Senate

Revised Explanatory Memorandum

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

Chapter 3 - Best financial interests duty

Outline of chapter

3.1 Schedule 3 to the Bill amends the SIS Act to require each trustee of a registrable superannuation entity and each trustee of a SMSF to perform the trustee's duties and exercise the trustee's powers in the best financial interests of the beneficiaries.

3.2 Schedule 3 also amends the SIS Act to require each director of the corporate trustee of a registrable superannuation entity to perform the director's duties and exercise the director's powers in the best financial interests of the beneficiaries.

3.3 Schedule 3 also amends the SIS Act to allow regulations to be made that prescribe additional requirements on trustees and directors of trustee companies of registrable superannuation entities where failure to comply with the additional requirements constitutes a breach of the best financial interests duty.

3.4 Schedule 3 also amends the SIS Act to reverse the evidential burden of proof for the best financial interests duty so that the onus is on the trustee of a registrable superannuation entity. The reverse onus does not apply to additional best financial interest duty requirements prescribed by regulations.

3.5 Schedule 3 also amends the SIS Act to allow contraventions of record-keeping obligations specified in regulations to be subject to a strict liability offence to provide regulators with an additional option to respond to compliance issues relating to record-keeping requirements.

3.6 Schedule 3 also amends the Corporations Act to remove an exemption from disclosing information about certain investments under the 'portfolio holdings disclosure' rules.

3.7 The intent of these amendments is to increase the accountability of superannuation trustees in relation to the execution of their fiduciary duties in relation to the many actions trustees take in operating a superannuation entity: which include incurring day-to-day essential operational expenditure and investing the beneficiaries' money, to less frequent strategic decisions and discretionary expenditures.

3.8 The new best financial interests duty test is intended to clarify the existing best interests duty. By requiring trustees and directors of corporate trustees to act in the financial interests of the beneficiaries, it eliminates the possibility that trustees and directors of corporate trustees can act in a manner that they judge improves the non-financial interests of the beneficiaries but at the expense of their financial interests. The amendments clarify the standard for trustees to meet when they operate a fund, which include making expenditure decisions in the best financial interests of the beneficiaries. This is all the more important, given the compulsory nature of superannuation so that Australians have confidence that the fund is being maintained solely for their financial interests and not some subsidiary or ancillary purpose.

3.9 In addition, the amendments are the Government's response to recommendation 22 of the Productivity Commission review into superannuation by providing a clearer articulation of what it means for a trustee to act in members' best interests.

3.10 Schedule 3 also amends the Corporations Act to remove an exemption from disclosing information about certain investments under the 'portfolio holdings disclosure' rules.

Context of amendments

Existing law

Section 52 covenants and the best interests duty

3.11 Trustees and directors of corporate trustees of superannuation entities are subject to a range of fiduciary and statutory obligations aimed at protecting beneficiaries. These obligations include a requirement to comply with covenants under the SIS Act.

3.12 Section 52 of the SIS Act sets out a number of covenants that are taken to be included in the governing rules of superannuation entities. This includes the covenant that each trustee of the entity must perform the trustee's duties and exercise the trustee's powers in the best interests of the beneficiaries (see paragraph 52(2)(c)).

3.13 Subsection 52(12) of the SIS Act also imposes another covenant on trustees to 'promote the financial interests of the beneficiaries'.

3.14 A trustee that contravenes an obligation to comply with a section 52 covenant is subject to a civil penalty (see subsection 54B(1) and section 193). Where the contravention involves dishonesty or an intention to deceive or defraud a criminal offence applies (see section 202). Trustees may be liable for fines up to 2,400 penalty units (which is equivalent to $532,800, as of 1 July 2020), and imprisonment up to five years (see sections 196 and 202)).

3.15 Both ASIC and APRA have administration of the section 52 covenants (see table item 18 in the table in subsection 6(1) of the SIS Act).

Directors of the corporate trustee of a registrable superannuation entity and best interests duty

3.16 Section 52A of the SIS Act sets out a number of covenants relating to each director of a corporate trustee of a registrable superannuation entity that are taken to be included in the governing rules of the registrable superannuation entity. This includes the covenant that each director must perform the director's duties and exercise the director's powers in the best interests of the beneficiaries.

