Senate

Revised Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Your Future, Your Super

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.

Schedule 2 to the Bill amends the SIS Act to require APRA to conduct an annual performance test for MySuper products and other products to be specified in regulations (such as 'trustee-directed products' where the trustee has control over the design and implementation of the investment strategy). A trustee providing such products will be required to give notice to its beneficiaries who hold a product that has failed the performance test. Where a product has failed the performance test in two consecutive years, the trustee is prohibited from accepting new beneficiaries into that product. APRA may lift the prohibition if circumstances specified in the regulations are satisfied.

Schedule 3 to the Bill amends the SIS Act to:

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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;

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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;

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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 these additional requirements would be a contravention of the best financial interests duty;

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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; and

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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.

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

Date of effect: Schedule 1 applies in relation to an employee's employment where that employment starts on or after 1 July 2021.

Generally, the amendments made by Schedule 2 apply in relation to MySuper products on and after 1 July 2021 and apply in relation to other products specified in the regulations on and after 1 July 2022.

These amendments in Schedule 3 apply from 1 July 2021.

Proposal announced: This Bill partially implements the measure 'Superannuation Reform-Your Future, Your Super' from the 2020-21 Budget.

Financial impact: Together, Schedules 1, 2 and 3 are estimated to have a cost of $46.0 million over the forward estimates period as reported in the 2020-21 Budget measure 'Superannuation Reform':

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights -Chapter 4.

Compliance cost impact: The 'Superannuation Reform-Your Future, Your Super' measure announced in the 2020-21 Budget is estimated to have a total regulatory impact of $5.1 million per year on business.

The Productivity Commission's report, Superannuation: Assessing Efficiency and Competitiveness, has been certified as a process and analysis equivalent to a Regulation Impact Statement for the purposes of the Government decision to implement this measure. The report can be accessed through the Australian Parliament House website.^[1]

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:

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

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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

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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:

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the default fund chosen by the employer; or

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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;

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

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

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

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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:

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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;

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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:

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

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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

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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);

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

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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:

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

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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;

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

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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.

Chapter 2 - Addressing underperformance in superannuation

Outline of chapter

2.1 Schedule 2 to the Bill amends the SIS Act to require APRA to conduct an annual performance test for MySuper products and other products to be specified in regulations (such as 'trustee-directed products' where the trustee has control over the design and implementation of the investment strategy). A trustee providing such products will be required to give notice to its beneficiaries who hold a product that has failed the performance test. Where a product has failed the performance test in two consecutive years, the trustee is prohibited from accepting new beneficiaries into that product. APRA may lift the prohibition if circumstances specified in the regulations are satisfied.

2.2 Consistent with the recommendations of the Productivity Commission review into superannuation, the intent of these changes is to subject all APRA-regulated superannuation funds to annual performance tests for their MySuper and other products specified in the regulations (recommendation 4). The amendments seek to ensure that superannuation products have their performance assessed against an objective, consistently-applied benchmark, giving greater transparency to beneficiaries and protecting beneficiaries from underperforming products. These amendments also include measures to strengthen APRA's powers to manage underperforming products.

Context of amendments

2.3 The superannuation system currently manages around $3 trillion of retirement savings of Australians and its compulsory nature means that the Government has a heightened responsibility in holding funds to account and protecting member outcomes. Several reviews, including the Productivity Commission's review into superannuation, have found that persistently underperforming funds are a flaw of the system. These amendments build on the existing law to strengthen the protections against underperformance in the industry.

Existing law

Section 52 covenants and the annual outcomes assessment

2.4 The operation of registrable superannuation entities are subject to a range of regulatory requirements to protect beneficiaries. These include obligations on trustees of registrable superannuation entities to comply with covenants under the SIS Act.

2.5 Section 52 of the SIS Act sets out a number of covenants that are taken to be included in the governing rules of registrable superannuation entities.

2.6 Currently, under subsections 52(9) to 52(11) of the SIS Act trustees of regulated superannuation entities have an obligation to conduct a self-assessed annual outcome assessment for MySuper and choice products.

2.7 This annual outcomes assessment was introduced in April 2019 and requires trustees to consider whether the assessed product is promoting the financial interest of beneficiaries with regard to several criteria including the product's risk, return, and fees and costs.

2.8 A trustee that contravenes a section 52 covenant is subject to a civil penalty order (see sections 54B and 193 of the SIS Act). Where the contravention involves dishonesty or an intention to deceive or defraud, a criminal offence applies. Trustees may be liable for fines up to 2,400 penalty units (which is equivalent to $532,800, as of 1 July 2020), and for serious breaches, imprisonment for not longer than five years (see sections 196 and 202 of the SIS Act).

2.9 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).

2.10 The annual outcomes assessment does not include an objective, consistently-applied performance test or include immediately operative consequences for underperformance.

APRA's powers to establish prudential standards

2.11 Under the current law, APRA is granted a rule making power to establish prudential standards, and other components of the prudential framework. This is aimed at maintaining the financial soundness of RSE licensees and their registrable superannuation entities, ensuring that RSE licensees protect the interests, and meet the reasonable expectations, of beneficiaries of registrable superannuation entities, and other prudential matters.

2.12 For the banking, insurance and superannuation industries, APRA has developed a comprehensive framework of prudential standards and prudential practice guides. APRA's standards set out minimum financial, governance, operational and risk management requirements. The prudential practice guides set out APRA's expectations on the implementation of its standard and set out APRA's view as to what amounts to best practice.

