to comply with the request and the reasons why they were not able to comply (AFCA rule A.9.2). Timeframe to provide document Previously, documentation had to be supplied within 28 days of the request. There is no prescribed time limit in the Corporations Law, with the requirement being that the person produce the documentation within such period as specified in the notice issued by AFCA. AFCA rule A.9.1 states that information must be provided within “the timeframe specified by AFCA”. Provision of document by third party The power to request documents is not limited to a superannuation provider. AFCA can make the request

of any person that it believes has relevant documentation. AFCA has stated that it would generally ask the superannuation fund to obtain and provide information in the first instance, but it has the statutory powers to require third parties to provide the information (AFCA Transitional Superannuation Guide, p 41). Unless a person has a reasonable excuse as to why they have not produced the requested documentation, they are liable to a strict liability offence with a penalty of 30 penalty units (Corporations Act 2001 s 1054A(3)-(5)). Requirement to attend interview AFCA has the power to compel a party to do anything else that AFCA considers may assist AFCA’s consideration of the complaint. This includes attending an interview or appointing an independent expert to report back to AFCA on something relating to the complaint. However, AFCA will take into account the costs a party may incur as a result of such a request (AFCA rule A.9.3).

Conciliation of Complaints ¶13-400 Conciliation of complaints Unlike the SCT, there is no prescribed requirement that AFCA attempt to settle the dispute through conciliation. However, AFCA has the ability to convene a conciliation conference as set out in AFCA rules (AFCA rule A.9.4). If AFCA convenes a conciliation conference it can direct parties attend, including any person whose presence would, in AFCA’s opinion, be likely to be conducive to settling the complaint (Corporations Act 2001 s 1054B(1)). The direction is by written notice, which would fix the date, time and place for the conference (Corporations Act 2001 s 1054B(2)). A person (other than the complainant) commits an offence if he or she does not attend a conference when required to do so and is subject to a penalty of 30 penalty units (Corporations Act 2001 s 1054B(4)). If a complainant does not attend a conciliation conference AFCA may treat the complaint as having been withdrawn (Corporations Act 2001 s 1054B(3)). AFCA may issue a direction which prohibits the disclosure of documents or information. The direction is to protect the privacy of each party. There is a statutory penalty of 30 penalty units if a person fails to comply with a confidentiality direction (¶13-560; Corporations Act 2001 s 1054BA).

Review of Decisions or Conduct ¶13-450 AFCA’s determination of superannuation complaints The SCT was not bound by technicalities, legal forms or rules of evidence. There is no similar legislative exemption for AFCA under the Corporations Law. AFCA has all the powers, obligations and discretions conferred on the trustee, insurer, RSA provider or other decision-maker whose decision or conduct is being reviewed. On reviewing a decision of a trustee, insurer or other decision-maker, AFCA must give written reasons for its determination of a superannuation complaint (Corporations Act 2001 s1055A). AFCA must affirm a decision or conduct if it is satisfied that the decision or conduct was fair and reasonable in all the circumstances in its operation in relation to the complainant (Corporations Act 2001 s 1055(2)). If AFCA is satisfied that the decision was unfair or unreasonable in its operation in relation to the complainant, it can take one or more actions but only for the purpose of placing the complainant in such a position that the unfairness, unreasonableness, or both, no longer exists (Corporations Act 2001 s 1055(4)). There are further considerations for AFCA if the complaint relates to the payment of a death benefit, as AFCA also needs to consider other parties who were joined to the complaint. In the case of a death benefit, AFCA must affirm a decision or conduct if it is satisfied that the decision or conduct was fair and

reasonable in all the circumstances in its operation in relation to the complainant and any other joined parties (Corporations Act 2001 s 1055(3)). If AFCA is satisfied that the decision was unfair or unreasonable in its operation in relation to the complainant or any other joined party, it can take one or more actions but only for the purpose of placing the complainant or joined party in such a position that the unfairness, unreasonableness, or both, no longer exists (Corporations Act 2001 s 1055(5)). If AFCA makes a finding that decision was unfair or unreasonable, the actions that AFCA may take are as follows: (a) vary the decision (b) set aside the decision, (i) substitute a decision for the decision so set aside, (ii) remit the decision to the person who made it for reconsideration in accordance with any directions or recommendations of AFCA. (c) if the complainant was unfairly or unreasonably admitted into a life policy fund (i) require a party to the complaint to repay money received under the life policy (ii) set aside the whole or part of the terms or conditions of the life policy in their application to the complainant (iii) vary the governing rules of the life policy fund in their application to the complainant (iv) cancel the complainant’s membership of the life policy fund or of any sub-plan of the fund (d) if the complainant was unfairly or unreasonably sold an annuity policy, contract of insurance or RSA (i) require a party to the complaint to repay money received under the annuity policy, contract, or RSA; (ii) set aside the whole or part of the terms or conditions of the annuity policy, contract, or RSA in their application to the complainant, or (iii) vary the terms or conditions of the annuity policy, contract, or RSA in their application to the complainant (Corporations Act 2001 s 1055(6)). AFCA must give written reasons for its determination (Corporations Act 2001 s 1055A).

¶13-460 De novo merits review There is no case law on whether AFCA can undertake a full de novo merits review. However, it would appear that the case law as it applied to the SCT would equally apply to AFCA. Over time, judicial decisions substantially expanded the role and powers of the SCT when it reviewed decisions of trustees. While the SCT was previously seen as undertaking a limited form of judicial review, a full de novo merits review seemed to be allowable. Rather than merely reviewing evidence that was before the trustee and considering whether the trustee’s decision on that evidence was fair and reasonable, the SCT appeared to be able to consider new evidence in deciding what was fair and reasonable. According to the Federal Court in Hornsby v Military Superannuation & Benefits Board of Trustees No 1 [2003] FCA 54, the SCT’s powers “bear a clear resemblance” to the de novo review powers of the AAT, the Migration Review Tribunal and the Refugee Review Tribunal. The question of the extent of the SCT’s review powers has arisen in the context of medical evidence that was not available to the decision-maker when making the original decision. In National Mutual Life v Jevtovic [1997] FCA 359; 217 ALR 316, it was argued that the SCT was limited to material which was before the decision-maker. The court did not find it necessary to decide the issue, and Sundberg J expressly left open the question whether new medical evidence could be considered.

In Seafarers’, the Federal Court found that the SCT could consider new material. According to Merkel J: “… the context and nature of the review by the Tribunal provided for under the Act can leave little doubt that the review … is to be by way of hearing de novo which can include, but is not restricted to, the material before the Trustee.” It was not clear from Seafarers’ whether such review is confined to evidence in existence when the trustee made its decision or whether later events can also be taken into account. This is a significant question where a complaint relates to a death benefit and an event has occurred between the date of the decision and the time of the hearing that materially affects the fair and reasonable apportionment of benefits between dependants. Experience in other jurisdictions shows that evidence not in existence at the time of the original hearing can be admitted where the review is a de novo hearing. In SCT Determination D01-02\037, the SCT said that, in a disability case, later medical reports can be taken into account to assist the SCT in forming its view of whether a complainant is likely to work in the future. However, only those issues relating to the progress of the conditions that were the subject of the original claim can be considered. In National Mutual Life Association of Australasia Ltd v Campbell 99 ESL 11, Heerey J rejected the trustees’ argument, based on Jevtovic, that the SCT was limited to reviewing the reasonableness of the trustee’s decision and could not simply substitute its own view of the correct decision. Heerey J said: “… the Tribunal is not acting like a court on judicial review determining whether a particular decision was lawfully open to a decision-maker … The Tribunal makes its own decision.” In SCT Determination D99-2000\030, the SCT adopted the de novo review approach of the Federal Court. Overturning the trustee’s decision and finding the complainant entitled to a total and permanent disablement benefit, the SCT considered evidence not before the trustees. The Tribunal held that, although the law does not require procedural fairness from the trustees, the Tribunal itself is subject to procedural fairness. Therefore, although the trustees could not be compelled to give access to the medical reports in their possession before the SCT review, the SCT would ensure, as part of the review process, that the complainant was given access to all relevant medical evidence. Fact-finding role The SCT’s fact-finding role was considered by the Federal Court in Marks v CSS Board of Trustees [2005] FCA 797, an appeal from the SCT’s determination to affirm a decision of the CSS Board not to allow a cancellation of an election. It would appear that a similar approach would apply for AFCA. As the SCT’s role involved an assessment of the merits of the material before it, the SCT was required, where appropriate, to use its fact-finding powers to ascertain material facts necessary for that assessment. Accordingly, a mere endorsement of the CSS Board decision on the basis that the finding was fairly and reasonably open to the Board would be an insufficient discharge of the SCT’s functions. Instead, the SCT was required to form a view about the necessary facts, determine what those facts were and, by reference to those facts, determine whether the decision under review was fair and reasonable in the circumstances. The facts ascertained by the SCT constitute “the circumstances” by reference to which the SCT makes its evaluation. As the SCT did not approach the matter in this way, the court set aside the SCT’s decision and remitted the matter to the SCT for determination according to law. [SLP ¶80-625]

¶13-470 Referral of question of law to Federal Court AFCA may, on its own initiative or at the request of a party, refer a question of law arising in relation to a complaint to the Federal Court (Corporations Act 2001 s 1054C). If a question of law has been referred to the Federal Court, AFCA must not make a determination on which the question is relevant while the reference is pending, or do anything inconsistent with the opinion of the court on the question. In Meilak v Commissioner of Superannuation (1991) 13 AAR 186, the Full Federal Court would not answer questions asked by the AAT because they were too widely expressed and were stated in a document which made almost no reference to the facts. The court said that, for questions of law to be

asked, the court must be provided with a proper factual basis upon which it could make its decision. This might be done by the parties agreeing upon and tendering a statement of the facts and, if appropriate, attaching relevant documents to it. If not, the Tribunal itself must find the primary facts, and its findings upon those facts must be tendered in evidence before the court can proceed. [SLP ¶80-630]

¶13-480 Complaints excluded by AFCA — more appropriate place to deal with complaint AFCA may decide not to hear and resolve a complaint if it believes there is a more appropriate place than AFCA to deal with that complaint (AFCA rule C.2.2(a)). More appropriate places may include a court, tribunal, another dispute resolution scheme or Office of the Australian Information Commissioner. In deciding whether to exclude the complaint on these grounds AFCA have indicated that they will consider the following factors: • potential advantages and disadvantages to each party. This may include time and expense, as well as ability to obtain or enforce a decision • whether the process is appropriate, including the consequences for each party of the alternative process. • issues that are partly within and partly outside AFCA’s jurisdiction. AFCA is likely to exclude a complaint if the remedy being sought is outside its jurisdiction. However, AFCA may consider a complaint if it raises significant issues within its jurisdiction if those issues can be dealt with separately from the issues outside jurisdiction, and • complexity is relevant, but not a sufficient reason in itself.

¶13-490 AFCA’s preliminary assessment of complaint AFCA may issue a preliminary assessment prior to the issuing of a final determination. A preliminary assessment sets outs relevant information and how AFCA thinks the complaint should be resolved (AFCA rule A.12.1). The preliminary assessment can be provided verbally or in writing. If the parties accept the preliminary assessment the complaint is resolved and finalised on that basis. A preliminary assessment will set out: • the relevant factual information • the relevant issues and AFCA’s preliminary assessment of those issues • how AFCA thinks the complaint should be resolved, and • the timeframes within which the parties must tell AFCA whether or not they are willing to settle the complaint in accordance with the preliminary assessment. For fast track complaints this is normally seven days. For standard or complex complaints this is normally 30 days. If a preliminary assessment is rejected the party rejecting the assessment must set out reasons why they are rejecting the assessment (AFCA rule A.12.3(b)(ii)). The complaint will then proceed to a determination (AFCA rule A.12.3).

¶13-500 Determinations by AFCA AFCA has all the powers, obligations, and discretions conferred on the trustee, insurer, RSA provider, or other decision-maker whose decision or conduct is being reviewed. On reviewing a decision of a trustee, insurer, or other decision-maker, AFCA must give written reasons for its determination of a superannuation complaint (Corporations Act 2001 s 1055A).

Terms of the determination AFCA must affirm a decision or conduct if AFCA is satisfied that the decision or conduct was fair and reasonable in all the circumstances in its operation in relation to the complainant (Corporations Act 2001 s1055(2)). If AFCA is satisfied that that the decision was unfair or unreasonable in its operation in relation to the complainant, it can take one or more actions but only for the purpose of placing the complainant in such a position that the unfairness, unreasonableness, or both, no longer exists (Corporations Act 2001 s 1055(4)). There are further considerations for AFCA if the complaint relates to the payment of a death benefit, as AFCA also needs to consider other parties who were joined to the complaint. In the case of a death benefit, AFCA must affirm a decision or conduct if AFCA is satisfied that the decision or conduct was fair and reasonable in all the circumstances in its operation in relation to the complainant and any other joined parties (Corporations Act 2001 s 1055(3)). If AFCA is satisfied that the decision was unfair or unreasonable in its operation in relation to the complainant or any other joined party, it can take one or more actions but only for the purpose of placing the complainant or joined party in such a position that the unfairness, unreasonableness, or both, no longer exists (Corporations Act 2001 s 1055(5)). If AFCA makes a finding that a decision was unfair or unreasonable, the actions that AFCA may take are as follows: (a) vary the decision (b) set aside the decision (i) substitute a decision for the decision so set aside (ii) remit the decision to the person who made it for reconsideration in accordance with any directions or recommendations of AFCA (c) if the complainant was unfairly or unreasonably admitted into a life policy fund (i) require a party to the complaint to repay money received under the life policy (ii) set aside the whole or part of the terms or conditions of the life policy in their application to the complainant (iii) vary the governing rules of the life policy fund in their application to the complainant (iv) cancel the complainant’s membership of the life policy fund or of any sub-plan of the fund (d) if the complainant was unfairly or unreasonably sold an annuity policy, contract of insurance, or RSA (i) require a party to the complaint to repay money received under the annuity policy, contract, or RSA (ii) set aside the whole or part of the terms or conditions of the annuity policy, contract, or RSA in their application to the complainant, or (iii) vary the terms or conditions of the annuity policy, contract, or RSA in their application to the complainant (Corporations Act 2001 s 1055(6)). To correct unfairness or unreasonableness In exercising its power of determination, the objective of AFCA is to correct, as much as practicable, any unfairness or unreasonableness found in a decision that was complained of. Previous case law relating to the SCT is relevant in determining how AFCA should exercise its decision-making powers. In Hannover v Membrey (2005) 13 ANZ Insurance Cases ¶90-122, the Federal Court emphasised that the SCT had the power to place the complainant as nearly as practicable in a position in which the unfairness or unreasonableness no longer exists. In this case, it allowed the Tribunal to not only grant simple interest, but also compound interest, for the period where the insurer had unreasonably withheld the payment of a benefit.

In attempting to correct any unfairness or unreasonableness, the AFCA is not empowered to do anything that would be contrary to law, or governing rules of a regulated superannuation fund or approved deposit fund, or the terms and conditions of the annuity policy, contract of insurance, or RSA. However, this limitation does not apply to determinations which vary the governing rules or which set aside or vary the terms or conditions in their application to the complainant (Corporations Act 2001 s 1055(7)). For example, if the governing rules of a fund only provide for death benefits to be paid to dependants of a member, AFCA cannot make a determination for the fund’s death benefits to be paid to a person who does not come within the definition of a dependant under those rules. In Briffa, the Federal Court held that the SCT could not make a determination conferring increased benefits on a member as this conflicted with that member’s entitlement under the trust deed. In Australian Reward Investment Alliance v Superannuation Complaints Tribunal 08 ESL 09, the Federal Court held that it was not open to the SCT to find that any decision of Australian Reward Investment Alliance (ARIA) in relation to the member was unfair or unreasonable. The directions which the Tribunal purported to give to ARIA were beyond the power of the SCT. In Machin v Board of Trustees of the State Public Sector Superannuation Scheme 10 ESL 20, the Federal Court set aside the SCT’s determination. The SCT had affirmed the trustee’s decision to refuse to pay a disablement benefit because it approved of the construction of the fund’s Deed adopted by the trustee in relation to the provisions regarding “total and permanent disablement” (TPD) and “permanent and partial disablement” (PPD). On the basis of that construction, a precondition was imposed by the trustee which was unwarranted by the terms of the Deed and it operated to deprive those applicants who failed to satisfy it of the opportunity to achieve eligibility under the definitions of TPD or PPD. AFCA should provide all parties with procedural fairness. In Employers First v Tolhurst Capital Limited [2005] FCA 616, the Federal Court set aside a SCT decision after finding that Employers First had been denied procedural fairness when the SCT had determined that a direction had been given under the trust deed to include certain contributions in the member’s retirement benefits, despite neither party urging the SCT to adopt that approach. In Smith v Superannuation Complaints Tribunal 08 ESL 07, the Federal Court found that the SCT determined that it did not have jurisdiction to hear the applicant’s complaint, which was a finding adverse to the applicant’s interests. It held that the SCT failed in its obligation of procedural fairness to the applicant by not allowing him a reasonable opportunity to make submissions as to the SCT’s jurisdiction. In Ludowyk, one of the submissions made by the applicant (L) was that the SCT had misconstrued the nature of its review function when it determined her first complaint on 20 April 2007. It did not carry out a merits review of the decisions in question but rather approached its task as if it were conducting a judicial review. Further, the SCT failed to undertake its own inquiry into L’s original complaint and thus failed to determine that complaint as required by the relevant provisions of the SRC Act. Therefore, L argued that the SCT’s failure to properly carry out its statutory review task meant that its decision in relation to her first complaint was beyond its power. The Federal Court disagreed and held that the SCT did not undertake judicial review of the relevant decision. The court considered that the SCT appropriately assessed the fairness and reasonableness of that decision against the evidentiary material presented to it and the submissions made to it so that it correctly addressed the requisite statutory task. The first step for the SCT was to decide whether it was satisfied that the trustee’s decision was fair and reasonable in the circumstances. If it was so satisfied, it was obliged to affirm that decision. It was only if the SCT was not so satisfied that other options were required to be considered. Was the decision fair and reasonable? The issue for AFCA is not what decision the AFCA would have made on the material before the trustee, but whether the decision of the trustee was fair and reasonable. AFCA must affirm a decision if it is satisfied that the decision was fair and reasonable in all the circumstances (Corporations Act 2001 s 1055(1), (3)). No criteria are provided for deciding whether a decision or conduct is fair and reasonable, but at common law the following would not appear to be fair and reasonable (¶13-110): • a trustee’s failure to comply with a fund’s governing rules • an insurer’s failure to comply with the terms of a contract

• an RSA provider’s failure to actively exercise its discretion when reaching a decision, eg because only its administrative staff considered an RSA holder’s request rather than the RSA provider genuinely considering it • a superannuation provider failing to consider all relevant evidence when making a statement to the Commissioner of Taxation about a member’s contributions, or • a trustee acting in bad faith, eg capriciously exercising its power. Asking the right question In National Mutual Life v Jevtovic [1997] FCA 359; 217 ALR 316, Sundberg J found that the SCT had not addressed itself correctly to “fair and reasonable” because it had considered whether the complainant satisfied the requirements to be classified as totally and permanently disabled, instead of whether the decision was fair and reasonable. Heerey J in Adkins v Health Employees Superannuation Trust Australia (unreported) followed the analysis in Jevtovic to find that the SCT had misunderstood its task when it posed, as the issue for review, whether the complainant was entitled to be paid a disability benefit because she satisfied the relevant definition. The Federal Court has stressed in recent cases that the question for the SCT in the determination of disability cases was not whether or not the complainant was totally and permanently disabled, but whether the operation of the trustee/insurer decision was fair and reasonable in relation to the complainant in the circumstances. This same rationale would apply for AFCA. Spender J in Cameron v Board of Trustees of the State Public Sector Superannuation Scheme [2003] FCA 63 said that it would be an error for the SCT to first direct itself as to whether the applicant was totally and permanently disabled as a necessary step along the way in concluding whether the trustee’s decision refusing a disability benefit was fair and reasonable. Rather, the correct question for the SCT was whether the decision complained of was fair and reasonable in the circumstances: “It is not for the Tribunal, in my opinion, to ask itself whether the trustee’s decision was the correct or preferable one. Nor is that a necessary enquiry before asking whether the trustee’s decision was a decision which was fair and reasonable in the circumstances.” The Full Federal Court dismissed the complainant’s appeal, upholding the original decision that he was not entitled to a disability benefit under the fund’s rules. The court considered that the correct approach for the SCT was summarised by Allsop J in Retail Employees Superannuation Pty Ltd v Crocker 01 ESL 13: “The Tribunal’s task is not to engage in ascertaining generally the rights of the parties, nor is it to engage in some form of judicial review of the decision of the trustee or insurer. Rather it is to form a view, from the perspective of the trustee or insurer, as to whether the decision of either was (recognising the overriding framework given by the governing rules and policy terms, respectively) unfair or unreasonable.” A similar approach was taken by the Full Federal Court in Edwards in dismissing an appeal by the parents of a deceased member against a SCT award of a death benefit to the de facto spouse of the deceased member. In McAtamney v Superannuation Complaints Tribunal [2016] FCA 1062 the Federal Court found that the SCT made a number of errors in arriving at its decision to treat the applicant’s complaint as withdrawn. The court held that the SCT failed to fulfil its statutory function because it did not ascertain for itself whether there was substance in the applicant’s complaint. Instead, it accepted the view expressed by the trustee that the amount paid to the applicant was correct. The SCT erred by placing the onus on the applicant to establish that the payment was fair and reasonable. The SCT’s decision was unreasonable in two respects. First, on the material available to it there was no evident and intelligible justification for the SCT’s conclusion that there was no substance in the complaint that the payment was unfair and unreasonable. Secondly, the SCT failed to make enquiries into several critical matters concerning the calculation of the amount due to the applicant when those matters could readily be determined. In Carrette v Superannuation Complaints Tribunal [2017] FCA 640, the Federal Court found that the SCT

erred in denying a claim because it failed to engage with critical parts of medical evidence presented in a total and permanent disablement benefit claim. The error resulted in the claim being denied. The matter has been remitted to the SCT for rehearing. In AIA Australia Ltd v Lancaster [2017] FCA 962, the Federal Court found that the SCT erred in calculating the income protection (IP) insurance payable by reference to actual salary at date of disablement rather than the salary which was properly notified to the insurer at the date of disablement. In Sharma v LGSS Pty Ltd [2018] FCA 167, the Federal Court found that eligibility to TPD and salary continuance (SC) cover involved complex questions of law under the Insurance Contracts Act 1984. The Federal Court found that the SCT made a number of legal errors, and remitted the matter to the SCT for a determination in accordance with the law. [SLP ¶80-325, ¶80-660, ¶80-670]

¶13-505 Matters set out in an AFCA determination An AFCA determination is a written assessment that sets out: • the relevant factual information • the relevant issues and AFCA’s analysis of those issues, and • AFCA’s determination as to how the complaint should be resolved. AFCA publishes de-identified determinations (¶13-610).

¶13-510 Notification of determination AFCA must give written reasons for its determination of a superannuation complaint (Corporations Act 2001 s 1055A).

¶13-530 Effect of AFCA’s determination A determination of AFCA comes into operation immediately upon the making of the determination, or on a later date as specified by the Tribunal (Corporations Act 2001 s 1055B(1)-(2)). A decision by AFCA varying a decision of a trustee, insurer, RSA provider or other decision-maker, or made in substitution for such a decision, is taken to be a decision of the trustee, insurer, RSA provider or other decision-maker (as appropriate). AFCA’s decision has effect from the date of effect of the original decision (Corporations Act 2001 s 1055B(3)). A person who is dissatisfied with an AFCA determination may appeal to the Federal Court on a question of law (Corporations Act 2001 s 1057), but such appeal does not affect the operation of the determination or prevent the taking of action to implement it (Corporations Act s 1057A). However, where an appeal is brought to the Federal Court from a determination of AFCA the court may make such orders staying or otherwise affecting the operation or implementation of the determination or part of the determination as the court thinks appropriate (Corporations Act 2001 s 1057A(2)).

¶13-535 Errors in an AFCA determination If the AFCA determination contains an error of law an appeal can be made to the Federal Court (¶13600). However, if the error is a simple arithmetic error or other accidental error, AFCA is able to correct the error. AFCA may correct a determination if it contains: • a clerical error • an error arising from an accidental slip or omission • a material miscalculation of figures, or a material mistake in the description of a person, thing or

matter, or • a defect of form.

¶13-540 Enforcement of determinations Although AFCA has no direct enforcement powers under the Corporations Act 2001 in relation to a determination made by it, severe consequences may arise if a party to a complaint fails to comply with an order, direction or determination of AFCA. If it appears to ASIC that the trustee of a regulated superannuation fund or an ADF has refused or failed to give effect to a determination of AFCA, the Regulator may inform the trustee that it proposes to conduct an investigation of the whole or a part of the affairs of the fund (SISA s 263(1)(c)). Where a s 263(1) notice is issued, ASIC has extensive powers for the purposes of the investigation. These include the power to seize assets, appoint inspectors, enter premises, and require the production of books and the identification of property of the fund (SISA s 264 to 275). The Regulator has similar powers in relation to an RSA provider if it appears that the RSA provider has refused or failed to give effect to a determination of AFCA (RSA Act s 93 to 103). A person who, without reasonable excuse, intentionally or recklessly refuses or fails to comply with a requirement of ASIC under SIS Act or the RSA Act may be liable to a monetary penalty (SISA s 285; RSA Act s 115). If the Regulator is satisfied that a person has failed to comply without reasonable excuse, it may certify the failure to the Federal Court or the Supreme Court of the state or territory. The court may then inquire into the case and order the person to comply with the order (SISA s 289; RSA Act s 119). As a result of an investigation, ASIC may make a claim in civil proceedings on behalf of any person where it is in the public interest to do so (SISA s 298; RSA Act s 128).

¶13-560 Confidentiality of information provided to AFCA There are legislative and AFCA rules which protect the confidentiality of information provided by all parties to AFCA. Information and documentation are shared between AFCA and the parties, and there are limitations on how this information and documents can be used outside AFCA. AFCA operates on a “without prejudice” basis. Information obtained through AFCA cannot be used in any subsequent court proceedings unless required by an appropriate court process (AFCA rule A.11.1). There are a number of exceptions to the confidentiality obligations, however these are mainly limited to resolution of the complaint. Parties must maintain the confidentiality of all information provided to them through the course of a complaint except: a) to the extent reasonably necessary to resolve the complaint b) to the extent reasonably necessary to discuss the complaint with their lawyer, adviser, accountant or insurer c) with the consent of the party who provided the information d) as required or permitted by law e) information that is already publicly available (AFCA rule A.11.2). If information or documentation is provided to a third party such as a lawyer or advisor under the above exception, the same confidentiality requirements apply to this third-party recipient. AFCA may also issue a direction to parties prohibiting or restricting the disclosure of information or documentation (Corporations Act 2001 s 1054BA; AFCA rule A.11.3). There is a statutory penalty of 30 penalty units if a person fails to comply with a confidentiality direction.

¶13-600 Appeals from an AFCA determination

A person can appeal to the Federal Court on a question of law from an AFCA determination (Corporations Act 2001 s 1057). Previous case law relating to the SCT is relevant in determining how Corporations Act 2001 s 1057 applies. In addition, AFCA has provided examples of errors of law. These include: • AFCA did not provide procedural fairness in determining the complaint • the AFCA decision-maker incorrectly applied the governing rules of the superannuation fund • the AFCA decision-maker paid a death benefit to a person on the basis that the person was in an interdependency relationship with the deceased member when there was no evidence to support an interdependency relationship, and • the AFCA decision-maker varied the terms of an insurance contract between a superannuation fund trustee and the insurer. In Sadleir v Motor Trades Association of Australia Superannuation Fund Pty Ltd 10 ESL 19, the Federal Court noted that as an appeal is confined to a question of law, it is necessary to identify precisely that question in the notice of appeal. In this case, the appellant, who was unrepresented, failed in her application to the Federal Court to review the decision of the SCT because she was not able to articulate the questions of law in her notice of appeal. In Kowalski v Superannuation Complaints Tribunal 10 ESL 12, the Federal Court dismissed an appeal against an alleged decision of the SCT because it was not a “determination of the Tribunal” for the purposes of s 46(1). An appeal must be instituted not later than the 28th day after the day on which a copy of the AFCA’s determination (or within such further period as the court allows) and must be in accordance with the rules of the court under the Federal Court of Australia Act 1976 (Corporations Act 2001 s 1057(2)). In Purcell v APS Chemicals Superannuation Pty Ltd 09 ESL 02, the Federal Court granted an extension of time within which to institute an appeal from a determination of the SCT to an applicant for a total and permanent disablement benefit from a superannuation fund. The court considered that the applicant’s mistake in not lodging an appeal in time was innocently made and that she acted promptly to rectify the situation. In the circumstances, the applicant had a satisfactory explanation for her failure to institute an appeal within time. The court does not review the AFCA’s determination as to the merits of the complaint; nor does it substitute its own view of what is “fair and reasonable” for that of AFCA. The court is limited to reviewing the AFCA’s determinations in the context of errors of law — either as to the legalities within the complaint itself, or as to the manner in which AFCA has exercised its powers (Jeffcoat v Queensland Coal and Oil Shale Mining Industry (Superannuation) Ltd 00 ESL 11 per Kiefel J. See also Kristoffersen v SCT 13 ESL 12, [9]–[10] (per Logan J), Campbell v SCT [2017] FCA 1509 (per Logan J) and Full Federal Court in Mercer Superannuation (Australia) Ltd v Billinghurst [2017] FCAFC 201). The institution of an appeal to the Federal Court from a determination of the AFCA does not affect the operation of the determination or prevent the taking of action to implement the determination (Corporations Act 2001 s 1057A). The Federal Court, however, may make such order as it thinks appropriate staying or otherwise affecting the implementation of the determination of AFCA or the decision to which the complaint to AFCA related. After hearing the appeal, the court may make such orders as it thinks appropriate, including an order affirming or setting aside a determination of AFCA or remitting the matter to be determined again by AFCA in accordance with the directions of the court. The court must not make an order awarding costs against a complainant if the complainant does not defend an appeal instituted by another party to the complaint. Case law resulting from SCT determinations and Federal Court appeals is relevant for determining how APRA determinations will be enforced in the Federal Court. As such, the following SCT determinations and subsequent cases are discussed to provide an insight into the approach of the courts for APRA determinations.

The case of Friar v Brown [2015] FCA 135 involved two appeals to the Federal Court from decisions of the SCT in relation to the proportions of death benefit payable to a beneficiary of a deceased member of a superannuation fund. The relevant issue before the court was whether the SCT erred in concluding that the beneficiary did not have an “interdependency relationship” with the deceased. The court dismissed the appeal on the basis that it was reasonably open to the SCT to make that finding. The Federal Court in Southwell v Equity Trustees Limited [2015] FCA 536 upheld part of an appeal brought by Mrs Southwell against the SCT on the question of whether the SCT erred in law by not following procedural fairness in a decision failing to find facts necessary to support its decision to review a decision. The facts were that the trustee’s failure to act on investment switching forms lodged by Mrs Southwell led to losses on her member balance with the fund resulting in the trustee compensating Mrs Southwell an amount for that loss. The Federal Court ordered that the matter be remitted to the SCT to reconsider its decision on the adjustment amount to Mrs Southwell’s account balance. Sherrah v Commonwealth Superannuation Corporation [2015] FCA 698 was an appeal to the Federal Court from a determination made by the SCT concerning a dispute about the interest rate which was applied to a superannuation fund member’s withdrawal benefit. Before submitting his application for a withdrawal benefit, the member was advised that interest on his benefit would be calculated using the earning rate applicable on the day after he lodged his application, or the date upon which his benefit was paid, whichever was the greater. However, this advice proved to be incorrect. In calculating the member’s benefit, the trustee of the fund applied a negative earning rate between the date the applicant applied for his benefit, and the date upon which the benefit was paid to him, reflecting the negative earnings of the member’s investment strategy over the relevant period. Before the dispute reached the SCT, the trustee of the fund made a compromise offer to the member, however, the trustee declined to recalculate the member’s benefit in the way sought by the member (which would have resulted in a significantly higher amount than the amount the trustee offered in compromise) because this was not permitted by the rules of the fund. The SCT concluded that the trustee of the fund had acted fairly and reasonably in compromising the applicant’s complaint by offering a settlement amount, rather than recalculating his benefits in the way sought by the member. The member appealed to the Federal Court, which held that the court had competency to hear the matter on the basis that the member had raised certain questions of law on appeal (dismissing the application made by the trustee to the contrary) and ultimately upholding the decision of the SCT on the basis that no error of law was made in its determination in favour of the trustee. In Williams v IS Industry Fund Pty Ltd [2016] FCA 524, the Federal Court allowed an appeal from a decision of the SCT which had affirmed the fund trustee’s decision to pay the deceased’s death benefit to the deceased’s brother and legal personal representative rather than the deceased’s father (the applicant). The court found that in reaching its decision the SCT had erred in failing to take into account relevant considerations, including whether the applicant and deceased were in an interdependency relationship immediately before the death of the deceased. The decision was set aside and the matter was remitted to the SCT to be heard and determined according to law and the reasons laid down in the judgment. The SCT reheard the case and affirmed the trustee’s decision. The applicant appealed once again to the Federal Court (Williams v IS Industry Fund Pty Ltd [2018] FCA 529) which dismissed the appeal and found that there was no error of law in the SCT deciding that the decision under review was fair and reasonable. In Ievers v Superannuation Complaints Tribunal [2016] FCA 936, the Federal Court upheld a decision of the SCT which had overturned the fund trustee’s decision to pay the deceased’s death benefit to the applicant (who was the deceased’s mother and legal personal representative) rather than the third respondent who contended that because he was a dependant (the deceased’s de facto spouse) he was entitled to be paid the benefit. The applicant argued, among other things, that the SCT did not have the power (jurisdiction) to make a finding that the third respondent was a dependant in relation to the deceased. The court however, found that the SCT did have such jurisdiction in accordance with the powers conferred upon it under the Superannuation (Resolution of Complaints) Act 1993 — this included all the powers, obligations and discretions of the trustee. [SLP ¶80-810, ¶80-820]

¶13-610 Published AFCA Determinations Published AFCA determinations should not be treated as precedents, but do provide an insight into how similar fact situations may be viewed. AFCA publishes determinations on its website on a de-identified basis. To search for published AFCA superannuation determinations, visit www.afca.org.au/what-toexpect/search-published-decisions/ and then search for “superannuation” in product line. Since AFCA commenced receiving superannuation complaints on 1 November 2018 to 30 June 2019, AFCA has published 27 superannuation determinations. Each determination is given a “Case number” and can be identified as a superannuation determination through the heading at the top of the published determination stating “Superannuation Determination”. Many determinations issued by the predecessor SCT scheme relate to death benefit distributions. While death benefit distributions remain a theme in published determinations made by AFCA, the most common issue in published AFCA superannuation determinations revolves around insurance premiums. Common issues One-third of all published superannuation determinations relate to insurance premiums, making it the common issue in published superannuation determinations. There are multiple published superannuation determinations that relate to incorrect fees and costs, which matches with AFCA statistics that fees and costs account for more superannuation complaints than any other issue. Other common issues in published superannuation determinations are death benefit distributions and complaints relating to investment switches. Success rates AFCA has not issued statistics as to how many superannuation complaints have been successful. The number of published determinations (27) is only a small fraction of the number of superannuation complaints received and resolved by AFCA. Of the 27 published determinations, the complainant was successful in five complaints, partially successful in one, and unsuccessful in 21. Most unsuccessful complaints were decided on the basis that the superannuation provider had made a decision that was in accordance with the rules of the fund, and hence the decision was fair and reasonable. A further critical factor in several decisions was the fact that the superannuation provider had communicated with the member, and hence provided the member with the opportunity to take action. Insurance premiums Of the nine published determinations relating to insurance premiums, the complainant was successful in only one case. In case AFCASD 611558, insurance premiums were charged at a different rate depending on the work categorisation applying to the member. However, this had not been clearly communicated by the superannuation provider to the member, and as such the member was not provided the opportunity to demonstrate to the superannuation provider that his categorisation was incorrect and he was a lower risk (and hence a lower premium). AFCA held that the difference in premiums should be refunded to the member. This can be contrasted to other determinations where insurance premiums and the basis of calculations were communicated to the member by the superannuation provider (AFCASD 605506, AFCASD 608938 and AFCASD 610240), and hence these complaints were dismissed. Several other determinations revolved around insurance premiums being calculated by the superannuation provider in accordance with the rules, and hence the complaints were unsuccessful (AFCASD 600807, AFCASD 602827 and AFCASD 605122). Death benefit distributions Most superannuation complaints received by the predecessor SCT scheme related to death benefits, and the decision made by the trustee as to distribution splits between beneficiaries. To date, AFCA has published three death benefit determinations. In two of the three published determinations the complainants were successful. The trustee in AFCASD 608933 decided the complainant was not the spouse of the deceased member (a FIFO worker) on the basis of separate residences and bank accounts. AFCA found that the complainant was a spouse. The AFCA decision was based on the fact that the deceased member stayed with the

complainant when in same city and provided financial assistance to the complainant and her children. AFCA found a spousal relationship existed and the complainant was entitled a portion of the death benefit. In AFCASD 606297, the deceased was living with his father at the time of his death, and the superannuation provider allocated 100% of the death benefit to the father. AFCA found that the relationship was purely one of father/son and not an interdependence relationship, and hence the mother was entitled to a portion of the death benefit. In AFCASD 601401 the fund trustee made a decision to distribute the entirety of a death benefit to the spouse on the basis that the spouse takes precedence over non-financially dependent children. The complainant was the daughter of the deceased, and wanted the benefit paid to herself and her two siblings. AFCA found that the decision of the trustee was fair and reasonable, and hence affirmed the decision. Fees The most common issue for a superannuation complaint is fees. There are three published superannuation determinations that relate to fees. The complainant was successful in one of the three cases. In AFCASD 602974, the complainant had requested a transfer from one fund to another so that higher earnings and less fees would be incurred. However, the transfer had not occurred in accordance with directions. AFCA held that the complainant’s intent was clear and they were entitled to a refund of the fees. In both AFCASD 601200 and AFCASD 621544, the decisions of the trustee and fees incurred were in accordance with the rules, and hence the requests for a refund were denied. No financial loss If the decision of the superannuation provider is not fair and reasonable, AFCA is able to issue a determination that compensates the member for the loss that has been occasioned. However, there must be a loss to the member for compensation to be awarded (¶13-117). In AFCASD 610019 the trustee acknowledged that it did not provide the member with an adequate level of service. The superannuation provider apologised to the member but refused to pay compensation as there was no financial loss. AFCA found against the complainant on the basis that there was no financial loss, and therefore compensation was not payable. Other issues A range of issues were considered in other published superannuation determinations including income protection benefits, poor and incorrect advice from the superannuation provider, investment switches, requests for early release, incorrect transfers to the ATO, and tax deductions withheld from superannuation payments. Each case was decided on the basis of whether the decision of the superannuation provider was fair and reasonable.