3.17 A director that contravenes an obligation to comply with a section 52A covenant is subject to liability under a civil penalty order and where dishonesty or an intention to deceive or defraud is involved may be liable for a criminal offence (see sections 193 and 202). Directors may be liable for fines up to 2,400 penalty units (which is equivalent to $532,800, as of 1 July 2020) and imprisonment up to five years (see sections 196 and 202).

SMSFs and the best interests duty

3.18 Section 52B of the SIS Act sets out a number of covenants that are taken to be included in the governing rules of SMSFs. This includes the covenant that each trustee of the fund must perform the trustee's duties and exercise the trustee's powers in the best interests of the beneficiaries.

3.19 Contraventions of covenants for SMSF trustees are not civil penalty provisions, but SMSF trustees found to have breached the duty may face a number of other consequences including issuance of a notice of non-compliance to the SMSF, rectification or education directions, or disqualification.

The superannuation system and the Productivity Commission review

3.20 The superannuation system currently manages around $3 trillion of retirement savings on behalf of millions of Australians. Trustees of superannuation funds must be accountable for how they operate the fund including expending members' money. This obligation is all the more important given the compulsory nature of the superannuation system.

3.21 Numerous reports and hearings in recent years have highlighted the extent of spending by superannuation funds on discretionary items like advertising, sponsorships and corporate entertainment. Inappropriate focus on issues or outcomes other than beneficiaries' financial interests, including engaging in inappropriate expenditure, risks compromising member outcomes and eroding retirement incomes. Trustee accountability is all the more important given the compulsory nature of the system.

3.22 The Productivity Commission review into superannuation found that superannuation entities clearly do not always act in the best interests of the beneficiaries. The Productivity Commission noted at page 43 of its report that "this reflects not only trustee misconduct but a lack of clarity around what is expected of trustees under the best interests duty in legislation - as has become apparent in the evidence emerging through the Royal Commission". Recommendation 22 of the report stated that the Government should pursue a clearer articulation of what it means for a trustee to act in members' best interests under the SIS Act. It said the Government should decide whether to pursue legislative change, greater regulatory guidance, and/or proactive testing of the law by regulators.

Summary of new law

3.23 Schedule 3 to the Bill amends the SIS Act to require each trustee of a registrable superannuation entity and trustee of a SMSF to perform the trustee's duties and exercise the trustee's powers in the best financial interests of the beneficiaries.

3.24 Schedule 3 also amends the SIS Act to require each director of the corporate trustee of a registrable superannuation entity to perform the director's duties and exercise the director's powers in the best financial interests of the beneficiaries.

3.25 Schedule 3 also amends the SIS Act to reverse the evidential burden of proof for the best financial interests duty so that the onus is on the trustee of a registrable superannuation entity. The reverse onus does not apply to additional best financial interest duty requirements prescribed by regulations.

3.26 Schedule 3 also amends the SIS Act to allow contraventions of record-keeping obligations specified in regulations to be subject to a strict liability offence.

3.27 Schedule 3 also amends the SIS Act to allow regulations to be made that prescribe additional requirements on trustees and directors of trustee companies of registrable superannuation entities where failure to comply with the requirements constitutes a breach of the best financial interests duty.

3.28 Schedule 3 also amends the Corporations Act to remove an exemption from disclosing information about certain investments under the 'portfolio holdings disclosure' rules.

Comparison of key features of new law and current law

Detailed explanation of new law

Obligation on trustees and directors to act in the best financial interests of the beneficiaries

Obligation applies to trustees of registrable superannuation entities

3.29 Schedule 3 to the Bill amends the SIS Act to require trustees of registrable superannuation entities to perform the trustee's duties and exercise the trustee's powers in the best financial interests of the beneficiaries. The existing covenant, which requires trustees to perform the trustee's duties and exercise the trustee's powers in the best interests of the beneficiaries is amended to refer to best financial interests. [Schedule 3, item 9, paragraph 52(2)(c) of the SIS Act]

3.30 The purpose of this amendment is to clarify that the financial interests (and not non-financial interests) of beneficiaries must be the determinative factor for trustees to comply with their obligations. In addition to the retirement benefits that superannuation provides members, the financial interests of members may include insured benefits (including death benefits or total and permanent disability coverage) provided in accordance with a properly formulated insurance strategy and other legal, regulatory and professional obligations. Subject to the trustees complying with the sole purpose test, this does not preclude trustees undertaking actions that also yield non-financial benefits to the beneficiaries, but the action cannot compromise the best financial interests of the beneficiaries. How any action will yield financial benefits to the beneficiaries of the superannuation entity must be the determinative consideration for any trustee.

