Senate

Supplementary Explanatory Memorandum

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

Payments Deemed to be made to a Complying Superannuation Fund or Scheme

Summary of the proposed amendments

The proposed amendments will ensure that if an employer makes superannuation contributions to a superannuation fund that is not a defined benefit superannuation scheme, those contributions will be treated as having been made to a "complying superannuation fund" for superannuation guarantee purposes provided there are reasonable grounds for believing that the fund is a complying fund at the time the contributions are made. This will be the case even if the fund is subsequently found to have been a non-complying fund for taxation purposes.

In the case of a defined benefit superannuation scheme, a separate amendment will ensure that a benefit certificate relating to the scheme will be treated as a benefit certificate in relation to a "complying superannuation scheme", provided there are reasonable grounds for believing that the scheme is a complying scheme. This amendment will apply even if the scheme is subsequently found to have been a non-complying scheme for taxation purposes.

Explanation of the proposed amendments

These amendments are designed to protect employers who make superannuation contributions to a fund that they believe is a complying superannuation fund but which is subsequently found to be a non-complying fund. Under the existing provisions of the Bill, if the fund turns out to be a non-complying fund, the employer's contributions will not satisfy the superannuation guarantee requirements. However, by the proposed amendment, employers in this position will be taken to have made their contributions to a complying superannuation fund.

Defined contribution funds

The amendment will allow contributions made by an employer to a defined contribution fund (ie. a fund that is not a defined benefit superannuation scheme) to be treated as having been made to a "complying superannuation fund" if at the time the contribution is made the following requirements are satisfied:

•

the employer has received a statement from the trustee of the fund that the fund is operating in accordance with the superannuation fund conditions under the Occupational Superannuation Standards Act ("the OSS Act"); and

•

since receiving the statement, the employer has not been notified by the trustee of the fund that the fund has breached a superannuation fund condition under the OSS Act. [New subclause 23B(1)]

These provisions will not apply to treat contributions as having been made to a complying superannuation fund:

•

if the employer, or an associate of the employer (in terms of subsection 26AAB(14) of the Income Tax Assessment Act 1936 ("ITAA")), is a trustee or a manager of the fund; and

•

it is reasonable to conclude that the employer knew (or should have known) that the fund was not operating in accordance with the superannuation fund conditions under the OSS Act; [New subclause 23B(2)]

Broadly, the effect of this amendment is that, if there is no association between the employer and the trustees or managers of the fund, contributions by an employer to a defined contribution fund which has given the employer an undertaking that it is complying with the superannuation fund conditions under the OSS Act (and which has not subsequently notified the employer that it has breached these conditions),will be taken to have been made to a "complying superannuation fund".

If the employer has been notified of a breach, contributions made to the fund after that time will not be treated as contributions to a complying superannuation fund under the new provisions of clause 23B. However, if the superannuation fund rectifies the breach to the satisfaction of the Insurance and Superannuation Commissioner and the trustee of the fund notifies the employer to this effect, the employer can re-commence making contributions to the fund and those contributions will be taken to be contributions to a complying superannuation fund.

It should be noted that even if these requirements are not satisfied, contributions made by an employer to a superannuation fund will be taken into account if the fund is, in actual fact, a complying superannuation fund. (Clause 7 of the Bill defines a complying superannuation fund or scheme). This could be the case if the employer has not obtained a written statement or if the breach of a superannuation fund condition is rectified in such a way that the fund is taken to be a complying superannuation fund even when in breach of the conditions. (See proposed new subsection 12(3A) of the OSS Act - Superannuation Guarantee (Consequential Amendments) Bill 1992).

Connection between employer and the fund

The amendment provides that if the employer, or an associate of the employer within the meaning of subsection 26AAB(14) of the ITAA, is a trustee or a manager of the fund and, in view of this, it is reasonable to conclude that the employer knew, or should have known, that the fund was not operating in accordance with the superannuation fund conditions under the OSS Act, then the new provisions which deem contributions to be made to a complying superannuation fund do not apply.

Meaning of "associate"

The definition of "associate" in subsection 26AAB(14) of the ITAA is summarised as follows -

1.

If the employer is a natural person (other than a trustee) the following are associates:

(a)

a relative (see the definition of "relative" in subsection 6(1) of the ITAA);

(b)

a partner;

(c)

the spouse or a child (see the definition of "child" in subsection 6(1) of the ITAA) of a partner;

(d)

a trustee of a trust estate where the employer or an associate benefits or is capable of benefiting under the trust either directly or indirectly;

(e)

a company where either:

(i)

the company is, or its directors are, accustomed or under an obligation (whether formal or informal) to act in accordance with the directions, instructions or wishes of the employer and/or an associate or associates (including a company which is an associate by virtue of this subparagraph), or

(ii)

the employer is and/or persons who are associates of the employer (including a company which is an associate by virtue of (i)) 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.

2.