14 SUPERANNUATION AND FAMILY LAW INTRODUCTION TO SPLITTING SUPERANNUATION INTERESTS When can family law courts deal with superannuation?

¶14-000

Glossary

¶14-005

What is an eligible superannuation plan?

¶14-010

Overseas superannuation funds

¶14-015

ADJUSTMENT OF PROPERTY INTERESTS UNDER THE FAMILYLAW ACT 1975 Property or financial resource?

¶14-020

Process for determining an alteration of property interests

¶14-030

Discretion and comparable cases

¶14-035

Global v two pool approach

¶14-045

Must the relationship have broken down?

¶14-050

Was there a de facto relationship?

¶14-080

De facto relationship — jurisdictional requirements

¶14-085

Documenting the settlement

¶14-090

Setting aside property settlement orders or financial agreements

¶14-095

Overview of the superannuation splitting scheme

¶14-100

Payment splitting

¶14-110

Drafting superannuation-splitting orders

¶14-120

Superannuation agreements

¶14-130

Flagging

¶14-200

Termination of payment flag

¶14-210

Splittable, unsplittable, not splittable and unflaggable payments and interests

¶14-220

Nature, form and characteristics of superannuation

¶14-240

Valuation of superannuation

¶14-250

Discrepancy between fund valuation and family law valuation

¶14-255

Valuing and splitting pensions

¶14-260

Self-managed superannuation funds

¶14-270

APPLYING S 79 (OR S 90SM) TO SUPERANNUATION Introduction

¶14-300

Assessment of contributions

¶14-310

Weight given to contributions before cohabitation and after separation

¶14-315

Section 75(2) or s 90SF(3) factors

¶14-320

Will a splitting order be made and, if so, what order?

¶14-330

Mechanisms for payment splitting

¶14-500

Whenever a splittable payment becomes payable

¶14-520

PROCEDURES Trustee must provide information

¶14-600

Fees payable to trustee

¶14-620

Non-member spouse may waive rights

¶14-630

Preservation of benefits

¶14-640

Death of member or non-member spouse

¶14-650

Protection for trustees

¶14-660

Trustee to be accorded procedural fairness

¶14-670

FINANCIAL AGREEMENTS (INCLUDING SUPERANNUATIONAGREEMENTS) Requirements for financial agreements (including a superannuation agreement) ¶14-700 Provisions for superannuation not yet in existence

¶14-710

Court may set agreement aside

¶14-720

Separation declarations

¶14-730

When to use a superannuation agreement?

¶14-740

Proposed amendments to legislative provisions with respect to financial agreements

¶14-750

Enforcement by court order

¶14-800

TAXATION CONSEQUENCES OF PAYMENT SPLITS Taxation consequences of payment splits

¶14-900

Superannuation lump sums

¶14-920

Superannuation income streams and annuities

¶14-940

Capital gains tax — exemptions

¶14-960

Capital gains tax — same asset roll-overs

¶14-980

Introduction to Splitting Superannuation Interests ¶14-000 When can family law courts deal with superannuation? The family law courts throughout Australia (except with respect to de facto relationships in the Family Court of Western Australia) have the power to deal with the superannuation of separated couples by valuing it in accordance with the Family Law (Superannuation) Regulations 2001 (FLS Regulations), splitting payments from a superannuation interest and flagging a superannuation interest. This affects the following couples: • married couples who are separating • couples in de facto relationships (other than those in Western Australia) who separated after 1 March 2009 (or 1 July 2010 in South Australia)

• couples entering de facto relationships, or getting married or who are in one of those relationships or at the end of one, who want to finalise their financial relationship using a financial agreement (including a superannuation agreement). The Full Court of the Family Court in Hauff & Hauff (1986) FLC ¶91-747 summarised the importance of superannuation to the parties in property settlement proceedings under the Family Law Act 1975 (FLA): “The relevance of superannuation in most proceedings is twofold. In the majority of cases it represents a form of saving by the parties during the course of their marriage to which each of them is treated as having made either a direct or indirect contribution … The second aspect in most cases is that it represents a future financial resource and a future protection against the uncertainties of life and a nest-egg for the retirement of both parties (and not merely the contributor) if their marriage continued to that point.” A comprehensive discussion of the FLA requirements and the case law affecting superannuation interests and property settlements generally is outside the scope of this Guide. Readers are advised to use this chapter in conjunction with other Wolters Kluwer publications which provide detailed treatment in these areas, such as the Australian Family Law and Practice and Australian Family Law Cases.

¶14-005 Glossary Some of the important terms and definitions defined in the relevant legislation are set out below. Further definitions are in Family Law Act 1975 (Cth) (FLA) s 90XD and Family Law (Superannuation) Regulations 2001 (FLS Regulations) reg 3. Note that FLA Pt VIIIB (s 90XA to s 90XZH) which deals with superannuation interests was renumbered as part of amendments introduced by the Civil Law and Justice Legislation Amendment Act 2018, with effect from 23 November 2018. Care should be taken when referring to cases or commentary written before that date. Eligible superannuation plan is defined in FLA s 90XD as any of: • a superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) • an approved deposit fund within the meaning of the SIS Act • a retirement savings account (RSA), or • an account within the meaning of the Small Superannuation Accounts Act 1995 (Cth). See also ¶14-010. Growth phase is defined in FLS Regulations reg 6 and 7. The simplest and most common explanation is that either the member has not satisfied a condition of release or a member has satisfied a condition of release but no benefit has been paid and no action has been taken by the member to be paid a benefit. Operative time determines when a trustee must recognise the non-member’s interest. The operative time is defined in FLA s 90XI in relation to a payment split under a superannuation agreement or flag lifting agreement, in FLA s 90XK in relation to a payment flag under a superannuation agreement, or is the time specified in the order in relation to a payment split under a court order. The base amount is adjusted with interest calculated at a rate set by the Australian Government Actuary calculated to the date of payment. Payment phase is defined in reg 8 of the FLS Regulations as an interest which is not in the growth phase. Payment split refers to the court’s power to split superannuation. The court can only split the payment of an interest in the payment phase. The court cannot split an interest in the fund although this will often occur due to the operation of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations), the FLS Regulations, and the governing rules of the fund. A payment split is defined as either:

• the application of s 90XJ in relation to a splittable payment, or • the application of a splitting order in relation to a splittable payment. Percentage-only interest is a prescribed superannuation interest under reg 9A of the FLS Regulations. Most judges’ pension and parliamentary schemes are prescribed. Relevant date is the date used in the FLS Regulations at which the value of a superannuation interest subject to a payment split (prior to creating a new interest for the non-member) is determined. In relation to a payment split under a superannuation agreement or a flag lifting agreement, the “relevant date” means: • the date agreed on for the purpose by the parties to the agreement • if no date is agreed on by the parties to the agreement and the agreement is dated, the date shown on the agreement, or • if no date is agreed on by the parties to the agreement and the agreement is not dated, the date when a copy of the agreement is served on the trustee of the relevant fund. In relation to a payment split under a splitting order, the date of the split is set out in the court order. Reversionary interest is defined in FLA s 90XF. A person’s interest in an eligible superannuation plan is a reversionary interest at any time while the person’s entitlement to benefits in respect of the interest is conditional on the death of another person who is still living. Splittable payment is defined in FLA s 90XE as a payment in respect of a superannuation interest of a member (see ¶14-220). Superannuation interest means an interest that a person has as a member of an eligible superannuation plan, but does not include a reversionary interest. A “member spouse”, in relation to a superannuation interest, means the spouse who has the superannuation interest, and a “non-member” spouse, in relation to a superannuation interest, means the spouse who is not the member spouse in relation to that interest. Unflaggable interest is a superannuation interest of a member that is in the payment phase (FLS Regulations reg 10A; ¶14-220). Unsplittable interest means a superannuation interest of a member with a withdrawal value under $5,000 (FLS Regulations reg 11; ¶14-220).

¶14-010 What is an eligible superannuation plan? A superannuation interest must be an eligible superannuation plan to be able to be dealt with under Pt VIIIB of the Family Law Act 1975 (Cth) (FLA). An eligible superannuation plan is defined in s 90XD of the FLA as any of: • a superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) • an approved deposit fund within the meaning of the SIS Act • a retirement savings account (RSA), or • an account within the meaning of the Small Superannuation Accounts Act 1995 (Cth). The fund must be an Australian fund to be covered by the superannuation splitting scheme under the FLA.

¶14-015 Overseas superannuation funds

Overseas superannuation funds are not covered by the Family Law Act 1975 (Cth) (FLA) superannuation splitting scheme. An example of an overseas fund arose in Forster & Forster [2015] FamCA 57. The husband was retired and received a pension of US$3,733 per month from a United States government agency. The wife’s adversarial expert valued the pension by giving it a capital value using the valuation factors approved under the Family Law (Superannuation) (Methods and Factors for Valuing Particular Superannuation interests) Amendment Approval 2003. Justice Benjamin rejected the valuation by the expert as he was not an expert in the law of the relevant United States government agency pension. Justice Benjamin treated the pension income as a valuable financial resource of the husband accumulated over about 28 years. The husband was married to the wife for about 10 years, being about 36% of the period of his employment. The husband gave evidence that the wife had rights under United States law to seek a portion of the pension income. The wife’s evidence was that she did not intend to claim any part of any entitlement that may exist. Justice Benjamin accepted the evidence and said that if the wife acted to the contrary to that evidence, she was likely to impeach the orders he made. Justice Benjamin divided the property (which did not include the United States pension) equally, which meant each party received about $260,000. Another example of overseas superannuation funds arose in Preiss & Preiss [2017] FamCA 12. Neither party sought an alteration of the Australian or Israeli superannuation interests. The parties agreed that their contributions to the superannuation funds were equal. The trial judge said that there were grounds for an adjustment of superannuation under FLA s 75(2), but taking into account that the parties were a long way from retirement and the absence of evidence about the substance and form of the various superannuation interests, the judge was satisfied that no adjustment of superannuation interests should be made.

Adjustment of Property Interests Under the Family Law Act 1975 ¶14-020 Property or financial resource? Prior to the superannuation splitting scheme, the Family Law Courts’ ability to deal with superannuation was restricted because superannuation was usually not considered to be “property” but a “financial resource” (Crapp & Crapp (1979) FLC ¶90-615 at p 78,181). Under the Family Law Act 1975 (Cth) (FLA) s 79(1)(a), the court has the power: “In property settlement proceedings, the Court may make such order as it considers appropriate … in the case of proceedings with respect to the property of the parties to the marriage of either of them — altering the interests of the parties to the marriage in other property …” The process adopted by the courts in altering the interests of the parties in property is discussed at ¶14030. The term “property” is defined widely in s 4(1) as: (a) in relation to the parties to a marriage or either of them — means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion, or (b) in relation to the parties to a de facto relationship or either of them — means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion. It covers: • property acquired by either or both party prior to the start of the de facto relationship or the date of the marriage, and • property acquired after separation.

Under Pt VIIIB of the FLA, superannuation is treated as “property” for the purposes of para (ca) of the definition of “matrimonial cause” in s 4 and para (c) of the definition of “de facto financial cause” in FLA s 4 (FLA s 90XC). However, the definition of “property” in s 4(1) was not changed. Hickey The first major reported case on superannuation splitting was Hickey & Hickey (2003) FLC ¶93-143; [2003] FamCA 395. The Full Court held (at pp 78,392–78,393): “… the effect of s 90MC [now s 90XC] is that in proceedings in relation to property under s 79 the superannuation interest is to be treated as property irrespective of whether or not a splitting or flagging order is sought or proposed to be made.” Coghlan The five-member Full Court in Coghlan & Coghlan (2005) FLC ¶93-220; [2005] FamCA 429 refining Hickey said as to the interpretation of s 90MC (now s 90XC) (at p 79,642): “… superannuation interests are another species of asset which is different from property as defined in s 4(1), and in relation to which orders also can be made in proceedings under s 79.” The majority considered that s 90MC (now s 90XC) did no more than confer jurisdiction on the courts to make orders in relation to superannuation. Section 90MC (now s 90XC) did not mean that superannuation was “treated” exactly the same as “property” as defined in s 4(1). The court did not explain precisely the consequences of superannuation being “another species of asset” and this phrase has not been widely adopted since. The Full Court majority in Coghlan said that the superannuation can be included in one pool: • by agreement • if the court is satisfied that the interest is property within the definition in s 4(1) • if the interest is not within that definition, but of relatively small value in terms of the other assets, or • there are features about the interest which lead the court to conclude that this is an appropriate approach. The Full Court majority said that the preferred approach was to deal with superannuation separately from property as defined in s 4(1). This approach meant that the direct and indirect contributions by either party to superannuation were more likely to be given proper recognition, and “the real nature” of the superannuation interests taken into account. It was relevant to “the real nature” of a superannuation interest, that an interest “may be no more than a present or future periodic sum, or perhaps a future lump sum, the value of which at date of receipt is unknown” (at p 80,203). The majority considered that all matters in s 79(4)(a) to (c), including the factors in s 75(2), had to be considered in relation to a superannuation interest, regardless of whether or not it was being split. The majority concluded there was insufficient evidence before it to enable it to re-exercise its discretion, and remitted the case for a rehearing in accordance with the principles it had enunciated. Warnick and O’Ryan JJ gave separate minority judgments. They disagreed with the majority’s interpretation of s 90MC (now s 90XC) and considered that the Full Court was bound by Hickey. They both said that s 79(4)(a) to (c) did not apply to a superannuation interest if it was not being split. Superannuation as property Prior to the superannuation splitting scheme, superannuation entitlements were usually not property with a defined or ascertainable value, rather a financial resource which was merely a factor to be taken into account in determining how the parties’ interests in the property should be altered. However, the status of the entitlement depended on a consideration of the relevant statutory or private instrument creating the fund. In Wunderwald & Wunderwald (1992) FLC ¶92-315; [1992] FamCA 1, the Full Court of the Family Court regarded the superannuation fund of the husband and the wife as property (rather than merely a financial

resource) because: (a) the immediate entitlements of the beneficiaries could be calculated (b) there was no evidence that either party would suffer unfair disadvantage if the fund was realised, and (c) the fund was the creature of the parties. In Todd & Todd [2014] FamCA 101, Berman J referred to Wunderwald and, as both parties had met a condition of release, he included superannuation in the same pool as non-superannuation. Other situations where a superannuation entitlement was found to be property include (although the extent to which they still apply since the commencement of Pt VIIIB is unclear): • where moneys were paid from a superannuation fund to an executor upon the death of the husband during the proceedings (Evans and the Public Trustee for the State of Western Australia as Personal Representative (1991) FLC ¶92-223), or • where two self-managed superannuation funds were conducted by a husband and wife (Stay & Stay (1997) FLC ¶92-751). The special nature of superannuation was reinforced in Mackah & Mackah [2017] FamCAFC 62. The Full Court of the Family Court held that the husband could not be ordered to access his superannuation fund to meet an obligation to pay a sum of money to the wife which he had been ordered to pay as part of property settlement orders. A superannuation splitting order had been made as part of the property settlement orders. The $350,000 outstanding to the wife was not part of the superannuation split. The Full Court held that it was bound by reg 6.33 of the Superannuation Industry (Supervision) Regulations 1994. This provides that “a member’s benefits in a regulated superannuation fund must not be cashed in favour of a person other than the member or the member’s legal personal representative”.

¶14-030 Process for determining an alteration of property interests When determining a property settlement, a court must follow the process set out in the Family Law Act 1975 (Cth) (FLA) s 79. The court is required to “make such order as it considers appropriate … altering the interests of the parties to the marriage in the property” (s 79(1)). However, the court cannot make an order under s 79 unless “it is satisfied that, in all the circumstances, it is just and equitable and make the order”. Similar requirements apply to de facto relationships and are set out in s 90SM. Section 79(4) (s 90SM(4) for de facto couples) sets out the factors a court “shall take into account in considering what order (if any) should be made”. The court is also required to make such orders as will finally determine the financial relationships between the parties and avoid further proceedings between them (s 81; 90ST for de facto relationships). Prior to Stanford v Stanford (2012) FLC ¶93-518; [2012] HCA 52, the courts used a “four-step approach” (eg Hickey & Hickey & Attorney-General for the Commonwealth (2003) FLC ¶93-143; [2003] FamCA 395). Following Stanford, the four-step approach is not mandatory. The Family Court held in Watson & Ling (2013) FLC ¶93-527; [2013] FamCA 57 that the High Court’s decision in Stanford and the principles stated with respect to s 79 also apply to proceedings under s 90SM. The High Court in Stanford confirmed that the proper approach under s 79 is for the court to alter the legal and equitable interests of the parties in property rather than dividing the property itself. This does not affect how the Family Law Courts deal with superannuation. In Stanford, in considering the operation of s 79, the High Court enunciated a general approach to the determination of a property settlement application that appeared to differ from the seemingly wellestablished four-step process. The majority said (at para 37–38, 40): “First, it is necessary to begin consideration of whether it is just and equitable to make a property settlement order by identifying, according to ordinary common law and equitable principles, the

existing legal and equitable interests of the parties in the property. Second, although s 79 confers a broad power on a court exercising jurisdiction under the Act, to make a property settlement order, it is not a power that is to be exercised according to an unguided judicial discretion … Third, whether making a property settlement order is ‘just and equitable’ is not to be answered by beginning from the assumption that one or other party has the right to have the property of the parties divided between them or has the right to an interest in marital property which is fixed by reference to the various matters (including financial and other contributions) set out in s 79(4). The power to make a property settlement order must be exercised ‘in accordance with legal principles, including the principles which the Act itself lays down’. To conclude that making an order is ‘just and equitable’ only because of and by reference to various matters in s 79(4), without a separate consideration of s 79(2), would be to conflate the statutory requirements and ignore the principles laid down by the Act.” These passages have been variously interpreted by the courts. Chief Justice Bryant and Thackray J in the Full Court in Bevan & Bevan (2014) FLC ¶93-572; [2014] FamCA 19 said (at para 84–85): “Just as the expression ‘just and equitable’ does not admit of exhaustive definition, it is not possible to catalogue the ‘range of potentially competing considerations’ that may be taken into account in determining whether it is just and equitable to make an order altering property interests. However, in our view, it would be a fundamental misunderstanding to read Stanford as suggesting that the matters referred to in s 79(4) should be ignored in coming to that decision. Indeed, such a reading would ignore the plain words of s 79(4), which make clear that in considering ‘what order (if any)’ to make, the court must take into account the matters referred to in that subsection (emphasis added). This requirement to consider the s 79(4) matters in determining whether it is just and equitable to make any order provides fertile ground for potential conflation of the two different issues, which the High Court has warned against. However, this potential will not be realised in many cases because of what the plurality said at [42] about the ‘just and equitable’ requirement being ‘readily satisfied’. But there will be a range of cases, of which arguably the present is a good example, where determining whether it is just and equitable to make any order altering property interests will not be so clear cut and will therefore require not only separate but very careful deliberation.” Chief Justice Bryant and Thackray J said (at para 19) that they had no issue with the four-step process being “a convenient way to structure both submissions and judgments” provided the fundamental propositions articulated in Stanford were not obscured. However, since Stanford, the Family Law Courts have generally not adopted the four-step approach which looked at whether orders were just and equitable at the end of the process rather than the beginning. Different approaches have been taken by the courts since Stanford, but the matters which are looked at are broadly: 1. Identify the legal and equitable interests of the parties 2. Value the property in which the parties have legal and equitable interests 3. Assess the contributions of the parties under s 79(4)(a) to (c): – Financial contributions to the property of the parties both direct and indirect – Non-financial contributions to the property of the parties both direct and indirect – Contributions to the welfare of the family (a “family” does not require that there be children of the relationship or marriage) – Financial or non-financial contributions to the property of the parties by others on their behalf. Section 90SM(4)(a) to (c) is similarly worded for de facto couples. 4. Look at and assess other relevant factors in s 79(4)(d) to (g). There is a list of factors under s 75(2), some of which are also in s 79(4)(d) to (g). These are listed above and include the age and state of

health of each of the parties, the income, property and financial resources of each of the parties, the care or control of a child of the marriage under the age of 18 years, the eligibility for superannuation and a standard of living that is reasonable in the circumstances. Sections 90SM(4)(d) to (g) and 90SF(3) are similarly worded for de facto couples. 5. Is it just and equitable under s 79(2) or appropriate under s 79(1) to make an order which alters the interests of the parties in the property? Sections 90SM(1) and 90SM(3) are similarly worded for de facto couples. The legislation itself sets out the process in more detail. In considering the order to be made (if any) the court is required to take into account the matters listed in s 79(4) (or the s 90SM(4) equivalent) which are: “(a) the financial contribution made directly or indirectly by or on behalf of a party to the marriage or a child of the marriage to the acquisition, conservation or improvement of any of the property of the parties to the marriage or either of them, or otherwise in relation to any of that last-mentioned property, whether or not that last-mentioned property has, since the making of the contribution, ceased to be the property of the parties to the marriage or either of them; and (b) the contribution (other than a financial contribution) made directly or indirectly by or on behalf of a party to the marriage or a child of the marriage to the acquisition, conservation or improvement of any of the property of the parties to the marriage or either of them, or otherwise in relation to any of that last-mentioned property, whether or not that last-mentioned property has, since the making of the contribution, ceased to be the property of the parties to the marriage or either of them; and (c) the contribution made by a party to the marriage to the welfare of the family constituted by the parties to the marriage and any children of the marriage, including any contribution made in the capacity of homemaker or parent; and (d) the effect of any proposed order upon the earning capacity of either party to the marriage; and (e) the matters referred to in subsection 75(2) so far as they are relevant; and (f) any other order made under this Act affecting a party to the marriage or a child of the marriage; and (g) any child support under the Child Support (Assessment) Act 1989 that a party to the marriage has provided, is to provide, or might be liable to provide in the future, for a child of the marriage.” The matters set out in s 75(2) which are to be considered, to the extent that they are relevant, due to s 79(4)(e) (similar factors apply to de facto couples and are set out in FLA s 90SF(3)) are: “(a) the age and state of health of each of the parties; and (b) the income, property and financial resources of each of the parties and the physical and mental capacity of each of them for appropriate gainful employment; and (c) whether either party has the care or control of a child of the marriage who has not attained the age of 18 years; and (d) commitments of each of the parties that are necessary to enable the party to support: (i) himself or herself; and (ii) a child or another person that the party has a duty to maintain; and (e) the responsibilities of either party to support any other person; and (f) subject to subsection (3), the eligibility of either party for a pension, allowance or benefit under:

(i) any law of the Commonwealth, of a State or Territory or of another country; or (ii) any superannuation fund or scheme, whether the fund or scheme was established, or operates, within or outside Australia; any superannuation fund or scheme, whether the fund or (g) where the parties have separated or divorced, a standard of living that in all the circumstances is reasonable; and (h) the extent to which the payment of maintenance to the party whose maintenance is under consideration would increase the earning capacity of that party by enabling that party to undertake a course of education or training or to establish himself or herself in a business or otherwise to obtain an adequate income; and (ha) the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt, so far as that effect is relevant; and (j) the extent to which the party whose maintenance is under consideration has contributed to the income, earning capacity, property and financial resources of the other party; and (k) the duration of the marriage and the extent to which it has affected the earning capacity of the party whose maintenance is under consideration; and (l) the need to protect a party who wishes to continue that party’s role as a parent; and (m) if either party is cohabiting with another person — the financial circumstances relating to the cohabitation; and (n) the terms of any order made or proposed to be made under section 79 in relation to: (i) the property of the parties; or (ii) vested bankruptcy property in relation to a bankrupt party; and (naa) the terms of any order or declaration made, or proposed to be made, under Part VIIIAB in relation to: (i) a party to the marriage; or (ii) a person who is a party to a de facto relationship with a party to the marriage; or (iii) the property of a person covered by subparagraph (i) and of a person covered by subparagraph (ii), or of either of them; or (iv) vested bankruptcy property in relation to a person covered by subparagraph (i) or (ii); and (na) any child support under the Child Support (Assessment) Act 1989 that a party to the marriage has provided, is to provide, or might be liable to provide in the future, for a child of the marriage; and (o) any fact or circumstance which, in the opinion of the court, the justice of the case requires to be taken into account; and (p) the terms of any financial agreement that is binding on the parties to the marriage; and (q) the terms of any Part VIIIAB financial agreement that is binding on a party to the marriage.” Under the Stanford principle, the Family Law Courts must determine whether it is just and equitable to make an order. However, the extent to which the courts must consider that the terms of the order itself

are just and equitable is unclear. Justices Strickland and Murphy in the Full Court of the Family Court held that the order was required to be just and equitable in Chapman & Chapman [2014] FamCAFC 91; (2014) FLC ¶93-592. The formulation of all three judges was similar to the so-called “fourth step” under Hickey. Chief Justice Bryant said (at para 40): “In addition, and important to the arguments in this appeal, a trial judge is obliged to ‘… consider the effect of the findings as to contribution on the respective positions of the parties, before proceeding to determine whether any adjustment was warranted pursuant to section 75(2)’ (Wills & Wills [2007] FamCA 819, at [50]). In that respect, the nature and form of the property or superannuation interests comprising a party’s entitlement, and not just the dollar value of that entitlements are clearly central to achieving justice and equity as s 79 requires.” Earlier, Bryant CJ said in relation to interpreting the Full Court’s interpretation of Stanford in Bevan & Bevan [2013] FamCAFC 116; (2013) FLC ¶93-545 (at para 9): “that it is not a requirement to take account of the matters in s 79(4) when considering the question of whether it is just and equitable to make any order under s 79(2). But as long as they are seen as separate and not conflated, the factors in s 79(4) have the potential to inform the decision under s 79(2), along with all other relevant considerations.” Justices Strickland and Murphy expressly said that if the majority in Bevan “intended that a consideration of the s 79(4) matters is mandatory in answering the s 79(2) question, we respectfully disagree”. The asset pool in Chapman after a 20-year marriage was $3.67m of which the superannuation was about $2.1m. The husband’s interest in a self-managed superannuation fund, of which he was the only beneficiary, was about $1.99m. He was entitled to a tax-free weekly pension which was, at the time of trial, about $3,000 per week. The wife had superannuation of about $100,000. In addition to the $3.67m to be divided between the parties, each of the parties had earlier received a payment from the net proceeds of sale of the former matrimonial home of $1m each. The trial judge declined to make an order splitting the husband’s superannuation and divided the available cash as to 86% to the wife (about $1.4m) and 14% (about $230,000) to the husband. The Full Court considered that the husband’s tax-free pension emanating from a superannuation fund, derived in the parties’ 20-year marriage was “an extremely important factor”. This was particularly the case when the wife was in her 50s and had a limited capacity for remunerative employment and would need to predominantly meet her future needs from income derived from property she received in the property settlement. The Full Court indicated that at least one of the three judges may have given this factor more weight than the trial judge. The case was “close to the point at which an appellate court would interfere with a trial judge’s discretion” but the trial judge’s decision was ultimately wrong. In a number of cases the Full Court of the Family Court has considered whether or not the court is required to expressly address the s 79(2) requirement that it be “just and equitable” to make an order or that the court’s satisfaction with the requirement can be implied. The Full Court in Bevan & Bevan [2013] FamCAFC 116 indicated that there needed to be a finding or determination as to s 79(2) and that was a precondition, but it also suggested that satisfaction with s 79(2) could be implied. The Full Court in Chapman & Chapman [2014] FamCAFC 91 agreed. In Hearne & Hearne [2015] FamCAFC 178, the Full Court dismissed an appeal against an absence of a finding that s 79(2) had been expressly addressed. However, the trial judge expressly considered justice and equity in an entirely different context from the s 79(2) requirements set out in Stanford as the former “fourth step” discussed above. The Full Court concluded that the s 79(2) requirement had been met by implication. The High Court majority in Stanford was clear that s 79(2) required “separate consideration” from the rest of s 79 and was a “separate enquiry” from s 79(4). The Full Court of the Family Court has not required that s 79(2) be addressed either as a necessary express and separate requirement or a threshold issue. In Whent & Marbrand [2018] FamCAFC 95, the Full Court of the Family Court upheld the trial judge’s finding that it was not just and equitable to alter the parties’ interests in property to make a property adjustment in favour of the husband. The parties lived together for 4½ years. The relationship was characterised by financial dichotomy and independence. The wife bought a property, but it was not intended to be a joint asset, and the husband

did not contribute to its purchase, the mortgage or its renovation. After separation, the husband received an insurance payment of $1.2m as a result of a chronic and potentially disabling illness. The funds were not shared with the wife and were dissipated by the husband within 18 months of him receiving them. A commercial enterprise entered into by the parties was found to be a commercial agreement and not a joint matrimonial endeavour. When the husband wanted to withdraw from the investment, the wife bought the husband out. Although the husband had no money and no property, the Full Court upheld the finding that it was not just and equitable for there to be a property adjustment. The parties had operated their finances separately. The husband had been given a “lifeline” of $1.2m. The husband had chosen to spend that money without reference to the wife, and in a manner which was inconsistent with it being intended to provide him with financial support for the rest of his life. He was unable to show that his expenditure was reasonable.

¶14-035 Discretion and comparable cases The Family Law Courts have a wide discretion in determining property settlements. This can make it difficult to predict outcomes. In cases like Fields & Smith (2015) FLC ¶93-638; [2015] FamCAFC 57, the Full Court seemed to confirm that earlier cases could not be relied on as a guide to decision-making. Chief Justice Bryant and Ainslie-Wallace J said, in relation to the use by the trial judge of a table of comparative cases prepared by one of the counsel: “The problem with the table is that it gives no indication of the relevant facts in the particular cases … With all due respect to his Honour, the table can only form the glibbest of comparisons, and although it may be a seductive tool, it cannot illuminate the valuing and weighing of contributions in this particular case and carries with it the danger, if relied upon, of detracting from the individual requirement to make orders that are just and equitable in an individual case.” Chief Justice Bryant and Ainslie-Wallace J considered that the apparent reliance on the table by the trial judge may have led him into error and acted as a fetter to the exercise of his discretion. The third member of the bench, May J, also allowed the appeal. In her judgment she did not refer to the offending table, but was critical of the trial judge for ignoring the wife’s post-separation contributions. However, there is considerable authority that the Family Law Courts can look at previous cases, provided the earlier cases are not used to fetter the court’s discretion. In Norbis v Norbis (1986) FLC ¶91-712; [1986] HCA 17, Mason & Deane JJ in the High Court said (at 75,174): “With all respect to those who think differently, we believe that the sound development of the law, in this area as in others, is served best by following the tradition of the common law. The genius of the common law is to be found in its case-by-case approach. The decision and reasoning of one case contributes its wisdom to the accumulated wisdom of past cases. The authoritative guidance available to aid in the resolution of the next case lies in that accumulated wisdom. It does not lie in the abstract formulation of principles or guidelines designed to constrain judicial discretion within a predetermined framework. There is no reason to think that the traditional approach, when applied in the family law area, leads to arbitrary and capricious decision-making or that it leads to longer and more complex trials.” The reference to “arbitrary and capricious decision-making” in Norbis was echoed by the High Court in Stanford & Stanford [2012] HCA 52 when it referred to the risk of “palm tree justice” and said that the court has a wide discretion, but that it must be exercised in accordance with legal principles laid down in the Family Law Act 1975 (Cth) (FLA). In Wallis & Manning (2017) FLC ¶93-759; [2017] FamCAFC 14, although not conceding that Fields & Smith dictated that comparable cases could not be relied upon, the Full Court of the Family Court also relied on Norbis and said: “While recognising the fact that no two cases are precisely the same, we are of the view that comparable cases can, and perhaps should far more often, be used so as to inform, relevantly, the assessment of contributions within s 79 ….

The word ‘comparable’ is used advisedly. The search is not for ‘some sort of tariff let alone an appropriate upper and lower end of the range of orders which may be made’. Nor is it a search for the ‘right’ or ‘correct’ result: the very wide discretion inherent in s 79 is antithetical to both. The search is for comparability — for ‘what has been done in other (more or less) comparable cases’ — with consistency as its aim.” The Full Court analysed a number of cases and compared factors such as the length of the relationship, and the nature, form and characteristics of the contributions made by the parties, including the timing of contributions. The Full Court said that the table in Fields & Smith did not do this. The table summarised cases by setting out matters such as the length of the relationship, the size of the pool and the number of children post-trial; summarised contributions in single words such as “modest”, “some”, “minor”, “negligible” and “significant”; and gave outcomes in percentage and dollar terms. The use of “comparable cases” will hopefully bring more predictability to family law property settlements and make it easier for lawyers to give advice to parties.

¶14-045 Global v two pool approach Generally, the Family Law Courts adopt a global approach to determining the property entitlements of the parties. This means that the contributions made by each party to the total assets are assessed and weighted as a whole, usually in percentage terms. Similarly, an overall weighting is applied to all of the property upon a consideration of the factors under s 75(2) Family Law Act 1975 (Cth) (FLA). The High Court in Norbis v Norbis (1986) FLC ¶91-712; [1986] HCA 17 held that an asset-by-asset approach was also possible, although not usually appropriate, in marriages of long duration. Such an approach is commonly used in very short relationships without children. It may also be appropriate where, for example, one party received an inheritance late in the marriage. The contributions by the respective parties to the inheritance might be assessed as 100% by the beneficiary of the inheritance and none by the other party, whereas the contributions to the non-inherited property might be assessed as say 50%:50%. Different weights could be given to the inherited and non-inherited property with respect to s 75(2) factors, particularly if the inherited property was large relative to the non-inherited property. This approach was adopted by the Full Court of the Family Court in Coghlan & Coghlan (2005) FLC ¶93220; [2005] FamCA 429. The Full Court said that a two pool approach was often justified, but a one pool approach could also be used. The circumstances in which a one pool approach might be justified are set out at ¶14-020. In Scrymegour & Scrymegour [2014] FamCAFC 130, the Full Court of the Family Court upheld an appeal where the parties agreed to adopt a two pool approach and the trial judge assured the parties that she would adopt that approach. However, the trial judge adopted a one pool approach and gave no reasons for doing so. By adopting a single pool approach, the trial judge: • failed to give any consideration to the husband’s post-separation contributions to his superannuation interest which increased by about $246,000 in the two years between separation and the time of the trial, and • made an order which resulted in the husband receiving no non-superannuation assets, having to liquidate every asset he owned and he would still be left with debt of over $27,000 to satisfy the wife’s entitlements. This was not an outcome which was either just or equitable. In Danvers & Danvers [2017] FamCAFC 265, the Full Court upheld the correctness of the trial judge’s approach in adopting one pool and not splitting the husband’s superannuation. The husband’s superannuation was $95,896 in a net asset pool of $775,000. It was just and equitable for there to be no superannuation split because the husband’s earning capacity was superior to that of the wife’s. In Pandelis & Pandelis [2018] FamCAFC 66, the trial judge took a two-pool approach, dividing the nonsuperannuation 65%/35% in favour of the wife and the superannuation equally. There was no appeal against the superannuation splitting order, but it was set aside on appeal as procedural fairness had not been given to the trustee and the wording of the order did not comply with the FLA requirements. The

adjustment of non-superannuation was found by the Full Court of the Family Court to have been incorrect because there was no principled ground for excluding the husband’s post-separation tax debt as his expenditure post-separation was legitimate.

¶14-050 Must the relationship have broken down? A superannuation split under a financial agreement (including a superannuation agreement) can only be made if a marriage or a de facto relationship has broken down. Alterations of interests in nonsuperannuation property can be made by court order in certain circumstances even if a marriage has not broken down (Stanford v Stanford (2012) FLC ¶93-518; [2012] HCA 52). Although in theory this means that the court may make orders splitting superannuation interests, the circumstances in which this occurs are likely to be rare, such as where the parties are living apart by circumstances not by intention. A property settlement is necessary as a maintenance order will be insufficient to meet the needs of the party seeking the property settlement (eg to pay a nursing home bond). The Family Law Courts discourage the misuse of this power in intact marriages (eg Redman & Redman [2012] FamCA 364). In de facto relationships, the Family Law Courts have no power at all to make orders altering property interests or splitting superannuation unless the de facto relationship has broken down. The breakdown of a marriage can be demonstrated in relation to a superannuation split which is contained in a superannuation agreement (Family Law Act 1975 (Cth) (FLA) s 90XI(1)): • if the parties are divorced, a copy of the decree absolute dissolving the marriage, or • if the parties are not divorced, a separation declaration where the declaration time (ie the time when it was signed by a spouse, or last signed by a spouse if it has been signed by both spouses: FLA s 90XP) is not more than 28 days before the time it is given to the trustee. The breakdown of a de facto relationship can be demonstrated by a separation declaration where the declaration time is not more than 28 days before the time it is given to the trustee. A payment split under an agreement can only commence on the fourth business day after the day on which a copy of the agreement is served on the trustee, the trustee must at the same time be given evidence that the marriage or de facto relationship has broken down (FLA s 90XI). This is known as the operative time. Separation declarations are discussed further at ¶14-730.