3.31 The identification of a financial benefit to members is a threshold consideration for trustees in assessing whether the proposed exercise of their power will fulfil the requirements of the duty. Trustees will need to have robust evidence to support their expenditures.

3.32 As a part of their decision making process, trustees will need to consider the appropriateness of making various kinds of expenditure.

3.33 Provided any expenditure is essential to the prudent operation of a superannuation entity and reporting and monitoring frameworks for such expenditure are put in place by trustees to ensure that the expenditure is necessary and provided on competitive terms (and any ongoing expenditure continues to achieve its intended outcomes), then the expenditure decision would likely be regarded to be in the best financial interests of the beneficiaries. Whether the expenditure ultimately is or is not in the best financial interests of beneficiaries will of course depend on all of the circumstances of the relevant case. To be clear, the best financial interests duty is not subject to any materiality threshold.

3.34 Where a fund undertakes expenditure that might be considered discretionary or non-essential to the ongoing operation of the superannuation entity they should expect to face greater scrutiny about the basis for that expenditure.

3.35 Actions taken by trustees differ in quantum, complexity, regularity and duration. The detail in supporting analysis would be expected to reflect these aspects of any particular action. For example, a trustee decision which represents a significant expenditure of members' money, would be expected to be supported by a robust analysis with quantifiable metrics to reflect expected financial outcomes (including but not limited to cost benefit analysis, articulation of risks associated with achieving the outcome and any mitigation strategy).

3.36 Clearly, expenditure on items that are not supported by identifiable financial benefits to members articulated in a clear business case, are unlikely to satisfy the requirements of the best financial interests duty.

3.37 With respect to expenditure associated with generating investment returns for members, the determinative motivation for trustees must be maximising the financial returns to beneficiaries having regard to an appropriate level of risk. As indicated above, this does not preclude investments that also yield non-financial benefits, but such investments must still be in the best financial interests of members.

Example 3.1 - Expenditure not in the best financial interests of beneficiaries

Yellow Super has decided to spend an amount of beneficiaries' funds in wellbeing and counselling services due to its preference for providing beneficiaries with a holistic retirement experience. While beneficiaries derive some benefits from these services, they are not financial benefits and offering the services comes at financial cost to the fund. This expenditure is unlikely to be in the best financial interests of the beneficiaries.

Example 3.2 - Investment with financial and non-financial benefits in the best financial interests of beneficiaries

The Red Super Fund has decided to invest in Blue Health, a private health insurance company. Blue Health offer its members access to an online health and wellbeing information tool. As part of the investment opportunity, Blue Health agreed to offer members of the Red Super Fund access to the information tool as well.

When conducting due diligence on the investment, the Red Super Fund found that the investment in Blue Health yielded an appropriate rate of return given the level of risk. Thus, Blue Health met the risk-return hurdles set out in the investment strategy agreed by The Red Super Fund's board. Red Super Fund also notes the other non-financial benefits that beneficiaries of the Fund may obtain from the investment in the form of access to the online health and wellbeing information tool, but the determinative factor in Red Super Fund's investment decision are the returns that the investment will generate for the Fund. This investment is likely to be in the best financial interests of the beneficiaries. However, the trustee should also ensure it considers its other legal obligations including the sole purpose test.

Example 3.3 - Expenditure in the best financial interests of beneficiaries

Orange Superannuation Fund decided to fund a television marketing campaign to promote their fund, spending $5 million of members' money. Orange Superannuation Fund argues that spending the money will lead to an increase in the number of members by 5,000. As a result of the increase in members, the trustee believes that this will allow them to reduce their fees by 0.01 percentage points by spreading the fixed costs of the fund across more members. However, following the campaign no decline in fees results.

APRA undertakes an audit of Orange Superannuation Fund. It asks for information to justify why the marketing campaign was in the best financial interests of beneficiaries. The trustee produces detailed analysis that shows previous campaigns delivered the increase in members. The trustee is also able to produce evidence of unforeseeable events that undermined the effectiveness of the campaign. APRA is satisfied that at the time of making the decision to proceed with the marketing campaign the fund had acted reasonably in forming the view that the expenditure was in the best financial interests of the beneficiaries.

