House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Chapter 8 Amendments to the Superannuation Guarantee (Administration) Act 1992 - definition of defined benefit superannuation schemes

Summary of proposed amendments

Purpose of amendment: To allow the trustee of a superannuation scheme which is not a defined benefit superannuation scheme within the meaning of the Superannuation Guarantee (Administration) Act 1992 (the Act) to elect that the scheme be treated as a defined benefit superannuation scheme for the purposes of the Act. The amendments will also allow a trustee to elect that such a scheme cease to be treated as a defined benefit superannuation scheme.

Date of Effect: The amendments will apply to assessments issued in the 1992-93 year and subsequent years.

Background to the legislation

For the purposes of the Act, the level of support provided by an employer for employees in a defined benefit superannuation scheme is determined on the basis of the superannuation benefits members will receive when they leave the scheme. It is independent of contributions made to the fund by the employer during a particular period. The level of support is determined by an actuary and is called the 'notional employer contribution rate' (subsection 10(2)). The Act presently allows reserves or surpluses in a defined benefit superannuation scheme to be taken into account in working out the level of superannuation support provided by an employer. The notional employer contribution rate reflects the use of any reserves or surpluses in providing the benefits of members.

There are no corresponding provisions in relation to schemes which are not defined benefit superannuation schemes within the meaning of the Act (these schemes are commonly referred to as 'defined contribution funds'). For the purposes of the Act, the level of superannuation support provided by an employer contributing to a defined contribution fund is calculated taking into account only those contributions made by the employer to the fund. A transfer of an amount of surplus funds by a trustee to a member's account does not generally constitute a contribution by the member's employer to the fund. Therefore, the amount of any surplus funds which are used in providing the benefits of members cannot be taken into account in working out the level of support provided by an employer for employees.

Explanation of proposed amendments

The proposed amendments will allow the trustee of a defined contribution fund to elect that the fund be treated as a defined benefit superannuation scheme for the purposes of the Act. If such an election is made, employers providing support in the fund will be treated as if they are employers in a defined benefit superannuation scheme. Consequently, employers providing support in the fund will be able to obtain a benefit certificate from an actuary which specifies a notional employer contribution rate in relation to the employees specified in the certificate. The notional employer contribution rate will reflect any surplus funds which are used in providing the benefits of members.

The definition of defined benefit superannuation scheme will be omitted from section 6 of the Act. A new definition will be inserted which:

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restates the old definition; and

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provides that a scheme, other than a scheme falling within the old definition, is a defined benefit superannuation scheme if a conversion notice has effect in relation to the scheme. In this case, the scheme commences to be a defined benefit superannuation scheme from the day on which the conversion notice takes effect, regardless of whether an assessment is made, or superannuation guarantee charge is paid, in respect of a contribution period that ended after the conversion notice took effect.

[New section 6A]

What is a conversion notice?

A conversion notice is a written notice by a trustee of a superannuation fund, given to the Insurance and Superannuation Commissioner, stating that the fund is to be treated as a defined benefit superannuation scheme for the purposes of the Act. That is, it is the mechanism by which, for superannuation guarantee purposes only, a trustee elects that a defined contribution fund be treated as a defined benefit superannuation scheme [New subsection 6B(1)].

When does a conversion notice take effect?

Subject to the conditions discussed below, a conversion notice takes effect from the day specified in the notice [New subsection 6B(2)] . A conversion notice cannot be expressed to take effect on a date before the first day of the financial year in which it is given to the Insurance and Superannuation Commissioner unless it is given before 15 August of a year, in which case, it may be expressed to take effect from the first day of the preceding financial year (i.e., 1 July of the preceding year) [New subsection 6B(3)].

For a conversion notice to be effective, the trustee must, before giving the notice, give to all employers contributing to the fund for the benefit of an employee written notice of:

•

the trustee's intention to give the conversion notice to the Insurance and Superannuation Commissioner; and

•

the proposed date on which the notice will take effect.

[New subsection 6B(4)]

While a conversion notice is in effect the trustee must also give to any employer who begins contributing to the fund written notice of:

•

the giving of the conversion notice; and

•

the date of effect of the notice,

within 30 days of the employer beginning to contribute to the fund [New subsection 6B(5)] .

Can a conversion notice be revoked?

Yes. Subject to the conditions discussed below, a trustee can revoke a conversion notice by giving to the Insurance and Superannuation Commissioner a written notice, called a revocation notice, which specifies a date on which the conversion notice is revoked. That date cannot be earlier than the date the revocation notice is given to the Insurance and Superannuation Commissioner [New subsection 6B(2)].

For a revocation notice to be effective, the trustee must, before giving the revocation notice to the Insurance and Superannuation Commissioner, give to all employers contributing to the fund for the benefit of an employee written notice of:

•

the trustee's intention to give the revocation notice to the Insurance and Superannuation Commissioner; and

•

the proposed date on which the notice will take effect.

[New subsection 6B(4)]

Notices given by post

Any notice given under section 6B will be taken as having been given by a trustee to the Insurance and Superannuation Commissioner or an employer if it is posted to that person [New subsection 6B(6)].

Benefit certificates given to schemes in relation to which conversion notices are in effect

Subject to the provisions of subsection 10(3) of the Act, a benefit certificate obtained from an actuary in relation to a scheme which is a defined benefit superannuation scheme by virtue of a conversion notice being in effect, is effective until the conversion notice is revoked [New paragraph 10(3)(d)].

Can contributions used to calculate the level of employer support provided while a conversion notice is effective in relation to a scheme be used a second time to calculate the level of employer support provided in a period when the conversion notice is not effective?

No. Contributions by an employer to a superannuation scheme in relation to which a conversion notice is in force and which are used to calculate the level of employer support provided under section 22, cannot be taken into account again under section 23. New subsection 23(8A) ensures that contributions cannot be claimed a second time as:

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prepaid contributions, in a period occurring after the conversion notice is revoked or ceases to have effect; or

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contributions in a period prior to the period the conversion notice was effective.

[New subsection 23(8A)]