¶14-080 Was there a de facto relationship? Superannuation splitting is available to married couples and also to de facto couples (except in Western Australia) who meet certain pre-conditions. For the purposes of the Family Law Act 1975 (Cth) (FLA) Pt VIIIAB, a de facto relationship can exist between same-sex and opposite-sex de facto couples. It can exist, even if one of the parties is married to someone else or in another de facto relationship (FLA s 4AA(5)). The Family Law Courts only have jurisdiction to hear property settlement applications made by parties to a de facto relationship if the relationship was in existence at 1 March 2009 (or 1 July 2010 in South Australia). Western Australia has its own State scheme which does not allow the splitting of superannuation for constitutional reasons. It also has its own definition of a de facto relationship. A person is in a de facto relationship with another person if they are not legally married to each other, are not related by family and having regard to all the circumstances of their relationship, they have a relationship as a couple living together on a genuine domestic basis. For the purposes of s 4AA(1), the circumstances may include all or any of the following: “(a) the duration of the relationship (b) the nature and extent of their common residence; (c) whether a sexual relationship exists;

(d) the degree of financial dependence or interdependence, and any arrangements for financial support, between them; (e) the ownership, use and acquisition of their property; (f) the degree of mutual commitment to a shared life; (g) whether the relationship is or was registered under a prescribed law of a State or Territory as a prescribed kind of relationship (i) the reputation and public aspects of the relationship.” The Full Court stated in Jonah & White (2012) FLC ¶93-522; [2012] FamCAFC 200 (at para 32) that the “touchstone” for the determination of whether a de facto relationship exists is the finding that the parties are a “couple living together on a genuine domestic basis” (s 4AA(1)(c)). None of the matters referred to in s 4AA(1)(c) has precedence over any other, nor must all necessarily be found before a finding of a de facto relationship is made. The Full Court discussed the principles relevant to the operation of s 4AA in Ricci & Jones (2011) FLC ¶94-000; [2011] FamCAFC 222 where it dismissed an appeal from a Federal Magistrates Court’s (now called the Federal Circuit Court) order summarily dismissing proceedings brought by the mother seeking a property division based on their de facto relationship. The mother did not argue that the parties had ever lived together, but that they had a relationship. She largely relied on that fact that she did not engage in a sexual relationship with the father until he told her that he had finished his previous relationship. In September 2009, the parties had a child together. The father denied ever having been in a de facto relationship with the mother. On appeal, the mother contended that the Federal Magistrate had erred in applying a rigid approach to s 4AA(2) in attempting to apply all of the circumstances listed instead of applying the circumstances relevant to this particular relationship. The Full Court rejected this contention, saying that it was clear from a reading of the judgment that the Federal Magistrate had correctly considered s 4AA(2) in the context of the matter as a whole. The mother also argued that the Federal Magistrate erred by failing to independently consider and reach her own independent conclusion on the question of whether it is a necessary precondition of a de facto relationship that the parties must live together. The Full Court considered that cohabitation can be relevant but is by no means determinative. In Zau & Uong [2013] FamCA 347, the court declared, pursuant to s 90RD, that the parties had not been in a de facto relationship. The court said that it first had to consider whether the relationship satisfied the definition of s 4AA(1) on its own terms. It noted that de facto relationships develop over time and it could be difficult to pinpoint the exact moment when the relationship became a “de facto” one (see Keaton & Aldridge [2009] FamCA 92) and, if it existed, when it ended. There had to be a degree of interdependence between the parties of an emotional, financial or physical nature. The words “genuine domestic basis” suggested a shared residence with a mutual intention to share lives with one another. However, it was also important to remember that in a discretionary judgment, a court was not required to dissect the words of s 4AA(1) into discrete elements. Rather, it was a “single composite expression of a comprehensive notion or concept” (see Simonis v Perpetual Trustee Co Limited (1987) DFC ¶95-052; (1987) 21 NSWLR 677 per Kearney J). The trial judge added that there was no reason to depart from the view that where parties have never lived together in a common abode, the circumstances strongly indicated that they had not “lived together as a couple on a genuine domestic basis”. Living under the one roof in a property owned by the parties and having a child together may not be sufficient of themselves to establish that a de facto relationship existed. In Benedict & Peake [2014] FCCA 642, the parties bought a home together and lived in it for 13 years. Harman J accepted the father’s evidence that they did not hold themselves out as a couple and that their sexual relationship was “brief, sporadic and far from reflective of mutual commitment”. Matters which were considered relevant to the finding that a de facto relationship did not exist included that the mother failed to register the father on the birth certificate and told Centrelink and the Australian Taxation Office that she was a single parent. In Ricci & Jones [2011] FamCAFC 222, the parties never lived together and their association ended after

seven months. The wife did not assert that the parties lived in the same residence at any time but that: • they had a child together, and • they did not engage in a sexual relationship until the husband advised the wife that he had finished his previous relationship. The Full Court confirmed that cohabitation was not necessary to establish a de facto relationship, but in this case there had not been a de facto relationship. In Regan & Walsh [2014] FCCA 2535, the parties acknowledged that they had shared a residence on various occasions for a total of more than six years between 2005 to 2013. During this time there were periods where the parties lived apart due to employment reasons. The parties disagreed as to the nature of their relationship. Mr Regan, the applicant, asserted that they were in a de facto relationship, while Mr Walsh did not concede this and described the relationship as one of “friends with benefits”. Despite the fact that the parties lived together for more than six years in total, the court held that a de facto relationship never existed between them. The lack of evidence of any joint ownership or acquisition of property, a mutual commitment to a shared life, nor an outward perception of the existence of a de facto relationship contributed to this finding. Additionally, the applicant appeared to contribute little financially to the residence, and only lived with the respondent when he chose to do so for his own benefit and convenience. Despite a sexual relationship existing between the parties, it was not enough to find the relationship was a de facto relationship without the presence of other factors. In Martens & Bocca [2016] FamCA 1044, the parties were in a relationship which spanned 13 years. Mr Bocca contended that the parties were not in a de facto relationship, claiming that they merely had a close friendship. The court found that the parties had been in a de facto relationship for the 13-year period and, as a result, the applicant, Mr Martens, could continue with property settlement proceedings. The court relied heavily on the enormous number of text messages and emails exchanged between the parties. He focussed on this aspect of their relationship when determining the “nature and extent of their common residence”, despite the fact that they maintained separate homes and had never formally lived together. They spent a couple of nights together each week and they embarked on holidays together. A substantially monogamous sexual relationship existed between the parties. This was backed up by a large number of text messages and emails, many of which were highly sexual in content. The written communications showed that the parties were both intimate and affectionate. The parties were mostly financially independent but there were several factors which lead to the finding of some financial interdependence. Mr Bocca had set up a self-managed superannuation fund and Mr Martens was intentionally made a trustee, but unintentionally made a member of that fund. They had also opened a joint bank account, and Mr Martens had done work to maintain Mr Bocca’s house. The parties had made plans to buy a house together, but this was never realised. Mr Bocca ended up purchasing a property on his own, although Mr Martens was heavily involved in the purchase. Mr Martens was also the sole beneficiary of Mr Bocca’s will. His Honour found that there was no question that the parties had “merged their lives”. The relationship between the parties was found to be very public. They travelled together and their relationship was well-known to their families. Further, the breakdown of the relationship was highly emotional and much more akin to the breakdown of a marriage than a friendship. Therefore, the parties were found to be in a de facto relationship despite the fact that they had never officially lived together. In Luk & Choy [2016] FamCA 534, the parties met through an internet dating website. Mr Choy lived in China and travelled to Australia to meet Ms Luk. The parties were in a relationship from July 2012 to February 2014. Ms Luk asserted that this was a de facto relationship, while Mr Choy argued that it was not. Mr Choy purchased Ms Luk a watch and handbag costing over $10,000 and an engagement ring for approximately $30,000. The parties purchased a property together. Mr Choy paid the deposit and the parties obtained a joint mortgage. Ms Luk lived in the property. She paid the mortgage instalments and other outgoings. Mr Choy gave Ms Luk a credit card which she used for a period of time. There was an argument about use of this credit card and Ms Luk returned the sum in dispute and the credit card to Mr

Choy. The court was not satisfied that the parties were in a de facto relationship, largely due to the lack of public aspects to the relationship and that they only stayed together for periods totalling a fraction of the duration of their relationship. In Nord & Van [2018] FamCAFC 75, the Full Court upheld the finding that a de facto relationship existed between the parties, rather than they had an affair, based on the following factors: • the length of the parties’ relationship being from February 2009 to March 2014 • Mr Nord’s lengthy stays with Ms Van particularly during periods in which his wife, Ms D, was travelling • Ms Van’s financial dependence on Mr Nord, including via Mr Nord’s purchase of an “investment property” in his sole name in which he allowed Ms Van to live with the parties’ child and Ms Van’s other children rent-free for more than three years; • Mr Nord’s regular attendance at Ms Van’s home to spend time with the parties’ child and Ms Van’s other children • the parties’ ongoing sexual relationship, and • the birth and care of the parties’ child.

¶14-085 De facto relationship — jurisdictional requirements Even if there was a de facto relationship, in order for the Family Law Courts to exercise jurisdiction under the Family Law Act 1975 (Cth) (FLA) there are several jurisdictional requirements which must be met. If these are not met, the parties may be able to rely upon the statutory scheme of a state or territory or common law and equitable principles which are exercised by the State or Territory Courts rather than the Family Law Courts. The state and territory legislative schemes do not provide for superannuation splitting. The requirements which must be met for a property settlement order to be made under s 90SM are: 1. There was a de facto relationship — discussed at ¶14-080. 2. The relationship broke down after 1 March 2009 (or 1 July 2010 in South Australia). Part VIIIAB of the FLA does not apply into Western Australia, which has its own legislation. 3. The parties satisfy one of the following conditions in s 90SB: (a) their de facto relationship was for a period or a total period of at least two years (b) there was a child of the de facto relationship (c) the applicant made substantial contributions and a failure to make the order would result in serious injustice to the applicant, or (d) the relationship is or was registered under a prescribed law of a state or territory. 4. The geographical requirements of s 90SK are met. These are either: (a) one or both parties were ordinarily resident in a participating jurisdiction when the relationship broke down and either: (i) both parties were ordinarily resident in a participating jurisdiction for at least one-third of their relationship, or (ii) the applicant made substantial contributions in relation to the de facto relationship in a participating jurisdiction, or (b) the parties were ordinarily resident in a participating jurisdiction when the relationship broke

down. In addition to these jurisdictional hurdles, the applicant must have an entitlement taking into account contributions under s 90SM(4) including the matters listed in s 90SF(3). In Vickery & Drew [2012] FamCAFC 221, the Full Court dismissed an appeal where the appellant submitted that the court had no jurisdiction nor power to hear the respondent’s application. There were two periods of cohabitation, the second of which ceased in August 2009. The Full Court accepted that the two periods could and should be added together and that the parties therefore reached the two-year threshold. One of the alternative grounds for a finding that there is jurisdiction when the parties have not been in a de facto relationship for two years is that the applicant made “substantial contributions”. In Harriott & Arena (2016) FLC ¶93-702, the Full Court held that the trial judge misdirected himself in finding that substantial contributions made by the applicant prior to the commencement of the de facto relationship were not “in relation to” the relationship. Federal Magistrate Altobelli (as he then was) in Webb & Douglas [2012] FMCAfam 1049 considered the meaning of the phrase “substantial contributions”. Substantial contributions must fall outside what should be regarded as “usual or ordinary”. Federal Magistrate Altobelli referred to Miller & Trent [2011] FMCAfam 324, V & K [2005] FCWA 80, Wall & Mitchell [2012] FamCA 114 and other cases. Where one party’s contribution was primarily a contribution to domestic duties where there are no dependent children and over a short period of time, Altobelli FM considered that a finding of substantial contributions is unlikely to be made.

¶14-090 Documenting the settlement Most couples do not rely on the Family Law Courts to decide how their property interests are altered following separation. They usually negotiate a settlement (with or without the assistance of lawyers) or mediate a settlement (again, with or without the assistance of lawyers and courts). Even if court proceedings are issued, most parties reach agreement without a judge making a final determination. Any agreement reached can be documented by one of the following methods: • Court orders made by consent dealing with any of: – property – superannuation, or – spouse maintenance. • Financial agreement dealing with any of: – property – superannuation, or – spouse maintenance. • A combination of court orders and a financial agreement. Most commonly, if both are used, the court orders will cover property (including superannuation) and parenting issues, and the financial agreement deals with spousal maintenance. A financial agreement is more likely to be used with respect to superannuation (rather than consent orders) where there is a self-managed superannuation fund or something unusual, such as the parties want to value the superannuation not in accordance with the FLS Regulations, but still want to split it. Child support is not usually the subject of court orders. It is usually determined by a formula under the Child Support (Assessment) Act 1989 or a child support agreement made between the parties. There are often significant risks for one or both of the parties if the agreement is not properly documented. In the absence of court orders or a financial agreement formalising the agreement reached,

one party may later try to make a further claim for a property adjustment and/or maintenance. It is more difficult to succeed in an application once a married couple has been divorced for 12 months or a de facto couple has been separated for two years as the leave of the court must be sought to proceed out of time (FLA s 44). Documenting a settlement by way of a financial agreement is discussed further at ¶14-130 and ¶14-700 and following.

¶14-095 Setting aside property settlement orders or financial agreements In some circumstances, property settlement orders or financial agreements can be set aside, either by consent or if, for example, there has been fraud. Sections 79A and 90SN Family Law Act 1975 (Cth) (FLA) apply to the setting aside of property orders (for married couples and de facto partners respectively). Sections 90K and 90UM apply to setting aside financial agreements (for married couples and de facto partners respectively). The transitional provisions of the Family Law Legislation Amendment (Superannuation) Act 2001 expressly excluded the superannuation splitting provisions from applying to a property settlement order in force when the amendments commenced. The transitional provisions also expressly prevent parties from setting aside existing orders with the consent of both parties to take advantage of the superannuation splitting scheme. Sections 79A and 90SN Section 79A(1)(b) FLA provides that a s 79 order can be set aside or varied if: “in the circumstances that have arisen since the order was made it is impracticable for the order to be carried out or impracticable for a part of the order to be carried out …” Section 90SN(1)(b) is similarly worded. A good example of the use of s 79A(1)(b) in the context of superannuation arose in Dalmans & Farber [2018] FCCA 2636. Final property settlement orders were made by consent in 2011 which included a superannuation splitting order of $34,550 in favour of the wife from the husband’s superannuation interest in Super Fund 1. The wife’s solicitor failed to serve a copy of the orders on Super Fund 1 after the consent orders were made. Over two years later, the husband established a self-managed superannuation fund (Super Fund 2) and rolled all of his superannuation out of Super Fund 1 to Super Fund 2. Prior to doing this, he enquired of his own solicitor as to whether the split to his wife had occurred and was told that it had been done. The wife later made enquiries with her own solicitor as to what had happened. Her solicitor lied to her and it was not until a formal complaint was made by the wife about the wife’s solicitor to the regulatory body, the Legal Services Commissioner, that the wife’s solicitor admitted that he had not taken any steps to ensure that the superannuation split occurred. The husband argued that s 79A(1)(b) did not apply because the circumstances which had arisen could reasonably have been contemplated. The judge disagreed, finding that the service of the order on the trustee was crucial and that the failure to serve the trustee could not have been reasonably contemplated. As a result, it was impracticable for the superannuation splitting order to be carried out. Neither party sought that all of the original orders be set aside. The wife sought that the trustee of Super Fund 2 be substituted for the trustee of Super Fund 1. The judge made that order. In Keegan & Webber [2016] FCCA 2685, the wife was successful in having property settlement orders made in 1999 set aside insofar as they dealt with superannuation. The orders did not purport to bind the trustee of the husband’s superannuation fund but required the husband to pay a sum to the wife upon his resignation or retirement from his employment. That sum was calculated on the basis of the formula in West & Green (1993) FLC ¶92-395 (see discussion at ¶14-315). The fund trustee told the wife it was not bound by the orders and that it considered the order should be set aside and spitting orders made under FLA Pt VIIIB instead. Judge Young found that the orders were “impracticable” within s 79A(1)(b) because (at para 5): “Obviously enough the trustee is not directly bound by the existing orders in the sense that it would

be with a splitting order under Pt VIIIB. Still, the trustee could well be liable if it paid out the husband’s superannuation entitlement in circumstances which it knew constituted a breach of orders by the husband.” However, there is a strong argument that this case was incorrectly decided. The orders were not “impracticable” as they could still be implemented. Once the husband received his superannuation, he was required to pay the wife her share. The orders did not purport to bind the trustee, but this did not make the orders impracticable. The husband had failed to comply with his child support obligations and refused to participate in the proceedings. Judge Young made a splitting order with a different effect from the 1992 order. He agreed with the wife that the West & Green formula was not appropriate since the commencement of the superannuation splitting scheme, but the non-participation of the husband in the proceedings meant that the judge could not properly assess contributions and s 75(2) factors. The judge assessed contributions on the same basis as they were assessed in 1999 and made no s 75(2) adjustment. This decision is inconsistent with the decision of Young J (not the same judge) in RBH & JIH [2005] FamCA 226. In this case, orders were made on 2 February 2000 in chambers by a deputy registrar in anticipation of the future super-splitting regime. However, once the regime commenced, they were not orders which could be implemented by the fund or enforced by the court. Justice Young held that he could not set the orders aside under s 79 for impracticability. The parties were, however, effectively in a “noman’s land”. There was no issue of delay. The parties had tried to negotiate an appropriate order or outcome with the trustee. There was no hardship to the wife if the orders were varied. The wife wanted to retain the benefits she received under the earlier orders subject to a negotiated figure whereby she received a higher sum of $100,000 but with no interest arrears. Justice Young exercised his power to review the orders of the deputy registrar, set aside the order and substituted a fresh order. This was not an option in Keegan & Webber, as the original orders were made by a judge rather than by a registrar. In S & S [2007] FamCA 973, Benjamin J followed RBH & JIH, however in Lehear & Lehear [2003] FamCA 645, Justice Cronin declined to follow RBH & JIH. The wife made an oral application to extend the time to review the registrar’s decision in 2001 to approve the s 79 orders. Cronin J refused to do so, as the parties themselves indicated that they did not want the court to examine any of the financial circumstances outside of making the orders relating to superannuation. The judge considered that, to do this, flew in the face of the court being able to make an order which was just and equitable under s 79. In addition, he had serious doubts about the appropriateness of endeavouring to circumvent the very clear intent of the legislation of 2001. It was not appropriate for a court to endeavour to find a way around specific prohibitions in legislation. It was quite clear that parliament intended to exclude parties who had made final orders under s 79. In Greetham & Greetham [2010] FamCA 645 and Myles & Tolman [2010] FamCA 157, the trial judges acknowledged Cronin J’s concerns but, similarly to RBH & JIH, extended the time for review and allowed a review of the registrar’s decision so that superannuation splitting orders could be made. Financial agreements and superannuation A financial agreement or superannuation agreement can be set aside in various circumstances. There are some particular instances which relate only to superannuation. These are set out in s 90K and 90UJ, and are: • A payment flag is operating on a superannuation interest covered by the agreement and there is no reasonable likelihood that the operation of the flag will be terminated by a flag-lifting agreement. • The agreement covers at least one superannuation interest that is an unsplittable interest. Financial agreements can be set aside on other grounds, including principles which apply to setting aside commercial contracts, such as duress, fraud, undue influence, unconscionable conduct, uncertainty, mistake, and misrepresentation. All of the grounds are listed at ¶14-720. The court has a discretion whether to set aside the agreement. It is not required to set aside the agreement even if one of the grounds is found to exist. For example, if a superannuation interest is

unsplittable because it is under the $5,000 threshold, the court is unlikely to set aside the agreement as the impact on the parties’ entitlements because the interest being unsplittable is minor.

¶14-100 Overview of the superannuation splitting scheme Part VIIIB Family Law Act 1975 (Cth) (FLA) contains the superannuation splitting scheme. Also relevant are the Family Law (Superannuation) Regulations 2001 (FLS Regulations) and the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and accompanying Regulations. The scheme is based on superannuation being “treated” as property for the purposes of para (ca) of the definition of “matrimonial causes” in FLA s 4(1). The “matrimonial causes” link the FLA with the federal government’s power to legislate regarding particular matters as set out in the Constitution. Paragraph (ca) gives the Family Law Courts the power to legislate with respect to proceedings between the parties to a marriage with respect to the property of the parties to a marriage. Paragraph (c) of the definition of “de facto financial causes” in s 4(1) is similarly worded although a breakdown of the de facto relationship is mandatory, before the Family Law Courts have any power to make orders. As superannuation is treated as property, the s 79 process (or s 90SM process with respect to de facto relationships) must be followed. This requires that an order be made unless it is just and equitable for an order to be made, and in considering what order should be made the superannuation must be valued, contributions are assessed and s 75(2) (or s 90SF(3)) matters are considered. This process is discussed at ¶14-030. There are however, some differences with respect to superannuation. One of these, the process of valuation, is discussed at ¶14-250. Splitting orders must also be made in accordance with FLA Pt VIIIB Div 3 (s 90XS to 90XUA). Division 3 allows the court to make two types of orders: • a payment-splitting order (¶14-110), and • a payment-flagging order (¶14-200).

¶14-110 Payment splitting A payment split of a member’s superannuation interest may be made in a financial agreement (including a superannuation agreement) or by a court order. A Family Law Court may make a splitting order as long as it accords with the Family Law Act 1975 (Cth) (FLA) s 79 or s 90SM principles and the requirements of FLA Pt VIIIB. The court cannot make orders splitting superannuation funds, interests or entitlements. It can only make orders to split payments being made from a fund, interest or entitlement. Splitting the interest itself can only occur depending on the fund under the superannuation legislation and regulations. Most commonly, it occurs when the superannuation is an accumulation fund in the growth phase. If a new interest is created for a non-member spouse, this occurs under Div 2.2 Superannuation Industry (Supervision) Regulations 1994 (Cth). The trustee of a superannuation fund can “split” an interest to create a new interest for the non-member or transfer assets to allow the non-member spouse to have an interest in another fund. The court is not obliged to make a splitting order in every case. If the court does not make a splitting order when one has been sought, it must give reasons. The trustee of a superannuation fund can “split” an interest to create a new interest for the non-member or transfer assets to allow the non-member spouse to have an interest in another fund. For an interest to be split, it must be both: • in a regulated superannuation fund, and • an accumulation interest in the growth phase or an allocated pension. The four types of orders the court can make, the most common of which are the first two, known as type

(a) and type (b) orders: (a) A lump sum is set aside within the member’s fund for the non-member. The lump sum is calculated on the basis of a dollar figure known as the “base amount”. The base amount is adjusted over time and the non-member’s interest grows independently of the member’s interest. The member can make contributions without affecting the base amount. This only applies to non-percentage interests, which are most interests. Some judicial pensions are percentage-only interests (s 90XT(1)(a)). See, eg Baxter & Brown and Anor [2012] FamCA 100; Stefanovski & Stefanovski [2012] FamCA 284; Mayne & Mayne (No 2) [2012] FamCAFC 90; (2012) FLC ¶93-510; Palmer & Palmer [2012] FamCAFC 159; (2012) FLC ¶93-514; Sebastian & Sebastian [2013] FamCA 191. (b) The non-member is paid a certain percentage of each splittable payment. This is more likely to be appropriate when superannuation is in the payment phase. The “payment phase” means that the member is receiving a superannuation pension or has met the conditions of release and is entitled to receive a pension or lump sum (s 90XT(1)(b)). See, eg Grey & Grey (No 2) [2012] FamCA 885. (c) An order giving the non-member spouse an entitlement to be paid an amount calculated in accordance with the regulations, but by reference to a percentage specified in the order, and reducing the entitlement of the member correspondingly. This only applies to percentage-only interests (s 90XT(1)(c)). (d) Such other order as the court thinks necessary for the enforcement of any of the above splitting orders (s 90XT(1)(d)). All of these orders bind the trustee of the superannuation fund provided it has been given procedural fairness, see ¶14-670. A payment split can also be made under a financial agreement (including a superannuation agreement), see ¶14-700. Section 90XE(1) FLA defines “splittable payments”. Only a splittable payment can be effected by a superannuation agreement or a flag lifting agreement. Splittable payments are: • a payment to the spouse (s 90XE(1)(a)) • a payment to the legal personal representative of the spouse, after the death of the spouse (s 90XE(1) (c)) • a payment to a reversionary beneficiary, after the death of the spouse (s 90XE(1)(d)), and • a payment to the legal personal representative of a reversionary beneficiary covered in (d), after the death of the reversionary beneficiary (s 90XE(1)(e)). A split cannot be made in favour of a third party, other than as specified above. In Stant & Stant [2015] FamCA 734, the court refused to make a splitting order in favour of the wife’s mother who was a judgment creditor of the husband. For splittable payments and superannuation interests which are not able to be flagged or split, pursuant to either an agreement or a court order, see ¶14-220. Some courts have taken the view that if a superannuation split is not sought by the parties, a superannuation split cannot be ordered (see Guthrie & Rushton [2009] FamCA 1144). If parties are not prepared for a superannuation split (because they have not provided procedural fairness in advance to the trustee of the fund. See ¶14-670), when final orders are proposed to be made, an adjournment may be required so that procedural fairness can be given to the fund. Alternatively, the court may make an order and reserve liberty to the trustee to apply to the court objecting to the order, within say a month, after being served with the order.

¶14-120 Drafting superannuation-splitting orders

As a general rule, orders made under the Family Law Act 1975 (Cth) (FLA) s 79 should be drafted on an in personam basis (ie requiring a person, such as the trustee, to do something), rather than an in rem basis (ie determining rights in property without making orders to put the rights into effect), to ensure they are effective and enforceable. However, in relation to a splitting order under s 90XT it is sufficient to include an express statement that the order binds the trustee of the fund (Wilkinson and Wilkinson (2005) FLC ¶93-222; [2005] FamCA 430 at p 79,683). The trustee must have been given procedural fairness (see ¶14-670). An order should contain an “operative time”, to provide the trustee with a reference point from which to commence the adjustments of the base amount for the purposes of the Family Law Superannuation Regulations 2001 (Cth) reg 45D. The operative time or date determines when a trustee must start to recognise the interest of the non-member. The operative time should ideally be the date of valuation of the interest, because the interest may continue to grow between the date of valuation and the order although not all superannuation fund trustees will accept an operative time which is in the past (Wilkinson). The operative time has a different meaning in different circumstances. It is defined in s 90XD as: (a) in relation to a payment split under superannuation agreement or flag lifting agreement — the beginning of the fourth business day after the day on which a copy of the agreement is served on the trustee, accompanied by the other documents required under s 90XI (b) in relation to a payment flag under a superannuation agreement — usually either: (i) the service time, if the eligible superannuation plan is a self-managed superannuation fund (ii) otherwise, the beginning of the fourth business day after the day on which the service time occurs (both (i) & (ii) are under s 90XK(1)), or (iii) if s 90XLA applies, the time that the payment to the trustee of the new ESP is made (s 90XLA(2)(c)). (c) in relation to a payment split under a court order, the time specified in the order. There is no specific requirement in the FLA as to the operative time in court orders but it should be specified. The operative time in a financial agreement is specified in the FLA. See ¶14-130. Interest is calculated from the operative time until the date of payment. The rate of interest is explained in ¶14-500. In Stevens and Stevens (2005) FLC ¶93-246; [2005] FamCA 1304, three technical defects in the orders were corrected: • a failure to identify the “type” of order made pursuant to s 90MT (now s 90XT), by reference to s 90MT(1) (now s 90XT(1)) under which the order was made • the order provided that the interest of the husband in the superannuation scheme “shall be split”, whereas the power to make orders is confined to splitting payments, and • the entire order was expressed to bind the trustee, including clauses which were of no concern to the trustee, and the trustee should only be bound by those clauses that relate to the trustee’s obligations. In summary, the elements of a superannuation-splitting order are: 1. Allocate a base amount or percentage of the payment. 2. Give the non-member spouse an entitlement to part or all of the payment. 3. Bind the trustee to calculate the entitlement, and pay the entitlement when making a splittable payment to the member spouse. 4. Set an operative time. Most public offer and industry superannuation funds have a preferred form of wording for orders. It can be

important to follow these to ensure that the trustee is correctly identified and that disputes as to the wording of the orders do not delay the making of the orders or complicate the implementation of the orders. The preferred wording is often available on the fund’s website. Due to the requirement that fund trustees are given procedural fairness (see ¶14-670), the wording of superannuation-splitting orders is usually compliant with the FLA. The wording of superannuation-splitting orders was found to be non-compliant with s 90MT (now s 90XT) FLA in Pandelis & Pandelis [2018] FamCAFC 66. For a discussion of the implementation of a superannuation-splitting provision in an order or an agreement, see ¶14-500.

¶14-130 Superannuation agreements Superannuation splits can be made and superannuation flags can be imposed or lifted by court order or by a financial agreement (including a superannuation agreement). Part VIIIB of the Family Law Act 1975 (Cth) (FLA) deals with superannuation agreements before dealing with court orders and covers superannuation agreements more extensively than court orders. This might erroneously suggest that financial agreements (including superannuation agreements) are the most common way in which parties will deal with their superannuation interests. In practice: • most splits are imposed by court order, and • flagging orders and financial agreements dealing with superannuation are not common. A “superannuation agreement” is a financial agreement that deals with a superannuation interest. Under s 90XH(2) the part of a financial agreement that deals with superannuation interests is a superannuation agreement for the purposes of Pt VIIIB. A superannuation interest can be flagged or split or a payment flag lifted. Part VIIIB uses the terms “superannuation agreement” and “flag lifting agreement”. For the purposes of this chapter, flag lifting agreements are included in references to “superannuation agreements” and “financial agreements”. A flag lifting agreement can also operate to split a superannuation payment (s 90XN(1)(b)). As with financial agreements dealing with non-superannuation property, a superannuation agreement must meet certain formal requirements to be binding under the FLA. The requirements for financial agreements are discussed at ¶14-700. There are some additional requirements for superannuation agreements relating to separation declarations which are discussed at. The operative time for a payment split of superannuation under a financial agreement (ie when the trustee needs to take action) is not until the fourth day after the day on which a copy of the agreement is served on the trustee accompanied by the documents required by s 90XI. See ¶14-050. In the absence of a divorce certificate, the trustee can rely on a “separation declaration”. Separation declarations are discussed at ¶14-050. A superannuation agreement or a financial agreement dealing with superannuation will usually deal with all of the superannuation of the parties on a final basis unless it is a flagging agreement, flag-lifting agreement or a termination agreement. If the agreement deals with all of the superannuation, it appears that a superannuation-splitting order can still be made as an enforcement order. In Cummings & Warner (No 2) [2018] FCCA 2838, the husband had not paid the wife the sum of $121,848.25 plus interest plus costs. The sum of $121,848.25 was owed to the wife pursuant to a financial agreement. The husband was unsuccessful in seeking that the agreement be declared not to be binding. The wife was seeking enforcement of a judgment, not seeking to vary the agreement, and the trustee of the husband’s superannuation fund expressed no difficulty with the wife’s proposed orders. Judge Neville referred to the powers of the court to enforce orders and concluded that the existence of the financial agreement did not oust the jurisdiction of the court to make a superannuation-splitting order by way of enforcement.

¶14-200 Flagging A flag acts as an injunction on the trustee of a superannuation fund. The trustee cannot make any payments or transfers in relation to that interest if a flag is in place. A flag only applies if the interest is in the growth, not the payment phase. A flag can be imposed by agreement under the Family Law Act 1975 (Cth) (s 90XL) or by order (s 90XU). A superannuation interest is in the growth phase if: • a condition of release has not been satisfied • a condition of release has been met but no benefit paid, or • only part of the benefit has been paid, provided that benefit is not a pension. Superannuation not in the growth phase is described as being in the payment phase. If a payment flag is in place, the trustee must notify the non-member and the member within 14 days of a splittable payment becoming payable (ie on satisfaction of a condition of release). The trustee cannot make a splittable payment unless the flag is lifted either by a court order or a “flag lifting agreement”. Splittable payments include most payments to a member. Payments for temporary incapacity or hardship and payments to children are not splittable payments. A flag does not prevent the member making decisions about investment options and life insurance. The interest can, therefore, still be eroded by high insurance premiums or risky investment decisions. A payment flag survives the death of either spouse. A payment flag can be imposed by court order or in a financial agreement (including a superannuation agreement). A court may make a flagging order in relation to a superannuation interest (other than an unflaggable interest): • directing the trustee not to make any splittable payment (¶14-220) in respect of the interest without the court’s permission, and • requiring the trustee to notify the member spouse and the non-member spouse, within a specified period, of the next occasion when a splittable payment becomes payable in respect of the interest (FLA s 90XU). The court may, in deciding whether to make an order in accordance with s 90XU: “take into account such matters as it considers relevant and, in particular, may take into account the likelihood that a splittable payment will soon become payable in respect of the superannuation interest.” A flag may be appropriate if: (a) the member is close to meeting or has met a condition of release (b) there is a chance that the non-member will not achieve a just and equitable settlement, eg the member elects to receive a pension rather than a lump sum (c) the member may terminate employment and put the superannuation into a less accessible form eg deferred annuity. Matters relevant to whether a flagging order should be made include: 1. The length of time before a splittable payment will be made. The closer this event is, the more likely a flag order might be made. The longer the period of time, the less likely a flag order would be made. The longer a flag is in place, the greater the likelihood of the parties losing contact with each other and the court. Section 90XU(2) refers to whether a splittable payment will be made “soon”. However, in BAR & JMR (No 2) (2005) FLC ¶93-231 (discussed below), this factor was not considered.

2. The circumstances of the parties. Section 81 requires the court to make an order which achieves finality but only if it is “practicable”. Section 81 must be balanced against s 90XU. 3. The type of interest. A flag order is more suited to defined benefit interests or partially vested accumulation interests than fully vested accumulation interests. A fully vested accumulation interest has a readily ascertainable value. There is little to be achieved by a flagging order unless the member is about to meet a condition of release. 4. The circumstances of the member. If payments are made in certain circumstances, they may not be protected by a flag order. The non-member may, however, be prepared to take a chance that they may receive more rather than accept a certain but lesser sum under a splitting order. An imminent event which may impact on the value of the superannuation will increase the likelihood of a flag order. The most common situations are: • proposed resignation • possible redundancy • possible invalidity, or • terminal illness. A flag cannot be made with respect to a non-splittable payment. See ¶14-220. A flagging order, rather than a splitting order, may be appropriate where the actual value of a superannuation interest is unknown but will become known in the very near future. Although the regulations provide a method for valuing superannuation interests, a court may consider it more appropriate to defer a final decision until the actual value of the superannuation interest is known. This order is more likely to be made in relation to defined benefit interests rather than accumulation interests which have a readily ascertainable value. Parties to a marriage or a de facto relationship can also enter into a flagging agreement which has a similar effect to a flagging order. The meaning of “soon” in s 90XU has not received extensive judicial consideration and does not appear to have operated as a bar to an order being made (at least in reported decisions). A payment flag was imposed in BAR & JMR (No 2) [2005] FamCA 386; (2005) FLC ¶93-231. Justice Young held that imposing a payment flag and giving the wife a split of the husband’s interest when it was in the payment phase, rather than the growth phase, would achieve a just and equitable outcome because the wife would share in the growth of the fund. The likely period until the husband retired was four years but it could be as long as 14 years. Justice Young considered the likely period until retirement was between four and nine years. He did not expressly consider the effect of s 90MU(2) (now s 90XU(2)) and whether the period until retirement was “soon”. A flagging order was made in Gerard & Gerard [2011] FamCA 263. Justice Cronin considered that as a flagging order is an injunction it should only be made, as with an FLA s 114 injunction, if it was proper to do so in the circumstances. There was evidence that the relevant deferred annuity was a superannuation interest which could be split and flagged. In a short judgment, Cronin J did not consider whether the period until retirement was “soon”. However, it appeared to be within that category as the order was made ex parte on the basis of urgency because the husband was about to turn 65 years of age. The parties were separated under the one roof, the husband did not speak to the wife and the wife said that the husband had not opened any letters from the wife’s solicitors. In Grange & Grange [2012] FamCA 678, the Family Court made a flagging order under FLA s 90MU (now s 90XU) because it seemed to the court that “there may be a history of money evaporating and a flagging order would be appropriate in these circumstances and the trustee of the superannuation fund will hold the fund”. Again, it was a short judgment and the meaning of s 90MU(2) (now s 90XU(2) was not addressed. In Silver & Woden [2016] FamCA 120, a flagging order was made in circumstances where the husband had said in an affidavit that he proposed to retire when he reached retirement age, which was prior to the

earliest anticipated date of the trial. The wife contended that the husband’s superannuation of about $120,000 appeared to be the only property from which the wife’s property entitlements could be met. The husband’s real property had a mortgage which secured a loan that appeared to be greater than the property’s value. The husband also owned shares in a company which indirectly owned an interest in land, but it was not possible to say at the time of the interim hearing whether the shares had any or any significant value. The husband did not consent to any flagging order or restraining order in relation to his superannuation entitlements, and was not prepared to give an undertaking not to deal with his superannuation. These matters were also relevant to the Family Court’s decision to make a flagging order. See also Zoller & Zoller [2012] FamCA 47, where there was a significant possibility that the husband would withdraw a portion of the parties’ property. He lived in Germany but was in the Caribbean at the time of the hearing. A flagging order was made without notice to the husband, although the superannuation fund had notice, did not seek to be heard and agreed to abide by any court order. Operative date for flagging order If the fund is a self-managed superannuation fund, the operative date for a payment flag in an agreement will be when the agreement about the payment flag is served on the trustee together with either: • if the parties are divorced, a copy of the decree absolute dissolving the marriage, or • if the parties are not divorced, a separation declaration that was made less than 28 days before the service on the trustee (FLA s 90XK(1)(a)). For other funds, the operative time is the beginning of the fourth business day after the day on which service of the required documents occurs. Impact of payment flag on trustee While a payment flag is operating on a superannuation interest, the trustee must not make any splittable payment to any person in respect of the interest (FLA s 90XL). If a splittable payment becomes payable in respect of a superannuation interest while a payment flag is operating, the trustee must, within 14 days after it becomes payable, give written notice to the member spouse and the non-member spouse. The trustee is only required to give such notice on the first occasion that a splittable payment becomes payable. The trustee’s notice is a trigger for the parties to consider what to do about the superannuation interest. If the parties respond to the trustee’s notice by making a flag-lifting agreement (FLA s 90XN), the flag-lifting agreement will: (a) lift the flag, and (b) contain a mechanism to split the superannuation interest. If the parties do not make a flag-lifting agreement, the payment flag overrides a payment request from the member (FLA s 90XL). A trustee who makes a splittable payment where there is a payment flag, or who fails to give notice to the parties when a splittable payment becomes payable, commits an offence for which the penalty is a $5,500 fine for an individual and $27,500 for a corporate trustee (FLA s 90XL(5)). Payment flags operate on splittable payments only. Unsplittable payments (¶14-220) can be paid to the member regardless of the existence of a payment flag. If either spouse dies while a payment flag is operating, the payment flag continues to operate and the legal personal representative of the deceased spouse has all the rights the deceased spouse would have had in respect of the payment flag (FLA s 90XL(7)). This includes the right to enter into a flag-lifting agreement so that the flag can be lifted and payments made in accordance with an agreement or court order.

¶14-210 Termination of payment flag

Section 90XN(1) of the Family Law Act 1975 (Cth) (FLA) provides that at any time when a payment flag is operating on a superannuation interest, the spouses may enter into a flag lifting agreement that either: • provides that the flag is to cease operating without any payment split (s 90XN(1)(a)), or • provides for a payment split pursuant to s 90XJ(1)(b) (s 90XN(1)(b)). A flag lifting agreement has no effect unless it satisfies the following criteria: • the agreement is signed by both parties (s 90XN(3)(a)) • for each spouse, the agreement contains a statement that the spouse has been provided with independent legal advice from a legal practitioner as to the legal effect of the agreement (s 90XN(3) (b)) • a certificate is attached to the agreement, signed by the person who provided the legal advice and stating that the advice was provided (s 90XN(3)(c)), and • after the agreement is signed by the spouses, each spouse is given a copy of the agreement (s 90XN(3)(d)). Sections 90XM and 90XS also allow a payment flag to be terminated by a court order.