If the employer is a company (other than a trustee) the following are associates:

(a)

a partner;

(b)

the spouse or a child of a partner;

(c)

a trustee of a trust estate where the employer or an associate benefits or is capable of benefiting under the trust either directly or indirectly;

(d)

another person where either:

(i)

the employer company is, or its directors are, accustomed or under an obligation (whether formal or informal) to act in accordance with the directions, instructions or wishes of that person or of that person and another person or other persons, or

(ii)

that person is, or that person and his or her associates 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 employer company;

(e)

another company where either:

(i)

the other company is, or its directors are, accustomed or under an obligation (whether formal or informal) to act in accordance with the directions, instructions or wishes of the employer company and/or an associate or associates of the employer company, or

(ii)

the employer company is, and/or the persons who are associates of the employer company 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 other company;

(f)

a person who is an associate of the other person referred to in (d).

3.

If the employer is a trustee of a trust estate the following are associates:

(a)

any person who benefits or is capable of benefiting under the trust estate either directly or indirectly;

(b)

any associate of a natural person who is an associate by virtue of (a);

(c)

if a company is an associate by virtue of (a) or (b), any associate of the company.

4.

If the employer is a partnership the following are associates:

(a)

a partner;

(b)

any associate of a partner.

Meaning of "relative" and "child" for the purposes of subsection 26AAB(14) of the ITAA

A "relative" in relation to a person means any of the following:

•

the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that person or his or her spouse; and

•

the spouse of that person or any other person specified in the paragraph above.

A "child" in relation to a person includes an adopted child, a step-child or an ex-nuptial child of that person.

Determining whether "reasonable grounds" exist

Subclause 23B(2) ensures that if the employer, or an associate of the employer, is a trustee or manager of the fund, and the employer has reasonable grounds to believe that the fund is not operating in accordance with the superannuation fund conditions under the OSS Act, then contributions to the fund are not deemed to be made to a complying superannuation fund.

In determining whether there are reasonable grounds for the employer to believe that the fund is not operating in accordance with the OSS standards, it is expected that the following types of factors will be taken into account:

(a)

the position the employer or associate holds in the fund;

(b)

if the associate is a trustee or manager of the fund, the nature of the connection between the employer and the associate;

(c)

the degree of involvement the employer or associate has in the activities or operation of the fund;

(d)

the nature of the breach of the superannuation fund conditions, the manner in which it occurred, the circumstances surrounding the breach (including the persons involved in the transactions or actions which caused the breach and their connection with the employer or the associate) and the consequences of the breach; and

(e)

any other factors which would have a bearing on determining the degree of knowledge the employer had about whether the fund was operating in accordance with the superannuation fund conditions under the OSS Act.

Defined Benefit Superannuation Scheme

In the case of a defined benefit superannuation scheme, the test for determining whether superannuation guarantee requirements are satisfied is not whether contributions have been made to a complying superannuation scheme, but whether a benefit certificate in relation to a complying scheme has effect for the contribution period. To ensure that employers contributing to a defined benefit superannuation scheme have a similar level of protection to employers contributing to a defined contribution fund, a further amendment is proposed. [New clause 23A]

The amendment will provide that a benefit certificate issued in relation to a superannuation scheme will be taken to be a benefit certificate in relation to a "complying superannuation scheme":

(a)

from the day that the employer receives the notice from the trustees of the scheme that the scheme is operating in accordance with the superannuation fund conditions under the OSS Act; or, if earlier

(b)

from the beginning of the contribution period (or the part of the contribution period if the benefit certificate only has effect for a part of the period), provided the employer receives a written statement from the trustee, within 30 days of that day, stating that the scheme is operating in accordance with the superannuation fund conditions under the OSS Act and that it was operating in this way from the day on which the benefit certificate took effect.

The benefit certificate will be treated as a benefit certificate in relation to a complying superannuation scheme until such time as the employer is notified by the trustee that the scheme has breached a superannuation fund condition under the OSS Act. If this occurs, the employer will have to make other arrangements in order to satisfy superannuation guarantee requirements for the remainder of the contribution period.

If the scheme subsequently rectifies the breach to the satisfaction of the Insurance and Superannuation Commissioner and the scheme notifies the employer to this effect, then the second notice will cancel the first notice and from that time the benefit certificate will again be taken to be a benefit certificate relating to a complying superannuation scheme.

If the employer, or an associate of the employer in terms of subsection 26AAB(14) of the ITAA, is a trustee or manager of the scheme and, in view of this, it is reasonable to expect that the employer knew, or should have known, that the fund was not operating in accordance with the superannuation fund conditions under the OSS Act, then the benefit certificate will not be treated as relating to a complying superannuation scheme by proposed clause 23A.

It should be noted that even if these requirements are not satisfied, superannuation support provided through a defined benefit superannuation scheme can be taken into account if the scheme is, in actual fact, a complying superannuation scheme [see Clause 7 of the Bill].

The meaning of "associate" and "reasonable"

The meaning of the terms "associate" and "reasonable grounds" are outlined in the preceding sections of this supplementary explanatory memorandum under the headings "Meaning of associate" and "Determining whether reasonable grounds exist".

Distribution of shortfall component

Generally, the Commissioner of Taxation is required to pay the shortfall component of the superannuation guarantee charge to a complying superannuation fund for the benefit of the affected employee. (Clause 60)

Amendments proposed will provide that a superannuation fund will be taken to be a complying superannuation fund for these purposes if the trustee of the fund has notified the Commissioner that the fund is operated in accordance with the superannuation fund conditions under the OSS Act. This will not apply if the trustee later notifies the Commissioner that it is operating in breach of a superannuation fund condition. [see new subclause 60(2)]