Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 1 - Single default account

Outline of chapter

1.1 Schedule 1 to the Bill amends the SGAA to limit the creation of multiple superannuation accounts for employees who do not choose a superannuation fund when they start a new job.

1.2 The amendments generally provide that if a new employee has an existing 'stapled' superannuation fund and does not choose a fund to receive contributions, their employer is required to make contributions on behalf of the employee into the stapled fund. These amendments increase members' retirement savings by ensuring unnecessary fees and insurance premiums are not paid on unintended multiple superannuation accounts.

1.3 All legislative references in this Chapter are to the SGAA unless otherwise indicated.

Context of amendments

1.4 The amendments in Schedule 1 to the Bill form part of the Your Future, Your Super reforms, which were announced by the Government on 6 October 2020 in the 2020-21 Budget. These reforms improve outcomes for superannuation fund members by addressing structural flaws in the superannuation system.

1.5 The amendments implement the Government's responses to recommendation 1 of the Productivity Commission's report, Superannuation: Assessing Efficiency and Competitiveness and recommendation 3.5 of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

1.6 The Productivity Commission, in its three year inquiry, highlighted that Australia's superannuation system needs to adapt to better meet the needs of a modern workforce. Unintended multiple accounts were identified in the Productivity Commission's final report as a structural flaw in the system that erodes members' balances through unnecessary fees and insurance. The same issues were identified through the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

1.7 The SGAA is an important part of Australia's superannuation system. It establishes the Superannuation Guarantee Scheme, which ensures that employers pay a minimum level of superannuation contributions on behalf of their employees. It also ensures that employers comply with the 'choice of fund' rules.

1.8 Currently, if an employee does not choose a fund, their employer may comply with the choice of fund rules by making contributions on behalf of the employee into the employer's chosen default fund. The employer's chosen default fund must be:

•

a complying fund (one that meets specific regulatory requirements and obligations under the superannuation law); and

•

registered by the Australian Prudential Regulation Authority to offer a MySuper product.

1.9 The purpose of this rule was to ensure that employers can comply with the choice of fund rules where employees do not choose a superannuation fund when they start a new job.

1.10 However, allowing employers to make contributions on behalf of their employees into their chosen default fund has also resulted in the creation of unintended multiple superannuation accounts. This has caused a reduction in retirement savings for affected members as unnecessary duplicate fees and insurance premiums are being paid on those accounts.

1.11 The amendments in Schedule 1 to the Bill address this issue by requiring employers to make contributions on behalf of an employee to the employee's existing 'stapled' fund in certain circumstances, including where the employee has not chosen a fund.

1.12 These reforms build on previous reforms introduced by the Government to improve outcomes for members of superannuation funds, including the reforms in the Treasury Laws Amendment (Your Superannuation, Your Choice) Act 2020.

Summary of new law

1.13 Schedule 1 to the Bill primarily amends the choice of fund rules in Part 3A of the SGAA.

1.14 Under the amendments, an employer can comply with the choice of fund rules by making contributions to the stapled fund of an employee who:

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started their employment on or after 1 July 2021;

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has a stapled fund; and

•

has not chosen a fund to receive superannuation contributions.

1.15 Additionally, if an employee has a stapled fund and started their employment on or after 1 July 2021, the employer cannot comply with the choice of fund rules relating to contributions made to:

•

the default fund chosen by the employer; or

•

a fund specified under a workplace determination or an enterprise agreement.

1.16 Employers can continue to make contributions of this kind in compliance with the choice of fund rules if the employee does not have a stapled fund. Similarly, contributions to these funds could be covered by another of the existing choice of fund rules (for example, contributions to a fund specified in a workplace determination would comply with the choice of fund rules in relation to an employee who selected that fund in exercising choice).

1.17 To support these new rules, the amendments enable employers to request the Commissioner to identify whether a stapled fund for their employee exists.

Comparison of key features of new law and current law

Detailed explanation of new law

1.18 The amendments introduce a new choice of fund rule relating to stapled funds. Under the new rule, a contribution made by an employer on behalf of an employee complies with the choice of fund rules if:

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the employee's employment started on or after 1 July 2021;

•

the employee has not chosen a fund to receive superannuation contributions;

•

the employer has requested that the Commissioner identify whether the employee has a stapled fund;

•

the Commissioner has notified the employer that the employee has a stapled fund; and

•

the contribution is made by the employer into the stapled fund.