¶14-220 Splittable, unsplittable, not splittable and unflaggable payments and interests A financial agreement (including a superannuation agreement) or a court order with a splitting provision is only effective in relation to a splittable payment and not, therefore, in relation to an unsplittable payment. There are also interests which are “not splittable” or “not flaggable”. Splittable payments A splittable payment is a payment in relation to a superannuation interest that can be split by a superannuation agreement or court order. A splittable payment can be the subject of a payment flag (¶14200) which prevents a payment being made. The following types of payments are splittable payments: • a payment to the member spouse • a payment to another person for the benefit of the member spouse (eg where the member spouse rolls over a superannuation interest into a new fund) • a payment to the legal personal representative of the spouse, after the member spouse’s death • a payment to a reversionary beneficiary, after the death of the member spouse, and • a payment to the legal personal representative of a reversionary beneficiary, after the death of the reversionary beneficiary (Family Law Act 1975 (Cth) (FLA) s 90XE(1)). If a payment is made to another person for the benefit of two or more persons including the member spouse, the payment is a splittable payment to the extent to which it is paid for the benefit of the member spouse (s 90XE(3)). Not splittable payments Some payments are prescribed by Family Law Superannuation Regulations 2001 (reg 12 to 14Q) as not splittable. Payments that are not splittable payments include: • a payment made on compassionate grounds (Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations) reg 6.19A), that is a payment:

– to treat a life threatening illness or to alleviate acute or chronic pain or mental disturbance – to prevent foreclosure by a mortgagee or the exercise of a power of sale over the family home – for medical transport – for home or vehicle modifications for a severely disabled person – for a dependant’s palliative care, funeral or burial expenses, or – as determined by the Australian Tax Office or the Australian Prudential Regulation Authority (APRA) to be for similar purposes. • a payment to be made to the member because of severe financial hardship (SIS Regulations reg 6.01(5)) • a payment made on grounds of permanent incapacity (SIS Regulations reg 6.01(2)) • a payment made on grounds of temporary incapacity unless the payment has been made continuously for at least two years • a payment made in either the CSS or PSS Commonwealth superannuation schemes where the member is being assessed for total and permanent disablement • a payment from the Superannuation Holdings Accounts Special Account (SHASA) that would have been splittable except that the trustee has opened an account in the name of the non-member spouse, and • a payment, after the death of a member spouse, to a reversionary beneficiary who is a child of the member spouse. A payment flag (¶14-200) cannot prevent an unsplittable payment from being paid to the member. Where the payment to be made by the trustee is an unsplittable payment, the payment can be made without notice to the non-member spouse. Unsplittable interest An unsplittable interest is defined in FLS Regulations reg 11. It is primarily an interest with a withdrawal benefit of less than $5,000. Unflaggable interest An unflaggable interest is defined in FLS Regulations reg 10A as an interest in the payment phase which cannot be flagged. In practice, it will almost always be a pension.

¶14-240 Nature, form and characteristics of superannuation Generally, where the superannuation interests of both parties to family law proceedings are accumulation interests, few difficulties are encountered by the Family Law Courts in dealing with them. However, an accumulation interest in the growth phase and a defined benefit interest in the growth phase differ in several important respects. As a result, examining the nature, form and characteristics of a superannuation interest is particularly important when a defined benefit interest is involved. Those differences include the method by which the ultimate benefit is calculated; the risk to the member inherent in each and, very importantly, the effect of a s 90XT(1)(a) Family Law Act 1975 (Cth) (FLA) order (an order which allocates a base amount to the non-member spouse). As the Full Court said in Bulow & Bulow [2019] FamCAFC 3 (at [18]): “Each and all of those differences can, and very often do, have a dramatic impact upon the justice and equity of a proposed splitting order and, in turn, its place within just and equitable orders for settlement of property.”

The FLA provides for splitting orders to be made which take effect when splittable payments become payable — that is, when the member spouse satisfies a condition of release. The FLA does not provide for the underlying superannuation interests themselves to be split. That work is usually done by Pt 7A of the SIS Regulations. The SIS Regulations allow the creation of a new superannuation interest in the name of the non-member spouse such that their interest is separated from the interest of the member spouse within the fund. The Full Court pointed this out in Bulow (at [20]): “Crucially, however, defined benefit funds are not regulated by Part 7A of the SIS Regulations. It is therefore fundamental to a consideration of any proposed splitting order that the Court consider the governing rules of such funds contained within their specific trust deeds. It is those rules which will determine the effect of any splitting order on the underlying interest within that particular fund. As an example, within a defined benefit fund the fund’s rules can dictate that a splitting order has significant effects on the formula by which a member’s ultimate entitlement is calculated.” The Full Court discussed the distinction between defined benefit interests and accumulation interests (at [22]-[23], [25]): “By reason of the matters just discussed, it is an error both to fail to consider the specific requirements and ramifications of the PSS Deed’s provisions and to assume that the effect of a s 90XT(1)(a) order upon the husband’s defined benefit interest is the same as it would be if the husband held an accumulation interest. It is also an error to assume that the effect of a splitting order for the non-member spouse is the same as it would be in respect of an accumulation interest. The terms of the scheme-specific PSS Deed will dictate the variables by which the husband’s present and future benefit will be calculated subsequent to any mooted splitting order. So, too, the PSS Deed will dictate the nature, form and characteristics of the interest which the wife will acquire subsequent to any such order. The justice and equity of any proposed splitting order cannot be considered without reference to both. Axiomatically, those matters are crucially relevant considerations in the exercise of a trial judge’s discretion in the making of a splitting order … The nature, form and characteristics of the interests held by each of the parties consequent upon the proposed splitting order; the future benefits for each party upon vesting; when the respective interests might vest and the form in which any benefits might (or must) be taken at that time, are all likely to be relevant in assessing the s 75(2) factors. As an example, in this case the husband asserts before this Court that the splitting order made by his Honour restricts the amount he can contribute from salary and, thereafter, his ultimate potential benefit.” The husband had unsuccessfully sought to obtain expert evidence on the effect of a splitting order on his defined benefit interest. Although the parties each had expert evidence as to the value of the husband’s interest, the Full Court said (at [28]): “Neither expert provided an opinion on the nature, form and characteristics of the husband’s superannuation interest nor how any splitting order sought by the wife (or any other splitting order) might impact upon that interest.” The Full Court concluded that the court needed to have evidence directly relevant to a determination of one of the central issues. Other cases which looked at the importance of considering the nature, form and characteristics of superannuation interests include many of the pension cases such as those discussed at ¶14-260. In summary, the differences in the nature, form and characteristics of an accumulation interest in the growth or payment phase and a defined benefit interest in the growth or payment phase include: • an accumulation interest is like a bank account — its value is transparent. By contrast, the value of a defined benefit interest is calculated by reference to a formula • the risk to the member of, and the effect of, an order which allocates a base amount to the nonmember spouse varies • the governing rules of the funds determine the effect of any splitting order on the underlying interest

within that particular fund. A defined benefit fund’s rules can dictate that a splitting order has significant effects on the formula by which a member’s ultimate entitlement is calculated. The justice and equity of any proposed splitting order cannot be considered without reference to the nature, form and characteristics of the interest.

¶14-250 Valuation of superannuation Section 90XT(2) of the Family Law Act 1975 (Cth) (FLA) requires the court to value a superannuation interest if an order for a payment split is being made. The valuation must be in accordance with the Family Law Superannuation Regulations 2001 (Cth) (FLS Regulations). If a splitting order is not made, the interest can be valued another way (eg in relation to a defined benefit interest, by relying on a recent member’s statement or an agreed figure). Alternatively, the valuation can be done other than in accordance with the FLS Regulations even if the payment is being split if it is effected by a financial agreement. See ¶14-700. The valuation provisions do not apply to self-managed superannuation funds (FLS Regulations reg 22(2) (b)). The individual assets in the self-managed superannuation fund are valued (eg shares, real property). The majority of superannuation interests are in the growth phase and are accumulation interests. Valuations will, therefore, usually be straightforward. A recent member’s statement and/or a completed Superannuation Information Form will be sufficient. See ¶14-600 and following. For other funds, the first step is to have the fund complete a Superannuation Information Form. Depending on the fund, this may give a valuation. If it does not, an expert in superannuation valuation will need to be engaged. The methods of valuing superannuation interests are in the FLS Regulations and the schedules to the Regulations. Orders in relation to superannuation interests differ from other orders under FLA s 79 or 90SM. The valuation of superannuation interests under the FLA is based on statutorily imposed criteria. The methods and techniques are not determined by case law or accounting standards. The valuation may differ from the entitlement according to the member’s statement issued by the fund. Superannuation has prescribed valuation methods and factors and their use is mandatory before the court makes a splitting order (s 90XT(2)(a)). By contrast, the methods of valuation of non-superannuation under the FLA is similar to other courts, not exercising jurisdiction under the FLA. The methods of valuing superannuation interests for the purposes of s 90XT(2)(a) are laid down in the FLS Regulations and the schedules to the Regulations (s 90XT(3)). However, the Attorney-General is also able to approve special methods or factors (FLS Regulations reg 38). Most of the funds with approved special methods are State and Commonwealth public sector superannuation schemes. Funds with approved special methods as at April 2019 were: • Commonwealth Governors General Pension Scheme • Commonwealth Judges’ Pension Act Scheme • Commonwealth Parliamentary Contributory Superannuation Scheme • Commonwealth Public Sector Superannuation Scheme • Commonwealth Superannuation Scheme • Defence Force (Superannuation) Productivity Benefit Scheme • Defence Force Retirement and Death Benefits Scheme • Ford Employees Superannuation Fund

• Ford Management Retirement Plan • GlaxoSmith-Kline Superannuation Fund • Hanson Australian Pty Limited as a participating employer in Sunsuper (previously known as Pioneer International Limited Staff Superannuation Plan) • Military Superannuation & Benefits Scheme • New South Wales Energy Industries Superannuation Scheme • New South Wales Local Government Superannuation Scheme • New South Wales Parliamentary Contributory Superannuation Scheme • New South Wales Police Association Superannuation Scheme • New South Wales Police Superannuation Scheme • New South Wales State Authorities Non-contributory Superannuation Scheme • New South Wales State Authorities Superannuation Scheme • New South Wales State Superannuation Scheme • Queensland Governors (Salary & Pensions) Act 2003 • Queensland Local Government Superannuation (known as LGIA Super) • Queensland Judges (Pensions & Long Leave) Act 1957 • Queensland Parliamentary Contributory Superannuation Scheme • Queensland Superannuation (State Public Sector) Scheme (known as QSuper) — both accumulation and defined benefit • RACV Superannuation Fund • South Australian Judges’ Pension Scheme • South Australian Local Government Superannuation Scheme • South Australian Metropolitan Fire Service Super Fund • South Australian Parliamentary Superannuation Scheme under the Parliamentary Superannuation Act 1974 (SA) • South Australian Police Superannuation Scheme • South Australian Superannuation Fund • Tasmanian Judges’ Contributory Pensions Act 1908 • UniSuper (the Superannuation Scheme for Australian Universities) • Victorian Judges Pensions (and other Officers) Scheme • Victorian Parliamentary Contributory Superannuation Fund • Victorian Racing Industry Superannuation Fund

• Victorian State Employees Retirement Benefits Scheme • Victorian State Superannuation Fund (new scheme and revised scheme) • Victorian Transport Superannuation Fund • WA Government Employees Superannuation Fund • Gold State Super Scheme (WA) • Woodside Superannuation Fund • Woolworths Group Superannuation Scheme. In Robertson & Robertson [2012] FamCAFC 60, the wife appealed against property settlement orders made by a Federal Magistrate on the basis that he erred in the evaluation of the parties’ contributions. There was no dispute that the valuation of the husband’s superannuation interest was six years old. The Full Court of the Family Court held that the absence of evidence and findings as to the present valuation of the husband’s superannuation interest constituted an error. In Kapoor & Kapoor [2010] FamCAFC 113, the Full Court of the Family Court had to determine the value of the wife’s superannuation interest. Unfortunately, the figures used by the wife were taken from her member statement rather than a Family Law Information Statement provided by her fund pursuant to the FLS Regulations. Justice Finn said (at para 94): “The Contributing Member Statement, on which the wife relied, is a document which essentially shows what a member’s entitlements in the scheme are, particularly on leaving the scheme. The Family Law Information statements serve an entirely different purpose, that purpose being, the valuation of superannuation interest for the purposes of Part VIIIB of the Act, that is, for the purpose of property settlement proceedings under the Act. Moreover, such statements are accorded evidentiary status under Regulation 68B(2) of the FLS Regulations. It may be that a Contributing Member Statement might be used for the purpose of preparing a valuation of a superannuation interest for family law proceedings, but in circumstances where a valuation is available which is based on a Family Law Information statement, that latter valuation is to be preferred.”

¶14-255 Discrepancy between fund valuation and family law valuation Care must be taken if the family law value of the interest is different to the scheme’s value of the interest. This is common with defined benefit interests. The method of valuation under the FLS Regulations is different to that used by the scheme. Sometimes the family law value is higher and sometimes it is lower. In some circumstances, the fund will not implement the split that the parties expect. For example, ComSuper says that it implements splits in accordance with their scheme rules. If the family law value is equal to or greater than the scheme value, the base amount specified in the orders will be split to the nonmember spouse. If, however, the scheme value is greater than the family law value, a separation amount is calculated and this is the amount subsequently split to the non-member spouse, in place of the base amount specified in the court orders or agreement. ComSuper says this is done to ensure that the nonmember spouse receives the benefit of the higher of the two methods of valuation. Although superannuation is usually valued using the Family Law Superannuation Regulations 2001 (Cth) (FLS Regulations) or scheme specific factors, discretion may arise, for example: (a) if the parties use a superannuation agreement rather than court orders to formalise the property settlement, they can agree to value superannuation in a different way (b) if superannuation is not being split, the court is not bound to accept the valuation in accordance with the regulations (s 90XT(2) Family Law Act 1975 (Cth) (FLA)). BAR & JMR (No 2) [2005] FamCA 386; (2005) FLC ¶93-231

In BAR & JMR, the single expert valued the husband’s defined benefit interest using the method in the FLS Regulations. As at 5 February 2005, it was worth $403,810.42. He calculated the resignation benefit, not in accordance with the FLS Regulations, as $534,084.74. The difference was $130,274.32. The expert said that valuing under the FLS Regulations did not give a fair and just valuation of the Emergency Services Superannuation Scheme (ESSS) fund but he did not give an alternative valuation. Justice Young disregarded the difference in the two values for valuation purposes, but held the difference relevant under s 75(2)(f) and (o). It was very significant that the valuation under the FLS Regulations increased by almost $45,000 within one year. The wife was entitled to share in the growth. A splitting order in the growth phase disadvantaged the wife. She would lose the very real financial benefit of the applicable multiple and the generous provisions of the particular fund. Her base amount when rolled over could not appreciate in value in any way comparable to the husband’s interest left within the fund. Section 90MT(2) (now s 90XT(2)) required the court to “make a determination” rather than a valuation. Without contrary evidence, Young J was unable to look behind the valuation. It is unclear how Young J would have dealt with any contrary evidence. There were many uncertainties and contingencies about valuing the husband’s interest, including: • the husband’s actual retirement date • the husband’s salary • the applicable superannuation tax rates for each of the parties • proposed changes to the ESSS fund • the husband’s applicable multiple (from time to time) • a just and equitable valuation as put by the single expert, and • the failure to have evidence from the trustee of the ESSS fund. Orders in the payment phase overcame these problems, allowed the wife to share in the growth of the fund and achieved a just and equitable alteration of property interests. The husband’s income, multiplier, applicable tax rate and retirement date would be known with certainty. The guess-work and likely injustices were largely eliminated. Winn & Winn [2011] FamCA 501 In Winn & Winn, the trial judge refused to accept a valuation of the husband’s superannuation interests under the FLS Regulations. The valuation assumed that the husband would live to approximately 80 years and the pension would continue until that time. The medical evidence was that, at best, he would live until his seventies and perhaps for five years until age 63. The valuation under the FLS Regulations was $774,265. Justice Johnston took the mid-point of the single expert’s calculations based on age 65 and age 70 which gave a figure of $383,534. His Honour declined to make a splitting order as: 1. there was ample non-superannuation to do justice and equity without a splitting order 2. the husband’s pension was his only source of income and was reduced by a split 3. the wife had significant superannuation and well paid expenses. In addition, although this reason was not given by the trial judge, by not splitting superannuation, the valuation under the Regulations did not need to be used.

¶14-260 Valuing and splitting pensions Pensions in the payment phase pose particular challenges to the Family Law Courts. The parties and the courts wrestle with the challenge of a lump sum value being given to an entitlement to, say, weekly or monthly payments which may never be able to be commuted to a lump sum, and also achieving an

outcome that is just and equitable. In some cases, a splitting order may no longer be effective if the non-member dies. Some pensions are referable to a capital sum which can easily be identified. Other pensions are not. The valuation process under the Family Law Superannuation Regulations 2001 (Cth) (FLS Regulations) gives a capital value to a pension even if the member can never receive a lump sum. Prior to the advent of superannuation splitting in December 2002, the problem of dealing with a pension in the payment phase arose in Perrett & Perrett [1989] FamCA 56; (1990) FLC ¶92-101. In Perrett, the Full Court refused to look at the husband’s fortnightly Defence Forces Retirement and Death Benefits Scheme (DFRDB) pension as anything more than an entitlement to receive a series of fortnightly pension payments for the rest of his life. The only “property” was the right to receive the next fortnightly payment. However, superannuation must now be “treated” as property. The FLS Regulations require a pension entitlement to be given a capitalised value if it is to be split. In the pre-superannuation splitting case of Cahill & Cahill (2006) FLC ¶93-253; [2003] FamCA 172, the husband had a DFRDB pension entitlement of just under $1,000 per fortnight. The husband’s entitlement was valued at about $430,000. Coleman J said this was artificial. He also said: “It is one thing to ‘treat’ superannuation as ‘property’ to enliven the jurisdiction of the Court to make an order in respect of superannuation, but another altogether to suggest that superannuation must be treated the same way as existing or tangible assets …”. His Honour said he could not make a contribution finding in relation to the DFRDB figure. The substantial guaranteed income stream was, however, a powerful s 75(2) factor under the FLA. This does not appear to be consistent with the Coghlan & Coghlan (2005) FLC ¶93-220; [2005] FamCA 429 approach required under s 79. See ¶14-020 and ¶14-030. The valuation provisions of the FLS Regulations distinguish between allocated pension products and other pension products (such as fixed term or complying pensions). A similar distinction is made in Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) Pt 7A. The rationale for this distinction is based on the fact that allocated pensions are based on a set capital amount which is readily identifiable (and thus may be split with relative administrative ease). A difficulty that arises with an interest in the payment phase is that the FLS Regulations contemplate that, where a base amount is stipulated, the first payment will be used to satisfy the interest of the non-member and, if this is deficient, a ratio of all future pension payments will be provided to the non-member. It may be possible, depending on the fund, for the non-member to request a commutation of an interest in the payment phase (see ¶14-940). This may create difficulties in relation to the continuation of payments for the member, especially where the underlying sum is insufficient to provide ongoing payments. A more recent decision of the Full Court of the Family Court, which is discussed below, is Surridge & Surridge (2017) FLC ¶93-757; [2017] FamCAFC 10. The wife’s hurt on duty pension was not dealt with as property and valued, but dealt with as an income stream under s 75(2). The earlier cases show the tension which frequently arises in these cases when the capitalised value of the pensions is the largest “asset”. In Goudarzi & Bagheri [2016] FamCA 205, the trial judge dealt with a pension in the payment phase (which was not a hurt on duty pension) as a financial resource. On appeal in Goudarzi & Bagheri (No 2) [2017] FamCAFC 190, the Full Court said this was a permissible, but not the only approach. The correctness of many of the cases discussed below which involve the valuation of a pension in the payment phase was thrown into doubt by the Federal Court’s decision in Campbell v Superannuation Complaints Tribunal [2016] FCA 808. Logan J heard an appeal from the Superannuation Complaints Tribunal (Tribunal). He held that Mr Campbell’s vested entitlement to an invalidity pension was, for the purposes of the FLS Regulations, an “accumulation interest”. Mr Campbell was receiving invalidity benefits under the Military Superannuation Benefits Scheme (MSBS). He applied for information about his superannuation interest in the MSBS under s 90MZB (now s 90XZB) FLA using a superannuation information form. The Commonwealth Superannuation Corporation (CSC) provided two responses: one with respect to his preserved benefit which was in the growth phase and one with respect to the invalidity pension which was in the payment phase. Mr Campbell objected to receiving information with respect to his invalidity pension and argued that it was

not superannuation. The Federal Court accepted that it was superannuation. It was not disputed that MSBS was a superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and thus, within the definition of s 90MD (now s 90XD) of an “eligible superannuation plan”. That definition is “an interest that a person has as a member of an eligible superannuation plan”. However, Logan J found that the invalidity pension was not a defined benefit interest as reg 5(2) removed it from the scope of reg 5(1) because the pension was “only payable on invalidity”. Regulation 5(2) states: “A superannuation interest, or a component of a superannuation interest, is not a defined benefit interest for these Regulations if the only benefits payable in respect of the interest, or the component, that are defined by reference to the amounts or factors mentioned in subregulation (1A) are benefits payable on death or invalidity.” The effect of the determination of Mr Campbell’s invalidity pension as an accumulation interest rather than a defined benefit interest on its value was not set out in the judgment. Logan J remitted the matter to the Tribunal. There is an even greater need for specialist superannuation advice regarding invalidity pensions in the payment phase now than there was before Campbell. The reasons for the decision in Campbell were explored by Stephen Bourke in “Invalidity Pensions after Campbell v SCT” Australian Family Lawyer, 26/2, August 2017. He also explained the effect of the decision, specifically with respect to the Military Superannuation & Benefits Scheme (taking into account amendments to the Scheme as a result of the decision in Campbell) and more generally with respect to hurt-on-duty pensions in the payment phase. Mr Bourke pointed out that the “method approved for the calculation of the amount to be taken as the value under r 43 of the FLS Regulations only applies to pensions payable for life and the approval instrument (see Family Law Superannuation (Methods and Factors for Valuing Particular Superannuation Interests) Approval 2003) does not apply to pensions other than pensions payable for life.” He emphasised the importance of ascertaining whether the pension is a lifetime pension or a fixed term pension payable only until the next medical review when payments may either cease or continue. He outlined the need for reform in this area taking into account the complexities of defined benefit superannuation and the individual schemes. The Full Court of the Family Court has not expressed a view on the correctness or otherwise of the decision in Campbell. However, in Welch & Abney [2016] FamCAFC 271, the Full Court of the Family Court in allowing an appeal, considered that the parties should have an opportunity to make submissions with respect to that decision. This was a factor in favour of the matter being remitted for rehearing rather than the Full Court re-exercising the discretion. Chapman & Chapman (2014) FLC ¶93-592; [2014] FamCAFC 91 The Full Court of the Family Court upheld the decision of the trial judge to split the superannuation of the husband leaving him with a weekly tax-free pension from the fund of about $3,000. See ¶14-030. Lincoln & Lincoln [2014] FamCAFC 69 The Full Court of the Family Court upheld an appeal against a decision to split the husband’s invalidity pension in the payment phase because the trial judge did not: • give adequate reasons in arriving at the wife’s contribution-based entitlement of 15% of the husband’s superannuation, and • assess the impact on the husband of the finding of 15% which resulted in a permanent reduction in the husband’s future income. Trott & Trott (2006) FLC ¶93-263; [2006] FamCA 207 The husband, a police officer, was entitled to a pension before the usual retirement age because of an injury he received after separation.

The single expert valued the husband’s superannuation at about $1,809,000, but under the FLS Regulations it was valued at about $1,865,000. The parties and the court accepted the lower value, seemingly contrary to s 90MT(2)(a) (now s 90XT(2)(a)). The husband had two superannuation interests in defined benefit funds. One was a pension in the payment phase and the other was in the accumulation phase. Watts J said that it was important to analyse the “real nature” of the husband’s superannuation, and the different contributions made to each interest. The Category 1 interest was a CPI-indexed pension, which was then $91,414.51 gross per annum. It was valued at about $1,390,000. The husband proposed that the wife receive 10% or about $180,000 of his superannuation by way of adjustment against other property. The wife sought variously 25%–50% of the superannuation and a 75:25 split in her favour of the non-superannuation. Watts J did not accept that giving a lump sum value to a pension had “an air of artificiality” (Coleman J in Cahill & Cahill [2003] FamCA 172; (2006) FLC ¶93-253). He said that it was reasonable to conclude that a similar purchase price was required to obtain an annuity with the income streams to which the husband was entitled and prior to Pt VIIIB being introduced, superannuation was often undervalued. The value of the superannuation under the FLS Regulations differed from the single expert’s valuation adopted by the parties and the court for several reasons. For example: • the FLS Regulations used a discount factor to age 65. Due to the injury, the husband was entitled to a pension until the age of 60 • the FLS Regulations did not have a method to value the pension which might later be commuted • the Category 2 superannuation had a different formula than would have been used had the husband worked to the usual retirement age • the Category 1 superannuation was not based merely on the length of time in the fund. The circumstances of the injury and the amount of salary at the time of the injury were also relevant. The trustee said that invalidity pensions were only splittable payments if they had been in the payment phase for more than two years. Provided the husband satisfied the definition of permanent incapacity, the single expert considered the pension payment was splittable. Watts J was satisfied that the husband was suffering from a permanent incapacity and was medically discharged from the police force on that basis. However, he also made an order against the husband personally. The wife sought a splitting order, but the husband did not. Watts J held (at para 197) that: “Much of the debate as to whether or not valuation methodology leads to ‘a quite artificial and largely arbitrary exercise’ is eliminated, if the facts of an individual case allow the utility of Section 90MT(1) (b) [now s 90XT(1)(b)] to be used. I find that in this case it can be.” Based on contributions, he proposed a splitting order of 15% in the wife’s favour of the Category 1 superannuation interest and a splitting order of 40% in the wife’s favour of the Category 2 superannuation interest. Treloar & Treloar (No 2) [2007] FamCA 1127 The husband joined the Defence Force about 16 years prior to cohabitation and was discharged at his request seven years after cohabitation commenced. The wife’s assessment of her entitlements to the husband’s superannuation was based on applying a formula comparing the time the husband was in the fund and the period of cohabitation prior to the husband’s discharge from the Defence Force. This was weighed up in the context of all other contributions made by the parties. She based this approach on Trott & Trott [2006] FamCA 207; (2006) FLC ¶93-263. Strickland J agreed with this approach as it was consistent with the Full Court decision in Coghlan & Coghlan (2005) FLC ¶93-220 at para 66. The husband made the greater contributions overall to the pension as he was in the fund for approximately 15 years before cohabitation and only seven years during cohabitation.

The contributions to the pension between 1992 and 1999 were assessed as being equal, but after factoring in the husband’s initial contributions and looking at the history of all other contributions made by the parties, Strickland J assessed the contributions of the parties to the pension at 85%:15% in the husband’s favour. Due to the absence of evidence as to the husband’s entitlements at the commencement of cohabitation and whether the rate of contributions to the fund had been altered, Strickland J found this assessment an almost impossible task. The wife received an adjustment against her under s 75(2) on the non-superannuation assets and the pension due to her higher income and the benefit to her of cohabitation with a new partner. The nonsuperannuation was divided 55%:45% in the husband’s favour, the superannuation interests (excluding the pension) were divided equally and the husband’s pension was split 87.5%:12.5% in the husband’s favour. The further hearing of the case was adjourned to enable the trustee to be given procedural fairness before the superannuation splitting orders were made. Glover & Glover (No 2) [2009] FamCA 411 There was little realisable property to distribute. The husband was receiving a DFRDB pension of $1,241 gross per fortnight with CPI increases. It was valued under the FLS Regulations at $609,139. Justice Moore said (at para 14): “There is otherwise the husband’s DFRDB entitlement which is a defined benefit interest in the payment phase. The single expert accountant … valued it … at $609,139 … But whatever its capitalised value, the difficulty here is that there is no sufficient other property to give to the wife a proper apportionment of the capitalised value in recognition of her contributions. They have both resolved this difficulty by proposing the wife receive the whole of his net after tax entitlement for a period of 13 years, which is not without implications for obligations and entitlements related to child support, Centrelink benefits and income tax assessment. Those implications cannot be solved by orders here, but to the extent orders can address possible issues related to child support assessment they will be made. Of course the DFRDB payment she receives will be towards her property entitlement and the funds will already have been taxed in the husband’s hands.” Each party kept the chattels in their possession and their own debts. The wife received: • 60% of the cash = $37,200 • 60% total superannuation entitlements = $59,547, and • $313,326 paid from the DFRDB payments over 13 years or a shorter period. Moore J said (at para 27): “Since the entitlement is to be passed through to the wife over those years and not paid in a lump sum, it is a flawed exercise to calculate the proportion this total sum bears to its value according to Ms B but nonetheless it can be noted that $313,326 is a little over 51% of $609,139 or, to put it another way, it is close to 53% of the value attributed to the period of marriage of $593,750.” Laporte & Penfold [2008] FMCAfam 1093 The parties cohabitated for 28 years. There were two children. The husband was invalided out of his employment due to Crohn’s disease. He received an annual indexed pension for life which was then about $325 per week. The pension entitlements were valued at $285,582.38. The contributions during the marriage were assessed as equal but post-separation contributions towards the parties’ non-superannuation assets favoured the husband. Brown FM divided the parties’ net non-superannuation assets 52%/48% in the husband’s favour. The husband argued that the parties’ contributions towards the acquisition of his CSS pension should be assessed independently of their contributions to the more conventional assets. As the pension resulted from his personal disability, his contributions towards that pension were intrinsically different from those

made by the wife and he should essentially be regarded as having made all the contributions to it. Brown FM considered such an approach potentially inequitable to the wife, given the value of the husband’s interest in the superannuation scheme, when compared with the value of the parties’ other assets. In addition, there was no doubt that the husband’s interest in the CSS pension was acquired by him entirely during the parties’ marriage. Brown FM said that the fact that the pension was triggered by the occurrence of a disability was no different from the situation where the payment was triggered by another factor, such as retirement or the attainment of a particular age, so far as the question of contributions, were concerned. Whatever the ultimate outcome of the proceedings, the husband would retain a financial “safety net”, which was a very significant resource. In his old age he had some semblance of financial security. The parties had differing prospective needs. The current wife had a far greater need to maintain and accrue capital for her future, but the husband needed present income. The situation would change when the wife retired from the workforce. The difficulty was that the husband’s CSS pension could only be split once so that it could not take account of the wife’s changing needs. Brown FM was not satisfied that any s 75(2) adjustment was warranted in favour of either party with respect to non-superannuation assets. The issue was more complicated with respect to the CSS pension. It was fundamentally inequitable to the husband if his recurrent income was dramatically reduced by half as he was so significantly incapacitated. However, the wife was a low income earner on a salary of around $30,000 per annum. She had limited scope to make provision for her retirement but, in comparison to the husband, her income situation, although modest, was vastly superior at that time. It was impossible to ascertain precisely how long the wife had to prepare for her retirement and so for how long the inequality in the parties’ respective income positions would remain. Brown FM apportioned a 25% split to the wife from the CSS pension. The husband was left with pension income of around $12,700 indexed. The wife could, if she wanted to do so, divert her income of around $4,200 per annum from the husband’s pension into her own superannuation. Cleary & Cleary [2007] FamCA 999 A 42-year-old husband was on leave from his employment as a police officer having been declared “hurt on duty”. Justice Cronin found that the value of his entitlement was completely distorted because he was about to become entitled to superable salary. Justice Cronin dealt with the husband’s superannuation in a separate pool. In 2001, it was valued at $212,000. Under the FLS Regulations, it was valued in July 2007 at about $387,000. As a result of his “hurt on duty” status, the valuation was reviewed. It rose to $1,716,670.74. No contributions were made to the wife’s superannuation on her behalf when she was out of the workforce and being the primary homemaker and parent. She needed to “catch up”. Justice Cronin gave the wife a split of $25,000 of the husband’s superannuation. She received 35% of the non-superannuation pool of $200,000. Cronin J said (at para 38): “The Court has looked at these sorts of cases on a number of occasions since 2001. It is clear that the superannuation value is determined actuarially. It is not cash in the hands of the husband but it is determined accordingly the philosophical concept that it would cost that sort of money to fund an income stream for the life of the recipient. On any mathematical view, that is probably a conservative value. The real benefit for the husband, however, is the fact that: (a) this pension is payable for life; and (b) this pension is payable regardless of whether the husband works and earns extra income or not.” BAR & JMR (2005) FLC ¶43-231; [2005] FamCA 386 The valuation under the FLS Regulations did not fit the husband’s circumstances. Young J held the valuation of the ESSS fund pursuant to the FLS Regulations was imperfect and uncertain and that might

not be appropriate in the circumstances. There were numerous factors which made any valuation of the husband’s interest in the ESSS fund uncertain, including: • the details of the husband’s income • the multiple to be applied from time to time • the date of retirement of the husband, which was likely to be a younger age than provided for in the FLS Regulations • the applicable superannuation tax rates • possible legislative changes to the ESSS fund • issues as to a just and equitable valuation as put in evidence by the single expert, and • the failure of the Trustee of the ESSS fund to give evidence. Justice Young took into account the overstatement of and uncertainty as to the value of the husband’s superannuation, when assessing the s 75(2) factors and when assessing the overall justice and equity of the orders. See also Winn & Winn [2011] FamCA 501 (¶14-255). Craig & Rowlands (2013) FLC ¶93-535; [2013] FamCAFC 45 The Full Court considered an appeal by the husband in property proceedings involving a DFRDB entitlement. The Federal Magistrate treated the husband’s DFRDB entitlement as if it were a capital sum capable of actual distribution and adopted a two pool approach. The Full Court concluded that the Federal Magistrate failed to demonstrate an appreciation of the different character or real nature of the DFRDB in the final stage, together with the necessary assessment of whether the orders were just and equitable. The Federal Magistrate “double counted” the DFRDB by determining the parties’ entitlement to it in one separate pool, then having regard to it again as a s 75(2) factor in the division of the other pool. See ¶14320. In both instances, the Full Court concluded that appealable error was demonstrated. Semperton & Semperton [2012] FamCAFC 132 After 38 years of cohabitation, the husband and wife had accumulated tangible assets worth $822,467. They also had superannuation and pension entitlements worth $520,250, almost all of which were held by the husband. The complicating factor was that 68% of the latter amount was represented by the capitalised value of the husband’s Defence Force Retirement and Death Benefit (DFRDB), which was a non-commutable pension, currently paid at the rate of $900 per fortnight. The effect of the Federal Magistrate’s decision was to leave the husband with $196,348 in tangible assets (23.9% of the tangible pool) and $401,784 in superannuation and DFRDB entitlements (77.2% of the superannuation pool). The husband, aged 59 years, thus received entitlements worth $598,132, or roughly 45% of the combined pools. However, nearly 60% of his settlement ($354,098) was in the form of the DFRDB, and a further 8% ($47,686) was superannuation which he could not immediately access. The wife, aged 56 years, received entitlements worth $744,585, all of which could be seen as “tangible”, given the Federal Magistrate found that she could immediately access the $118,466 she received by way of superannuation. On appeal, the Full Court emphasised the need to look at the nature of the superannuation interest. Justices Thackray and Ryan noted the superannuation interest was valued pursuant to a formula which did not have regard to the taxation payable by the member of the fund. One element of the husband’s complaint had its origin in the DFRDB pension having been capitalised by application of the scheme-specific formula and then included in the superannuation pool, alongside the other superannuation entitlements, and then treated in the same way as them, notwithstanding a “splitting

order” having not been sought. After analysing the authorities dealing with pensions in the payment phase, two of the three judges said (at para 188–190): “Experience teaches that no case is the same as another. Each not only has its own facts, but also individual nuances that often defy description. By way of example, and subject to the proviso mentioned about tax, it would be surprising to see any complaint about the approach adopted by the Federal Magistrate here if both parties had more than ample assets and income to accommodate and support themselves without resort to social security. If that had been the position, the DFRDB would properly have been seen as no different from an annuity acquired as part of prudent retirement planning. However, the scenario becomes more complex when one or both of the parties has insufficient assets or income to provide secure accommodation. The party with the benefit of a secure, lifetime pension might prefer to ‘trade’ all or part of that for the different security offered by capital sufficient to acquire secure accommodation. Litigants are driven by wishes, desires and hunches about their own futures that differ from the imperatives that inspire the statisticians who apply the law of averages in constructing formulae. It is considerations of this sort that encourage us to accept that ‘one size does not fit all’. Or put another way, why one approach to a particular problem should not be seen as the preferred or the correct approach. Ideally, a judicial officer will be alive to the nuances of each individual dispute, including the reasonable wants and desires of each of the parties, and thus seek to craft an order that will provide individual justice for both parties.” While the overall approach adopted by the Federal Magistrate was found to be open to him, his failure to consider the different character of the DFRDB pension at the final stages of the process constituted an error. The matter was remitted for rehearing. Linch & Linch [2014] FamCAFC 69 The Full Court found it impossible to discern how the trial judge arrived at 15% as the wife’s contribution — based entitlement to the husband’s pension entitlement. The husband’s total period of membership and contribution to the fund included 19 years of pre-cohabitation membership compared with less than six years of membership during cohabitation. Although the wife was affected by the events post-2005 which led to the husband commencing sick leave in May 2009, it was the husband who was injured. The Full Court was critical of the trial judge for a lack of adequate reasons in arriving at 15% as the contribution-based entitlement, but also for failing to “refer to, and more importantly, take into account the impact on the husband of that finding of 15%. That impact is the permanent reduction of the husband’s future income”. The Full Court also failed to consider “the other side of the coin”. The wife was entitled to $175,000 of the husband’s superannuation but as his superannuation was an invalidity pension in the payment phase and was considered an unrestricted non-preserved fund, the wife could receive her entitlement in cash. She did not need to retain it in a superannuation fund of her own provided she met a condition of release. Although the trial judge made a traditional splitting order, it did not have the usual outcome. The husband would not have the same opportunity to receive a cash sum and had a limited expectation of receiving any significant lump sum by way of commutation. As there were issues with respect to the valuation of a real property owned by the husband at the commencement of cohabitation, the matter was remitted for retrial. Fitzgerald-Stevens & Leslighter [2015] FCWA 25 The husband was a former member of federal parliament and was entitled to a parliamentary superannuation pension under the Parliamentary Contributory Superannuation Scheme. Special methods and factors for valuing entitlements under that scheme had been approved. The wife’s expert had valued the husband’s interest in accordance with the FLS Regulations as $885,267 but added that the Regulations were deficient in that: • they made no allowance for the taxation of pension benefits from untaxed superannuation funds (as