2.13 Under Part 3A of the SIS Act, APRA has the power to establish prudential standards relating to prudential matters (see section 34C of the SIS Act). Currently, APRA does not have an explicit power to establish prudential standards for resolution planning as this is not a prudential matter as defined by the SIS Act.

Productivity Commission review into superannuation

2.14 The Productivity Commission review into superannuation found that entrenched underperforming superannuation products are a structural flaw in the superannuation system. In order to address persistent underperformance and increase beneficiaries' retirement savings, the Productivity Commission recommended requiring all APRA-regulated superannuation funds to be subject to annual outcomes tests for their MySuper and other offerings, with direct consequences for failing the test (recommendation 4).

Summary of new law

2.15 Schedule 2 to the Bill amends the SIS Act to require APRA to conduct an annual performance test for MySuper products and other products to be specified in regulations (such as trustee-directed products). A trustee providing such products will be required to give notice to its beneficiaries where their product has failed the performance test. Where a product has failed the performance test in two consecutive years, the trustee will be prohibited from accepting new beneficiaries into that product. APRA may lift the prohibition if circumstances specified in the regulations are satisfied.

Comparison of key features of new law and current law

Detailed explanation of new law

2.16 Schedule 2 to the Bill inserts a new Part 6A into the SIS Act, which provides that:

•

APRA must conduct an annual performance test, each financial year, on 'Part 6A products';

•

APRA must notify trustees of the superannuation products of the results of the annual performance test;

•

Trustees of superannuation products that fail the annual performance test must notify beneficiaries who hold the product, that their product has failed the annual performance test; and

•

Trustees of superannuation products that fail the annual performance test in two consecutive years are prohibited from accepting new beneficiaries into the superannuation product, unless APRA lifts the prohibition (if circumstances specified in the regulations are satisfied).

2.17 The Schedule inserts a definition of 'Part 6A product'. The definition provides that a 'Part 6A product' is a MySuper product or a class of beneficial interest in a regulated superannuation fund, if that class is identified by regulations. For example, this could include trustee-directed products. [Schedule 2, items 5 and 9, subsection 10(1) and section 60B of the SIS Act]

2.18 It will be considered a contravention of a covenant (see sections 54B and 193 of the SIS Act) for a trustee to fail to comply with the notification requirements or prohibition on accepting beneficiaries.

2.19 The amendments also provide APRA with a resolution planning prudential standard making power and make amendments facilitating the implementation of the YourSuper comparison tool announced by the Government as part of the Your Future, Your Super reforms.

Annual performance test conducted by APRA

2.20 Schedule 2 to the Bill amends the SIS Act to require APRA to conduct an annual performance test for MySuper products and other classes of beneficial interest in a regulated superannuation fund to be specified in regulations (such as trustee-directed products). A trustee providing such Part 6A products will be required to give notice to its beneficiaries where their product has failed the performance test. Where a product has failed the performance test in two consecutive years, the trustee is prohibited from accepting new beneficiaries into that product.

2.21 The annual performance test applies in relation to regulated superannuation funds (other than a regulated superannuation fund with fewer than 5 members). This ensures that the annual performance test will not apply in relation to other registrable superannuation entities or SMSFs. [Schedule 2, item 9, subsection 60C(1) of the SIS Act]

2.22 APRA must determine whether a Part 6A product has passed or failed the annual performance test. This means the annual performance test will apply to Part 6A products, including MySuper products and other classes of beneficial interest in a regulated superannuation fund specified in regulations (such as trustee-directed products). [Schedule 2, item 9, subsection 60C(2) of the SIS Act]

2.23 APRA must conduct the annual performance test for each financial year and notify trustees in writing of APRA's determination of the test results within a period, starting after the end of a financial year, set out under the regulations. [Schedule 2, item 9, subsections 60C(2), (3) and (4) of the SIS Act]

2.24 Within the same period, APRA must publish the test results on a website maintained by APRA. [Schedule 2, item 9, subsection 60C(5) of the SIS Act]

2.25 APRA's determination of the results of the annual performance test will not be a 'reviewable decision' within the meaning of the SIS Act. This is because the test results are based on product performance compared to relevant benchmarks over the assessment period. The methodology to calculate a product's performance and benchmark will be clearly specified in regulations.

2.26 The requirements for the annual performance test will be set out in regulations. It is expected that the regulations will be made for this purpose that include, but are not limited to the following matters:

•

specifying requirements in respect of investment returns (which may be net of fees and taxes); and

•

specifying requirements that depend on the exercise of a discretion by APRA; and

•

specifying matters that APRA may or must take into account in exercising such a discretion; and

•

allowing APRA to make specified assumptions in exercising such a discretion.

[Schedule 2, item 9, subsections 60D(1), (2), (3) and (4) of the SIS Act]

2.27 Furthermore the amendments clarify that, in specifying requirements, regulations may include requirements based on a comparison between actual returns for a product and a benchmark return. The regulations may include different methods for these calculations. Such methods may involve assumptions to be made in applying the method, which may be specified in the regulations, such as assumptions as to rates of tax or fees or other matters. The regulations may also set out circumstances (including pre-conditions for) when APRA has discretion to depart from such assumptions by legislative instrument. [Schedule 2, item 9, subsections 60D(5), (6), (7) and (8) of the SIS Act]

2.28 For example, it may be appropriate to depart from assumptions specified in the regulations about fees and taxes, if the fee or tax environment changes and the assumptions in the regulations become out of date. This flexibility allows APRA to respond to changes in a timely fashion to ensure the test operates as intended over time.