[Schedule 1, item 8, subsection 32C(1A)]

1.19 Employers who are also covered by another choice of fund rule can also make contributions to an employee's stapled fund in compliance with the choice of fund rules. The only exception to this is where an employee has a chosen fund (as the new rules about stapled funds cannot be used where an employee has a chosen fund).

What is a stapled fund?

1.20 A fund is the stapled fund for an employee at a particular time if the requirements prescribed by the regulations are met in relation to the fund at that time. [Schedule 1, item 18, section 32Q]

1.21 The regulations will cover:

•

basic requirements that must be satisfied for a fund to be a stapled fund, including the requirement that the fund is an existing fund of the employee;

•

tie-breaker rules for selecting a single fund where an employee has multiple existing funds; and

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when a fund ceases to be the stapled fund for an employee.

1.22 This regulation-making power is appropriate to ensure there is sufficient flexibility for the Government to respond quickly to evolving industry practices as needed. It is also anticipated that the regulations will contain significant technical detail. For instance, the tie-breaker rules will include considerations about recent activity and account balances similar to the existing tie-breaker rules in regulation 14 of the Superannuation (Unclaimed Money and Lost Members) Regulations 2019. Any regulations made would be subject to parliamentary scrutiny and disallowance.

Contributions made to an employer's chosen default fund

1.23 For employees starting employment on or after 1 July 2021, an employer cannot comply with the choice of fund rule for contributions made to the employer's chosen default fund unless:

•

the employer has requested that the Commissioner identify whether the employee has a stapled fund; and

•

the Commissioner has notified the employer that there is no stapled fund for the employee.

[Schedule 1, item 10, paragraph 32C(2)(aa)]

1.24 This ensures that an employer cannot comply with the choice of fund rules if the employee has a stapled fund and the employer makes contributions on behalf of the employee to the employer's chosen default fund (thereby creating a new superannuation account for the employee).

1.25 In these circumstances, an employer can satisfy the choice of fund rules by making contributions into the employee's stapled fund in compliance with new subsection 32C(1A).

1.26 The requirement to seek information from the Commissioner ensures employers obtain accurate information about whether a stapled fund for the employee exists. This means that employers are not permitted to independently determine whether an existing fund is a stapled fund for the employee. A digital service will be established and maintained by the Australian Taxation Office to receive and respond to requests from employers about whether a stapled fund for their employee exists.

Contributions made in accordance with a workplace determination or enterprise agreement

1.27 Similarly, for employees starting employment on or after 1 July 2021, an employer cannot make contributions on behalf of the employee in accordance with a workplace determination or enterprise agreement made before 1 January 2021 and comply with the choice of fund rules unless:

•

the employer has requested that the Commissioner identify whether the employee has a stapled fund; and

•

the Commissioner has notified the employer that there is no stapled fund for the employee.

[Schedule 1, items 14-16, paragraphs 32C(6)(g) and (h), and subsection 32C(6AAA)]

1.28 If the Commissioner notifies the employer that the employee has a stapled fund, the employer can comply with the choice of fund rules by making contributions into the employee's stapled fund in compliance with new subsection 32C(1A). Employers can also continue to comply with the choice of fund rules by making contributions to a fund specified in a workplace determination or enterprise agreement if an employee has selected that fund in exercising choice.

1.29 These changes build on the amendments to the choice of fund rules by the Treasury Laws Amendment (Your Superannuation, Your Choice) Act 2020 (which prevents employers from relying on workplace determinations and enterprise agreements entered into on or after 1 January 2021 to satisfy the choice of fund rules generally).

Successor funds of stapled funds

1.30 An employer will also comply with the choice of fund rules if:

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the employer has been making contributions to an employee's stapled fund in compliance with new subsection 32C(1A);

•

the employee's interest in the stapled fund is transferred to a successor fund without the employee's consent; and

•

the employer makes contributions on behalf of the employee to the successor fund.

[Schedule 1, item 13, subsection 32C(2AB)]

1.31 In these circumstances, the employer is not required to make a further request to the Commissioner about whether the employee has a stapled fund. This reflects that the employee will have an existing superannuation account with the successor fund.