3.38 As the best financial interests duty is part of the sections 52 and 52A covenants, the civil penalty for a contravention draws on the existing civil penalty regime under the SIS Act (see sections 54B and 193 of the SIS Act). The maximum penalty is 2,400 penalty units (which is equivalent to $532,800, as of 1 July 2020).

3.39 The penalty is the same as the penalty for other civil penalty provisions of the SIS Act and has the same purpose to achieve the aim of deterrence. The civil penalty provides a deterrent from breaching the best financial interests duty and ensures that appropriate penalties are available depending on the nature of the breach. It is important that the penalty regime acts as a sufficient deterrent and that the penalties reflect the seriousness of potential non-compliance. The maximum penalty amount enables courts to impose proportionate penalties in light of the circumstances of the contravention.

3.40 Where the contravention involves dishonesty or an intention to deceive or defraud, a criminal offence applies. The maximum sentence for such a contravention is five years imprisonment (see section 202 of the SIS Act). The aim of the offence and its sanction is to provide a deterrence from breaching the best financial interests duty. The availability of a criminal offence and sanction for contraventions that involves dishonest or an intention to deceive or defraud reflects the more serious nature of such breaches.

3.41 A breach could cause harm to beneficiaries as a breach would mean a trustee or director of a corporate trustee is not acting in the beneficiaries' best financial interests. A person who suffers loss or damage as a result of a trustee or director contravening the covenant may have a cause of action to recover the loss or damage (see section 55 of the SIS Act).

3.42 The Guide to Framing Commonwealth Offences was considered in determining the applicable civil penalty amount and criminal offence. It is important that an appropriate range of options are available for responding to contraventions. The ability to issue civil penalties provides a deterrent to behaviours that may result in outcomes contrary to the interests of Australians. The availability of a criminal offence and sanction for contraventions that involves dishonest or an intention to deceive or defraud reflects the more serious nature of such breaches where there is dishonesty or an intention to deceive or defraud.

3.43 A legislative note is added that in civil penalty proceedings for a breach of any of the covenants under the SIS Act (which includes paragraph 52(2)(c) for the best financial interests duty) a mental element is not required to be established. If certain mental elements are present in a breach of a covenant there may be criminal consequences for that breach. The note also signposts that the existing rules about civil and criminal liability apply. The note does not change the existing rules about how civil and criminal liability apply. [Schedule 3, item 8, note at the end of subsection 52(1) of the SIS Act]

Obligation applies to each director of the corporate trustee of a registrable superannuation entity

3.44 Schedule 3 to the Bill amends the SIS Act to require each director of a corporate trustee of a registrable superannuation entity to perform the director's duties and exercise the director's powers in the best financial interests of the beneficiaries. The existing covenant, which requires each director of the corporate trustee of a registrable superannuation entity to perform their duties and exercise their powers in the best interests of the beneficiaries is amended to refer to best financial interests. [Schedule 3, item 13, paragraph 52A(2)(c) of the SIS Act]

3.45 The purpose of this amendment is the same as the purpose for clarifying the duty for trustees.

3.46 The penalty for directors not performing their duties and not exercising their powers in the best financial interests of the beneficiaries is a civil penalty, and where dishonesty or an intention to deceive or defraud is involved, a criminal offence. As the obligations are part of the section 52A covenants, the penalty for not performing the director's duties and exercising the director's powers in the best financial interests of the beneficiaries is the same penalty that applies if a director contravenes an existing section 52A covenant (sections 54B and 193 of the SIS Act).

3.47 As outlined above, the consequences of a trustee or director breaching the best financial interests duty may include:

•

a regulator pursuing civil penalties;

•

a regulator pursing criminal penalties (where there is dishonesty or an intention to deceive or defraud); and

•

an individual pursuing a trustee or director to recover loss or damage (under section 55 of the SIS Act).

3.48 In the cases of a regulator pursuing civil penalties or an individual pursuing recovery of losses or damages, whether against a trustee or director, there is no mental element. What is required is that the regulator or individual is able to prove (to the civil standard of proof) that the duty was in fact breached (be that through an act or an omission).

3.49 Conversely, in order to successfully pursue criminal penalties, a regulator must prove a mental element. That is, that the breach of the best financial interests duty involved dishonesty or an intention to deceive or defraud.