2.29 The regulations may later be updated to reflect the updated set of assumptions. This may include updates that apply to past periods (periods occurring before the regulations are made) if the regulations provide the same assumptions as those specified by APRA in exercising its discretion. [Schedule 2, item 9, subsections 60D(9), (10) and (11) of the SIS Act]

2.30 This power will ensure that a consistent set of assumptions will apply for each past period in each application of the annual performance test. Making such regulations will ensure a complete record of all the assumptions that have been used in the annual performance test is available on the publicly available statute book, which provides transparency and certainty. As the regulations may only apply the same assumptions that were applied by APRA in the past to past periods, funds will not be disadvantaged by regulations that change assumptions for past periods.

2.31 None of the clarifications to the regulation making power for the annual performance test (described above) are intended to limit the scope of regulations that may be made. [Schedule 2, item 9, subsection 60D(12) of the SIS Act]

2.32 The amendments also clarify that the regulations outlining the annual performance test may provide for a matter by incorporating external material as in force or existing from time to time. [Schedule 2, item 9, subsection 60D(13) of the SIS Act]

2.33 It may be appropriate for the regulations setting out the annual performance test to incorporate a range of materials by reference. For example, it may be necessary for regulations to refer to APRA reporting standards, under which funds report investment information to APRA. Such information could form the basis of data used in the annual performance test calculations.

2.34 It may be necessary for regulations to refer to such instruments as in force, to ensure the annual performance test is based on data that was reported to APRA in relation to past periods. It may also be appropriate for regulations to refer to such instruments as they exist from time to time to ensure that any future changes in the reporting of data to APRA is reflected in the annual performance test. APRA's reporting standards are legislative instruments and therefore publicly and freely available on the Federal Register of Legislation.

Regulations may allow different performance requirements for different products and provide APRA with flexibility in applying the test

2.35 This regulation making power operates broadly to allow different performance requirements to be specified for different classes of products (such as trustee-directed products). This allows circumstances to be specified where the annual performance test applies or does not apply for particular classes of products. It would also allow a different annual performance test to apply for a particular class of product. It also allows regulations to prescribe circumstances where APRA has discretion on these matters. [Schedule 2, item 9, subsections 60D(1) and (4) of the SIS Act]

2.36 The annual performance test is generally intended to assess long term investment performance of a product. As such, the regulations could ensure the performance test generally only applies for products with a minimum number of years of performance. For example, the regulations could provide that a product that has less than a few years of performance history need not meet any performance benchmarks unless APRA has exercised discretion to require the product to meet a benchmark.

2.37 The regulations can also provide discretion to APRA to depart from this general rule relating to the application of the annual performance test to ensure trustees cannot create 'new' products to deliberately avoid being subjected to the new performance test. The regulations could further provide that APRA consider particular matters in exercising this discretion.

Regulations may allow the performance of 2 or more products to be assessed together

2.38 For the purposes of new Part 6A of the SIS Act (or specified provisions in Part 6A), the regulations may specify circumstances in which two or more Part 6A products (the single Part 6A product) may be treated as being one Part 6A product (the combined Part 6A product). The regulations may specify circumstances where anything happening in relation to one of the products is to be treated as having happened in relation to the combined product. [Schedule 2, item 9, paragraphs 60G(2)(a) and (b) of the SIS Act]

2.39 The single Part 6A product can include a product that originated from a product that has ceased to exist (a replaced product). For example, in a merger situation there are two products from two different funds that are merged. One of the funds has ceased to exist and the merged fund continues to offer the product. The regulations may specify circumstances that treat anything that happened in relation to the replaced product as having happened in relation to the single product (and therefore as having happened in relation to the combined product). [Schedule 2, item 9, paragraph 60G(2)(b) and subsections 60G(3) and (4) of the SIS Act]

2.40 This will allow regulations to be made to ensure that the annual performance test can be appropriately applied in a range of situations. For example, where a trustee transfers beneficiaries from a product that is close to failing (or has previously failed) the annual performance test into a new but similar product. This could be done to bypass the consequences of failing one or more annual performance tests.

2.41 For example, in circumstances specified in the regulations (such as where APRA considers it appropriate that the performance of the products be considered together), the performance history of the underperforming product could be attributed to the new similar product.