this one was), and • they have not been revised to reflect mortality changes since their publication. He also made it clear that the figure of $885,257 was a ”combined” entitlement which could be broken down into two components (at 198): ”the first being the value of the member’s benefit for life (amounting to $749,000) and the second being an allowance for the probability of the member remarrying and a calculation of the entitlements of the surviving spouse (amounting to $136,000). If a similar calculation were to be performed to take into account the value of the member’s benefit for life together with an allowance for the member having a spouse at the date of valuation, then the relevant figures would be $749,000 (for the principal benefits) and $315,000 (for the spouse or reversionary benefits) — making a total of $1,064,000 ….” Using revised life expectancies, the expert valued the husband’s pension at $716,000 and the wife’s reversionary benefits as $583,000. Walters J found that one of the drawbacks of the expert’s report was his focus on what he described as “the appropriate compensation for the entitlements that (the wife) would lose on divorce”. Walters J said these calculations were “unhelpful”. Walters J found that the “true value” of the husband’s pension entitlements that existed prior to divorce and at the time of trial was $716,000 and the true value of the wife’s reversionary benefits was $583,000. Relying on Semperton & Semperton [2012] FamCAFC 132, Walters J accepted that he was not mandatorily required to determine the value of a party’s superannuation entitlement as neither party sought a splitting order. As that figure of $885,000 was, he said (at para 206) “beset by a number of deficiencies, not the least being its failure to make any allowance for income tax payable by the recipient of the pension and the inclusion within the total figure of reversionary benefits payable to a possible future spouse”, His Honour preferred to accept the expert evidence at the actuarial value of the husband’s aftertax pension entitlements as $716,000. He was satisfied that this amount comprised an appropriate, and accurate, reflection of the true value of the husband’s pension at the date of trial. In relation to it being a pension, Walters J rejected the proposition that valuing an income stream as a lump sum was “artificial” or that it was inherently less valuable than any other form of property. He also said that the significance of a pension entitlement was different in different cases. In this case, neither party was at risk of being unable to accommodate themselves adequately, irrespective of the manner in which the court dealt with the pension. Surridge & Surridge [2015] FamCA 493 (see appeal below) Foster J adopted a two pools approach with the wife’s pension being a discrete second pool and the parties’ other superannuation and non-superannuation assets being in the primary pool. The wife was in receipt of a hurt on duty pension under the Police Regulation Superannuation Act 1906 (NSW). She received a pension of $900 net per week increasing to about $1,000 per week net at the time of trial. Foster J referred to the difficulty of assessing contribution-based entitlements to the type of superannuation interest held by the wife and quoted favourably from Watts J in Schmidt & Schmidt [2009] FamCA 1386. In Schmidt, the court assessed the wife’s contribution to the hurt on duty pension entitlement at 10%. The parties were together for seven and a half years and the husband was in the police force for just over 21 years prior to his retirement. In Surridge, the wife was aged 46 years and her eligible service period commenced in June 1987. The wife and husband commenced a relationship in 1991, married in 1996 and separated in August 2012. Contributions to the primary pool were assessed as equal. A s 75(2) adjustment of 12.5% was made in favour of the wife who had the continuing care of the children aged 16 and 15 years with little prospect of financial support from the husband. The s 75(2) adjustment also took into account unexplained funds received and disbursed by the husband of $800,000. Foster J found that the wife was employed prior to cohabitation for nine years with the police force. He seems to have made an error here. They married nine years after the wife started with the police force but cohabitation commenced about four years after she started with the police force. The value of the wife’s

future pension was determined according to fund specific factors at $1,022,821. No lump sum was payable in the future to her but the effect of a splitting order was to allow an immediate lump sum to be paid to the husband or for a roll-over of that lump sum to another superannuation fund or a combination of the two. The effect of any splitting order was to commensurately reduce the wife’s pension. His Honour found that the wife’s contribution-based entitlement to the income stream was overwhelming and it was difficult to find any contribution-based entitlement of the husband. The pension was in effect unearned income, indexed and payable during the wife’s lifetime. The consequence of any splitting order of the pension entitlement was to commensurately reduce the wife’s pension and procure an immediate cash payment to the husband leaving the wife with the reduced periodic income. His Honour found that a modest adjustment of 5% in relation to the wife’s pension was appropriate in favour of the husband which equated to an approximate lump sum of about $20,000. The outcome of the orders was that the wife had a cash equivalent of about $1,621,250 from the primary pool less an adjustment of $20,000 in favour of the husband from the pension pool leaving a net figure of $1,601,250. The wife otherwise retained her pension intact. The husband had an entitlement of $993,050 including the $20,000 adjustment of the wife’s pension. Janos & Janos [2013] FamCA 846 The property pool was modest and the husband’s superannuation was the most significant part of it. The husband was aged 58 years and in receipt of an invalidity pension of $900 per week. It had been valued at $631,767 for family law purposes. At aged 60, he could commute the whole of his pension entitlement to a lump sum of $225,000 or commute part of it only. The Family Court accepted that there should be a notional add-back of certain assets to the property pool, as the husband had either wasted assets or given no explanation as to how they had been dissipated. The adjusted property pool, including the add-backs and using the commutation value for the superannuation rather than the family law value, was only $305,640. The Family Court said (at para 39): “Otherwise the valuation obtained is a capitalisation of a future income stream which, if included in the asset pool, would result a distortion in relation to the available assets of the parties for division.” For the wife to receive 60% of the property pool, she was entitled to a superannuation split of 80% of the commuted lump sum. Although that would reduce the husband’s income in circumstances where the wife, aged 49 years, had an income of $60,000 per annum, the husband was in receipt of workers’ compensation payments of about $28,600 per annum. There was no evidence to support his assertion that he had no capacity for employment following his recovery from heart surgery. He would receive the balance of his superannuation pension indexed for life. The Family Court, in relying on the commutation value of the pension rather than the family law value, said (at para 164): “The captialised value of the pension is significantly in excess of its realisable value on commutation.” Welch & Abney (2016) FLC ¶93-756; [2016] FamCAFC 271 The wife appealed against a decision which valued her total and permanent disablement (TPD) pension under the Family Law (Superannuation) Regulations 2001. The valuation was almost $1m, however, as her pension was not being split the FLA did not require that valuation method to be used. A single expert gave evidence about the nature of the wife’s superannuation entitlement and that it should be considered to be similar to earnings from employment. Also relevant was the impact of taxation (which the trial judge had ignored) and the possibility that if the wife’s health improved, she would no longer be eligible for the pension. The wife’s appeal was successful. Jarvis & Seymour [2016] FCCA 1676 The husband, supported by the evidence of a single expert as to the value of his superannuation, argued that there should be three pools: the non-superannuation pool, the invalidity superannuation benefit of the husband, and the retirement superannuation benefit of the husband. The wife contended that there should be only two pools, being the superannuation pool and the nonsuperannuation pool.

Although Altobelli J acknowledged that in other cases involving a hurt on duty pension, such as Schmidt & Schmidt [2009] FamCA 1386, a distinction was drawn between the invalidity benefit and the retirement benefit, he declined to do so in Jarvis. Altobelli J had difficulty adopting the distinction for a number of reasons: • The expert report made assumptions about the husband’s retirement age and whether he would take any benefits as a pension only or commute to a lump sum and if so, at what age. There was no evidence led by or for the husband about these matters. • The valuation of the husband’s superannuation as two components — retirement and invalidity — did not total the valuation of the interest as a whole. • To value the invalidity component of the husband’s superannuation in that manner suggested by the single expert was to take a legalistic and technical approach to the assessment of the wife’s contributions to his hurt on duty pension and had the potential to distract the court from its fundamental task under s 79(2) which was to make an order that was, in all the circumstances, just and equitable. Section 79(4) requires the court to consider “the very broad ranges of contribution” set out in s 79(4) (at para 88). Surridge & Surridge (2017) FLC ¶93-757; [2017] FamCAFC 10 On appeal, the Full Court found that Foster J’s approach to the wife’s hurt on duty pension was erroneous, even though both parties urged him to adopt that approach. Although no ground of the wife’s appeal referred to the error, their Honours considered themselves bound to correct it as it was a matter of significance and productive of injustice. The Full Court found that it was not just and equitable to make a splitting order in respect of the wife’s pension and stated: “The failure to consider any of these important considerations and, conversely, to take up the gross value of the wife’s pension in the manner in which his Honour did, has resulted in the miscarriage of the trial judge’s discretion leading to orders which are unjust to the wife” (at para 34). The Full Court found (at para 27) that it was not just and equitable to make a splitting order with respect to the wife’s pension. Indeed, there was “… a compelling case for not doing so”. The reasons for this conclusion were the following: 1. Importantly, the property and superannuation interests of the parties permitted justice and equity to be achieved without such an order. The wife had only a possible residual capacity for some form of future part-time employment. Her pension income of $50,000 per annum was modest and she had the continuing full-time care of two children, one of whom was only 12. She also had little prospect of receiving child support or other financial assistance from the husband, although he had a significant earning capacity. 2. Once the trial judge determined not to make a splitting order, there was no requirement to value the interest (FLA s 90MT — now s 90XT). 3. The wife could never receive the calculated lump sum amount in specie. Nor could she commute any part of the pension to a lump sum. Her only entitlement was to an income stream for so long as she remained entitled to receive the pension. If no splitting order was to be made but an assessed percentage entitlement was attributed to the lump sum on account of the husband’s contributions (even if those contributions were assessed to be modest as the trial judge considered them to be), the husband was receiving a lump sum entitlement from a lump sum that the wife could never receive. 4. The pension was taxed, but the scheme-specific methodology by which the capital sum was calculated referred to the gross amount of the pension. 5. If the wife’s pension was to be included in the parties’ assets and liabilities, even if part of a separate pool, her very significant contributions to it needed to be considered and the trial judge did not do so. 6. The proper way to deal with the wife’s pension was under s 79(4)(e) as income in the hands of the

wife. There was no actuarial assessment of the “value” of the projected income stream of the husband of $340,000 per annum based on his earning capacity (as he had chosen not to work, his projected income was irrelevant), to compare to the lump sum calculation of the wife’s pension income stream. The Full Court increased the wife’s entitlements overall to 75% by way of a s 90(4)(e) adjustment of 25%, mainly because of large transactions made by the husband which were unexplained and significantly depleted the pool. Although they could not be precisely quantified because of the husband’s attempt to mislead the wife and the court. Regan & Regan [2017] FamCA 406 The capitalised value of the husband’s hurt on duty pension was $1,418,302. The wife was assessed to have made contributions to the husband’s pension of 5% but the contributions to the wife’s modest superannuation were assessed as equal. The wife’s contributions to the non-superannuation were assessed as 52.5%. The trial judge declined to split the husband’s superannuation because of the severe impact it would have on the husband’s income. As the superannuation was not being split, the capitalised value of the superannuation under the Regulations did not need to be used. The case had been reopened following the handing down of Campbell v Superannuation Complaints Tribunal (2016) FLC ¶93-724, but the pension was found to be one which could still be valued under the Family Law (Superannuation) (Methods & Factors for Valuing Particular Superannuation Interests) Approval 2003. The agreed valuation was similar to the earlier valuation used at trial. The adjustment made by the trial judge for s 75(2) factors was greater because the adjustment was only over the non-superannuation interests of the parties. An adjustment of 20% was made. The wife therefore received 72.5% of the non-superannuation pool or $777,635 of $1,072,600. The wife received 8% or $129,000 of the superannuation pool of $1,551,101. If the total pool had been dealt with using the capitalisation value of the pension, the wife received only 35% of the total pool. Goudarzi & Bagheri (No 2) [2017] FamCAFC 190 The extent to which the recent cases that deal with a pension in the payment phase as an income stream and a financial resource rather than an asset available for distribution remain good law since Sempteron, Surridge and Regan, discussed above, is unclear. The Full Court in Goudarzi confirmed this uncertainty (at para 4): “During their years together, the parties acquired a portfolio of real estate which her Honour determined was valued at $16.19 million. Including the husband’s State Super pension, which was in the payment phase, the total net property was valued at $16.906 million. However, the pension was not treated by her Honour as an asset available for distribution on the basis that taking it ‘into account as an available capital sum for distribution would lead to an inequitable outcome’ [93]. It would seem that the primary judge interpreted Semperton v Semperton [2012] FamCAFC 132 as authority for the proposition that ‘the proper course is to take this asset into account under s 75(2) of the Family Law Act 1975 (Cth) (“the Act”) as an income stream with the character of superannuation as an adjusting factor’ [93]. We should not let this pass without comment and observe that although support for that proposition can be found … That said, the majority acknowledged the wide discretion invested in a judge in the position of the primary judge …” Perrin & Perrin (No 2) [2018] FamCAFC 122 The husband had a police force hurt-on-duty pension which had a value of $727,996 at trial out of a total property pool of $1,155,437 or approximately 63%. The trial judge found that the increase in value of the husband’s superannuation as a result of receiving a hurt-on-duty pension was a direct contribution by the husband. The trial judge further found that the wife made no contribution, direct or indirect, to this increase. An examination of the nature, form, and characteristics of the husband’s superannuation interest revealed that a component of his entitlement was the amount of his salary as at the date of discharge. The wife had made contributions as a parent to the husband’s children and as a homemaker. These contributions

allowed the husband to maintain his employment as a police officer and earn that amount of salary. The level of salary which the husband received at the time that he was hurt-on-duty was in part a result of contributions made by the wife during cohabitation. The wife’s homemaking and parenting contributions (incorrectly referred to by the Full Court majority as non-financial contributions) were possibly indirect contributions to the husband’s salary. The trial judge’s failure to consider whether the wife made indirect contributions to the husband’s superannuation interest was a miscarriage of the trial judge’s discretion. The matter was remitted for re-trial.

¶14-270 Self-managed superannuation funds Members of self-managed superannuation funds (SMSFs) must also be trustees of the fund or directors of the trustee company of the fund. If both parties to the marriage are members of an SMSF, an added layer of complexity arises as both parties must continue to be involved in the trusteeship of that fund until the parties are no longer members of the same fund. This may affect decision-making during the period between separation and settlement. Furthermore, the underlying assets may be illiquid or “lumpy”, and a strategy may be required to ensure that the interest of one party is properly transferred to another fund. The capital gains tax (CGT) concessions that may apply in transferring assets in specie between superannuation funds are discussed at ¶14-900 and following. If the SMSF’s financial statements show current values of the assets in the fund, these can be used to value the fund. However, the valuations in the financial statements are usually not current; publicly listed shares may be, but real estate is usually not. In addition, sales and purchases may have taken place, interest or dividends may have been earned, and taxation or other expenses incurred since the financial statements were prepared. Valuations may be more costly with SMSFs than other superannuation funds. Accountants and real estate valuers may be required. Expert actuarial advice may be required to consider issues associated with reserves, forgone benefits or unallocated contributions. Legal advice may be required to assist with the interpretation or construction of the trust deed, and to finalise the relevant resolutions of the trustee. Care must be taken when dealing with SMSFs as some are non-compliant. If the SMSF is compliant, it is important to ensure that the fund maintains its complying status at all times. Independent advice may be desirable if the fund is non-compliant as to the works and costs required to make the fund compliant. Professional advice should be sought as to how to deal with any potential tax penalties. See, for example, Linder & Linder [2013] FamCA 988, Gabbard & Gabbard [2010] FMCAfam 486 and Thurston & Loomis [2016] FamCA 318, the latter two of which are discussed below. If the SMSF’s financial statements show current values of the assets in the fund, these can be used to value the fund. However, the valuations in the financial statements are usually not current; publicly-listed shares may be, but real estate is usually not. In addition, sales and purchases may have taken place, interest or dividends may have been earned and taxation or other expenses incurred since the financial statements were prepared. There may be liabilities to take into account. Capital gains tax may affect the valuation of the fund if the requirements of Rosati & Rosati [1998] FamCA 38; (1998) FLC ¶92-804 are met. It is important to ascertain whether the CGT will definitely be incurred. If it is not incurred immediately or in the near future, it should not be taken into account in valuing the SMSF. The CGT may not eventually be payable or the amount may vary due to changes in the member’s circumstances, tax laws, etc. There may be roll-over relief available if assets are transferred from one SMSF to another or to another complying superannuation fund. Other CGT relief is available in certain circumstances and specialist advice should be sought. The conditions which must be satisfied to attract CGT roll-over relief because of marriage or relationship breakdown between funds in circumstances where each party is keeping their own entitlement are as follows: 1. The parties are members of an SMSF.

2. An interest in the SMSF is subject to a payment split under the FLA. 3. The trustee of the SMSF transfers a CGT asset to the trustee of another complying fund for the benefit of the leaving party. 4. The transfer is in accordance with an award, order or agreement under s 126-140(2B) of the Income Tax Assessment Act 1997 (ITAA97) or under FLA s 90XZA. 5. The transfer is in accordance with the terms of a superannuation agreement or order and the transfer is because of marriage or relationship breakdown. 6. As a result of the transfer, the leaving party will have no entitlement in the SMSF. 7. It may be necessary to have cross-splits to ensure that the party who remains a member of the SMSF does not incur a CGT liability as a result of the restructure. CGT roll-over relief may also be available to payment splits where the parties are not retaining their own interests if the requirements of the Family Law Act 1975 (Cth) (FLA), especially s 90XZA, or the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations), are met. CGT is discussed further at ¶14-900 and following. Gabbard and Gabbard [2010] FMCAfam 1486 The husband dissipated nearly all of the assets of the SMSF without the wife’s knowledge or consent. In August 2007, there was $164,936.45 in the SMSF. By 12 January 2009, the balance was only $1,767.23. Henderson FM found that it was a priority that the fund be repaid the sum necessary to make it compliant. There had been two adjournments to enable the husband to do certain things including to reimburse the SMSF, but he did not do so. The wife relied on the report of an expert setting out the actions required to make the SMSF compliant. These actions were: • the moneys must be fully refunded • tax returns had to be prepared for the six non-complying years • the ATO had to be advised of the husband’s conduct and actions, and • the parties would then await the ATO’s decision. Henderson FM referred to the SMSF’s trust deed and found that the wife could be appointed as the delegate of the trustee of the SMSF to do all acts necessary to make the fund compliant. She also appointed the wife as trustee to sell the real estate so that the wife could pay the amount necessary to the fund to make it compliant. Callis & Callis [2014] FamCA135 The parties finalised property matters in December 2002. These orders were set aside in February 2013 under FLA s 79A(1)(b) and (c). The transitional provisions when the superannuation splitting legislation commenced, prohibited the parties from re-opening previous settlements by consent on the grounds of the introduction of the superannuation splitting regime. These parties were able to rely on other grounds to set them aside and a consent order for a superannuation split. The base amount was determined by the parties to be the amount equal to the value of a real property in Suburb D, Queensland. That sum was to be met by a transfer of the Suburb D property to the wife’s superannuation fund. All costs associated with the transfer were to be paid by the wife. Cronin J was surprised at this as the order left only one trustee liable for the costs, being the wife, rather than both trustees. Thurston & Loomis [2016] FamCA 318 Forrest J was dealing with an SMSF with which there were substantial issues of non-compliance with

legislative and regulatory requirements by the parties who were directors of the corporate trustee of the SMSF. The parties had withdrawn most of the funds from the SMSF to pay for the development of real property registered in the name of one party and the rest to pay for personal purposes not related to the proper conduct of the fund. A jointly instructed independent accountant gave evidence which was summarised by Forrest J (at para 4) recommending that: “… the withdrawals should be treated as loans to members of the fund as a prelude to taking remedial steps so as to reduce the impact of the regulatory consequences of the non-compliance, as far as is possible. Whilst … treating the withdrawals as loans to members does not in itself remedy the non-compliance because they are related party loans and breach the ‘in house asset’ rules of the Superannuation Industry (Supervision) Act 1993 (Cth) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) … if the loans are repaid with interest calculated at the appropriate rate, having regard to guidance set by the Australian Tax Office (‘the ATO’), that the issues of noncompliance may be dealt with in a less punitive fashion by the ATO than they might if the noncompliance is otherwise not addressed.” Forrest J ordered that funds held in two bank accounts which derived from the sales of real property acquired by the parties during the relationship should be used to repay the SMSF. He also ordered that the independent accountant report the matters to the ATO. He adjourned the delivery of his judgment until after the interim matters were dealt with and the parties and the judge had been advised of the remaining funds in the two accounts. Linder & Linder [2016] FamCAFC 139 The self-managed superannuation fund was non-compliant and there were therefore contingent taxation liabilities, the amounts of which were unknown. Both parties were members, but there was no dispute that the non-compliance arose from the husband’s mis-management of the fund. The tax liabilities were potentially between $22,817 and $343,240. The trial judge proposed that the superannuation fund be brought to the attention of the ATO, then whatever liability was payable could be assessed. The wife agreed with this course of action, but the husband did not. The husband proposed that he retain the whole of the self-managed superannuation fund with no allowance for taxation. On appeal, one of the husband’s arguments was that the trial judge was in error in not making any allowance for taxation, and sought that half of the highest possible amount, namely $171,620, be deducted. The Full Court dismissed this aspect of the appeal because: • the husband did not ask the trial judge to include the contingent tax liability as a debt of the parties • it was not possible at trial to determine precisely the magnitude of the liability to the ATO or when it might arise, and • if there was a future liability to the ATO, it would be the result solely of the husband’s failure to properly manage the fund, and this failure should affect the wife.

Applying s 79 (or s 90SM) to Superannuation ¶14-300 Introduction There is a debate about the extent to which the usual s 79 Family Law Act 1975 (Cth) process for altering property interests applies to superannuation (see ¶14-030). For the purposes of s 79 (and s 90SM for de facto relationships), superannuation is “treated” as property under s 90XC. The five members of the Full Court in Coghlan & Coghlan (2005) FLC ¶93-220; [2005] FamCA 429 did not agree on the effect of this. See discussion at ¶14-020. The majority in Coghlan said that all matters in s 79(4)(a) to (g), including the s 75(2) factors, need to be considered in relation to superannuation interests. The two minority judges disagreed and while not necessarily stating that they

were following the minority judgment, some later trial judges impliedly accepted their approach.

¶14-310 Assessment of contributions Section 79(4)(a) to (c) Family Law Act 1975 (Cth) (FLA) requires the Family Law Courts to look at the respective contributions of the parties to the marriage. The equivalent section for de facto relationships is s 90SM(4)(a) to (c). The contributions considered are: (a) direct or indirect financial contributions by or on behalf of a party to the marriage or a child of the marriage to the acquisition, conservation or improvement of any of the property of the parties or either of them (b) direct or indirect non-financial contributions by or on behalf of a party to the marriage or a child of the marriage to the acquisition, conservation or improvement of any of the property of the parties or either of them, and (c) contributions by a party to the marriage to the welfare of the family constituted by the parties to the marriage, including any contribution made in the capacity of homemaker or parent. The main issues which arise with respect to the assessment of contributions to superannuation are as follows: 1. How to take account of the superannuation of the parties at the commencement of cohabitation? 2. How to take account of contributions to superannuation compared to contributions to nonsuperannuation during the relationship? The preferred Coghlan approach of separate pools enables contributions to be assessed differently to superannuation and non-superannuation. But should they always be assessed differently? 3. How to assess indirect financial contributions or homemaking and parenting contributions to superannuation? Sometimes they are assumed to be non-existent. In the past, some cases (eg Money & Money [1994] FamCA 116; (1994) FLC ¶92-485, Bremner & Bremner (1995) FLC ¶92-560) took the approach that an initial contribution lost value or was eroded by effluxion of time. The Full Court rejected this approach in cases such as Pierce & Pierce [1998] FamCA 74; (1999) FLC ¶92-844, where the Full Court said (at para 28): “In our opinion it is not so much a matter of erosion of contribution but a question of what weight is to be attached, in all the circumstances, to the initial contribution. It is necessary to weigh the initial contributions by a party with all other relevant contributions of both the husband and the wife. In considering the weight to be attached to the initial contribution, in this case of the husband, regard must be had to the use made by the parties of that contribution.” The two pool approach outlined in Coghlan allows courts to assess contributions differently to superannuation than to non-superannuation. Usually, this is to the disadvantage of the non-member. Sometimes it occurs because one spouse came into the relationship with more superannuation than the other. Sometimes it occurs because the court gives more weight to the direct financial contributions of the member and the member’s employer to the superannuation rather than the indirect financial contributions or homemaking and parenting contributions of the non-member. This approach is contrary to the accepted approach in relation to contributions that non-financial or homemaking and parenting contributions are given the same weight as financial contributions (eg Mallet v Mallet [1984] HCA 79; (1984) FLC ¶91-507). It is not essential that the contributions were made by the non-member at a time when the superannuation existed. As Finn J said in Farmer & Bramley [2000] FamCA 1615; (2000) FLC ¶93-060 (at para 56): “an issue has arisen … as to whether an entitlement based on contributions made to the welfare of the family can only be satisfied out of property available to the parties at the time the contribution was made. In my view, there is nothing in s 79(4)(c) or indeed elsewhere in the Act, or in the authorities to date, which would justify such a limitation.”

The timing of the contribution should be less important than the weighing of contributions. As Kay J said, in a minority but often quoted judgment, in Aleksovski v Aleksovski [1996] FamCA 111; (1996) FLC ¶92705 (at p 83,443): “What his Honour had to assess by way of contribution was 18 years where each party provided their labours towards the acquisition, conservation and improvement of assets, and towards the welfare of the marriage generally. Additionally, late in the marriage, the wife received a large capital sum arising out of a motor car accident. In my view whether the capital sum was acquired early in the marriage, in the midst of the marriage or late in the marriage, the same principles apply to it. The Judge must weigh up various areas of contribution. In a short marriage, significant weight might be given to a large capital contribution. In a long marriage, other factors often assume great significance and ought not be left almost unseen by eyes dazzled by the magnitude of recently acquired capital. A party may enter a marriage with a gold bar which sits in a bank vault for the entirety of the marriage. For 20 years the parties each strive for their mutual support and at the end of the 20 year marriage, they have the gold bar. In another scenario they enter the marriage with nothing, they strive for 20 years and on the last day the wife inherits a gold bar. In my view it matters little when the gold bar entered the relationship. What is important is to somehow give a reasonable value to all of the elements that go to making up the entirety of the marriage relationship. Just as early capital contribution is diminished by subsequent events during the marriage, late capital contribution which leads to an accelerated improvement in the value of the assets of the parties may also be given something less than directly proportional weight because of those other element.” The management of investments in an SMSF may also be an issue when contributions are assessed. The Full Court in Kane & Kane [2013] FamCAFC 205; (2013) FLC ¶93-569 dealt with the issue of whether the husband’s contributions to an SMSF were a “special” contribution. The Full Court found that they were not. Although not the decisive factor, all three judges, in two separate judgments, considered that it was relevant that the husband would not have argued that he bear all the losses if his investments had made losses. Similarly, Benjamin J in Idoni & Idoni [2013] FamCA 874, refused to take into account the husband’s extra contributions to the SMSF or his losses on the investment in the fund in his assessment of the parties’ contributions. The husband had transferred his superannuation entitlements of about $166,000 into the fund and the wife had only transferred $40,000. Over a period of about six years the fund fell from an asset base of between $200,000 and $300,000 to about $22,000. The husband had effective control of the funds and oversaw what Benjamin J described as its “decimation”. Benjamin J said (at para 35): “The husband could have at any time taken steps to sell the options and reduce the losses. He did not, as he did with the other investments, draw a line in the sand. He stood mute while the fund was reduced to where it is now.” Benjamin J ordered that the balance of the fund be transferred to the wife. He said (at para 147): “I have considered the superannuation fund both in the context of contribution and s 75(2)(o) factors. As to contribution the husband put aside a relatively large sum and the wife a lesser sum. That arose from the different, but agreed, paths the parties took during their relationship. As indicated earlier I have treated those, as part of a holistic approach, as equal. As to the disastrous post-separation superannuation investments, it was open for the husband to discuss this fund (in which the wife had a significant interest) with her. He did not do so. It was also open for the wife to become involved in the management of the fund, she did not do so. I have not made an adjustment in favour or against either party in the context of contributions. I have included a modest percentage (3 per cent) in the overall adjustment in favour of the wife under the s 75(2) factors.” Out of the total pool of $575,207, the husband received $171,886 or 32%. The parties’ contributions were assessed as equal but the wife received a s 75(2) loading of 15% (including 3% for the husband’s wastage of the fund) plus an adjustment of $12,500 for half of the legal costs drawn down by the husband. In Courtnay & Courtnay [2015] FamCAFC 108, the Full Court upheld the trial judge’s decision that the husband was partly responsible for the losses to the value of his self-managed superannuation fund. He lost $400,000 from his entitlements of $633,173 over two years. Prior to 2008 when he retired, his

superannuation had been in an accumulation fund. The husband did not adequately explain his usage of his entitlements and did not provide disclosure to establish that the losses were attributable to the global financial crisis, which was his verbal explanation for the losses.

¶14-315 Weight given to contributions before cohabitation and after separation Prior to December 2002, when superannuation could not be split, courts and legal practitioners sometimes used formulas to calculate the amount of “extra” non-superannuation assets which the nonmember would receive to adjust for the member retaining all of their superannuation. Under a formula based on West & Green (1993) FLC ¶92-395, the non-member sometimes received extra non-superannuation calculated on the following formula: 50%

×

period of cohabitation period of membership

×

estimated net value of current superannuation

Formula approaches were described as “artificial” by the Full Court in such cases as Tomasetti & Tomasetti (2000) FLC ¶93-023; [2000] FamCA 314 and Bartlett & Bartlett (1996) FLC ¶92-721. Since the commencement of the superannuation splitting regime, the Full Court’s criticisms of a formulaic approach were repeated in M & M [2006] FamCA 913; (2006) FLC ¶93-281, which is discussed below. When used post-December 2002, West & Green is used to calculate the percentage split of superannuation to which the non-member is entitled on the basis that the member’s pre-cohabitation and/or post-separation contributions are quarantined from being divided between the parties. Contributions and s 75(2) Family Law Act 1975 (Cth) (FLA) factors are not assessed on this quarantined amount. Example: • the husband has $300,000 of superannuation at the end of a 10-year relationship and 15 years of employment • 10 years as a proportion of 15 years is two-thirds • two-thirds of $300,000 is $200,000 • $200,000 is divided equally between the two parties. Before December 2002 this could only be done notionally. The non-member received their share from non-superannuation assets, and • the non-member receives $100,000 and the member retains $200,000. However, if the actual superannuation at the start of a 10-year relationship can be ascertained, this is better evidence than saying, as under the above formula, that after 15 years of employment, one-third of the superannuation was accrued prior to the relationship. Clearly, one-third of the superannuation did not accrue prior to separation. In most cases, contributions in money terms were less in the first five years than in the final five years. There would also have been growth in the fund during the relationship. In long relationships, pre-cohabitation contributions made to non-superannuation are often of little, if any, significance. Using this formula for superannuation may seem unfair because it gives more weight to precohabitation contributions to superannuation than are often allowed for pre-cohabitation contributions to other property. It also ignores other factors which were referred to by the Full Court in Coghlan & Coghlan (2005) FLC ¶93-220 at p 79,646 [2005] FamCA 429:

“In the context of a consideration of the matters [in s 79(4), FLA] … the following matters may well be relevant: the relationship between years of fund membership and cohabitation; actual contributions made by the fund member at the commencement of the cohabitation (if applicable), at separation and at the date of hearing; preserved and non-preserved resignation entitlements at those times; and any factors peculiar to the fund or to the spouse’s present and/or future entitlements under the fund.” While over time the “value” of pre-cohabitation contributions to other property falls (eg Bremner & Bremner (1995) FLC ¶92-560; Pierce & Pierce (1999) FLC ¶92-844; [1998] FamCA 74), the West & Green formula increases the “value” of pre-cohabitation contributions. Even where the West & Green formula is not used, family law courts frequently “quarantine” preseparation contributions to superannuation in a way which they do not usually do with respect to other contributions, such as the equity in a home at the time of cohabitation. For example, in Ritter & Ritter [2014] FCCA 2640, there was unchallenged expert evidence as to the value of the husband’s pension at the commencement of cohabitation. O’Reilly J quarantined this figure and gave the husband full credit for the dollar value of this contribution. Disputes about the date of valuation of superannuation usually relate to the weight to be given to postseparation contributions. Assets are usually valued as at the date of trial. Post-separation contributions affect the percentage division of the overall pool and any contributions made or assets acquired after separation are not usually “quarantined” at their full value. Usually, if there are children of the marriage, contributions to the family after separation offset any contributions by the primary income earner to property, including superannuation after separation. For example, Spiteri & Spiteri (2005) FLC ¶93-214; [2005] FamCA 66. The Family Law Courts have displayed a diversity of approaches to the assessment of post-separation contributions to property. In Singerson v Joans [2015] HCA Trans 195, the High Court unfortunately declined an opportunity to express a view. It refused the husband’s application for leave to appeal against the decision of the Full Court of the Family Court in Singerson & Joans [2014] FamCAFC 238. The husband received a $3m inheritance after separation. The wife had otherwise made greater financial and homemaking contributions during the relationship and greater homemaking contributions post-separation. The husband suffered from depression and had sporadic employment for much of the marriage. The Full Court of the Family Court re-exercised the discretion and, taking a holistic — or global — approach rather than an asset-by-asset approach, gave the wife 73% of the property excluding the inheritance and 47.5% of the total property including the inheritance. There was no adjustment under FLA s 75(2). The net result was that the wife retained about $3.6m and the husband about $3.9m. Unfortunately, the High Court had the opportunity in Singerson v Joans to develop some principles to guide the Family Law Courts and legal practitioners when dealing with “windfalls” and the assessment of post-separation contributions, but it declined to do so. The unexplained contrast between the outcomes in the Full Court of the Family Court in such cases as Singerson & Joans, as opposed to the “fractional contemporaneity” approach reminiscent of Guest J in Farmer & Bramley [2000] FamCA 1615 (which requires contributions to be made at the same time as the property exists so that contributions made during the marriage are not assessed as contributions to property acquired after separation) and discussed in ¶14-310, taken in Eufrosin & Eufrosin, [2014] FamCAFC 191 (discussed below) remains. M & M (2006) FLC ¶93-281 In M & M, the Full Court seemed to be trying to close the door on formula approaches. It considered that the cases in which formulas can be usefully applied to an adjustment of non-superannuation assets, taking into account contributions to superannuation, were rare. Despite this statement, formulaic approaches have continued to be used. Using the West & Green formula to assess the wife’s contributions to the husband’s superannuation, the trial judge in M & M found that the wife made an equal contribution to 13/20ths of it. She was therefore entitled to over $330,000. However, the trial judge only awarded the wife $80,000 from the non-superannuation. The strength of the Full Court’s criticisms of formulaic approaches was diminished by its finding that it

could not order a superannuation split as neither party sought one. It also referred to other advantages for not splitting superannuation in this case. It adjusted for the husband’s pension entitlement by giving the wife a greater share of the non-superannuation. The most the wife could secure for her $330,000 “contribution” to the husband’s superannuation was about $158,000, being the husband’s equity in the home. This was about double the amount ordered by the trial judge and less than 50% if the West & Green formula was used as a rough rule of thumb. Palmer & Palmer (2012) FLC ¶93-514; [2012] FamCAFC 159 The Full Court of the Family Court allowed the wife’s appeal against a decision of a Federal Magistrate on the grounds that he had erred in assessing the wife’s interest in the parties’ superannuation. The Federal Magistrate awarded the wife a figure of $260,000 which, together with her superannuation, gave her $286,988 of superannuation. This represented approximately 32% of the total superannuation of the parties or, disregarding the wife’s superannuation, approximately 30% of the husband’s superannuation. The Federal Magistrate did not explain his reasons for arriving at this figure. The Full Court said that it was impossible to determine what weight the Federal Magistrate gave to the husband’s pre-relationship contributions and how he arrived at the figure of $260,000. The Federal Magistrate also made an error of fact when he found that some of the husband’s superannuation, valued at $864,386, was attributable to post-separation contributions by the husband. In fact, the husband’s superannuation was valued at the date of separation and there was no evidence as to its value at the time of the hearing two years later. The husband argued that the value of his superannuation to be included in the pool should be determined at the time of separation so that 62% of the total value of his superannuation of $864,386 was attributable to the relationship, or $535,920. The Full Court said that the husband’s argument was “superficially attractive”. However, the Federal Magistrate had not purported to explain the result on that basis. The Full Court also noted that the Federal Magistrate had a valuation of the husband’s interests in 1993, which was the date of the marriage and about a year after cohabitation commenced. This valuation had been properly prepared and was the only evidence as to pre-cohabitation values. The Full Court said (at para 55) that the proper approach was: “More importantly, His Honour was obliged to consider the totality of the parties contributions to the superannuation and non-superannuation assets, to take account of any relevant factors under s 75(2). and then to consider whether the overall result he arrived at was just and equitable.” McKinnon & McKinnon (2005) FLC ¶93-242; [2005] FamCA 1245 On appeal from the Federal Magistrates Court, Coleman J sitting as a Full Court, assessed the wife’s contributions to the husband’s Australia Post superannuation as one-sixth because they cohabited for 4 out of the 13 years of his employment. She made no contributions to his Defence Forces Retirement and Death Benefit Scheme (DFRDB) superannuation which related to other employment which ended nine years before cohabitation. Coleman J dealt with it as a separate pool, using the asset-by-asset approach. Coleman J stated (at para 16) “that recent discussions of the Full Court suggest such an approach to be less heretical than in earlier times”. Coleman J held that: “Whilst the determination of contribution entitlements involves the exercise of a wide discretion, and does not readily permit mathematical precision, the figures indicated above are useful for present purposes.” He made an adjustment under s 75(2) in favour of the wife regarding the other assets. Her contributions to the asset pool (excluding $248,774 referable to the DFRDB pension) of $596,000 were assessed at 15.5%. A 10% adjustment was made for s 75(2) factors. The 10% figure equated to four years of the husband’s superannuation pension payments. Trott & Trott (2006) FLC ¶93-263; [2006] FamCA 207 The husband had two pensions. Watson J assessed the wife’s contributions to the Category 1 pension as 15%. The husband was a member of that fund for 10 years before the marriage. Relevant matters to the treatment of contributions before and after cohabitation included: • the importance of the imbalance in initial contributions lessens as the period of cohabitation increases, even if there is equality of contributions during cohabitation (eg Bremner & Bremner (1995) FLC ¶92-