3.50 A legislative note is added that in civil penalty proceedings for a breach of any of the covenants under the SIS Act (which includes paragraph 52A(2)(c) for the best financial interests duty) a mental element is not required to be established. If certain mental elements are present in a breach of a covenant there may be criminal consequences for that breach. The note also signposts that the existing rules about civil and criminal liability apply. The note does not change the existing rules about how civil and criminal liability apply. [Schedule 3, item 12, note at the end of subsection 52A(1) of the SIS Act]

Obligation applies to trustees of SMSFs

3.51 Schedule 3 to the Bill amends the SIS Act to require trustees of SMSFs to perform the trustee's duties and exercise the trustee's powers in the best financial interests of the beneficiaries. The existing covenant to perform the trustee's duties and exercise the trustee's powers in the best interests of the beneficiaries is amended to refer to best financial interest. [Schedule 3, item 16, paragraph 52B(2)(c) of the SIS Act]

3.52 The amendments apply to SMSF trustees to clarify the existing best interest duty. Similar to the trustees of other APRA-regulated superannuation entities, SMSF trustees will be required to ensure that they are acting in the best financial interests of their beneficiaries.

3.53 As the obligations are part of the section 52B covenants, there is no penalty if a trustee of a SMSF contravenes the best financial interests duty. However, SMSF trustees found not acting in the best financial interests of the beneficiaries could be penalised if they also breach other regulatory provisions in the SIS Act such as section 62 for breaching the sole purpose test or section 65 for providing financial assistance to relatives or members. SMSF trustees in breach of the covenants may also be considered not to be fit and proper to manage their SMSF and could be disqualified under section 126A of the SIS Act.

Clarification of the best financial interest duty - third party payments

3.54 As with the existing best interests duty, the new best financial interests duty will continue to apply to an exercise of a trustee's powers in making payments to third parties by, or on behalf of the entity or fund, for example, payments for the provisions of goods and services to the fund or an investment. These actions by a trustee must be in the best financial interests of the beneficiaries. The trustee should be able to produce evidence supporting its decision, and have oversight mechanisms in place to ensure that the investment or the goods and services provided in response to the payments are in the best financial interests of the beneficiaries. [Schedule 3, items 11 and 17, subsections 52(3A) and 52B(2A) of the SIS Act]

3.55 One approach a trustee could take to satisfy this requirement is to conduct reasonable due diligence when assessing payments to a third party. If, after having conducted this reasonable due diligence, the trustee knows or ought reasonably to know that the payments to the third party are not in the best financial interests of the beneficiaries, or there is a concern that they might not be, the trustee should take immediate steps to cease making the payments. The use of an interposed corporate entity that a superannuation fund owns equity in, to acquire services on behalf of the superannuation fund, will not insulate the trustee from ensuring that the services that are ultimately provided to the fund are in the best financial interest of the beneficiaries.

3.56 Trustees cannot hide behind unjustifiable claims that they are ignorant of what they are purchasing. Trustees should reasonably know what they are purchasing, and such purchases should be in the best financial interests of beneficiaries.

Example 3.4 - Payment to industry representative body

Blue Trustee manages the Aqua Superannuation Fund. Blue Trustee authorises the payment of subscription fees to an industry representative body. Prior to making the decision to pay the subscription fees, Blue Trustee does not closely examine what services the industry representative body will provide in return for those fees and how the payment is in the best financial interests of members. The industry representative body then uses the fees paid by Blue Trustee, in addition to the fees from other superannuation entities, to undertake activities that are not in the best financial interest of Aqua Superannuation Fund's members. In this case, the payment of the subscription fee is unlikely to be in the best financial interests of the beneficiaries.

3.57 The clarification applies equally to directors of corporate trustees in relation to their best financial interests obligation. [Schedule 3, item 15, subsection 52A(2A) of the SIS Act]

Reversal of the evidential burden

3.58 The evidential burden of proof for the best financial interests duty is reversed so that the onus is on the trustee of a registrable superannuation entity to adduce evidence to support the contention that the trustee performed their duties and exercised their powers in the best financial interests of the beneficiaries. [Schedule 3, item 20, section 220A of the SIS Act]

3.59 A definition of 'evidential burden' is inserted into the SIS Act. [Schedule 3, item 5, subsection 10(1) of the SIS Act]

3.60 The reversal of the evidential burden should emphasise to trustees that they need to have strong systems and processes in place to ensure they can point to evidence, for example, quantifiable metrics, that the performance of their duties and exercise of their powers were in the best financial interests of members. It should also highlight the need for trustees to keep clear records of the decision-making process. Trustees should assess the costs and benefits of actions, which will commonly include quantifiable metrics to demonstrate what the anticipated financial outcome is and the reasonable basis for that expectation. Actions taken by trustees differ in quantum, complexity and duration, and the detail in supporting analysis would be expected to reflect these aspects of a particular action.