2.42 The amendments clarify that regulations made for this purpose may include but are not limited to the following matters:

•

specifying requirements that depend on the exercise of a discretion by APRA; and

•

specifying matters that APRA may or must take into account in exercising such a discretion; and

•

allowing APRA to make specified assumptions in exercising such a discretion. [Schedule 2, items 9, subsections 60G(6) and (7) of the SIS Act]

2.43 The amendments allow regulations to treat products as combined only for the purposes of certain provisions in new Part 6A (or for the whole of Part 6A). For example, two or more products may be treated as combined for the purposes of the rules providing the annual performance test requirements but not for the purposes of the rules triggering the prohibition on accepting new beneficiaries into the product. [Schedule 2, item 9, subsections 60G(1) and (5) of the SIS Act]

Results of annual performance test to be factored into annual outcomes assessment

2.44 Trustees must take into account the results of the annual performance test when completing their annual outcomes assessment. Trustees of a product that fails the annual performance test will find it very difficult to show that the product is promoting the financial interests of beneficiaries in their annual outcomes assessment. [Schedule 2, item 7, subparagraph 52(9)(a)(iv) of the SIS Act]

Notification of underperformance by trustees to beneficiaries

2.45 The Schedule amends the SIS Act to require a trustee of a superannuation product to give notice to its beneficiaries who hold the product, generally within 28 days of APRA giving notice of the test results, where the product has failed the annual performance test. The notification must be provided via pre-paid post or by courier and electronically to a beneficiary's nominated electronic address (if there is a nominated electronic address), and in accordance with the form and content requirements specified by regulations. A trustee will be required to notify beneficiaries for each year that a product fails the annual performance test. This notification will ensure that beneficiaries are made aware that their superannuation product is underperforming. [Schedule 2, item 9, subsections 60E(1), (2), (3) and (5) of the SIS Act]

Consequences of failing to notify

2.46 The civil penalty for trustees who fail to notify beneficiaries is 2,400 penalty units (which is equivalent to $532, 800, as of 1 July 2020). As the obligations are part of the section 52 covenants the civil penalty draws on existing civil penalty regime under the SIS Act (see sections 54B and 193 of the SIS Act).

2.47 The penalty is the same as the penalty for other civil penalty provisions of the SIS Act and has the same the purpose to achieve the aim of deterrence. The civil penalty provides a deterrent from breaching the relevant notification requirement provisions and ensures that appropriate penalties are available depending on the nature of the breach. The maximum penalty amount enables courts to impose proportionate penalties in light of the circumstances of the contravention.

2.48 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 deterrent from breaching the relevant notification requirement provisions.

2.49 Contraventions could cause harm to beneficiaries as they would not be given notice that their superannuation product is underperforming. This information could assist beneficiaries as they make decisions that affect their retirement incomes. A breach could also give a trustee an unfair advantage over trustees of other superannuation products who are complying with the notification requirement.

2.50 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 impose civil penalties provides a deterrent, and encourages the provision of information to beneficiaries in a context where that information may allow a beneficiary to make informed decisions regarding their financial interests. The availability of a criminal offence and sanction for contraventions that involves dishonesty or an intention to deceive or defraud reflects the more serious nature of such breaches.

Timeframe for notification

2.51 Generally, the notification to beneficiaries must be given within 28 days of APRA giving the trustee notice of the test results. However, both ASIC and APRA may in writing defer the due date for the trustee to notify beneficiaries. This discretion would be used in very limited circumstances where the information would be redundant or not relevant to a member, such as if a fund was undertaking a successor fund transfer. In this situation, it would be appropriate for the underperformance notification due date to be deferred. ASIC and APRA jointly administer the notification requirement as it relates to a covenant in section 52 of the SIS Act. As the notification by trustees is a disclosure obligation, it is expected that the discretion would generally be exercised by ASIC. . [Schedule 2, item 9, subsections 60E(3) and (4) of the SIS Act]

Requirements of the notification

2.52 The notification must be given to members via pre-paid post or by courier. The notification must also be given electronically to a beneficiary's nominated electronic address. However, if the beneficiary has not provided an electronic address, no electronic notification is required. The intent is to maximise the chances that a member of a fund will read and engage with the notification. Some members are more likely to engage with a hard copy letter, while others might find it easier with an email. [Schedule 2, item 9, subsection 60E(5) of the SIS Act]

2.53 In the context of civil proceedings for a failure to notify under these rules, section 323 of the SIS Act provides a defence from liability, which may apply in circumstances where a trustee reasonably relies on incorrect or outdated information given in relation to contact details.

2.54 The notification to beneficiaries must be consistent with any form and content requirements about the notification prescribed by regulations. This could mean that a superannuation product's underperformance must be worded and presented in a clear, concise and effective manner. Regulations may also specify information that is a standard text or standard texts, including specifying a model notification letter. These clarifications to the regulation making power do not limit the scope of regulations that can be made about the form and content of the notification. [Schedule 2, item 9, paragraph 60E(6)(a) and subsections 60E(8) and (9) of the SIS Act]

2.55 These requirements ensure that there will be a consistent approach taken to how information about underperformance is presented by all trustees who must comply with the new obligation.

2.56 The regulations may specify that information relating to the ranking of products according to relative fee levels, investment returns or other metrics be included in the notification. This could be satisfied by the notification incorporating by reference material from a website maintained by the Australian Taxation Office, as in force or existing from time to time. [Schedule 2, item 9, paragraph 60E(6)(b) and subsection 60E(7) of the SIS Act]

2.57 This ensures that the regulations could require the notification to include a link to the YourSuper comparison tool, announced by the Government as part of the Your Future, Your Super reforms, to empower beneficiaries to compare and select a superannuation product that meets their needs.

2.58 Incorporating material into the notification as it exists from time to time will ensure that the most up-to-date comparison information is provided by trustees to beneficiaries. The material to be incorporated by reference will be publicly and freely accessible.

Prohibition against accepting beneficiaries into underperforming superannuation products

General operation of the new prohibition

2.59 Schedule 2 to the Bill also amends the SIS Act to prohibit superannuation trustees from accepting new beneficiaries into products that have failed the annual performance test in two consecutive years. [Schedule 2, item 9, subsections 60F(1) and (2) of the SIS Act].