All employers can use the stapled fund rules

1.32 Employers must comply with the stapled fund rules to satisfy the choice of fund rules for contributions made:

•

to the employer's chosen default fund (where an employee has no chosen fund); or

•

in accordance with a workplace determination or enterprise agreement made before 1 January 2021.

1.33 Other employers can also use the stapled fund rules in new subsection 32C(1A) to comply with the choice of fund rules, unless the employee has chosen a fund. This applies even where the employer could have satisfied another choice of fund rule (for example, by making contributions to an unfunded public sector scheme or to a fund specified in a preserved or notional State agreement).

1.34 This approach is consistent with these employers being able to contribute to a chosen fund of an employee, even where they could have used other types of contributions to satisfy the choice of fund rules.

Requests to the Commissioner about stapled funds

1.35 To support the new stapled fund rules, the amendments allow employers to request that the Commissioner identify any stapled fund for their employees. Such a request must be made in the approved form and in accordance with any requirements prescribed by the regulations. [Schedule 1, item 18, subsection 32R(1)]

1.36 The regulation-making power ensures there is sufficient flexibility for the Government to respond quickly to evolving industry practices as needed. Any regulations made would be subject to disallowance and parliamentary scrutiny.

1.37 If an employer makes a valid request, the Commissioner must consider the request and notify the employer about whether the Commissioner has identified a stapled fund for the employee as soon as practicable. If the Commissioner is satisfied that there is a stapled fund for the employee, the Commissioner must also give the employer the information needed to make contributions to that fund on behalf of the employee. The Commissioner's consideration of the request and notification must meet any requirements prescribed by the regulations. [Schedule 1, item 18, subsection 32R(2)]

1.38 It is anticipated that the regulations will cover matters of a machinery nature. These may include the form in which the Commissioner must provide notices to employers.

1.39 The regulations may also prescribe circumstances in which the Commissioner may notify an employer of any change to an earlier notification given in relation to an employee. These regulations are intended to be used to allow the Commissioner to correct an error in an earlier notification. [Schedule 1, item 18, subsection 32R(3)]

1.40 These provisions also allow an employer's agent (such as a tax or BAS agent) acting within the scope of their authority to request the Commissioner to identify any stapled fund for an employee of the employer. Where an employer's agent makes such a request, the Commissioner will need to provide information to the agent and to the employer. This approach allows an employer to reduce the compliance burden associated with the choice of fund rules, while ensuring they still have oversight over the information being requested by the agent.

1.41 The requirement to respond to employers (and their agents where the agent has made the request) makes clear that taxation officers (who are delegates of the Commissioner) involved in the consideration and notification process do so in the course of performing their duties as a taxation officer. This means that the use and disclosure of any relevant protected information by taxation officers as part of these processes are consistent with the protected information framework in the Taxation Administration Act 1953.

Discretion to reduce an employer's individual superannuation guarantee shortfall

1.42 The amendments introduce a discretion for the Commissioner to reduce an employer's individual superannuation guarantee shortfall for an employee where:

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the employer was notified by the Commissioner about a stapled fund for the employee;

•

that fund did not accept contributions from the employer on behalf of the employee; and

•

the employer makes a late contribution to any fund on behalf of the employee.

[Schedule 1, item 3, subsections 19(2F) and (2G)]

1.43 An employer can make a late contribution that complies with the choice of fund rules by making another request to the Commissioner about whether the employee has a stapled fund and making the contribution to that fund if there is one. If the Commissioner identifies there is no stapled fund, the employer may be able to make contributions to the employer's chosen default fund. Alternatively, the employer can ask the employee if they would like to choose a fund and can make contributions to the chosen fund. Failure to comply with the choice of fund rules when making the late contribution may result in a choice liability arising.

1.44 This discretion allows the Commissioner to reduce (including to nil) an employer's individual superannuation guarantee shortfall for the employee that is due to the lateness of these contributions. However, the safeguard will only apply where there is no chosen fund for the employee at the time the employer attempted to make the contribution. This reflects that if there is a chosen fund at that time, the employer should make contributions into that fund to comply with the choice of fund rules. [Schedule 1, item 3, subsections 19(2F) and (2G)]

1.45 The Commissioner must make guidelines that must be considered when deciding whether to exercise this discretion. These guidelines are a legislative instrument and will provide guidance for employers about when the discretion may be exercised. [Schedule 1, item 5, subsection 21(2)]

1.46 This discretionary power is necessary to ensure employers are not liable for an individual superannuation guarantee shortfall for an employee where the employer has acted reasonably in compliance with the new stapled fund rules.