3.61 The evidential burden of proof is not reversed for trustees of SMSFs as there is no penalty for a contravention of the best financial interests duty. However, SMSF trustees found not acting in the best financial interests of the beneficiaries could be penalised if they also breach other regulatory provisions in the SIS Act. The reverse onus would not apply to a requirement prescribed by the regulations for the purposes of the best financial interests duty. This recognises that a reverse onus is more appropriately applied where the requirements are identified under primary legislation rather than created under regulations. [Schedule 3, item 20, subsection 220A(3) of the SIS Act]

3.62 The reverse onus would not apply where a criminal penalty is pursued because the effect would not be proportionate due to the serious consequences of being held liable for a criminal offence.

3.63 The reverse onus would not apply to actions to recover loss or damage under section 55 of the SIS Act. This means that it will only apply to actions brought by a regulator for the contravention of the best financial interests duty where a civil penalty applies for the breach and not actions to recover loss or damages as a result of a contravention of the best financial interests duty. The reverse onus would not apply to class actions against trustees brought by beneficiaries or brought by the regulator on behalf of beneficiaries.

3.64 This reversal of the evidential burden of proof is proportional, necessary, reasonable and in pursuit of a legitimate objective. Given that the facts of whether a trustee has acted in the best financial interests of beneficiaries can be peculiarly within the knowledge of the trustee; proof of this could be readily provided by the trustee; and the reverse onus is confined to situations where the consequences of a breach are civil penalties sought by the regulator, and will not be applied to situations where a criminal penalty is pursued.

3.65 The reversal of evidential burden is reasonable as a trustee should be readily able to point to evidence that they considered the likely financial impact on beneficiaries of a decision. For example, in the case of a payment to a third party for services, the trustee could adduce records showing the due diligence undertaken in respect of the payment and the relevant third party and other factors demonstrating that the payment was in the best financial interests of beneficiaries. Whereas it may be difficult for the regulator to prove that the trustee failed to take certain matters into account in determining whether a decision or payment was in the best financial interests of beneficiaries.

3.66 Reversal of the evidential burden is also justified given the potentially serious and widespread impact of a trustee's failure to act in the best financial interests of beneficiaries.

3.67 Reversing the evidential burden will mean that if the trustee is able to adduce evidence or point to evidence that suggests a reasonable possibility that there was a proper discharge of its duties, the evidential burden is discharged and the Regulator will then be required to prove on the balance of probabilities that the trustee did not perform their duties and exercise their powers in the best financial interests of the beneficiaries. [Schedule 3, item 20, subsection 220A(2) of the SIS Act]

Allowing additional best financial interest duty requirements to be prescribed by regulations

3.68 The Schedule amends the SIS Act to allow regulations to be made that prescribe additional requirements that must be complied with by the trustees and directors of trustee companies of registrable superannuation entities. A failure to comply with the specified additional requirements would constitute a contravention of the best financial interests duty. [Schedule 3, items 10 and 14, paragraphs 52(2)(c) and 52A(2)(c) of the SIS Act]

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

3.70 As failure to comply with the additional requirements would constitute a contravention of the best financial interests duty, the civil penalty for a contravention draws on the existing civil penalty regime under the SIS Act (see sections 54B and 193 of the SIS Act).The maximum penalty is 2,400 penalty units (which is equivalent to $532, 800, as of 1 July 2020). Where the contravention involves dishonesty or an intention to deceive or defraud, a criminal offence applies. The maximum sentence for such a contravention is five years imprisonment (see section 202 of the SIS Act). The availability of the same civil penalty and the same criminal offence reflects that a contravention of the additional requirements is to be treated the same as a contravention of the best financial interests duty.

3.71 The intention is to impose additional requirements that will apply in circumstances where there is a heightened risk of trustees avoiding their obligations under the best financial interests duty. For example, this might include trustees using schemes or corporate structures to shield themselves from accountability under the duty.