2.60 As compliance with the prohibition is part of the section 52 covenants, the maximum penalty for accepting new beneficiaries into underperforming superannuation products is the same penalty that applies if a trustee contravenes a section 52 covenant (see sections 54B and 193 of the SIS Act). [Schedule 2, item 8, subsection 52(14) of the SIS Act]

2.61 The prohibition prevents individuals from entering persistently underperforming superannuation products. That is, existing beneficiaries of the entity who do not hold the product will not be permitted to switch into the product and individual beneficiaries will not be able to acquire the product.

2.62 Beneficiaries who hold an interest in a product at the time the product becomes subject to a prohibition may continue to hold the product. Such beneficiaries are also not precluded from continuing to make contributions to that product.

2.63 Generally, trustees will still be able to accept a beneficiary into another product offered by the trustee where that other product is not subject to a prohibition. That is, the prohibition operates at the product level, rather than the superannuation entity level.

Exception from the prohibition

2.64 However, the prohibition on accepting new beneficiaries into a product does not apply in relation to a person who becomes a beneficiary as a result of a payment split within the meaning of the Family Law Act 1975. This ensures a trustee can create a new interest for a non-member spouse in a product to give effect to a payment split. [Schedule 2, item 9, subsection 60F(9) of the SIS Act]

Operation of the prohibition in special cases involving 2 different products failing the annual performance test in consecutive years

2.65 The amendments provide that for the purposes of new Part 6A of the SIS Act, the regulations may specify circumstances in which two or more Part 6A products (the single Part 6A product) may be treated as being one product (the combined Part 6A product). The regulations may also specify circumstances where holding a product should be considered holding the combined product. [Schedule 2, item 9, paragraphs 60G(2)(a) and (c) of the SIS Act]

2.66 This means that despite the prohibition generally operating at the product level, the amendments allow regulations to specify the circumstances where two products offered that fail the annual performance test in two separate but consecutive years may both be subject to the prohibition. That is, the first product fails the test in a year and a second product fails the test in the following year.

2.67 For example, this will allow regulations to deal with a situation where the trustee has begun offering or transferred beneficiaries to a new but substantially similar product. This might be done in an effort to avoid being subject to the prohibition. In such a case, no singular product has failed the annual performance test in two consecutive years, but it may nonetheless be appropriate for a prohibition to be imposed on both products for the protection of beneficiaries given the similarity of the two products.

Lifting the prohibition

2.68 The amendments allow APRA to determine that the prohibition be lifted where the requirements to be specified in regulations have been met. This will allow the regulations to specify the criteria for when a superannuation product may re-open to new beneficiaries based on when the product's performance has improved. [Schedule 2, item 9, subsections 60F(3) and (4) of the SIS Act]

2.69 APRA's determination that the prohibition should be lifted comes into force on the day the determination is made or a later day specified in APRA's determination. [Schedule 2, item 9, subsection 60F(5) of the SIS Act]

2.70 APRA must give a copy of the determination to the trustee as soon as practicable after making it. [Schedule 2, item 9, subsection 60F(6) of the SIS Act]

2.71 The amendments clarify that such a determination by APRA is not a legislative instrument within the meaning of section 8 of the Legislation Act 2003. The determination relates to a specified product offered by a specified entity (that is, it applies the law in a particular circumstance and is administrative in character). The clarification is included to assist readers of the legislation and is merely declaratory of the law. [Schedule 2, item 9, subsection 60F(7) of the SIS Act]

2.72 If APRA makes a determination that the prohibition should be lifted, this does not prevent APRA from making a later determination to prohibit superannuation trustees from accepting new beneficiaries into products that have failed the annual performance test in two consecutive years. The earlier lifting of the prohibition does not prevent the later determination from applying. The amendments clarify this, for the avoidance of doubt. For example, if the re-opened product fails the annual performance test in another 2 consecutive years, the trustee could be prohibited from accepting members into the product again (until another APRA determination is issued to lift the second prohibition). [Schedule 2, item 9, subsection 60F(8) of the SIS Act]

APRA notification to Fair Work Commission

2.73 APRA must also notify the Fair Work Commission in writing of its determination that a MySuper product is prohibited from accepting new beneficiaries, and of its determination that a prohibition is lifted. [Schedule 2, item 9, subsection 60F(10) of the SIS Act]

APRA resolution planning prudential standards power

2.74 Schedule 2 to the Bill also amends the SIS Act to provide APRA with a resolution planning prudential standard making power that relates to facilitating the resolution of an RSE licensee, a registrable superannuation entity or a connected entity of an RSE licensee, in order to best protect the interests of beneficiaries. [Schedule 2, item 6, paragraph 34C(4)(ea) of the SIS Act]

2.75 However, for facilitating the resolution of a connected entity of an RSE licensee, it must be reasonably necessary to:

•

facilitate the resolution of the RSE licensee; or

•

facilitate the resolution of the registrable superannuation entity; or

•

protect the interests of the beneficiaries of the registrable superannuation entity; or

•

meet the reasonable expectations of the beneficiaries of the registrable superannuation entity.