1.47 Where the Commissioner reduces an employer's individual superannuation guarantee shortfall under the new provisions, the late contributions (which triggered the discretion being exercised) cannot be taken into account in relation to any other quarter for the purposes of the reduction of charge percentage in section 23 of the SGAA. This prevents double counting of the late contributions. [Schedule 1, item 6, subsection 23(8AA)]

1.48 This discretionary power is based on the existing discretion in subsection 19(2E) of the SGAA, which allows the Commissioner to reduce an increase in an employer's individual superannuation guarantee shortfall where an employer makes contributions on time, but not in compliance with the choice of fund rules.

1.49 Amendments are made to clarify that the guidelines the Commissioner must develop and consider when deciding whether to exercise this existing discretionary power are a legislative instrument. The existing requirement in subsection 21(2) that the guidelines are to be made available for inspection on the internet is subsequently repealed because it is redundant. The existing guidelines that are in force immediately before the commencement of these amendments continue to be in force. [Schedule 1, items 2, 4, 5 and 25, subsections 19(2E), 21(1) and 21(2)]

Other amendments

1.50 Schedule 1 to the Bill contains amendments to the Superannuation Act 2005 to ensure Australian Public Service employers are required to comply with the new stapling rules. Therefore, if a relevant employee does not choose a superannuation fund when they start employment in the Australian Public Service (or with certain other Commonwealth employees), their employer cannot make contributions on behalf of the employee to the Public Sector Superannuation Accumulation Plan if the employee has a stapled fund. [Schedule 1, items 30 to 32, sections 17 and 18 of the Superannuation Act 2005]

1.51 The existing choice of fund rules relating to successor funds of an employer's chosen default fund are relocated into new subsection 32C(2AB) alongside the new provisions about successor funds of stapled funds. Subsection 32NA(1A) is subsequently repealed because it is redundant. There are no substantive changes to the operation of the rules relating to successor funds of an employer's chosen default fund. [Schedule 1, items 11 to 13 and 17, subsections 32C(2), 32C(2AB) and 32NA(1A)]

1.52 Section 32Y of the SGAA, which relates to the notional earnings base, is also repealed as it is no longer operative. [Schedule 1, item 19, section 32Y]

Consequential amendments

1.53 The definitions in subsection 6(1) of the SGAA are updated to signpost the new definition of stapled fund. [Schedule 1, item 1, subsection 6(1)]

1.54 The overview of the structure of Part 3A of the SGAA, which relates to the choice of fund rules, is updated to include new Division 7 which relates to stapled funds. [Schedule 1, item 7, section 32B]

1.55 The heading for subsection 32C(2) is updated to take into account the new stapled fund rules. [Schedule 1, item 9, subsection 32C(2)]

1.56 Amendments are also made to ensure that provisions of a Commonwealth industrial award or a Territory industrial award that require contributions to be made to a particular fund are not enforceable to the extent that an employer instead makes contributions to a stapled fund or a successor fund of a stapled fund. This is consistent with the existing treatment of chosen funds. [Schedule 1, items 20 and 21, section 32Z]

1.57 Similarly, amendments are made to ensure that a requirement in a law of a State or Territory that requires contributions to be made to a particular fund are not enforceable to the extent that an employer instead makes contributions to a stapled fund or a successor fund of a stapled fund. [Schedule 1, items 22 and 23, section 32ZAA]

1.58 Amendments to the Superannuation Act 1990 and the Superannuation Act 2005 are also made to ensure the existing provisions continue to apply correctly in relation to the successor fund of an employer's chosen default fund. [Schedule 1, items 26 to 29, 32 and 33, Superannuation Act 1990 and Superannuation Act 2005]

Application and transitional provisions

1.59 Schedule 1 to the Bill applies in relation to an employee's employment where that employment starts on or after 1 July 2021. [Schedule 1, item 24]

1.60 Therefore, where an employee starts employment on or after 1 July 2021, the amendments in Schedule 1 to the Bill apply for the duration of the employee's employment and to any subsequent employment they undertake.

1.61 Arrangements for employees who are employed by their employer before 1 July 2021 are not affected by these changes. This means that employers cannot rely on the new stapled fund rules to comply with the choice of fund rules for these employees.