3.72 The additional requirements will seek to ensure that this avoidance activity cannot occur. Under a compulsory superannuation system, these amendments are especially warranted so that beneficiaries have the utmost confidence that trustees cannot avoid acting in their best financial interests.

3.73 More broadly this amendment signals to the superannuation industry that the Government is ready to respond if any evidence of trustees seeking to avoid the best financial interest duty requirements is detected. It is expected that this will have a deterrence effect on trustees that might otherwise be inclined to enter into avoidance activities leading to overall higher levels of compliance and promoting more confidence in the system.

3.74 Consistent with standard practice, the Government envisages undertaking consultation before making any regulations under this power to minimise the risk of unintended consequences.

Strict liability offence for record-keeping requirements

3.75 The Schedule includes amendments that make specified record-keeping obligations in the SIS Act a strict liability offence.

3.76 The amendments relating to the best financial interests duty may encourage trustees to keep better records to demonstrate compliance with their duties. The amendments relating to record-keeping support this by ensuring that where regulations are made to require the keeping of records, regulators are able to take a proportionate enforcement response. These amendments are in addition to the existing options under section 34 of the SIS Act.

3.77 Currently, section 34 of the SIS Act provides that a breach of an operating standard is an offence, where the contravention is intentional or reckless and the maximum fine is 100 penalty units. This will include where there is a contravention of record-keeping obligations that are specified as operating standards.

3.78 The amendments supplement the offence in section 34 of the SIS Act with a strict liability offence. Specifically, the amendments introduce a strict liability offence for the contravention of an operating standard relating to a record-keeping obligation. The offence will attract a maximum penalty of 50 penalty units. [Schedule 3, item 6, subsections 34(2A) and 34(2B) of the SIS Act]

3.79 Imposing a strict liability offence (with maximum penalty of 50 penalty units) for a failure to comply with a record-keeping obligation is consistent with other similar provisions in the SIS Act. For example, see section 104 of the SIS Act about the duty to keep records of changes of trustees.

3.80 The penalty amount of 50 penalty units is also consistent with the Guide to Framing Commonwealth Offences, which provides that a fine of up to 60 penalty units should be imposed for a strict liability offence. Consistent with the principles in the Guide, the strict liability offence will also not be punishable by imprisonment.

3.81 A contravention of the strict liability offence does not affect the validity of a transaction. [Schedule 3, item 7, subsection 34(3) of the SIS Act]

Administration arrangements

3.82 The general administration table in the SIS Act is amended to provide that for the new section 117A, the regulatory responsibility departs from the division of regulatory responsibility for the rest of Part 14. [Schedule 3, item 3, table item 37 in the table in subsection 6(1) of the SIS Act]

3.83 The amendments provide that both ASIC and APRA have administration of the new subsection 34(2A) standards relating to record keeping obligations. [Schedule 3, item 2, table item 7A in the table in subsection 6(1) of the SIS Act]

3.84 The general administration table in the SIS Act is amended to provide that for the new subsection 34(2A), the regulatory responsibility departs from the division of regulatory responsibility for the rest of Part 3. [Schedule 3, item 1, table item 7 in the table in subsection 6(1) of the SIS Act]

Portfolio holdings disclosure

3.85 Schedule 3 to the Bill includes amendments to the portfolio holdings disclosure rules, which generally require trustees to publish information about their disclosable investment items on their website. The portfolio holdings disclosure rules currently contain an exemption that allows trustees to choose not to disclose up to five per cent of superannuation holdings.

3.86 The amendments remove this exemption. [Schedule 3, item 23, subsection 1017BB(5A) of the Corporations Act]

3.87 This change increases transparency in the superannuation system and empowers members to make fully informed decisions about their retirement savings.

Application and transitional provisions

3.88 The amendments relating to the duty to act in the best financial interest of beneficiaries apply on or after 1 July 2021. [Schedule 3, item 21]

3.89 The amendments relating to the reversal of the evidential burden apply in relation to contraventions that occur on or after 1 July 2021. [Schedule 3, item 22]

3.90 The amendments relating to trustee compliance with record-keeping requirements apply in relation to contraventions that occur on or after 1 July 2021. [Table item 6 of commencement table]

3.91 The amendments to the portfolio holdings disclosure rules apply to the reporting day that is 31 December 2021, and to later reporting days. This reporting day covers the six month period that commences on 1 July 2021. [Schedule 3, item 24]