[Schedule 2, item 6, subparagraphs 34C(4)(ea)(iii), (iv) (v) and (vi) of the SIS Act]

2.76 The amendments amend the definition of a 'prudential matter', and insert the definition of 'resolution' into subsection 10(1) of the SIS Act. The definition has the same meaning as it does in the other industry Acts (see Banking Act 1959, Insurance Act 1973 and Life Insurance Act 1995). [Schedule 2, items 5 and 6, subsection 10(1) and paragraph 34C(4)(ea) of the SIS Act]

2.77 This ensures that APRA has clear powers to set appropriate prudential standards on resolution planning, and ensure that RSE licensees put in place measures to improve their preparedness for resolution. This allows APRA to ensure RSE licensees are prepared for a range of contingencies, including the possibility that the prohibition against accepting new beneficiaries into a product may lead to a material deterioration in the financial condition of the regulated superannuation fund.

2.78 Under the other industry Acts, the term 'prudential matters' is important in determining the scope of the prudential standard-making powers of APRA and the matters for which standards may be made. However, this term is currently defined differently in the SIS Act and other industry Acts, as the SIS Act does not currently contain any specific reference to resolution. That resolution planning is not included in the SIS Act as a prudential matter may lead to uncertainty regarding APRA's ability to make prudential standards relating to the resolution of an RSE licensee and in some cases their connected entities.

2.79 The amendments harmonise the definition of 'prudential matters' across the industry Acts by incorporating a specific reference to resolution under the SIS Act. The amendments also clarify APRA's ability to require RSE licensees and their connected entities to take actions to address potential barriers to orderly resolution.

Amendments facilitating implementation of the YourSuper comparison tool

2.80 The YourSuper comparison tool will be available on an interactive website designed to make it easy for beneficiaries to choose a superannuation product based on fees and performance information. The amendments in this Schedule facilitate implementation of this website.

2.81 The amendments allow regulations to specify one or more formulas that form the basis for the ranking of, superannuation products. The formulas assist products to be ranked according to specified metrics including fee levels, investment returns or any other criterion. [Schedule 2, item 9, subsection 60J(3) of the SIS Act]

2.82 This provides transparency and certainty about the basis by which superannuation products will be ranked on the YourSuper website.

2.83 The Schedule amends the SIS Act to allow APRA to share information about Part 6A products with the ATO, which the ATO may make available on a website maintained by the ATO, without breaching secrecy provisions. If the disclosure of information is for the purposes of the new SIS Act provisions then subsection 56(3) of the Australian Prudential Regulation Authority Act 1998 provides an exception to the secrecy offence in subsection 56(2) of that Act. In giving information to the ATO, APRA may take into account the regulations specifying formulas and methods. [Schedule 2, item 9, subsections 60J(1), (2), (3) and (4) of the SIS Act]

2.84 The amendments clarify that the information may be made available by making it available in response to a user query or by providing a list of ranked products, or displayed in a range of different ways. This reflects the intent to design an interactive, user friendly website. [Schedule 2, item 9, subsections 60J(5) and (6)]

2.85 It is expected that APRA will provide data and ranking instructions to the ATO (based on the formulas set out in the regulations) to allow the website to be built and be updated over time. The ATO's role in maintaining the website does not constitute the provision of financial advice.

2.86 As soon as practicable after receiving the information from APRA, the Commissioner of Taxation must ensure that the information relating to MySuper products is published on the website. [Schedule 2, item 9, subsection 60J(4) of the SIS Act]

Consequential amendments

2.87 The amendments insert definitions of 'resolution' and 'Part 6A product' in the definitions section of the SIS Act. [Schedule 2, item 5, subsection 10(1) of the SIS Act]

Administration arrangements

2.88 The amendments provide that ASIC has administration of the new Part 6A amendments about annual performance assessments introduced by these amendments to the extent the provisions relate to disclosure or record-keeping, and APRA has administration to the remaining extent. [Schedule 2, item 4, table item 21A in the table in subsection 6(1) of the SIS Act]

2.89 Both ASIC and APRA have administration of the Part 6A amendments that relate to consequences of 2 consecutive fail assessments and that relate to notifying beneficiaries of the fail assessments. [Schedule 2, item 4, table items 21B and 21C in the table in subsection 6(1) of the SIS Act]

2.90 The ATO has administration of the amendments facilitating the implementation of the YourSuper comparison tool relating to the information being made publicly available. APRA has administration of the amendments facilitating the implementation of the YourSuper comparison tool relating to giving information to the ATO. [Schedule 2, item 4, table items 21A and 21D in the table in subsection 6(1) of the SIS Act]

Protecting employers from breaching other rules, where products are closed to new beneficiaries

Protecting employers from breaching rules about contributing to a particular fund

2.91 The Schedule includes amendments to ensure that an employer is not in breach of various rules where they are prevented from making contributions to a fund on behalf of their employees because the funds' products are closed due to underperformance. This covers rules in Commonwealth laws, State or Territory laws, including industrial awards. [Schedule 2, items 3 and 9, section 32ZAB of the SGAA and section 60H of the SIS Act]

2.92 The amendments ensure that if certain criteria are established, rules that require an employer to contribute to a particular superannuation fund (or class of funds) on behalf of their employees are not enforceable. The criteria for these protections to operate are that the employer cannot make contributions to the relevant default fund (or class of funds) because a product offered by the fund is subject to the prohibition on accepting new beneficiaries into the underperforming product. [Schedule 2, item 9, subsection 60H(3) the SIS Act]