560) • it was not practical or desirable to approach cases in a pseudo-mathematical way, but this was a “rough initial point of reference” (eg Clauson & Clauson (1995) FLC ¶92-595), and • it was “not so much a matter of erosion of contribution but a question of what weight is to be attached, in all the circumstances to the initial contribution” (eg Pierce & Pierce (1999) FLC ¶92-844; [1998] FamCA 74). Watts J referred to Coghlan & Coghlan (2005) FLC ¶93-220; [2005] FamCA 429 where the Full Court said the following matters were relevant to the assessment of contributions: 1. the relationship between years of fund membership and cohabitation 2. the actual contributions made by the fund member at the commencement of cohabitation (if applicable), at separation and at the date of hearing, and 3. preserved and non-preserved resignation entitlements at those times. The Full Court in Coghlan used the West & Green formula as a rough rule of thumb, and concluded that insufficient weight was given to the wife’s contributions. The Full Court’s first point seemed to suggest that there may be life in a West & Green approach as a starting point to consider the initial contributions or post-separation contributions. However, the weight and effect of “time served” contributions had to be assessed in the context of the contributions made by each party. The second and third points might be important depending on the nature of the fund. Watts J did not, however, consider that the West & Green approach fitted comfortably with how the court assessed contributions to other property. Using the West & Green formula, the wife’s entitlements were 21.7% of the husband’s superannuation. Despite this, Watts J assessed the wife’s contributions to the interest in the growth phase as 40%. Clives & Clives [2008] FamCAFC 172 The Full Court considered pre-cohabitation and post-separation contributions by the husband to superannuation. At the commencement of cohabitation, the husband had superannuation of approximately $33,000. There was no dispute that the present day value of his initial financial contribution was $71,768.55. The trial judge noted that the husband’s initial contributions to his superannuation fund, at their present day value, represented 23% of its agreed value of $310,731. The trial judge gave weight to the husband’s contributions, but rejected a pure mathematical approach and divided superannuation 60%/40% in favour of the husband. The Full Court considered the trial judge gave appropriate weight to the husband’s greater pre- and postcohabitation contributions to his fund, including his post-separation contributions of $122,000, but gave insufficient weight to the disparity in the parties’ ages and, as a consequence, the number of years until the likely retirement of each party. The Full Court held that the trial judge, when dealing with relevant matters under s 75(2), failed to consider the quantum of the splitting order he proposed to make in the wife’s favour. The wife’s superannuation entitlements would increase from $76,944 to $170,456 and the husband’s entitlements reduce from $310,731 to $217,219. This omission constituted appealable error. The Full Court assessed the husband’s contributions to his superannuation fund to be approximately 62% or $191,249 and the wife’s indirect contributions to be approximately 38%. Post-separation, there was a significant but unexplained increase in the husband’s superannuation entitlement. The Full Court was hindered by the paucity of evidence from the husband in assessing his post-separation contributions. However, post-separation the wife continued her role as primary carer of the children, and as a result of the agreement between the parties to invest the net proceeds of sale of the matrimonial home, the husband’s child support obligations were reduced, prima facie providing him with greater capacity to

make contributions to his superannuation. Under s 75(2), it was relevant that the husband, by reason of his age, had a shorter working life expectancy than the wife (the husband was aged 49 years at the date of trial and the wife, 38 years). That factor balanced against the husband’s higher earning capacity to that of the wife. The wife was to retain approximately $50,000 more from the net proceeds of sale of the matrimonial home than the husband and received additional superannuation by way of a splitting order of approximately $81,000. In all of these circumstances, no adjustment was made under s 75(2) to the husband’s superannuation entitlements. The Full Court reduced the splitting order by about $12,000 from the order made by the trial judge. Steele & Stanley [2008] FamCA 83 A defined benefit fund was valued by a single expert on two different dates: • date of separation — October 2004 at $670,729, and • date of hearing — October 2007 at $815,222. Benjamin J acceded to the wife’s request to use the lower figure for assessing contributions, but used the higher figure for determining the pool. He took the difference into account as a factor under FLA s 75(2) (o). Xu-Mao & Xu-Mao [2009] FamCA 375 Property interests were being adjusted three years after separation where the husband had the care of the two children post-separation while the wife lived overseas. Cronin J found that the contributions to non-superannuation assets were 70%/30% in favour of the husband. In relation to superannuation, Cronin J found the contributions were equal until the date of separation. As at the date of separation the husband’s superannuation was $294,000 but 3½ years later it was $531,000. Cronin J considered possible reasons for the disparity and concluded (at para 42–43): “The first of course is that the husband has continued to work and this is a defined-benefit fund. In addition he has had salary increases which have put him in the category that he now enjoys. In addition to that, the accumulation component has continued to amass some interest, presumably at government rates. However, offset against those increases has been the fact that there was seed capital, not only in terms of the value as at separation, but also that the husband has the position of employment that he does by virtue of the wife’s contribution during the period of time that the parties were together. To that extent it is a little more difficult to try and quantify the contributions and, having regard to the totally different nature of non-superannuation and superannuation assets, I cannot find the same contributions. In this case I find the contributions favour the husband as to 60% and to the wife 40%.” Cronin J dealt with the superannuation separately to non-superannuation due to its structure and type. He found that he could not compare it to the other assets. It was a combination of a defined benefit fund and an accumulation fund and the values of the components were starkly different from the money that was notionally in the fund. He gave the wife a split of $95,000 of it, being her entitlement of $100,000 less $5,000 for a costs order. Bevis & Bevis [2014] FamCAFC147 After a 27-year relationship the parties had four children, one of whom was still under 18 at the time of trial. The two younger children were aged 10 and 16 at the time of separation five years previously. The parties had: • superannuation, mostly in the husband’s name, of $750,000 • equity of $186,000 in a unit in the husband’s name purchased using his inheritance of about $280,000 received approximately two years after separation, and • negligible other non-superannuation assets.

During cohabitation the husband had accumulated a substantial interest in a defined benefit fund of approximately $426,000 together with a smaller accumulation fund of about $39,000. The wife’s superannuation was worth $23,000 at the time of trial but there was no evidence of this value at the date of separation. The husband’s superannuation entitlements had increased in value by $261,606 during the period postseparation. He argued that he had contributed about $80,000 by means of contributions by his employer as part of his salary package. The trial judge stated that the husband had to be given credit for his direct financial contributions to superannuation but the situation was not clear cut. The wife had made indirect contributions to the husband’s ability to put $80,000 into his fund post-separation because she had made an indirect contribution to his income earning capacity. In addition, there were other forces such as interest on the funds or the effect of his years of service and salary level or both which had been at work with respect to the remainder of the increase. The trial judge considered that a 3% adjustment in the husband’s favour (equal to about $21,800) was a proportionate response to the husband’s post-separation contributions and assessed contributions to the husband’s superannuation as being 53% for the husband and 47% for the wife. With respect to the wife’s superannuation, the trial judge recorded that the wife had made a direct financial contribution to her entitlement after separation but to the extent that she was able to do so it was in part due to her education during the relationship in which she had received some support from the husband. The trial judge assessed contributions to the wife’s superannuation as being in the proportions of 53% in favour of the wife and 47% by the husband. The effect of the trial judge’s findings in relation to contributions was that the husband was entitled to superannuation worth $396,359 and the wife was entitled to superannuation worth $345,188. The trial judge made an order that the wife receive 50% of the husband’s superannuation which gave her an additional 3% or about $21,800 over and above her contribution based entitlement. She was also able to retain the whole of her own superannuation. The Full Court dismissed the husband’s appeal. Lester & Lester [2014] FamCAFC 209 After an 18-year marriage and four children the pool of almost $1m was divided by the trial judge so that the wife received net assets of about $746,000 including superannuation of $312,000 (being about 77% of the pool including virtually all of the non-superannuation property) and the husband received net assets of about $223,000 of which his remaining superannuation was about $198,000. The husband’s 23% of the pool was overwhelmingly constituted by superannuation. The husband’s appeal was allowed. The husband sought that the order that his superannuation be split so as to give $158,000 of it to the wife, be set aside and the parties property would, as a consequence, be divided as to approximately 61% to the wife and 39% to him. The Full Court upheld the finding of the trial judge that the contribution-based entitlements of the parties were 52%/48% in favour of the wife, but found that it could not discern a proper basis upon which it could be determined that an adjustment of 25% in favour of the wife for s 75(2) factors was appropriate. The Full Court found that the appropriate adjustment for s 75(2) factors in favour of the wife was in the range of 8–10%. While the trial judge correctly gave weight to the significant disparity in the parties’ incomes and earning capacities and the wife’s sole responsibility for the day-to-day care of the four children, the husband also paid significant child support. However, also relevant (at para 80) was: “Worthy of even greater weight is the fact that the husband will receive his property settlement as superannuation. It will be a number of years before the husband is able to access his superannuation, with the probability being that, whereas the wife has capital assets which are immediately available to her and at least provide her with the comfort of a home (plus superannuation), the husband is left with a modest income and no tangible assets from which he must in effect start again, without there being any clear prospect that he could ever manage to acquire a home of his own.”

Eufrosin & Eufrosin [2013] FamCA 311 This is not a superannuation case, but is a useful example of the two pool approach. The husband argued that he had contributed to the wife’s gambling win of $5m received six months after separation. There was uncertainty as to the source of the funds used to purchase the ticket. Justice Stevenson adopted a two pool approach. Pool 1 consisted of the assets, liabilities and financial resources which existed at separation (although not necessarily at that value or quantum) and Pool 2 consisted of the assets, liabilities and financial resources which represented the present balance of the wife’s share of the Tattslotto win. The net assets in Pool 1 totalled $2,437,987 and in Pool 2 totalled $3,368,530. Justice Stevenson assessed the parties’ contributions to Pool 1 as equal and that the husband made no contribution to Pool 2. No s 75(2) adjustment was made to Pool 1. The husband argued for a 33.3% (or $1,111,615) adjustment in his favour in relation to Pool 2. The wife argued that it should be only 5% (or $168,426). Section 75(2)(b) was relevant because as a result of the contributions assessment, the wife had over $4.5m and the husband, after a 20-year marriage with two adult children, had just over $1.2m. Justice Stevenson rejected both proposals and made an adjustment of $500,000 to recognise the husband’s future needs. On appeal in Eufrosin & Eufrosin [2014] FamCAFC 191, the Full Court rejected the significant focus by the husband at trial on the source of funds used by the wife to purchase the winning ticket. The parties were living “separate” lives, including separate financial lives, and the Full Court said this was crucial. The Full Court upheld the two pool approach and the orders made by the trial Judge. Holland & Holland [2017] FamCAFC 166 The Full Court found that the trial judge erred in excluding from the property pool an unencumbered property inherited by the husband 3½ years after separation. It said that it was wrong as a matter of principle to refer to any existing legal or equitable interest of the parties as being “excluded” from consideration. The inherited property could have been dealt with separately from the rest of the property and superannuation interests, but the decision to do this could only be made after an assessment of contributions of all types made until the date of the trial. If the inherited property was dealt with in a separate pool, it was a significant factor weighing in the wife’s favour in the s 75(2) assessment.

¶14-320 Section 75(2) or s 90SF(3) factors The s 75(2) factors in the Family Law Act 1975 (Cth) (FLA) in relation to a marriage (or s 90SF(3) factors in relation to a de facto relationship) are sometimes incorrectly described as “future needs factors”. Unlike contributions under s 79(4)(a) to (c) or 90SF(3)(a) to (c), s 75(2) and 90SF(3) primarily look to the future at such matters as the ability of the parties to support themselves taking into account their ages, health, care of children or the effect the duration of the marriage has had on their respective earning capacities. There are however, other matters which relate more to the past, such as the standard of living which is reasonable in the circumstances and the ability of a creditor to be paid. Section 75(2) is reproduced at ¶14-200. The impact of s 75(2) factors on the appropriate split of superannuation is often not considered by the courts in detail despite the majority in Coghlan & Coghlan (2005) FLC ¶93-220; [2005] FamCA 29 indicating that they must be considered in relation to a superannuation interest (see ¶14-020). The options are (assuming for simplicity that contributions are assessed as equal): 1.

Superannuation and non-superannuation are bundled together in one pool and the same percentage split applied to each. Example: House

$500,000

Superannuation

$200,000 – husband $180,000 – wife $20,000

Total

$700,000

Wife receives 50% for contributions and 10% for s 75(2) factors. Wife receives 60% of the equity in the home being $300,000 plus 60% of the superannuation being $120,000, including her $20,000. She receives a superannuation split of $100,000. 2.

Superannuation and non-superannuation are bundled together in one pool and the percentage split is applied overall. The husband has the majority of the superannuation but no splitting order is made. Example: House

$500,000

Superannuation

$200,000 – husband $180,000 – wife $20,000

Total

$700,000

Wife receives 50% for contributions and 10% for s 75(2) factors. The wife retains her $20,000 of her superannuation. Overall, she is entitled to $420,000 so she also retains $400,000 of the equity in the home. 3.

Superannuation and non-superannuation are dealt with in separate pools. Contributions and s 75(2) factors can be assessed differently but for this example contributions are equal to both pools. There is no “loading” for s 75(2) factors on the superannuation. Example: House

$500,000

Superannuation

$200,000 – husband $180,000 – wife $20,000

Wife receives 50% for contributions and 10% for s 75(2) factors on the non-superannuation only. She retains $300,000 of the equity in the home, her $20,000 of superannuation and a superannuation split of $80,000. Superannuation is usually considered to be a financial resource (Crapp & Crapp (1979) FLC ¶90-615 at p 78,181). Although it is treated as property for the purpose of Pt VIIIB, the introduction of the superannuation splitting regime did not change its nature. An overview of recent cases such as discussed below, suggests that s 75(2) factors are often ignored in relation to superannuation despite the Full Court saying in Coghlan & Coghlan (2005) FLC ¶93-220; [2005] FamCA 429 (see ¶14-020) that they need to be considered. A concern about double-dipping sometimes arises although it is difficult to reconcile this concern with the process required to determine an adjustment of property interests. See ¶14-030. As the Full Court said in Craig & Rowlands (2013) FLC ¶93-535; [2013] FamCAFC 45 (at para 57): “In this case, as in Semperton and the decision in McKinnon, the wife had been found to have a contribution based entitlement to the DFRDB interest. Therefore, as we will explain, the Federal Magistrate fell into error also by having regard to the interest at the s 75(2) adjustment phase when considering the other assets. The better course would be to have commenced with the other assets.” Section 75(2) includes two factors which expressly refer to superannuation: (b) the income, property and financial resources of each of the parties … (f) … the eligibility of either party for a pension, allowance or benefit under: … (iii) any superannuation fund or scheme, whether the fund or scheme was established or operates, within or outside Australia; and the rate of any such pension allowance or benefit being paid to either party …

Sections 75(2)(b) and (f) were in the FLA before Pt VIIIB was inserted and were not altered or removed by the legislation which brought in the superannuation-splitting regime. They remain relevant to the alteration of legal and equitable interests in non-superannuation property when, for some reason, superannuation is not being split, but they may also be relevant to the splitting of superannuation or the alteration of legal and equitable interests in non-superannuation property when superannuation is split, particularly when one party is left with significantly more superannuation than the other. Mayne & Mayne (2011) FLC ¶93-479; [2011] FamCAFC 192 and Mayne & Mayne (No 2) (2012) FLC ¶93-510; [2012] FamCAFC 90 This was a 23-year marriage with two adult children. At trial the parties had been separated for at least three years. The Federal Magistrate divided the total pool either 38%, 43% or 48% to the husband and not 22% as the Federal Magistrate said he was doing. The Federal Magistrate excluded the superannuation from the pool and let each party retain their own. The wife had $25,000 of superannuation and the husband had $260,000. May and Strickland JJ, in separate judgments (and Faulks J agreed on this point), said that in circumstances where the superannuation interests constitute a significant portion of the parties’ property, it may be appropriate to adopt a two pool approach and that was appropriate in this case. However, the Federal Magistrate failed to consider the contributions by either party to each other’s superannuation although he noted the wife had made direct contributions to the husband’s superannuation. There was an absence of evidence as to the reasons for the post-separation growth in the husband’s superannuation. His superannuation had grown substantially in the six years since separation. In the re-exercise of the Court’s discretion, the wife proposed that from a total pool of about $1.2m, excluding an add-back and the agreed values of superannuation, that she receive 78%, thus requiring the husband to split about $114,000 of his $376,000 of superannuation. Alternatively, she included the addback and superannuation in the pool and sought 81%, thus requiring a split of the husband’s superannuation to her of about $116,500. Both options left the husband with only a small amount in shares, an aged vehicle and superannuation he could not access for at least seven years. The husband argued for a two pool approach and sought 35% of the non-superannuation assets including the add-back and 60% of the superannuation assets. The Full Court divided the non-superannuation assets 70%:30% in favour of the wife and the nonsuperannuation 65%:35% in favour of the husband. The wife was required to make a cash payment to the husband of about $227,000 and the husband had to make a superannuation split to the wife of about $105,000. A s 75(2) adjustment was not made to the superannuation but was made in favour of the husband on the non-superannuation. Craig & Rowlands (2013) FLC ¶93-535; [2013] FamCAFC 45 The Full Court considered an appeal by the husband and concluded that appealable error was demonstrated because the Federal Magistrate: • failed to demonstrate an appreciation of the different character or real nature of the DFRDB in the final stage, together with the necessary assessment of whether the orders were just and equitable. See ¶14-260 • double counted the DFRDB by determining the parties’ entitlement to it in one separate pool, then having regard to it again as a s 75(2) factor in the division of the other pool. Strickland J said in relation to the double counting issue (at para 123): “At the very least, having taken the benefit into account as its capitalised value (and allocating a percentage entitlement to the wife) it was double-dipping to then take it into account under s 75(2) of the Act.” May and Forrest JJ said (at para 70):

“The Federal Magistrate correctly used the capital ‘value’ of the DFRDB fund and then discretely decided the entitlement to it by each party and the s 75(2) impact of such a finding in isolation. The Federal Magistrate then took the husband’s DFRDB into account in deciding the s 75(2) considerations which might apply flowing from the property division of the other pool. There was a double count. As importantly, the Federal Magistrate failed to demonstrate an appreciation of the ‘different character’ of the DFRDB in the final stage, together with the necessary assessment of whether the orders were just and equitable.” Bulow & Bulow [2019] FamCAFC 3 The parties’ experts agreed that $66,100 was the portion of the family law value of the husband’s PSS superannuation that was attributable to him making contributions at the rate of 10% of salary, rather than at 2% of salary after separation. The experts made it clear that the direct financial contributions made by the husband had a direct impact upon specific variables which in turn directly impacted upon an increased value of the fund. The Full Court accepted that the trial judge had not properly considered the husband’s direct postseparation contributions to his superannuation. However, it said (at [50]): “But, without any reference at all to the particular nature of the husband’s interest; the specific evidence about the increase in the value of that fund; the derivation of that increase; and any specific comparison between that contribution and specific contributions made by the wife, a consideration of those highly relevant matters cannot be implied from what was said [in] the reasons. There is otherwise nothing within his Honour’s reasons to suggest that consideration has been given to these highly relevant matters.”

¶14-330 Will a splitting order be made and, if so, what order? Whether superannuation will be split and in what proportions will depend upon the circumstances of the case. Superannuation and non-superannuation need not be divided in the same proportions (Engelbrecht & Moss [2015] FCWA 10). Possibly, relevant factors were set out in such cases as Levick & Levick (2006) FLC ¶93-254, BAR & JMR (No 2) (2005) FLC ¶93-231; [2005] FamCA 386 and Coghlan & Coghlan (2005) FLC ¶93-220; [2005] FamCA 429. These include: • whether there are children • if splitting the superannuation means the primary carer can keep the home • whether one party has little or no superannuation • the needs of the parties for cash and saleable assets • the value of all the property and the proportion of the property pool which is superannuation • the type of fund • the ages of the parties • the length of time before the parties reach a condition of release, and • tax implications such as whether a party is close to the employment termination payment components. For example, some pre-1983 tax benefits may be lost if the fund is split. The Full Court confirmed in Doherty & Doherty (2006) FLC ¶93-256; [2006] FamCA 199 that the mix of superannuation and non-superannuation was discretionary. B and B [2005] FamCA 624 Following Coghlan, Faulks DCJ held it was particularly appropriate, in the circumstances of the case, to deal with superannuation separately from other property.

Deputy Chief Justice Faulks considered whether the wife contributed to the husband’s superannuation. It was still in the accumulation phase and potentially would be for another 12 years. The husband contributed to his superannuation for four years before the relationship commenced. The wife argued that she contributed indirectly to it for 17 years. Deputy Chief Justice Faulks rejected the wife’s argument which was based partly on the proposition that, during cohabitation, funds were not available to the family because they were paid by the husband into his superannuation. The husband had no choice about his contributions. The wife’s argument had more force if voluntary contributions were made. Deputy Chief Justice Faulks concluded that the wife had contributed about 45% and the husband 55% to the superannuation. The difference was due to earlier contributions by the husband. Deputy Chief Justice Faulks considered the superannuation under s 75(2)(f) after contributions had been assessed. He assessed the s 75(2) factors as reducing the wife’s entitlements to the husband’s superannuation to 20%. The wife had superannuation in the payment phase. As the wife’s entitlements accrued prior to cohabitation, the husband had made no contributions to them. The income stream was valued at about $333,400. The wife argued that if her superannuation was included in the assets at its capital value, then he should treat the wife as having no income. Deputy Chief Justice Faulks considered there was some force in that submission. Deputy Chief Justice Faulks assessed the contributions of the parties to the non-superannuation as 52% by the wife and 48% by the husband. Due to s 75(2) factors (including that the wife’s superannuation was not otherwise taken into account), the parties’ entitlements were adjusted so that the wife’s entitlements were 57% and the husband’s were 43%. As neither party sought a splitting order, the wife received a nonsuperannuation adjustment of $52,000 on account of the husband’s superannuation. Raine & Creed [2013] FamCA 362 The husband sought a splitting order but this was opposed by the wife. The Family Court decided not to make a splitting order as the husband had a present source of income, the wife also had some income and each party contributed to their own superannuation scheme. The court considered that it was preferable for the superannuation to be taken into account in adjusting the overall pool of assets. The wife said that she had $10,000 in superannuation at the commencement of cohabitation, but the bulk of the parties’ superannuation entitlements arose during the relationship and were acquired from income derived during the marriage. The court took into account the wife’s initial contribution of $10,000 as a contribution made from funds acquired prior to the relationship. It did not consider it necessary to make any further adjustment to the overall distribution of property in respect of superannuation issues, assessing contributions as equal. The wife was left with her $66,500 of superannuation and the husband with his $189,500. Werner & Werner [2013] FamCA 341 The Family Court concluded that the pool of net property, “add backs” and superannuation interests should notionally be divided as 66% to the wife and 34% to the husband. In relation to the superannuation interests, the husband wanted a cash payment from the wife, rather than a superannuation split, because he needed the money immediately and could not wait 10 years until he retired. The husband’s own superannuation interest was only $700 of the total $486,886 of superannuation in the pool. He required a further $164,841 of superannuation to have 34% of the total superannuation. The court said that there was absolutely nothing unjust and inequitable about the husband receiving his percentage share of the superannuation interests by way of a splitting order. That way he was in no significantly different position with respect to the distribution of that pool than the wife. The court also took into account the fact that the husband was 56 years of age so that he had already reached his preservation age. Once the split occurred, the husband was able to access all of his superannuation, albeit with some taxation consequences, if he retired before he turned 60. Alternatively, he could access some of his superannuation by way of a transition to retirement pension. The court was satisfied that the husband did not have to wait 10 years to receive the benefits of the superannuation split. Bishop & Bishop [2013] FamCAFC 138; (2013) FLC ¶93-553 The Full Court of the Family Court allowed the husband’s appeal regarding the parties’ contributions to

their superannuation entitlements. In remitting the matter for rehearing, the Full Court found that the Federal Magistrate failed to make findings regarding the parties’ contributions to their superannuation entitlements. The Federal Magistrate adopted a “separate pool” approach as suggested by the Full Court decision in Coghlan & Coghlan (2005) FLC ¶93-220; [2005] FamCA 429 (see ¶14-020) but did not follow Coghlan as he did not make any findings concerning the parties’ contributions to their superannuation interests which had a relatively significant value in the overall context of the parties’ assets. Simpson & Simpson [2012] FamCA 444 The parties wished to sever their relationship for all time. The wife had no interest in remaining a member of a superannuation fund managed by the husband and it was not in her best interests for her to remain in such a position. The court ordered the husband to pay to the wife a cash amount equivalent to her entitlement previously determined, less a small discount for immediate payment. The amount to be paid by the husband to the wife was rounded down to $30,000. Moss & Moss [2012] FamCA 538 The court did not make a splitting order in relation to the husband’s superannuation interest because it was not an outcome that justice and equity demanded. The superannuation splitting order was raised at a late stage but neither party was cross-examined on the issue. In final submissions the order was only mentioned in passing. It was not necessary to split the husband’s superannuation interest to ensure economic equality or stability. Benford & Benford [2012] FMCAfam 8 The Federal Magistrate decided not to make a superannuation splitting order. In deciding how to divide the assets between the parties, he took a “two-pool” approach. That is, he attributed to the wife an overall entitlement that was 50% of the value of the superannuation assets and 60% of the non-superannuation assets. The court said that did not mean that there had to be a superannuation splitting order of 50%, or at all, especially if it meant that the wife would not be able to retain the former matrimonial home. The court also noted that while one of the policy reasons behind the superannuation splitting law was to provide equity in relation to separated parties’ future retirement security, the total value of the parties’ superannuation in this case was insufficient to provide any long-term security in retirement for either of them. Jenkins & Stewart [2013] FamCA 387 In a rare case, both parties were undischarged bankrupts and were seeking that the court make orders splitting the husband’s superannuation entitlements, there being very little else to divide. The parties cohabited for about 10 years and had two children aged nine and five who lived nine nights out of 14 with the wife. The parties had been separated for three years. On the basis of contributions, Cronin J was prepared to find that an adjustment that gave each an equal amount from the superannuation was appropriate. However, he made orders to effect a 60/40 split in the wife’s favour, not a 70/30 split as sought by the wife. He found that a 70/30 split would be most unfair but a 60/40 split was just and equitable. Engelbrecht & Moss [2015] FCWA 19 Justice Walters considered whether or not the wife should receive part of her property entitlements in the form of a share of the husband’s superannuation, as proposed by the husband. The wife wanted to retain as much non-superannuation property as possible so she could acquire a home for herself and the children. Neither party would be able to access their superannuation entitlements for at least 15 years in normal circumstances. Justice Walters said (at para 228) that: “If the wife’s entitlement is 72.5% of the property ‘pool’, then it is at least arguable that she ought to receive 72.5% of the net realisable property and 72.5% of the superannuation entitlements.” However, he went on to say (at para 229): “Justice and equity do not require both ‘types’ of property to be divided in the same way. Clearly, the Court has a wide discretion as to how to structure the proposed property settlement. Put another way, this Court has always had power to allocate individual items of the parties’ property as it sees fit,

and in such a way as to achieve what it considers to be an appropriate division of the property as a whole. It is in the course of this process that the structure, style and balance of the actual orders the Court proposed to make are considered. The provisions of s 79(2) permeate this process as they do all other aspects of the property settlement exercise.” Justice Walters made orders which meant that the wife should retain or receive approximately 84% of the parties’ net realisable assets (which included paid legal fees) and 47.5% of the total value of the parties’ superannuation entitlements. The husband received approximately 58.5% of his overall entitlement in the form of superannuation. The husband was “allocated” about $49,000 over and above his paid legal fees. Some of this was in the form of the husband’s furniture, chattels and effects, his net interest in his motor vehicle and his savings. Bellenger & Bellenger [2015] FamCA 645 The husband did not seek a superannuation split. Although the wife considered the fact that she had about $162,000 more superannuation than the husband was reasonable due to her greater superannuation at the commencement of their 10-year relationship (about $78,000 more), she proposed a split in the husband’s favour of about $50,000. Justice Berman took into account that the wife’s superannuation scheme was more generous than that of the husband. He reflected the wife’s greater initial contribution to superannuation by assessing contributions to the superannuation pool as 60/40 in the wife’s favour but he gave the husband a further 5% on account of s 75(2) factors. Justice Berman said (at para 151): “It is however reasonable to consider s 75(2) factors in respect of the disparity in superannuation and in this regard the greater potential for the wife’s financial security arising out of her more generous superannuation entitlement and the likely exponential growth arising out of greater income and higher accrued multiple is such that would warrant an adjustment of 5 per cent in the husband’s favour with an overall outcome of 55/45 per cent.” This meant that the husband was entitled to a superannuation split of about $54,000. The nonsuperannuation pool was adjusted 53% to 47% in favour of the husband on the basis of contributions alone as no party sought a s 75(2) adjustment. Goudarzi & Bagheri [2016] FamCA 205 The husband was receiving a pension of $3,068 per week. It was valued at $2.03m, which was equivalent to about 14% of the property pool. The court did not deal with it as an asset, but as a financial resource. This was because it was payable over the lifetime of the husband, whatever that period was, and was not presently available as a lump sum. A s 75(2) adjustment of 20% was made in the wife’s favour, the majority of which was on account of the husband’s pension. Her total property entitlements were determined at almost $8m and the husband retained $6.5m of property plus his pension. This approach was upheld on appeal in Goudarzi & Bagheri (No 2) [2017] FamCAFC 190 as an option which the trial judge could adopt as part of their wide discretion.

¶14-500 Mechanisms for payment splitting A payment split can be made by court order under Family Law Act 1975 (Cth) (FLA) s 79 or 90SM (s 90XS(1)). The types of orders which can be made are described at ¶14-110. A payment split of a member’s superannuation interest in a financial agreement (including a superannuation agreement) may be made if the requirements of s 90XJ(1) are met: (a) the interest is identified in the agreement (¶14-130) (b) if the interest is a percentage-only interest, as defined in reg 9A — the agreement specifies a percentage that is to apply (c) if the interest is not a percentage-only interest — the agreement specifies: (i) an amount as a base amount (ii) a method by which such a base amount can be calculated at the time when the agreement is

served on the trustee, or (iii) a percentage that is to apply to all splittable payments in respect of the interest (d) the agreement is in force at the operative time (¶14-130) (e) the relevant marriage or de facto relationship is broken down at the operative time, and (f) the interest is not an unsplittable interest (¶14-220). The agreement must also meet the requirements of s 90G(1) or 90UJ(1). See ¶14-700. Mechanisms for payment splits Allocation of base amount The FLA and Family Law Superannuation Regulations 2001 (Cth) (FLS Regulations) provide for: (a) the identification of a base amount to be transferred to the non-member spouse (b) its adjustment over time for interest that has accrued, and (c) the superannuation interest to be split at the time of payment. The base amount, not exceeding the value of the superannuation interest, is allocated by the court to the non-member spouse or is specified in the superannuation agreement. Alternatively, a method for calculating the base amount can be specified. Under this option, payment to the non-member spouse cannot occur until the member satisfies a condition of release (¶3-280). Creation of new interest When the payment split is made, an interest will be created for the non-member spouse in a regulated superannuation fund or an ADF. It can be done either at the non-member spouse’s request or at the trustee’s initiative. Part 7A of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) gives three options: (1) the creation of a new interest (2) the transfer or roll over of the interest (3) the payment of a lump sum where the non-member spouse has satisfied a condition of release (eg reaching retirement age). Part 7A contains additional operating standards for regulated superannuation funds and ADFs (SISR reg 7A.02). Failure to observe these standards constitutes an offence (SISA s 34) and puts the complying status of the fund at risk. The amount payable to the non-member spouse is calculated in accordance with reg 45A, 45B, and 45D(3) and (4) of the FLS Regulations. The Regulations require that at the time of payment, the amount to be paid to the spouse is the base amount stipulated in the court order or superannuation agreement adjusted with interest from the operative time up to the payment date. The interest rate applied to the base amount is determined by the Australian Government Actuary and is published in the Commonwealth Gazette. The rate is 2.5% above the percentage change in the original estimate of full-time adult ordinary time earnings for all persons in Australia, as published by the Australian Bureau of Statistics during the year ending with the November quarter immediately before the beginning of the adjustment period. The rates for the current and last two financial years are as follows: • 2019/20 — 4.8% • 2018/19 — 4.9%

• 2017/18 — 4.7% The actual scheme earning rate has no relevance in determining the interest rate to be applied. It is irrelevant if the scheme has negative earnings between the operative date and the payment date; interest is still paid on the base amount. Relevant date When valuing a superannuation interest, the relevant date is the date at which the value of the interest is determined under the Family Law (Superannuation) Regulations 2001. It is usually either the date the request for a valuation the Superannuation Information Form (SIF) is signed by the eligible person or it is the date it is received by the fund. In some cases, another date is nominated such as the date of cohabitation or the date of separation. Operative time or date The operative time or date determines when a trustee must start to recognise the interest of the nonmember. It has a different meaning in different circumstances. It is defined in s 90XD as: (a) in relation to a payment split under superannuation agreement or flag lifting agreement — the beginning of the fourth business day after the day on which a copy of the agreement is served on the trustee, accompanied by the other documents required under s 90XI. (b) in relation to a payment flag under a superannuation agreement — usually either: (i) the service time, if the eligible superannuation plan is a self-managed superannuation fund (ii) otherwise, the beginning of the fourth business day after the day on which the service time occurs (both (i) and (ii) are under s 90XK(1)), or if s 90XLA applies, the time that the payment to the trustee of the new ESP is made (s 90XLA(2) (c)). (c) in relation to a payment split under a court order, the time specified in the order. In relation to a superannuation agreement, the operative time is the beginning of the fourth day after the service of the agreement and any other relevant documents on the trustee (s 90 XDA(a)). The Full Court in Wilkinson & Wilkinson (2005) FLC 93-222 said that a splitting order should have an operative date. The parties agreed that this should be the date of the order. The court considered that it should generally be the date of valuation of the interest. This was because the member’s interest may continue to grow from the date of valuation to the date the orders are made. The majority’s approach is very inconvenient and perhaps less practical for the trustee, but fairer between the parties. In practice, the trustee will object if the operative date is before the date on which the order is served. Base amount This term is not defined in the FLA but is used when splitting most interests. A set dollar figure is allocated to the non-member. This represents the non-member’s interest in the total value of the superannuation. Adjustments may be made to the base amount before the splittable payment occurs. A payment can also be split by allocating a percentage of the splittable payment to the non-member. Payment split notice If splitting the interest is possible, the trustee must issue a payment split notice. The notice gives three options to the non-member: (1) a new interest can be created in the member’s superannuation fund (2) the interest can be rolled over to a fund nominated by the non-member (3) a lump sum can be paid if the non-member spouse satisfies a condition of release, such as retirement or permanent incapacity.

The options are explained in more detail below. The trustee is generally obliged to notify both the member and the non-member spouse, within 28 days, that the member’s interest is subject to a payment split (SISR reg 7A.03). The trustee must send to the non-member spouse any documents that it sends to the member, but not if such disclosure would be unreasonable having regard to the personal circumstances of the member. Splitting options Once the trustee has given a payment split notice, there are three options for an accumulation interest that is in the growth phase, and for an allocated pension, market linked pension or account-based pension that is being paid in respect of an interest. Each of these options must be exercised before the end of 28 days after the trustee gives the member and the non-member the payment splitting notice (SISR reg 7A.08(1)): (1) The non-member spouse can request that a new interest be created for the non-member spouse in the fund in which the original interest is held. With two exceptions, the member has no right of veto and the trustee does not have to consult the member. The exceptions are: (a) if the superannuation interest is in an SMSF, the member has the right to request that the nonmember’s interest be rolled over or transferred to another fund (but if there are conflicting requests by the member and the non-member spouse, the trustee must act on the request first received) (b) the trustee must not give effect to the request to create a new interest if this would breach the governing rules of the fund (in such a case, the trustee must roll over or transfer the benefit to a fund nominated by the non-member spouse or, in the absence of a nomination, to an eligible rollover fund) (SISR reg 7A.09). (2) The non-member spouse can request the trustee to roll over or transfer the interest to another fund, being a regulated superannuation fund, an ADF, an exempt public sector scheme or an RSA. Where the nominated fund does not accept the roll-over or transfer, the trustee must roll over or transfer the benefit to another fund nominated by the non-member spouse or to an eligible rollover fund. The member spouse may also ask the trustee to roll over or transfer the benefit when the superannuation interest is held in an SMSF. Where there is a conflict between a member and a non-member spouse’s request, the trustee must deal with the request first received (SISR reg 7A.06; 7A.09; 7A.12). The trustee is generally required to roll over or transfer the non-member spouse’s entitlements within 90 days of receiving the request, and must notify the non-member spouse (and the member if the roll-over was requested by the member) within 28 days of the roll-over or transfer taking place. (3) The non-member spouse may request payment of a lump sum but only if the non-member spouse has satisfied a condition of release (eg retirement, permanent incapacity or reaching retirement age). The lump sum to be paid to the non-member spouse is one of the following: (a) the value of the base amount, if there is a base amount (b) the value of the adjusted base amount, if there is an adjusted base amount that has been retained by the trustee, or (c) if the payment split is effected by means of a percentage payment split method, the value of the original interest when the new interest is created multiplied by the percentage which could have applied to all splittable payments (SISR reg 7A.07; 7A.13). Despite a non-member spouse not having satisfied a condition of release at the time of the splittable payment, pension payments payable to the non-member spouse must be paid to the non-member spouse if a pension (other than an allocated pension or market linked pension) was already being paid to the member out of the splittable interest on or before the operative time for the payment split (SISR reg 7A.17).

Baines & Baines [2016] FCCA 1017 This is a useful example of a complex splitting order. To ensure that the superannuation entitlements were split equally, Scarlett J adopted the “cross split order” proposed by the single expert. The wife’s entitlement in the self-managed fund was split 100% to the husband and then the husband’s entitlements were split 50% to the wife. See also Fischer & Fischer [2014] FCCA 1088.