2.93 The amendments also provide that the terms 'employer', 'employee', 'Commonwealth industrial award', 'State industrial award' and 'Territory industrial award' have the same meaning as in the SGAA for the purposes of these rules. [Schedule 2, item 9, subsection 60H(4) of the SIS Act]

2.94 The amendments also override rules that require a particular fund to be the sole eligible choice fund for an employee. This includes laws such as section 15 of the Australian Defence Force Superannuation Act 2015 (which requires ADF Super to be the sole eligible choice fund for certain employees) and section 16 of the Superannuation Act 2005 (which requires PSSAP to be the sole eligible choice fund for certain employees). The amendments allow regulations to specify additional superannuation funds with analogous provisions, which may be overridden. [Schedule 2, item 3, section 32ZAB of the SGAA]

2.95 For the listed superannuation funds (ADF Super and PSSAP), including those listed in regulations, the criteria for these rules to be overridden are that the employer cannot make contributions to the relevant sole eligible choice fund because a product offered by the fund is subject to the prohibition on accepting new beneficiaries into the underperforming product. [Schedule 2, item 3, subsection 32ZAB(1) of the SGAA]

2.96 The Schedule also amends an existing provision of the SGAA to clarify the intended interaction between the override rules in that Act and the Fair Work Act 2009. This change is consistent with other amendments in the Bill to the existing overriding provisions in the SGAA which ensure they continue to operate appropriately where a conflict could arise between that Act (as amended) and the Fair Work Act 2009. These amendments make it clear that Part 3A of the SGAA, including the override rules in that Part, are able to be prioritised over conflicting provisions in the Fair Work Act 2009. [Schedule 2, item 1, subsection 5B(1) of the SGAA]

Protecting employers from breaching rules about the superannuation guarantee charge

2.97 The Schedule makes amendments to the SGAA to ensure an employer is not liable for superannuation guarantee charge in certain circumstances. [Schedule 2, item 2, subsection 23(6A) of the SGAA]

2.98 Where one or more products offered by a fund are closed due to underperformance, there is a possibility that an employer is unable to make a superannuation guarantee contribution on time because an earlier attempt to make the contribution failed. In such circumstances, the employer may become liable to pay a superannuation guarantee charge through no fault of their own. The amendments ensure that employers are not penalised for a late contribution (made later than 28 days after the end of the quarter) provided the contribution is made within 56 days after the end of the quarter.

2.99 The criteria for the rule to operate are that:

•

the employer has attempted to make a contribution for the benefit of the employee (and if it had been successful, it would have met the superannuation guarantee contribution deadline (that is, it would have been made within the period of 28 days after the end of the quarter); and

•

the attempt was unsuccessful due to one or more products in the fund being closed to new members under the prohibition introduced in this Schedule; and

•

the employer has successfully made the contribution to another fund within 28 days after the superannuation guarantee contribution deadline (that is, within 56 days after the end of the quarter).

Contingent amendments

2.100 Part 3 of the Schedule makes amendments contingent on the commencement of Schedule 1 to the Treasury Laws Amendment (Self Managed Superannuation Funds) Act 2020, which amends the SIS Act to increase the maximum number of allowable members from four to six in SMSFs. It amends the definition of self managed superannuation fund in section 17A, repealing paragraph 17A(1)(a) of the SIS Act which says 'it has fewer than 5 members' and substitutes the paragraph with 'it has no more than 6 members'.

2.101 The contingent amendments ensure that where SMSFs are carved out under the amendments introduced in this Schedule, SMSFs continue to be carved out in the event that the basic conditions for what constitutes a self managed superannuation fund changes. [Schedule 2, items 11 and 12, subsections 52(14) and 60C(1) of the SIS Act]

2.102 Part 3 of the Schedule also makes amendments contingent on the commencement of the Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy) Act 2020. The Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy) Act 2020 implements a referral of powers from Western Australia by introducing Part VIIIC in the Family Law Act 1975, which applies specifically to Western Australian de facto couples who wish to split their superannuation interests. Part VIIIC is broadly equivalent to Part VIIIB of the Family Law Act 1975, which contains superannuation splitting provisions that apply to married and de facto couples in other jurisdictions.

2.103 The contingent amendments ensure that the reference to the definition of a payment split in Part VIIIB of the Family Law Act 1975 will also reference the equivalent definition in the new Part VIIIC. [Schedule 2, item 13, paragraph 60F(9)(a) of the SIS Act]

Application and transitional provisions

2.104 The amendments relating to the new annual performance test apply in relation to MySuper products on and after 1 July 2021 and in relation to other classes of beneficial interest in a regulated superannuation fund specified in the regulations on and after 1 July 2022. This will include the amendments protecting employers from breaching other rules, where products are closed to new beneficiaries and facilitating implementation of the YourSuper comparison tool. [Schedule 2, subitem 10(1)]

2.105 The amendments introducing a new resolution planning prudential standard making power for APRA and clarifying the interaction between the override rules in the SGAA and the Fair Work Act 2009 apply on the day after Royal Assent. [Schedule 2, subitem 10(2)]

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]

Chapter 4 - Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Schedule 1 - Single default account

4.1 Schedule 1 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.2 Schedule 1 primarily amends the Superannuation Guarantee (Administration) Act 1992 to limit the creation of multiple superannuation accounts for employees who do not choose a superannuation fund when they start a new job.