¶14-520 Whenever a splittable payment becomes payable A splitting order operates under s 90XT Family Law Act 1975 (Cth) (FLA) “whenever a splittable payment becomes payable”. Therefore, the order does not operate until the splittable payment becomes payable. There is not usually a difficulty with the interpretation of this phrase. The payment split either occurs when the member becomes entitled to a condition of release, or earlier if the rules of the fund enable the nonmember spouse to receive it before the member has met a condition of release. The necessity to examine the meaning of the phrase more precisely arose in Dalmans & Farber [2018] FCCA 2636 which is discussed at ¶14-095. One issue was when the husband’s interest in Super Fund 1 became subject to a payment split. The options seemed to be: • when the order was made, or • when the order was served upon the trustee bound by the order, or • when the splittable payment referred to in the order becomes payable. Harper J referred to Commonwealth v Cornwell [2007] HCA 16, which was not a family law case, but a case in which the High Court dealt with negligent advice given to an employee about which superannuation scheme to join. The High Court referred to s 90MT FLA (now s 90XT) and, in the view of Harper J (at [39]-[40]). The High Court took the following approach: “Although not giving an interpretation of the expression ‘whenever a splittable payment becomes payable’, the comments of the High Court highlight the futurity inherent in the word ‘payable’. The decision in Cornwell suggests, even if it does not decide, two possible conclusions of importance: (i) a splitting order made pursuant to s 90MT(1)(a) [now 90XT(1)(a)] of the Act does not operate until the splittable payment becomes payable to the superannuation interest holder and (ii) the relevant payment becomes ‘payable’ when the interest holder becomes eligible to receive his or her entitlements under the relevant superannuation fund. The second conclusion seems consistent with the wording of s 90ME(1) [now s 90XE(1)] of the Act. Section 90ME(1)(a)-(e) [now s 90XE (1)(a)-(e)] specifies the five types of payment which are splittable payments. The first two, (a) and (b), have already been referred to, being payments ‘to the spouse’ or ‘to another person for the benefit of the spouse’. The remaining three types are payments which all arise after the death of a spouse or a reversionary beneficiary, who receives a payment after the death of a spouse. These considerations favour construing s 90ME(1) as referring to payments made upon the accrual of entitlements to payment under superannuation legislation and the rules of a relevant fund. Often the point of accrual will be retirement, but it will depend upon the terms of the superannuation, and it may be upon the death of the spouse holding the interest”. If a splitting order made under s 90XT(1)(a) does not operate until the splittable payment becomes payable, the other question was whether the order could result in the superannuation interest being “subject to a payment split”. Harper J found that there were at least two reasons why the order was not operative: 1. The orders specified an “operative time”, which was specified as being four business days after the sealed orders were served on the trustee. As the sealed orders were never served, the “operative time” never crystallised. 2. The orders were expressed in such a way that the wife had no entitlement to receive a payment until the “splittable payment becomes payable to the husband”. Even if the orders had been served, the husband’s entitled to a splittable payment did not arise for a number of years.

Harper J’s preferred position, but in the absence of argument, not a concluded view, raised questions of how a non-member spouse could bring about a rollover of their interest before the member spouse’s interest becomes payable. His preferred view was that a superannuation interest may not become “subject to a payment split” until the relevant splittable payment of that interest becomes “payable” to the member spouse. This interpretation would delay the engagement of Div 7A FLA and mean that a nonmember spouse could not request a split (the judge used the phrase “rollover” but this appears to be an error) of the interest until the member spouse’s interest becomes payable. The parties’ preferred construction was that the wording “application of a splitting order in relation to a splittable payment” means that a splitting order applies when it is made and served upon the trustee of the relevant superannuation fund. The judge adopted this interpretation with misgivings as it was the common position of the parties and there was no binding authority to settle the question of consideration.

Procedures ¶14-600 Trustee must provide information In order to calculate the value of a superannuation interest, the parties to a financial agreement or court order, need certain information from the trustee of the superannuation fund. The information is provided in a Superannuation Information Form. A trustee must provide information, on request from an eligible person, about the superannuation interest of a member Family Law Act 1975 (Cth) (FLA) s 90XZB). The trustee cannot tell the member about the request (s 90XZB(6)). Who can apply for information? Only an “eligible person” can apply to the trustee for information about the superannuation interest of a member. The member, a spouse of the member and a person who intends to enter into a financial agreement with the member can be an eligible person. A current de facto relationship or marriage is not a requirement. The definition of “eligible person” also includes the legal personal representative of a deceased member or of a deceased spouse of a member (s 90XZB(8)). Request for information A person applying for information from the trustee must make a declaration that the information is required for either or both of the following purposes: • to assist the applicant to properly negotiate a superannuation agreement • to assist the applicant in the operation of Pt VIIIB. The declaration must be in the prescribed form (Form 6 declaration) and accompanied by the “reasonable fee” required by the trustee. There is no case law on “reasonable fee” but the fee is commonly between nil and $250. If the application is in the right form, the trustee must provide the information unless the information requested is outside the list in the FLS Regulations or the FLS Regulations say that the trustee does not have to provide any information at all. Failure to provide information when required to do so makes the trustee liable for penalties as discussed below. The information that a trustee may be required to provide varies. There are separate lists of requirements for different types of superannuation interests. Under the FLS Regulations reg 63 to 68, the following categories of superannuation interest are identified: • accumulation interests • defined benefit interests • percentage-only interests • self-managed superannuation fund interests, and

• small superannuation accounts interests. Within these categories, the information to be provided differs depending on whether the superannuation interest is in the growth or payment phase. Penalties The trustee must not provide the non-member spouse with the address of the member (s 90XZB(5)). The trustee must also not inform the member that the non-member spouse has requested information about the superannuation interest (s 90XZB(6)). Breach of either of these prohibitions carries a penalty of 50 penalty units for an individual and 250 penalty units for a corporation. Failure to provide information when required to do so makes the trustee liable for a penalty of 50 penalty units for an individual or 250 penalty units for a corporation.

¶14-620 Fees payable to trustee The trustee may charge reasonable fees in respect of a payment split or otherwise in respect of a superannuation interest such as for the completion of the Superannuation Information Form. If a fee remains unpaid after the time it is due for payment, the trustee can recover any unpaid amount by deduction from amounts that would otherwise become payable by the trustee, in respect of the superannuation interest, to the person liable to pay the fee (Family Law Act 1975 (Cth) (FLA) s 90XY). The Family Law Superannuation Regulations 2001 (FLS Regulations) set out at reg 59 who is liable to pay the fees of the trustee of a superannuation fund. Generally, the fees are liable to be paid equally by the parties except: • Section 90XZB Superannuation Information Forms, the fees for completion of which are paid by the applicant. • If a superannuation split gives the whole of the amount of each splittable payment to the non-member spouse, then the non-member spouse is required to pay the total fee.

¶14-630 Non-member spouse may waive rights A non-member spouse may waive their right to an entitlement under a payment split in return for the trustee “buying-out” the non-member spouse’s interest. For instance, the trustee may be able to, under the governing rules of the fund, roll over or transfer funds or pay a lump sum to the non-member spouse even though the superannuation splitting rules do not require the trustee to do so until the member has met a condition of release. A non-member spouse may serve a waiver notice on the trustee releasing the trustee from paying the non-member spouse amounts that would otherwise be payable (FLA s 90XZA(1)). The effect of the waiver is that: (a) the non-member spouse is not entitled to be paid any amount under a payment split for the splittable payment, and (b) the entitlement of the member is reduced as if the entitlement of the non-member had not been terminated. Example Gail has an interest in the Kelly Superannuation Fund valued at $500,000. The court makes an order allocating a base amount of $150,000 to Gail’s non-member spouse Max. To avoid ongoing administration of the base amount in the Kelly Superannuation Fund, the trustee offers to pay Max an amount equivalent to that base amount. Max serves a waiver notice on the trustee and the payment is made. Gail retains a benefit of $350,000 in the fund. The effect of the waiver notice is that the trustee is not required to make any payment to Max in the future.

Non-member spouse must receive financial advice

A waiver notice is not effective until the non-member spouse has received independent financial advice (s 90XZA(2)). The financial adviser must provide: • a statement that the non-member spouse has been provided with independent advice as to the financial effect of the waiver notice • a signed certificate stating that the advice was provided. The financial advice must be provided by a “prescribed” financial adviser. Regulation 60 of the FLS Regulations prescribes the following persons: (a) a person who is the holder of an Australian financial services licence under s 913B of the Corporations Act 2001, being a licence that authorises the person to provide advice of the kind mentioned in FLA s 90XZA(2)(a), and (b) a person who provides a financial service, within the meaning of Ch 7 of the Corporations Act 2001, on behalf of a person mentioned in para (a) in the circumstances in which that is permitted under s 911B of that Act.

¶14-640 Preservation of benefits A payment split by a trustee pursuant to a superannuation splitting order or a provision in a financial agreement may result in a new interest being created, an interest being transferred or rolled over into another fund or the payment of a lump sum to the non-member spouse. In all cases, the newly created interest of the non-member spouse is taken proportionately from the member spouse’s preserved, restricted non-preserved and unrestricted non-preserved benefit. They retain the same character in the non-member spouse’s new interest (Superannuation Industry (Supervision) Regulations 1994 reg 7A.11(7); 7A.12(3B); 7A.13(6)).

¶14-650 Death of member or non-member spouse The death of a member has no effect on the interest of the non-member spouse if the agreement or order resulted in a new interest being created, an amount being rolled over or transferred, or a lump sum payment. The interest is a personal interest in the name of the non-member spouse. If the non-member spouse dies after the operative time (¶14-120, ¶14-130) for a payment split: • the payment split continues to operate • the payment split then operates in favour of the legal personal representative of the deceased spouse and is binding on that legal personal representative, and • the legal personal representative has all the rights the deceased spouse would have had in respect of the payment split, including the right to serve a waiver notice (¶14-630) (Family Law Act 1975 (Cth) (FLA) s 90XZC). The deceased estate of the non-member spouse may not be able to benefit from the splitting order if the non-member dies. There may be no residual benefit payable to the non-member’s dependants, eg Defence Forces Retirement and Death Benefits Scheme. Particular caution should be taken with self-managed superannuation funds (SMSFs). Wooster & Morris [2013] VSC 594 did not involve a superannuation splitting orders, but the problems which arose could easily arise if a party to a superannuation splitting order dies and the trustee of the SMSF replacing the deceased is antagonistic towards the person in whose favour the splitting order was made. The deceased and his second wife, Mrs Morris, were the only members and trustees of an SMSF. The deceased made a binding death benefit nomination (BDBN) in favour of his two adult daughters from a previous marriage, who were the plaintiffs. The plaintiffs were granted probate of the deceased’s will. Mrs Morris appointed her adult son from a

previous relationship as her co-trustee. They then changed the trusteeship of the SMSF to a company of which Mrs Morris was the sole director and shareholder. The trustee decided that the BDBN was not binding and paid the deceased’s death benefits to herself. The plaintiffs issued court proceedings. The parties agreed that a special referee rather than the court decide whether the BDBN was valid. The special referee held in favour of the plaintiffs and that they were entitled to be paid the death benefits of $924,509 plus interest. The trustee’s legal costs in defending the claim were substantial and they had been paid only from the deceased’s interest in the fund. The Supreme Court of Victoria held that all funds held by the SMSF (including Mrs Morris’ account) were available to meet the payments to the plaintiffs, and the trustee and Mrs Morris were joint and severally liable to pay. Important points to note arising from the case are that a BDBN does not guarantee that the nominated beneficiaries will receive the funds. Also, the identity of the trustee is important and this is determined by the deed of the SMSF. The legal personal representative of the deceased may not be appointed as the trustee. The deed may need to be changed to provide for this.

¶14-660 Protection for trustees Trustees have extensive responsibilities under the superannuation splitting scheme. However, a trustee is not liable for any loss or damage suffered by a person because of things done or not done by the trustee in good faith in accordance with Family Law Act 1975 (Cth) (FLA) Pt VIIIB. This applies to acts done in reliance on: (a) any document served on the trustee for the purposes of Pt VIIIB, or (b) a court order made in accordance with Pt VIIIB (FLA s 90XZE). Part VIIIB has effect despite anything to the contrary in a Commonwealth, state or territory law, or in a trust deed or other instrument (FLA s 90XB). The trustee is only protected if acting in good faith. Generally, this means that the trustee must act honestly and be sincere in carrying out the obligations imposed by Pt VIIIB. A trustee who receives an order to split a superannuation interest and who honestly believes that the order is properly made would not, therefore, be liable for any loss that a member suffers as a result of the order being carried out. In contrast, the trustee would be unprotected if the trustee had reason to believe that the order had been fraudulently obtained or that one of the parties had not received adequate legal advice.

¶14-670 Trustee to be accorded procedural fairness Parties to orders have a legitimate expectation to receive procedural fairness before the orders are made (FAI Insurances Ltd v Winneke (1982) 151 CLR 342; Kioa v West (1985) 159 CLR 550). The trustee must have had prior notice of the specific order sought and had the opportunity to be heard about the order before it was made. Notice of an intended order usually occurs by serving a copy of the proposed order on the trustee. If the terms of the proposed order change, further notice to the trustee is usually required. Procedural fairness must also be given in relation to superannuation provisions in financial agreements. The FLA does not define “procedural fairness”. It appears that a trustee is required to be given reasonable notice of any intended orders relating to the superannuation fund and be given an opportunity to be heard in respect of them. If procedural fairness is not accorded, there is an error of law justifying an appeal. Generally, the phrase “procedural fairness” has a similar meaning to “natural justice” and “due process”. The right of a trustee to procedural fairness is reinforced by Family Law Act 1975 (Cth) (FLA) s 90XZD. The court cannot make an order which binds a trustee who is not a secondary government trustee without

according procedural fairness (s 90XZD(1)). A “secondary government trustee” means a trustee that is the Commonwealth, a state or territory and is a trustee only because of the operation of s 90XDA. The court may, if it thinks fit, accord a secondary government trustee with procedural fairness (s 90XZD(2)). In practice, the court prefers that all trustees are accorded procedural fairness and is likely to refuse to make an order which binds any trustee if there has not been procedural fairness. If an order is sought by consent in the Family Court which is intended to bind the trustee of an eligible superannuation plan, not less than 28 days before lodging the draft consent order or filing the Application for Consent Orders, a party must notify the trustee in writing of: • the terms of the order that will be sought to bind the trustee • the next court event (if any) • that the parties intend to apply for the order sought if no objection to the order is received from the trustee within 28 days, or • that if the trustee objects to the order sought, the trustee must give the parties written notice of the objection within 28 days (Family Law Rules 2004 (Cth) (FLR), r 10.16(2)). If the matter is proceeding to trial, a party seeking an order to bind the trustee of an eligible superannuation plan must, not less than 28 days before the date fixed for the trial, notify the trustee of the fund in writing of the terms of the order that will be sought at the trial and bind the trustee, and the date of the trial (r 14.06(1)). The FLA and the FLR are silent about according procedural fairness to trustees in financial agreements. However, if the parties do not give the trustee reasonable notice of the terms of the agreement which it is proposed will affect them, before executing the agreement, the trustee may say it is unable to put the provisions dealing with superannuation into effect. The Federal Circuit Court Rules are not specific about how procedural fairness is to be provided. Although it was not an issue raised by the parties, the Full Court of the Family Court in Pandelis & Pandelis [2018] FamCAFC 66 raised the problem that the trustee had not been given procedural fairness and required that the parties rectify this before fresh orders were made.

Financial Agreements (Including Superannuation Agreements) ¶14-700 Requirements for financial agreements (including a superannuation agreement) A financial agreement is a written agreement entered into between parties to a marriage or de facto relationship which meets certain requirements including that each party has received independent legal advice. A financial agreement can be made before, during or after a marriage or de facto relationship. A superannuation agreement is a financial agreement which only deals with superannuation or it may be a part of a financial agreement. The technical requirements are the same as for a financial agreement. The formal requirements for a financial agreement (including a superannuation agreement) (Family Law Act 1975 (Cth) (FLA) s 90G(1)): (a) the agreement must be signed by all parties (b) before the agreement was signed, each party was provided with independent legal advice from a legal practitioner about: – the effect of the agreement on the rights of that party – the advantages and disadvantages, at the time that the advice was provided, to that party of making the agreement

(c) either before or after signing the agreement, each party was provided with a signed statement by the legal practitioner that the advice was provided (ca) a copy of the legal practitioner’s statement provided to each party is given to the other party or his/her legal practitioner (d) the agreement has not been terminated or set aside by a court. Similar provisions apply to de facto relationships (s 90UJ(1)). An agreement which does not meet the requirements of s 90G(1) (or s 90UJ(1)) may, nevertheless be found to be binding under s 90G(1A) (or s 90UJ(1A)) if: (a) the agreement is signed by all parties (b) one or more of the requirements in s 90G(1)(b), (c) and (ca) are not satisfied (c) a court is satisfied that it would be unjust and inequitable if the agreement were not binding on the parties to the agreement (disregarding any changes in circumstances for the time the agreement was made), and (d) the court makes an order deciding that the agreement is binding. The meanings of s 90G(1) and 90G(1A) have been considered in many cases. The issues are complicated by changes made to the wording of s 90G(1) in 2003 and 2010. The 2010 changes were retrospective. A detailed analysis of these cases is beyond this chapter but is contained in the Wolters Kluwer Australian Family Law & Practice. Relevant decisions of the Full Court of the Family Court include Senior & Anderson (2011) FLC ¶93-470 [2011] Fam CAFC 129, Wallace & Stelzer (2013) FLC ¶93-566; [2013] FamCA FC 199, Parker & Parker (2012) FLC ¶93-499; [2012] FamCAFC 33 and Hoult & Hoult (2013) FLC ¶93-546; [2013] FamCAFC 109. Besides meeting the requirements for a financial agreement in Pt VIIIA, a superannuation agreement must meet other conditions which do not apply to court orders dealing with superannuation. These are: (1) A trustee cannot act on a superannuation agreement unless it is satisfied that the parties are either separated or divorced. The operative time for a payment split is determined by the date of service of the agreement and certain other documents as set out in s 90XL. One or both parties can sign a declaration stating that they are married but are separated at the time of the declaration (s 90XI(a)(ii) and s 90XP). If the parties are divorced, the decree absolute must be served (s 90XI(a)(i)). For a financial agreement made before divorce, a s 90DA separation declaration may also be required. (2) If the member’s interest exceeds the eligible termination payment tax-free threshold ($200,000 in 2017/2018 and $205,000 in 2018/2019), a separation declaration under s 90XP is required. This is to reduce the potential for tax avoidance (s 90XQ). The declaration must state that: • the parties are married • the parties separated and lived separately and apart for a continuous period of at least 12 months immediately before the time the declaration was made • in the opinion of the party or parties making the declaration, there is no reasonable likelihood of cohabitation being resumed. (3) An agreement which splits an interest does not bind the trustee until four working days after the date on which a copy of the agreement is served on the trustee (s 90XI). The grounds for setting aside a financial agreement are discussed at ¶14-720. The proposals for amending the provisions relating to financial agreements which were tabled in federal parliament on 25 November 2015 are discussed at ¶14-740.

¶14-710 Provisions for superannuation not yet in existence An agreement can be made before a superannuation interest exists and can be made in contemplation of the acquisition of such an interest (eg where an agreement is made before membership of a superannuation fund commences) (Family Law Act 1975 (Cth) (FLA) s 90XH; 90XHA). However, a provision in an agreement which provides for the parties to split any future superannuation may not be possible to implement without an order of the court made pursuant to s 90XT. Section 90XH(1) says a superannuation interest does not have to exist when the agreement is made but s 90XJ(1)(a) requires the interest to be identified in the agreement. These provisions appear to be inconsistent as an unknown future interest cannot be identified. The inherent difficulty in identifying future property interests of the parties in a prenuptial agreement was referred to in Garvey & Jess [2016] FamCA 445. The wife argued that this meant the agreement was voidable for uncertainty. The court rejected this argument and said that the “joint assets” to be divided could be identified by applying the objective test of a reasonable bystander. The identification of superannuation was not in issue, as superannuation is not a “joint asset”. This decision was not affected by the appeal in Jess & Garvey [2018] FamCAFC 44. Section 90XI(1)(b) allows a split if the agreement specifies a method for calculating the base amount. A formula can possibly be inserted in the agreement even though the future superannuation interests of the parties are unknown, but s 90XJ(1)(a) will not be complied with. What about procedural fairness to the trustee? The FLR requires this for orders but the FLA is silent in relation to financial agreements. Although an unsplittable payment is a ground for agreements to be set aside under s 90K(1)(g), trustee refusal to implement is not within the definition of an unsplittable interest in Family Law Superannuation Regulations 2001 (FLS Regulations) reg 11. As a superannuation split cannot be as clearly set out in a prenuptial or pre-cohabitation agreement or an agreement during cohabitation or marriage as in a post-separation agreement or court order, a trustee may be quite justified in refusing to implement it or the trustee may be unreasonable. There may be a ground for setting aside the agreement due to impracticability within s 90K(1)(c) (see ¶14-720) so lawyers may need to advise clients about the risks of including superannuation-splitting provisions. As a matter of best practice, if a proposed financial agreement contains a superannuation-splitting provision, it should be provided to the trustee of the fund to be split, to ensure that it can be implemented before the parties execute the agreement. It may be possible to make a super-splitting order to implement the provisions of a financial agreement by way of enforcement under s 90G(2). However, this is unlikely as the order is creating a right rather than enforcing it. It is far easier to envisage the court making orders under FLA s 90G(2) and 90KA by way of enforcement to transfer, say, shares in entities which were not in existence at separation (under a general provision requiring that a party transfer shares in all entities to the other) than creating a super-splitting order from scratch. If superannuation is not properly dealt with in the agreement, can s 79 orders be sought to deal with superannuation? Section 71A appears to prohibit a s 79 order being made, even if not all property is deal with. However, there is no judicial authority on this point. Section 90XS indicates that orders in relation to superannuation interests can be made in proceedings under s 79 or 90SM. A court cannot otherwise make an order under s 79 or 90SM in relation to a superannuation interest (s 90XS(2)). An agreement in contemplation of marriage or a de facto relationship has no effect unless, and until, the parties marry or enter into the de facto relationship. A superannuation interest can only be split on the breakdown of the marriage or de facto relationship. In Pascot & Pascot (2012) FLC ¶94-100(23); [2011] FamCA 945, the court held that there was no valid superannuation agreement. The agreement was entered into over a year before the commencement of the Family Law Legislation Amendment (Superannuation) Act 2001. The transitional provisions contained in the Amending Act, precluded the parties from entering into financial agreements dealing with

superannuation before the start date of the Amendment Act in 2002. Section 90XJ(1) requires that for a superannuation split to be effective: • the superannuation interest must be identified • the agreement must be “in force” at “the operative time”, and • the interest must not be an unsplittable interest, defined for this purpose as an interest with a withdrawal benefit of less than $5,000 or an annual benefit of less than $2,000 (FLA s 90XD; FLS Regulations reg 11). A superannuation agreement is in force when the financial agreement of which it is a part is in force, ie when the financial agreement is binding on the parties (FLA s 90XG). The operative time for a payment split under a superannuation agreement or a flag lifting agreement is the beginning of the fourth business day after the day on which a copy of the agreement is served on the trustee, accompanied by: • either a copy of the decree absolute dissolving the marriage or a separation declaration () made within the last 28 days • if the agreement specifies a method for calculating a base amount used to calculate the non-member spouse’s entitlement (¶14-500), a document setting out the amount calculated using that method, and • a declaration in the prescribed form (FLA s 90XI).

¶14-720 Court may set agreement aside Superannuation agreements are a discrete subset of financial agreements under the Family Law Act 1975 (Cth) (FLA). The grounds for setting aside financial agreements are set out in FLA s 90K (and s 90UM for de facto relationships). Superannuation agreements, or provisions with respect to superannuation in financial agreements, are subject to two further grounds for being set aside, namely s 90K(1)(f) and (g). The grounds for setting aside superannuation agreements are: • the agreement was obtained by fraud (s 90K(1)(a)). To succeed under this ground, the applicant needs to prove that there was a false statement of fact (including non-disclosure of a material matter), culpable intent and reliance • either party entered into the agreement either for the purpose or for purposes that included the purpose of defrauding or defeating the interests of a creditor or creditors of the party or with reckless disregard of the interests of a creditor or creditors (s 90K(1)(aa)) • either party entered the agreement (s 90K(1)(ab)): (i) for the purpose, or for purposes that included the purpose, of defrauding another person who is a party to a de facto relationship with a spouse party (ii) for the purpose, or for purposes that included the purpose, of defeating the interests of that other person in relation to any possible or pending application for an order under s 90SM, or a declaration under s 90SL, in relation to the de facto relationship, or (iii) with reckless disregard of those interests of that other person • the agreement is void, voidable or unenforceable (s 90K(1)(b)) • it is impracticable for the agreement (or part of it) to be carried out having regard to circumstances that have arisen since the agreement was made (s 90K(1)(c)) • where a party to the agreement will suffer hardship and that party has responsibility for the care,

welfare and development of a child (s 90K(1)(d)) • the agreement is unconscionable (s 90K(1)(e)), for example, where the conditions under which the superannuation agreement was made were grossly unfair or unjust to one of the parties and the other party took advantage of the other party • there is no reasonable likelihood of a flag being terminated by a flag lifting agreement (s 90K(1)(f)), and • one of the superannuation interests covered by the superannuation agreement is an unsplittable interest (s 90K(1)(g)). Similar provisions apply under FLA s 90UM for setting aside Pt VIIIAB financial agreements. A major difference is that a Pt VIIIAB financial agreement ceases to be binding if the parties marry each other (s 90UJ(3)). Similar grounds apply to the setting aside of a flag-lifting agreement or a termination agreement (s 90XN(4)) and in respect of agreements made between de facto couples (s 90UM). Thorne v Kennedy [2017] HCA 49 The High Court agreed with the trial judge that two financial agreements should be set aside. The first agreement was first seen by the wife 10 days before the wedding, and the second was signed about a month later. The wife moved to Australia to marry the husband, she had no income and few assets, and her family had arrived in Australia for the wedding. The High Court found that she was “powerless” and had “no choice” but to enter into the agreement. The agreement was a particularly bad bargain for the wife. The High Court found that the fact that the bargain was so bad for the wife, helped to support a finding that she was subject to undue influence and unconscionable conduct. Ainsley & Lake [2016] FCCA 2132 The wife sought enforcement of a post-separation financial agreement and the husband sought that it be set aside. The wife did not disclose her superannuation of $35,000 in the agreement although she had told her lawyers of its value and they had confirmed this in a letter. The husband knew that the wife had superannuation but believed it to be about $6,000. There was a blank space left in the schedule next to the words “Ms Ainsley’s superannuation”. The asset pool was modest, being less than $400,000. The husband defaulted under the agreement, with his two breaches amounting to over $38,000. The agreement was set aside although the husband had knowledge that the wife had some superannuation, he had failed to comply with the terms of the agreement and the pool was modest. These matters were irrelevant to the discrete issue in the case, which was the wife’s failure to disclose.

¶14-730 Separation declarations Evidence of the breakdown of a marriage or a de facto relationship is required in order for superannuation splits in financial agreements (including superannuation agreements) to be effective (but not for court orders). Both types are discussed below. A separation declaration is not required for court orders with respect to alteration of property interests (including superannuation). Separation declarations are used to help ensure that financial agreements (which are essentially private arrangements) are not used to enable parties in intact marriages to take advantage of the superannuation-splitting provisions, CGT rollover relief and other assistance given to separating couples. Separation declarations — superannuation provisions in financial agreements There are two types of separation declarations that apply to superannuation splits in financial agreements, depending on the value of the superannuation interest: (1) Section 90XP Family Law Act 1975 (Cth) (FLA) — Where the member has superannuation interests with a withdrawal value that is less than the low rate cap amount ($200,000 for 2017/18 and

$205,000 for 2018/19: ¶8-210), the separation declaration needs to state that the spouses were married or in a de facto relationship but are separated at the declaration time. If either or both of the spouses have died, the declaration must state that the spouses were married or in a de facto relationship, but separated, at the most recent time when the spouses were alive. In this latter case, the declaration may be signed by the spouse’s legal personal representative. The withdrawal value of the member’s interests is determined by adding together the withdrawal benefits for each superannuation interest the member has in any eligible superannuation plan (Family Law Superannuation Regulations 2001 (Cth) (FLS Regulations) reg 20). (2) Section 90XQ FLA — Where the member has superannuation interests with a withdrawal value that is more than the low rate cap amount, a more formal declaration is required. This is because of the considerable tax advantages that are on offer. In such a case, the declaration must state that: • the spouses were married or lived in a de facto relationship • the spouses have separated and thereafter lived separately and apart (even if under the one roof) for a continuous period of at least 12 months immediately before the declaration time • in the opinion of the spouse signing the declaration (or both if both are signing), there is no reasonable likelihood of cohabitation being resumed. Where either or both of the spouses have died, the declaration may be signed by the spouse’s legal personal representative and must state that at the most recent time when both spouses were alive: • the spouses were married or in a de facto relationship, but • the spouses were separated and had lived separately and apart for a continuous period of at least 12 months immediately before that time. A person who makes a separation declaration under s 90XP or 90XQ knowing that it is false or misleading in a material respect may be guilty of an offence if the declaration is served on the trustee of a fund for the purposes of splitting a superannuation interest. The penalty is imprisonment for a period of up to 12 months (FLA s 90XZG). However, a person is not guilty of the offence if a spouse to which the declaration relates died before the declaration was made. Separation declarations — agreements generally A financial agreement will be of no force or effect unless and until a separation declaration is made under s 90DA or 90UF. A s 90DA separation declaration applies to a financial agreement (including a superannuation agreement) to the extent to which it deals with: • how, in the event of the breakdown of the marriage, all or any of the property or financial resources of either or both of them at the time when the agreement is made or at a later time and before the termination of the marriage by divorce, is to be dealt with, or • the maintenance of either of them after the termination of the marriage by divorce. In relation to de facto relationships, a s 90UF declaration is required for a Pt VIIIAB financial agreement (including a superannuation agreement) to the extent to which it deals with how, in the event of the breakdown of the de facto relationship, all or any of the property or financial resources of either or both of the spouse parties: • at the time when the agreement is made, or • at a later time and during the de facto relationship. There is no reference to maintenance in s 90UF. Section 90UG specifically provides that to the extent that a Pt VIIIAB financial agreement deals with incidental or ancillary matters (ie not property or financial resources of the parties or maintenance) the agreement is effective from the date of separation and that

no separation declaration is required to make them effective. The separation declaration must be signed by at least one of the parties to the financial agreement, and must state that: • the parties have separated and are living separately and apart at the declaration time, and • in the opinion of the parties making the declaration, there is no reasonable likelihood of cohabitation being resumed. In practice, a separation declaration complying with s 90DA or 90UF is usually annexed to the agreement if it is entered into after separation. Section 90DA(5) adopts the same definition of “separated” as in s 90XP(6). A separation period of 12 months is not required for a s 90DA separation declaration. There are two types of separation declaration under the FLA: (1) Separation declarations to enable certain provisions of a financial agreement to be effective. A financial agreement will be of no force or effect unless and until a separation declaration is made under s 90DA or 90UF. (2) Separation declarations to enable a superannuation split in a financial agreement to be effective. They are required to help ensure that financial agreements (which are essentially private arrangements) are not used to enable parties in intact marriages to take advantage of the superannuation-splitting provisions, CGT roll-over relief and other assistance given to separating couples.

¶14-740 When to use a superannuation agreement? Reasons for using a superannuation agreement include the following: (1) The parties want to settle their affairs with a financial agreement. Under s 90XH(1), a superannuation agreement can be part of a financial agreement which also deals with nonsuperannuation property. Parties may prefer to have all their financial issues covered by one document in circumstances where they have already agreed to formalise the division of nonsuperannuation property in a financial agreement. (2) There does not need to be a formal valuation of the superannuation. This may suit parties faced with difficult valuation issues regarding a defined benefit fund, self-managed superannuation fund or a pension in the payment phase. There may be a significant difference in the value of the fund using scheme specific factors rather than the member’s statement and the parties agree to rely on the members statement. Another example is when parties agree to assume a retirement age of, say 55, rather than another age imposed by the Regulations or scheme specific factors. Valuation evidence of some sort is still required to reduce the risk of later negligence claims against the lawyers. (3). The parties may have agreed to take the superannuation into account in a manner which may not seem, on its face, to be just and equitable. Using a superannuation agreement avoids the risk of a Registrar knocking back the consent orders in Chambers and referring the matter to a Judge in open Court. Of course, the benefits of this must be weighed up against the risks of a later application by one of the parties to set the agreement aside. (4) The parties can specify a method in the agreement for splitting the superannuation interest. This can be different to the two options available in court orders. An order can only either set a base amount or a percentage basis for the split. If the parties use their own method, they must give an example to the trustee to show how the base amount is to be achieved (s 90XI(b)). This does not need to be in the agreement itself but can be in a separate document. (5) The complexity of superannuation generally and of the proposed orders in a particular case may encourage lawyers to split superannuation by a superannuation agreement even if nonsuperannuation is dealt with in consent orders. A superannuation agreement can be particularly

useful with self-managed funds.

¶14-750 Proposed amendments to legislative provisions with respect to financial agreements The Family Law Amendment (Financial Agreements & Other Measures) Bill 2015 was tabled in federal parliament on 25 November 2015. The Bill did not pass before the 2016 Federal election and has not been restored to the notice paper since. The future of the amendments relating to financial agreements is unclear, particularly as some of the other changes to the Family Law Act 1975 (Cth) (FLA) proposed in that Bill were inserted in the Family Law Amendment (Family Violence & Other Measures) Act 2018.

¶14-800 Enforcement by court order A trustee is required to take certain action to implement a financial agreement to either split payments or to flag a superannuation interest. Should one party wish to resile from the agreement or the trustee does not do what is required, the court is also given power to make orders to enforce the superannuation provisions of an agreement (Family Law Act 1975 (Cth) (FLA) s 90XR(1)). Although an order in relation to a superannuation interest may be expressed to bind the person who is the trustee at the time the order takes effect, the court cannot make such an order unless the trustee has been accorded procedural fairness before the making of the order (¶14-670). For example, see Palance & Marley [2012] FMCAfam 271 at para 77. However, where the court does make an order, the order will also be binding on any person who subsequently becomes trustee.

Taxation Consequences of Payment Splits ¶14-900 Taxation consequences of payment splits The taxation consequences of a payment split after a court order is made or a superannuation agreement is entered into may be summarised as follows. • Superannuation lump sums. A superannuation lump sum paid to, or a superannuation interest created for, a non-member spouse after a payment or interest split is treated as a separate superannuation benefit for the non-member spouse. The components of the benefit are split in the same proportions as the overall split (¶14-920). • Superannuation income streams. If a non-member spouse’s entitlement is paid as a superannuation income stream, it is treated as a separate superannuation income stream for the non-member spouse (¶14-940). • Capital gains tax (CGT). Capital gains or losses arising from the creation of rights when a superannuation agreement is entered into or terminated are disregarded. There is a CGT exemption for payments made from a superannuation fund or an ADF to a non-member spouse. CGT roll-over relief is available for in specie transfers between a small superannuation fund (funds with fewer than five members) and another complying superannuation fund (¶14-960). The tax consequences of payment splits before 2007/08 are discussed in Chapter 14 of the Wolters Kluwer 2006/07 Australian Master Superannuation Guide. The tax treatment before 2007/08 was considerably more complex, in particular because of the interaction with the reasonable benefit limits (RBLs) and superannuation contributions surcharge. RBLs were abolished from 1 July 2007 and the superannuation contributions surcharge was abolished from 1 July 2005.

¶14-920 Superannuation lump sums A new superannuation benefit (¶8-130) is created for a non-member spouse if: • a payment split (¶14-110) applies to a splittable payment (¶14-220)

• as a result, a payment is made to the non-member spouse (or to their personal representative if the spouse has died) • the payment, if it had been made to the member spouse, would have been a superannuation benefit. For the purposes of the meaning of “superannuation benefit”, if a “family law superannuation payment” is made to a non-member spouse (a party to either a marriage or a de facto relationship) because another person is a member of a superannuation fund, a holder of an RSA or a depositor with an ADF or the annuitant under a superannuation annuity: • the non-member spouse is treated as a member of the fund, holder of the RSA, depositor with the ADF or annuitant under the superannuation annuity, and • the member spouse is not treated as a member of the fund, holder of the RSA, depositor with the ADF or annuitant under the superannuation annuity (ITAA97 s 307-5(5), (6)). This means that the benefit is a superannuation benefit for the non-member spouse but not for the member spouse. Apportionment of components of a superannuation benefit When there is a superannuation split, both the member spouse and the non-member spouse are entitled to a share of the components of the member’s superannuation benefit at the time the benefit is paid. Since 1 July 2007, the two components of a superannuation benefit are the tax free component and the taxable component (¶8-155). The components for each of the member and the non-member spouse are worked out by calculating the components of the superannuation benefit immediately before the payment or interest split and apportioning them in the same proportion as the payment or interest split. As part of the components contained in the member’s superannuation benefit or interest are allocated to the nonmember spouse, the components in the member’s benefit or interest are reduced accordingly. Example Assume that the amount to which the payment split is applied (the pre-split amount) is $200,000 and that the amount paid to the non-member spouse is $80,000. Assume also that the tax free component of the pre-split amount is $50,000 and that the taxable component is $150,000. The tax free component of the $80,000 paid to the non-member spouse would be calculated as:

$80,000 × $50,000 = $20,000  $200,000   After the payment split, the member’s superannuation interest is reduced by the amount paid to the non-member spouse. The $80,000 payment for the non-member spouse is made up of two components: $20,000 tax free component and $60,000 taxable component.

¶14-940 Superannuation income streams and annuities Splitting of a superannuation income stream or a superannuation annuity results in two regular payments being made from the same income stream or annuity. Generally, this means that, after the split, a new superannuation income stream or superannuation annuity is considered to have commenced for the nonmember spouse and will be assessed accordingly. A superannuation income stream includes all income stream payments from superannuation vehicles that comply with the payment standards applying from 1 July 2007, and also income streams that began to be paid before 20 September 2007 and that were at that time a pension or annuity within the SISA s 10 definition (¶8-150). A superannuation annuity is basically a superannuation income stream purchased from a life insurance company or from a similar provider (ITAR reg 995-1.01). As with superannuation lump sums (¶14-920), when a superannuation income stream or superannuation annuity is split, both the member spouse and the non-member spouse are entitled to a share of the components of the income stream or annuity. From 1 July 2007, the two components are the tax free

component and the taxable component (¶8-155). The components for each of the member and the nonmember spouse are worked out by calculating the components of the superannuation income stream or annuity immediately before the split and apportioning them in the same proportion as the income stream or annuity is split. When part of the components contained in the member’s superannuation income stream or annuity are allocated to the non-member spouse, the components in the member’s income stream or annuity are reduced accordingly. Each of the member and the non-member spouse is taxed at appropriate rates on the income stream or annuity that they receive. The tax treatment of superannuation income stream benefits and superannuation annuities is discussed at ¶8-150 and following. Commutation of superannuation income stream or annuity If a member spouse has commenced to receive a superannuation income stream benefit (or a superannuation annuity), a commutation or partial commutation of the income stream benefit or annuity may be required as a result of a superannuation agreement or court order. For example, an income stream benefit may be partially commuted to pay a lump sum to the non-member spouse, while the member spouse continues to receive an income stream. In that case, the non-member spouse is taxed on the lump sum at appropriate rates, and the member spouse is taxed accordingly on the superannuation income stream (¶8-150 and following).

¶14-960 Capital gains tax — exemptions There are two types of capital gains tax (CGT) concessions available as a result of splitting superannuation interests. CGT exemptions are available for capital gains or losses arising from the transfer of an asset or making of a payment under a superannuation agreement or court order and when a non-member spouse receives a payment or property from a superannuation fund as a result of a superannuation agreement or court order (see below). The deferral of a capital gain or loss arising from a same asset roll-over between small superannuation funds is discussed at ¶14-980. Gains or losses from superannuation agreements to be disregarded A capital gain or capital loss will be disregarded when a contractual right, or other legal or equitable right, is created or comes to an end and that event happens because of the transfer of an asset or making of a payment under a superannuation agreement or court order (ITAA97 s 118-313). This applies, eg if: • a spouse forgoes a right to seek a property settlement under the Family Law Act 1975 (Cth) (FLA) by entering into a financial agreement — in such a case, the spouse acquires new rights to replace their original rights, or • a Family Law Court sets aside a financial agreement on establishing that a spouse had entered into the agreement on a ground such as duress — the rights a spouse had under that agreement come to an end when the court sets the agreement aside. Rights connected to superannuation payments From 28 December 2002, a capital gain or capital loss is disregarded when a non-member spouse receives a payment or property from a superannuation fund as a result of a superannuation agreement or court order (ITAA97 s 118-305). Such a situation normally arises when a member of a superannuation fund receives a payment from the fund. This is an example of CGT event C2 (ie the member’s rights to recover the payment ending), and there are no CGT consequences for the member. The exemption applies if a non-member spouse acquires a right for consideration, being the non-member spouse’s forgoing of a right to a property settlement in respect of their superannuation interests under the FLA by entering into a superannuation agreement.

¶14-980 Capital gains tax — same asset roll-overs Essentially, where the trustee of a small superannuation fund transfers an asset to another complying superannuation fund and certain basic conditions are satisfied, a same asset roll-over will apply and any

capital gain or loss made by the transferor trustee will be deferred (Income Tax Assessment Act 1997 (Cth) (ITAA97) s 126-140). Prior to 1 July 2007, limited CGT roll-over relief was available for asset transfers representing a spouse’s entitlement under a payment splitting order or agreement to another small superannuation fund (rather than any complying superannuation fund). A “small superannuation fund” is a complying superannuation fund with fewer than five members (ITAA97 s 995-1(1)). A complying superannuation fund is defined in Superannuation Industry (Supervision) Act 1993 (SISA) s 42, 42A and 45 and is discussed at ¶2-100 and ¶2-140. The three situations where CGT roll-over relief can apply are discussed below. Situation 1 — payment split under FLA A roll-over is available where: • an interest in a small superannuation fund is subject to a payment split • a non-member spouse in relation to that interest serves a waiver notice under Family Law Act 1975 (Cth) (FLA) s 90XZA on the trustee of the fund in respect of that interest, and • as a result of serving the notice, the trustee of the fund (the transferor) transfers a CGT asset to the trustee of another complying superannuation fund (the transferee) for the benefit of the non-member spouse (s 126-140(1)). Situation 2 — payment split under Superannuation Industry (Supervision) Regulations 1994 (Cth) A roll-over is also available where: • an interest in a small superannuation fund (the first fund) is subject to a payment split • as a result of the payment split, there is a transfer or roll-over of benefits, for the benefit of the nonmember spouse, from the first fund to another complying superannuation fund • the transfer is under SIS Regulations provisions dealing with superannuation interests that are subject to payment splits, and • in order to give effect to the payment split, the trustee (the transferor) of the first fund transfers a CGT asset to the trustee (the transferee) of the other fund for the benefit of the non-member spouse (s 126-140(2)). Situation 3 — transfer of personal interest in a small superannuation fund A roll-over is also available on the breakdown of a marriage or a de facto relationship (¶14-050) for the transfer of an asset representing the personal interest of a spouse in a small superannuation fund to another complying superannuation fund (ITAA97 s 126-140(2A)). This covers the situation where: • an individual has an interest in a small superannuation fund (the first fund) • the individual’s spouse, or former spouse, also has an interest in the first fund • the trustee (the transferor) of the first fund transfers a CGT asset to the trustee (the transferee) of another complying superannuation fund for the benefit of the individual • the transfer is in accordance with an award, order or agreement mentioned in s 126-140(2B) (see below) • if the transfer is part of a series of transfers in accordance with the award, order or agreement — the individual will no longer have an interest in the first fund when the series of transfers is complete • if the transfer is not part of a series of transfers in accordance with the award, order or agreement — as a result of the transfer, the individual no longer has an interest in the first fund, and • there has not been a roll-over under s 126-140(1) or (2) (see above) or an earlier roll-over in relation

to the transfer of another CGT asset from the first fund, where the transfer was made because of the award, order or agreement and for the benefit of that spouse, or former spouse. The roll-over is only available to one spouse. That is, once the trustee of the transferor fund has obtained the roll-over for the benefit of one spouse, the roll-over is no longer available for a transfer of fund assets representing the personal superannuation interest of the other spouse. To qualify for the roll-over, the transfer must be made in accordance with one of the following: • an award made in an arbitration referred to in FLA s 13H or a corresponding award made in an arbitration under a corresponding state law, territory law or foreign law • a court order made under FLA s 79, 90AE(2), 90AF(2) or 90SM • a court order made under a state law, territory law or foreign law relating to breakdowns of relationships between spouses that corresponds to an order made under FLA s 90AE(2), 90AF(2) or 90SM • a financial agreement made under FLA Pt VIIIA that is binding because of FLA s 90G, or a corresponding written agreement that is binding because of a corresponding foreign law (in this case, the conditions in s 126-140(2C) must also be met: see below) • a Pt VIIIAB financial agreement that is binding because of FLA s 90UJ (in this case, the conditions in s 126-140(2C) must also be met: see below) • a written agreement that is binding under a state law, territory law or foreign law relating to the breakdown of a relationship between spouses that, because of such a law, prevents a court from making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement is varied or set aside (in this case, the conditions in s 126-140(2C) must also be met: see below) (ITAA97 s 126-140(2B)). The CGT roll-over is available for CGT events that happen on or after 1 July 2007, irrespective of when the award, order or agreement was made. The two conditions specified in s 126-140(2C) that must be met are: • at the time of the transfer, the spouses, or former spouses, involved are separated and there is no reasonable likelihood of cohabitation being resumed, and • the transfer happened because of reasons directly connected with the breakdown of the relationship between the spouses or former spouses. Consequences of the same asset roll-over The consequences of the roll-over are: • the capital gain or loss that the trustee of the transferor fund (transferor) makes on the transfer of the asset is disregarded, ie the CGT consequences are deferred until a later CGT event happens to the asset, such as a sale of the asset by the trustee of the transferee superannuation fund (transferee) • if the transferor acquired the asset on or after 20 September 1985 — the acquisition cost (ie the first element of the asset’s cost base or reduced cost base) in the hands of the transferee is the asset’s cost base or reduced cost base in the hands of the transferor at the time the transferee acquired it, and • if the transferor acquired the asset before 20 September 1985 — the transferee is taken to have acquired it before that day (s 126-140(3) to (5)).

15 OTHER TRUSTEE OBLIGATIONS • ACCOUNTING STANDARDS SUPERANNUATION TRUSTEE OBLIGATIONS Obligations under other laws and accounting standards

¶15-000

ANTI-MONEY LAUNDERING AND COUNTER-TERRORISM FINANCING Anti-money laundering regime

¶15-100

AMLCTF designated services and reporting entities

¶15-120

AMLCTF customer identification and verification

¶15-130

AMLCTF reporting obligations

¶15-140

AMLCTF program requirements

¶15-150

AMLCTF record-keeping requirements

¶15-160

AMLCTF offences and enforcement

¶15-180

BANKRUPTCY AND SUPERANNUATION Superannuation fund members — bankruptcy issues

¶15-300

Void and voidable transactions

¶15-320

Superannuation contributions made pre-bankruptcy

¶15-350

ACCOUNTING AND AUDITING STANDARDS Superannuation fund accounting and standards

¶15-600

Financial reporting — AASB 1056 “Superannuation Entities”

¶15-640

Superannuation auditing standards and audit guide

¶15-650

Precedent: superannuation audit plan

¶15-660

ATO electronic Superannuation Audit Tool (eSAT)

¶15-700

Superannuation Trustee Obligations ¶15-000 Obligations under other laws and accounting standards Trustees of superannuation entities and their service providers must comply with a range of regulatory provisions (collectively called “regulatory provisions” under the SIS Act regime) in order for the entities to be concessionally taxed as complying superannuation funds, complying ADFs and PSTs. In addition, they must also comply with the requirements of other Federal Acts and regulations to the extent that the legislation affects them (see ¶2-140, ¶3-000 and Chapters 2 to 5, 9, 11, 13 and 14). This chapter contains brief commentary on the anti-money laundering law and the bankruptcy law insofar as they impose obligations on superannuation fund trustees or impact on the operation of superannuation funds. These laws are not “regulatory provisions” within the SIS Act regime (¶2-140, ¶3-000). A failure to comply with these laws does not usually affect the “complying fund” status or concessional tax status of the superannuation entity under the SIS Act or ITAA97, but there are consequences for non-compliance including penalties. The chapter also provides an overview of the main accounting and auditing standards of particular

relevance to superannuation fund accountants and auditors. These standards are also not “regulatory provisions” within the SIS Act regime, but fund accountants and auditors are required to comply with the standards in pursuance of their SIS accounting and audit obligations. This chapter does not purport cover all the issues that may be involved or need to be addressed in a particular case. Detailed commentary or coverage of these laws and standards are available in other Wolters Kluwer publications, such as the Australian Accounts Preparation Manual — Commentary and Legislation, Australian Accountant’s Toolkit, Australian Superannuation Audit Manual, Australian Insolvency Management Practice and Australian Superannuation Law & Practice. In addition, readers should also refer to the particular provisions of the relevant legislation to have a complete picture of all the legislative requirements and exemptions (if any), and seek advice from suitably qualified professionals in these specialised areas of law or fund operations for their particular needs.

Anti-money Laundering and Counter-Terrorism Financing ¶15-100 Anti-money laundering regime The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AMLCTF Act) provides a regulatory regime to fulfil Australia’s international obligations to combat and address anti-money laundering and counter-terrorism financing (AMLCTF) activities in Australia. Detailed operating rules for the regime are covered in the Rules and Guidance Notes issued by the Australian Transaction Reports and Analysis Centre (AUSTRAC). The regulatory regime under the AMLCTF Act builds upon the obligations imposed under the Financial Transaction Reports Act 1988 (FTR Act), but applies to a wider range of businesses as well as imposes a wider range of obligations (see below) so as to bring Australia in line with international best practices to address money laundering and terrorism financing. What is money laundering? The term “money laundering” means conduct that amounts to: (a) an offence against Div 400 of the Criminal Code, or (b) an offence against a law of a state or territory, or of a foreign country, or of a part of a foreign country, that corresponds to an offence referred to in para (a) (AMLCTF Act s 5). Money laundering is best described by the three stages which typify how money is laundered — placement, layering and integration. At the “Placement” stage, illegal funds or assets are first brought into the financial system. When illegal funds are placed in the financial system, they become more liquid. For example, if cash is converted into a bank deposit, it becomes easier to transfer and manipulate. Money launderers “place” the illegal funds using a variety of techniques, including depositing cash into bank accounts and using cash to purchase assets. The “Layering” stage serves to conceal the illegal origin of the “placed” funds so as to make them really useful. The funds must be moved, dispersed and disguised, and this process of distancing the placed funds from their illegal origins is known as “layering”. At this stage, money launderers have many different techniques to layer the funds, such as using multiple banks and accounts and superannuation accounts, using attorneys and other professionals who act as intermediaries, and using business entities like corporations and trusts. The funds may be shuttled through a web of many accounts, funds, companies and countries in order to disguise their origins. Once the funds are layered and distanced from their origins, they are made available to the parties involved to use and control as apparently legitimate funds. “Integration” is the final stage in the money laundering process. At this stage, the laundered funds are made available for investment in legitimate or illegitimate businesses or spent to promote the parties’ lifestyle. At this stage, the illegal money has achieved the guise of legitimacy. It should be noted that not all money laundering transactions go through this three-stage process. Transactions designed to launder

funds can also be effected in one or two stages, depending on the money laundering technique being used. What is financing of terrorism? “Financing of terrorism” means conduct that amounts to: (a) an offence against s 102.6 or Div 103 of the Criminal Code (b) an offence against s 20 or 21 of the Charter of the United Nations Act 1945, or (c) an offence against a law of a state or territory, or an offence against a law of a foreign country or a part of a foreign country, that corresponds to an offence referred to in para (a) or (b) (AMLCTF Act s 5). Who will the AMLCTF Act apply to? The AMLCTF Act applies to persons (“reporting entities”) who provide “designated services” under the AMLCTF Act. Certain superannuation providers and entities are specified by the Act as reporting entities and their operations are regarded as providing designated services (see ¶15-120). The AMLCTF Act applies a risk-based approach to compliance. The Act imposes principal obligations on reporting entities which will have the flexibility to develop their procedures based on their assessment of whether the risk of providing a “designated service” to a customer may facilitate money laundering or terrorism financing. In the AMLCTF Act, the acronym AUSTRAC means the Australian Transaction Reports and Analysis Centre and AUSTRAC CEO means the Chief Executive Officer of AUSTRAC. Regulatory regime and obligations imposed by the AMLCTF Act • The AMLCTF Act imposes obligations on a reporting entity (a financial institution or other person) who provides designated services (designated services are listed in s 6). • A reporting entity must carry out prescribed procedures to verify a customer’s identity before providing a designated service to a customer. In special cases, this may be done after the provision of the designated service. • Certain low risk services are subject to modified identification procedures. • Reporting entities must report to the AUSTRAC CEO: (a) suspicious matters (b) certain transactions above a threshold. • Certain international funds transfer instructions must be reported to the AUSTRAC CEO. • Cross-border movements of physical currency must be reported to the AUSTRAC CEO, a customs officer or a police officer if the total amount moved is above a threshold. • Cross-border movements of bearer negotiable instruments must be reported to the AUSTRAC CEO, a customs officer or a police officer if a customs officer or a police officer requires a person to make such a report. • Electronic funds transfer instructions must include certain information about the origin of the transferred money. • Providers of designated remittance services must be registered with the AUSTRAC CEO. • Reporting entities must have and comply with AMLCTF programs. • Financial institutions are subject to restrictions in connection with entering into correspondent banking

relationships. Many of the above transactions and activities covered by the AMLCTF Act may or may not be relevant to superannuation entities or providers and their operations. The more directly relevant obligations that may arise are covered by the following Parts of the AMLCTF Act: • Part 2 — customer identification and verification (¶15-130) • Part 3 — reporting (¶15-140) • Part 7 — developing and maintaining an AMLCTF program (¶15-150) • Part 10 — record-keeping (¶15-160). Offences under the AMLCTF Act and enforcement rules are discussed at ¶15-180. In addition to AUSTRAC’s general exemptions, a person may apply to AUSTRAC for either an exemption from certain provisions of the AMLCTF Act or a declaration that one or more provisions apply as modified. For the application procedures, see AUSTRAC Guidance Note “Exemptions and modifications under the AMLCTF Act” (available at www.austrac.gov.au/files/exe_mod.pdf). AUSTRAC Rules, guidelines and information AUSTRAC CEO may make legally binding AMLCTF Rules under s 229 of the AMLCTF Act (see AntiMoney Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No 1) (F2007L01000, as amended: www.legislation.gov.au/Series/F2007L01000; www.legislation.gov.au/details/F2019C00383). These Rules are legislative instruments and are registered on the Federal Register of Legislative Instruments (www.legislation.gov.au). The AMLCTF Rules, together with details of the changes to the rules since 2007, the latest compilations and draft rules, are available at www.austrac.gov.au/aml_ctf_rules.html. Public Legal Interpretations AUSTRAC releases Public Legal Interpretations (PLIs) from time to time to convey its view on the legal meaning and effect of various AMLCTF Act provisions. The PLIs are not legal advice on individual circumstances but are intended to assist cash dealers and reporting entities better understand their obligations under the AMLCTF regime. PLIs are available at www.austrac.gov.au/pli.html. Other notes and guidelines Additional AUSTRAC information (including regulatory guides, guidance notes, guidelines and information booklets and circulars) may be found on its website at www.austrac.gov.au. AUSTRAC risk assessment report into the superannuation sector AUSTRAC’s 2016 money laundering and terrorism financing risk assessment into Australia’s superannuation (Australia’s superannuation sector — Money laundering and terrorism financing risk assessment: www.austrac.gov.au/australias-superannuation-sector) identified fraud as by far the most commonly identified crime affecting superannuation funds. Cybercrime in particular was identified as a key growing threat, with some superannuation funds facing almost daily attempts to hack accounts for information or funds access. Privacy Reporting entities, in relation to activities undertaken to comply with the AMLCTF Act, should be aware of other obligations they may have under the Privacy Act 1988, including the requirement to comply with the Australian Privacy Principles, even if they would otherwise be exempt from the Privacy Act (see ¶15-160) (www.oaic.gov.au). Interaction with Financial Transaction Reports Act 1988 Australia’s anti-money laundering and counter-terrorism financing program places obligations on financial institutions and other financial intermediaries under both the Financial Transaction Reports Act 1988 (FTR Act) as well as the AMLCTF Act. For example, the FTR Act requires “cash dealers” (eg financial

institutions, financial corporations, insurance companies and their intermediaries, managers and trustees of unit trusts, etc) to report to the AUSTRAC CEO suspicious transactions, cash transactions of A$10,000 or more or the foreign currency equivalent, and international funds transfer instructions, and requires cash dealers to verify the identity of persons who are signatories to accounts. To avoid regulatory duplication, certain exemption under the FTR Act apply. Notably, the reporting of significant cash transactions by cash dealers do not apply to a transaction if the cash dealer complies with s 43 of the AMLCTF Act (about reporting transactions over a $10,000 threshold: ¶15-140) (FTR Act s 7(1A)).

¶15-120 AMLCTF designated services and reporting entities Under the AMLCTF Act, a reporting entity means a person who provides a “designated service” within the meaning in s 6 of the AMLCTF Act. Entities that constitute a provider of a designated service (the reporting entity) and the person to whom the designated service is provided (the customer) are set out in columns 2 and 3, respectively, of the tables in s 6(2) (see below). For AUSTRAC guidelines on items in the tables and the key concepts (such as “in the capacity of” and “in the course of carrying on a business”), see Public Legal Interpretation No 4 of 2008 — “What constitutes a reporting entity” (www.austrac.gov.au/files/pli_4_reporting_entity.pdf). As a general rule, designated services are limited to services provided to a designated customer in the course of carrying on the core activity of a business and do not capture activities which are peripheral to the core activity of the business. Accordingly, some particular items in Table 1 specifically limit the designated service in this manner where it would be possible for the service to be provided in a noncommercial manner. If a business has more than one core activity, whether an activity is a core activity of the business will be determined by the circumstances in each case. Note that only those items in Table 1 dealing with or relevant to superannuation activities or operations are listed below.

Table 1 — Financial Services Item

Provision of a designated service

Customer of the designated service

40

in the capacity of provider of a pension or annuity, accepting payment of the purchase price for a new pension or annuity, where: (a) the provider is not a self managed superannuation fund, or (b) the pension or annuity is provided in the course of carrying on a business of providing pensions or annuities

the person to whom the pension or annuity is to be paid

41

in the capacity of provider of a pension or annuity, making a payment to a person by way of: (a) a payment of the pension or annuity (b) an amount resulting from the commutation, in whole or in part, of the pension or annuity, or (c) the residual capital value of the pension or annuity; where the provider is not a self managed superannuation fund

the person

42

in the capacity of trustee of: (a) a superannuation fund (other than a self managed superannuation fund), or (b) an approved deposit fund accepting a contribution, roll-over or transfer in respect of a new or existing member of the fund

the member

43

in the capacity of trustee of: (a) a superannuation fund (other than a self managed superannuation fund), or (b) an approved deposit fund cashing the whole or a part of an interest held by a member of the fund

the member, or if the member has died, the person, or each of the persons, who receives the cashed whole or a cashed part of the relevant interest

43A (former)

in the capacity of FHSA provider, accepting a contribution, roll-over or transfer to an FHSA in respect of a new or existing FHSA holder

the FHSA holder

43B (former)

in the capacity of FHSA provider, cashing the whole or a part of an interest held by an FHSA holder

the FHSA holder, or if the FHSA holder has died, the person, or each of the persons, who receives the cashed whole or a cashed part of the relevant interest

44

in the capacity of RSA provider, accepting a contribution, roll-over or transfer to an RSA in respect of a new or existing RSA holder

the RSA holder

45

in the capacity of RSA provider, cashing the RSA holder, or if the RSA holder has the whole or a part of an interest held by died, the person, or each of the persons, an RSA holder who receives the cashed whole or a cashed part of the relevant interest

54

in the capacity of holder of an Australian the person financial services licence, making arrangements for a person to receive a designated service (other than a service covered by this item)

Note that many of the terms or expressions used in the above table are defined in the AMLCTF Act (s 5). For example, a “transfer” includes any act or thing, or any series or combination of acts or things, that may reasonably be regarded as the economic equivalent of a transfer (eg debiting an amount from a person’s account and crediting an equivalent amount to another person’s account). In addition, item 1 in Table 4 in s 6(5) dealing with “prescribed services” provides that the “provision of a designated service” covers providing a service specified in the regulations, and “customer of the designated service” is the person who, under the regulations, is taken to be the person to whom the service is provided. Person and joint persons If a designated service is provided jointly to two or more customers, the service is taken to have been provided to each of those customers for the purposes of the AMLCTF Act (s 7(1)). A person in the AMLCTF Act means any of the following: (a) an individual (b) a company

(c) a trust (see also s 239 “trust with multiple trustees”) (d) a partnership (see also s 237 and 238 “unincorporated associations”) (e) a corporation sole (f) a body politic (s 5). Geographical link An item of a table in s 6 does not apply to the provision by a person of a service to a customer unless: (a) the service is provided at or through a permanent establishment of the person in Australia (b) both of the following apply: (i) the person is a resident of Australia (ii) the service is provided at or through a permanent establishment of the person in a foreign country, or (c) both of the following apply: (i) the person is a subsidiary of a company that is a resident of Australia (ii) the service is provided at or through a permanent establishment of the person in a foreign country. Exception: risk-only life policy interests in a superannuation fund Superannuation funds which provide “risk-only life policies” in the fund are exempted from the AMLCTF Act. Specifically, the Act does not apply to a designated service that is of a kind described in item 42(a) or 43(a) (see table above) if: • the provision of the designated service relates to an actual or potential interest in, or entitlement under, a risk-only life policy of a member of a superannuation fund (a risk-only life policy interest) (regardless of whether the member has any other interests, benefits, entitlements, balances or accounts in the superannuation fund), where the risk-only life policy: (a) has been acquired by the trustee of the superannuation fund from a life insurer on behalf of the member of the fund, and (b) is held by the trustee as the policy holder, and • the risk-only life policy interest of the member does not include an investment component or an accumulated balance or account, and • in respect to a designated service which falls within item 43(a), on the occurrence of an event specified in the risk-only life policy, the trustee cashes out the whole or part of the risk-only life policy interest in relation to that occurrence to the member (regardless of whether or not the trustee exercises its discretion to cash out other interests, benefits, entitlements, balances or accounts the member may have in the fund) (Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No 1), Chapter 47 cl 47.1–47.3). A “risk-only life policy” is a life policy which falls outside the definition of “life policy” in s 5 of the AMLCTF Act and, in particular, is a life policy in respect of which: (a) a single lump sum amount is, or instalment amounts are, payable to the trustee of the superannuation fund as policy holder, on the occurrence of an event specified in the policy relating to the death or disability of the member of the superannuation fund, and (b) there is no prescribed minimum surrender value (other than that which may be provided for in the

policy documentation and promotional material) or no investment component (cl 47.4(2)). The question of whether a policy has a prescribed minimum surrender value is to be determined in accordance with the prudential standards made under s 230A of the Life Insurance Act 1995 as in force from time to time. The definition of “life policy” in s 5 of the AMLCTF Act has the effect that the provision of risk-only life policies by life insurance companies is carved out as a designated service from items 38 and 39 in Table 1 of s 6 of the AMLCTF Act. Accordingly, the AMLCTF Act does not impose obligations on life insurers providing such policies. However, since the provision of risk-only life policies by superannuation funds are captured by items 42 and 43 as a designated service, the trustees of superannuation funds are required to comply with the relevant obligations under the AMLCTF Act. The exemption means that superannuation funds providing interests in risk-only life policies (but not as product issuers) are treated consistently as life insurers providing such policies (see AMTCTF Rules Chapter 47 Risk-only life policy interests in a superannuation fund; relocated to Part 11, Division 7 Riskonly life policy interests in a superannuation fund).

¶15-130 AMLCTF customer identification and verification Part 2 of the AMLCTF Act sets out the provisions dealing with identification procedures and verification, as outlined below. • A reporting entity must carry out a procedure to verify a customer’s identity before providing a designated service to the customer. However, in special cases, the procedure may be carried out after the provision of the designated service. • Certain pre-commencement customers are subject to modified identification procedures. • Certain low risk services are subject to modified identification procedures. • A reporting entity must carry out ongoing customer due diligence. An exemption from the identification requirements applies to the cashing out of small superannuation accounts and online applications for DASP to the ATO (see below “ACIP exemption — cashing out of superannuation fund low balance accounts” and “ACIP exemption — DASPs”). Section 32 — Carrying out customer identification procedure before provision of a designated service A reporting entity must not commence to provide a designated service to a customer if: (a) there are no special circumstances that justify carrying out the applicable customer identification procedure in respect of the customer after the commencement of the provision of the service (see s 33 below) (b) the reporting entity has not previously carried out the applicable customer identification procedure in respect of the customer, and (c) neither s 28 nor 30 (see above) applies to the provision of the service. If a reporting entity commences to provide a designated service to a customer, they are taken to be special circumstances that justify carrying out of the applicable customer identification procedure in respect of the customer after commencement of the provision of the service if: • the service is specified in the AMLCTF Rules, and • such other conditions (if any) set out in the AMLCTF Rules are satisfied (s 33). Section 34 — Carrying out customer identification procedure after commencement of provision of a designated service

Section 34 applies if a reporting entity has commenced to provide a designated service to a customer and: (a) when the reporting entity commenced to provide the designated service to the customer, there were special circumstances that justified the carrying out of the applicable customer identification procedure in respect of the customer after commencement of provision of the service (see s 33) (b) the reporting entity has not previously carried out the applicable customer identification procedure in respect of the customer (c) the reporting entity has not carried out the applicable customer identification procedure in respect of the customer within whichever of the following periods is applicable: (i) if the designated service is specified in the AMLCTF Rules — the period ascertained in accordance with the AMLCTF Rules, or (ii) in any other case — the period of five business days after the day on which the reporting entity commenced to provide the service, and (d) neither s 28 nor 30 applies to the provision of the service. In that case, after the end of the period referred to in (c) above, the reporting entity must not continue to provide, and must not commence to provide, any designated services to the customer until the reporting entity carries out the applicable customer identification procedure in respect of the customer (s 34(1)). This is a civil penalty provision. Section 34(1) does not apply if the AMLCTF Rules specify that the reporting entity is not required to carry out the applicable customer identification procedure in respect of the customer and the reporting entity takes such action as is specified in the AMLCTF Rules (s 34(2)). Verification of identity of customer Section 35 applies to a reporting entity if: (a) at a particular time, the reporting entity has carried out the applicable customer identification procedure in respect of a particular customer to whom the reporting entity provided a designated service, and (b) at a later time, an event prescribed by the AMLCTF Rules happens, a circumstance in the AMLCTF Rules comes into existence or a period ascertained in accordance with the AMLCTF Rules ends. Where s 35(1) applies, the reporting entity must take such action as specified in the Rules within the time limits allowed by the Rules (s 35(2)). This gives AUSTRAC the flexibility to respond to emerging money laundering and terrorism financing risks, for example, the use of new technologies or systems. Section 35 is a civil penalty provision. Identification procedures for certain low-risk services If a designated service is taken to be a low risk service under the AMLCTF Rules, s 32 and 34 do not apply to the provision of the designated service by the reporting entity to the customer (s 30). In that case, s 31 applies to the reporting entity. When the reporting entity commences to provide a designated service to a customer that is taken to be a low-risk service under the AMLCTF Rules and, at the relevant time or at a later time, a “suspicious matter reporting obligation” (as defined in s 41 of the Act: see ¶15-140) arises concerning that particular customer, the reporting entity is required to take such action as specified under the AMLCTF Rules within the time limit allowed under the AMLCTF Rules (s 31(2)). This is a civil penalty provision. Collection and verification of beneficial owner information An AMLCTF program must include appropriate systems and controls for the reporting entity to determine the beneficial owner of each customer and collect, (including from the customer, where applicable) and take reasonable measures to verify the matters specified in Rule 4.12.1 (AMLCTF Rules Pt 4.12). This

must be effected, either before the provision of a designated service to the customer or as soon as practicable after the designated service has been provided. Where applicable, an AMLCTF program must also include appropriate risk-management systems to determine whether a customer or beneficial owner is a politically exposed person (AMLCTF Rules Pt 4.13). For superannuation services, the requirements in Pt 4.12 and 4.13 of the Rules do not apply to a reporting entity which provides a designated service of the type specified in Column 1 of the table below and is exempt from Div 4 of Pt 2 of the AMLCTF Act in accordance with the circumstances and conditions of the AMLCTF Act or AMLCTF Rules specified in Column 2. Column 1 — Designated service in s 6(2) of the AMLCTF Act

Column 2 — AMLCTF Act and AMLCTF Rules references relevant to the exemptions

Item 43(a)

Pt 41.2 in Ch 41 — Exemption from applicable customer identification procedures — cashing out of low value superannuation funds and for the Departing Australia Superannuation Payment (see ACIP exemption below)

Items 43 or 45

Pt 41.3 in Ch 41 — Exemption from applicable customer identification procedures — cashing out of low value superannuation funds and for the Departing Australia Superannuation Payment (see ACIP exemption below)

AMLCTF Rules — ACIP and STVP customer identification requirements The identification requirements for customers acting in their capacity as trustees of a trust and the customer identification procedure (ACIP) are set out in AMLCTF Rules Pt 4.4. A reporting entity may use the Simplified Trustee Verification Procedure (STVP) with respect to specified types of trusts. SMSFs are currently eligible to be viewed by reporting entities as being “subject to the regulatory oversight of a Commonwealth statutory regulator in relation to its activities as a trust” under the STVP (see cl 4.4.8(3)). As a result of identified criminal abuse of SMSFs, including falsification of member details and creation of falsified funds (see AUSTRAC Information Circular No 62 (Archived) — Criminal activity involving identity theft, false bank accounts and false SMSF: www.austrac.gov.au/files/aic62_criminal_activity.pdf), the AMLCTF had examined whether SMSFs should be subject to the full ACIP requirements relevant to trusts, rather than the STVP concession (www.austrac.gov.au/files/draft_rules_amend_ch4.pdf). Following a review and consultation, AUSTRAC has advised that the previous risk regarding the misuse of SMSFs has lessened to the extent that it is no longer considered to pursue the full ACIP disclosure for SMSFs (AUSTRAC email advice, 17 April 2015). ACIP exemption — cashing out of superannuation fund low balance accounts Chapter 41 of the AMLCTF Rules exempts providers of item 43(a) designated services (cashing of superannuation interests) from conducting the ACIP on customers in certain circumstances. An AUSTRAC determination exempts the trustees of a superannuation fund (other than an SMSF) from carrying out the ACIP in Pt 2 Div 4 of the AMLCTF Act from 2 December 2009 where: • the value of the interest is not greater than $1,000 on the date the member applies to the superannuation fund to cash out the interest • no additional contributions are accepted from the member in relation to the interest • the whole of the interest of the member in the superannuation fund is cashed out, and • the account in which the interest of the member in the superannuation fund was held is closed as soon as practicable after the cashing out of the interest of the member.

AUSTRAC considers the ACIP an unnecessary financial and administrative burden on the reporting entities in such circumstances (Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2009 (No 5): Legislative Instrument F2009L04377) (see AMLCTF Rules Chapter 41 Exemption from applicable customer identification procedures — cashing out of low value superannuation funds and for the Departing Australia Superannuation Payment; relocated to Part 12, Division 11 Low value superannuation funds and the Departing Australia Superannuation Payment). ACIP exemption — DASPs Temporary residents who leave Australia are entitled to cash their superannuation benefits once they leave Australia under the departing Australia superannuation payment (DASP) regime administered by the ATO (see ¶3-286, ¶8-400). An exemption from the ACIP applies in the following circumstances: (1) the member applies to cash out his/her interest in a superannuation fund, ADF or RSA (2) the application is made online using the DASP system (3) the value of the interest is not greater than $5,000 (4) the member does not make any more contributions to the interest (5) the whole of the interest is cashed out, and (6) the account which held the interest is closed as soon as practicable after the interest is cashed out (Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2012 (No 5): Legislative Instrument F2012L02563). The exemption is because applicants cashing out superannuation benefits through the DASP system are already required to provide information to the ATO to confirm their identity and eligibility to receive a DASP (see AMLCTF Rules Chapter 41 Exemption from applicable customer identification procedures — cashing out of low value superannuation funds and for the Departing Australia Superannuation Payment; relocated to Part 12, Division 11 Low value superannuation funds and the Departing Australia Superannuation Payment). Ongoing customer due diligence A reporting entity must monitor its customers in relation to its provision of designated services at, or through, a permanent establishment in Australia, with a view of identifying, mitigating and managing the risk it may reasonably face if the provision of the designated service might (whether inadvertently or otherwise) involve or facilitate money laundering or financing of terrorism. The reporting entity must fulfil this obligation in accordance with the AMLCTF Rules (s 36(1)). This is a civil penalty provision. An exemption from this obligation is available where the designated service is covered by item 54 of Table 1 in s 6 (this item covers a holder of an Australian financial services licence who arranges for a person to receive a designated service). If a reporting entity is a member of a designated business group, the obligation imposed by s 36(1) may be discharged by any other member within the group (s 36(4)). General rules and exemptions Agency A reporting entity may use an agent to carry out the applicable customer identification procedure in respect of the customer on the reporting entity’s behalf (s 37). The general principles of agency apply and a reporting entity remains liable for the conduct of its agents. Reliance on another reporting entity A reporting entity may rely on an applicable customer identification procedure carried out by another reporting entity if the following conditions are met: • the procedure was carried out as specified in the AMLCTF Rules

• the customer is or becomes a customer to whom another reporting entity provides, or proposes to provide, a designated service, and • such other conditions set out in the AMLCTF Rules are satisfied (s 38). Section 38 does not apply to the requirements under Pt 10 dealing with record-keeping requirements (¶15-160). General and superannuation-related exemptions AMLCTF Act Pt 2 does not apply to the following designated services: • a service that is of a kind or is provided in the circumstances specified in the AMLCTF Rules (s 39(1) to (4)) • a designated service that is provided by a reporting entity at, or through, a permanent establishment of the entity in a foreign country (s 39(5)) • a service covered by the following items in s 6 (other than Div 6 — dealing with customer due diligence: see above): – item 40 — accepting payment of the purchase price for a new pension or annuity. Section 6 deals with accepting an RSA contribution, roll-over or transfer – item 42 — accepting a superannuation contribution, roll-over or transfer – item 44 — accepting an RSA contribution, roll-over or transfer (see ¶15-120) (s 39(6)) • a service covered by item 54 of Table 1 in s 6 (see above) if the service relates to arrangements for a person to receive a designated service covered by items 40, 42 or 44 in that table (s 39(7)).

¶15-140 AMLCTF reporting obligations Part 3 of the AMLCTF Act deals with the reporting obligations of a reporting entity, as below: • A reporting entity must give the AUSTRAC CEO reports about suspicious matters (s 41). • If a reporting entity provides a designated service that involves a threshold transaction, the reporting entity must give the AUSTRAC CEO a report about the transaction (s 43). • If a person sends or receives an international funds transfer instruction, the person must give the AUSTRAC CEO a report about the instruction (s 45). • A reporting entity may be required to give AMLCTF compliance reports to the AUSTRAC CEO (s 47). Exemptions from the reporting obligations as specified in the AMLCTF Rules may be available. Providers of designated services must be entered on the Reporting Entities Roll (AMLCTF Act Pt 3A). Suspicious matter reporting obligation The expression “suspicious matter reporting obligation” is defined in s 41(1) of the AMLCTF Act. A “suspicious matter reporting obligation” arises if a reporting entity suspects or has reasonable grounds to suspect that funds are the proceeds of criminal activity or are related to terrorist financing, and it requires the entity to promptly report its suspicions to the financial intelligence unit of AUSTRAC. A copy of the AMLCTF Rules dealing with suspicious matter reportable details may be found on the AUSTRAC website (see Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No 1): ¶15-100). The obligation also requires a reporting entity to pay special attention to all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. The background and purpose of such transactions should, as far as possible, be examined, the

findings established in writing, and be available to help competent authorities and auditors. If a “suspicious matter reporting obligation” arises in relation to a person, a reporting entity must give the AUSTRAC CEO a report about the matter within: (a) three business days after the day on which the reporting entity forms the relevant suspicion — if s 41(1)(d), (e), (f), (i) or (j) applies, or (b) 24 hours after the time when the reporting entity forms the relevant suspicion — if s 41(1)(g) or (h) applies (s 41(2)). A report under s 41(2) must be in the approved form, contain such information as is specified in the AMLCTF Rules and a statement of the grounds on which the reporting entity holds the relevant suspicion. Section 42 is a civil penalty provision. For additional rules about reports, see s 49 and 244 dealing with the provision of further information and production of documents by the reporting entity. Reasonable grounds for suspicions The AMLCTF Rules may specify matters that are to be taken into account in determining whether there are reasonabl