4.3 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 their stapled fund.

Human rights implications

4.4 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

4.5 This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 2 - Addressing underperformance in superannuation

4.6 Schedule 2 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.7 Schedule 2 amends the SIS Act to require APRA to conduct an annual performance test for MySuper products and other products to be specified in regulations (such as 'trustee-directed products' where the trustee has control over the design and implementation of the investment strategy). A trustee providing such products will be required to give notice to its beneficiaries who hold a product that has failed the performance test. Where a product has failed the performance test in two consecutive years, the trustee is prohibited from accepting new beneficiaries into that product. APRA may lift the prohibition if circumstances specified in the regulations are satisfied.

Human rights implications

4.8 The impact of Schedule 2 on the following human rights has been considered:

•

the right to justice under Article 14 of ICCPR; and

•

the right not to be convicted of something that was not a crime when the activity took place under Article 15 of the ICCPR.

New civil penalties for contravening new section 52 covenants

4.9 Schedule 2 imposes penalties for contravening new section 52 covenants. This may be considered to engage the right to justice in Article 14 of the ICCPR. The Schedule creates a notification obligation and an obligation to close a product to new beneficiaries on trustees of superannuation products. Failure to comply with such requirements may attract a civil penalty.

4.10 The penalty is intended to achieve the legitimate objective of ensuring compliance with the requirements with the new covenants in section 52.

4.11 The penalty is appropriate given the potential benefits and profits that may be derived from non-compliance with the covenants in the SIS Act, and the need to create a sufficient deterrent to protect beneficiaries of superannuation funds. The penalty reflects the seriousness of potential non-compliance and aligns with community standards and expectations.

4.12 The civil penalty provision contained in the Schedule is not 'criminal' for the purposes of human rights law. While a criminal penalty is deterrent or punitive, these provisions are regulatory and disciplinary. Further, the provisions do not apply to the general public, but to a sector or class of people who should reasonably be aware of their obligations under the SIS Act (for example, trustees of a registrable superannuation entity).

4.13 Imposing the civil penalty will enable an effective disciplinary response to non-compliance. The civil penalty amount is reasonable and consistent with existing penalties that apply for existing covenants in the SIS Act. The cumulative effect and the nature and severity of the civil penalties in the Schedule is not 'criminal' for the purposes of human rights law.

4.14 Schedule 2 engages but does not limit the right to justice in Article 14 of the ICCPR.

New criminal offence for contravening new section 52 covenant

4.15 Where a contravention of the new civil penalty provisions involves dishonesty or intention to deceive or defraud, that contravention is punishable on conviction by imprisonment for a maximum of 5 years. This may be considered to engage the right to justice in Article 14 of the ICCPR and the right not to be convicted of something that was not a crime when the activity took place in Article 15 of the ICCPR.

4.16 The introduction of the criminal offences do not amend any of the criminal process or procedural rights that currently exist and are upheld in accordance with Article 14 of the ICCPR.

4.17 The maximum penalty amounts of imprisonment for a maximum of 5 years are adequate to sanction misconduct for the worst possible cases of non-compliance that involve dishonesty and intention to deceive or defraud. The new offences are consistent with the existing penalty regime in the SIS Act that provides for when a contravention of a civil penalty provision is an offence.

4.18 The penalty will apply to offences committed after Schedule 2 commences, and therefore apply prospectively, therefore upholding Article 15 of the ICCPR.

4.19 Schedule 2 engages but does not limit the right to justice in Article 14 of the ICCPR and the right not to be convicted of something that was not a crime when the activity took place in Article 15 of the ICCPR.

Conclusion

4.20 This Schedule is compatible with human rights, because to the extent Schedule 2 may limit human rights, those limitations are reasonable, necessary and proportionate.

Schedule 3 - Best financial interests duty

4.21 Schedule 3 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.22 Schedule 3 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;

•

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;

•

allow regulations to be made that prescribe additional requirements on trustees and directors of trustee companies of registrable superannuation entities;

•

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; and

•

allow contraventions of record-keeping obligations specified in regulations to be subject to a strict liability offence.

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

Human rights implications

4.24 The impact of Schedule 3 on the following human rights has been considered:

•

the right to justice under Article 14 of ICCPR; and

•

the right not to be convicted of something that was not a crime when the activity took place under Article 15 of the ICCPR.

New civil penalty provision for contravening additional best financial interest duty requirements set out in the regulations

4.25 The Schedule makes amendments to introduce civil penalty provisions for failure to comply with additional requirements prescribed in the regulations. Failure to comply with the additional requirements prescribed in the regulations is a contravention of the best financial interests duty and may attract a civil penalty. This may be considered to engage the right to justice in Article 14 of the ICCPR.

4.26 The Schedule amends the SIS Act to allow regulations to prescribe additional requirements that must be complied with. A failure to comply with the specified additional requirement would constitute a contravention of the best financial interests duty. It is envisaged that additional requirements would only be prescribed in circumstances where there is a heightened risk that particular arrangements are being entered into that could have the effect of enabling trustees and directors of trustee companies of registrable superannuation entities to avoid the best financial interest duty. As such, attracting a civil penalty provision for contravening an additional requirement prescribed in the regulations acts as an effective deterrent. Furthermore, as the additional requirements will be prescribed in regulations, they would be subject to disallowance by the Parliament.

4.27 The civil penalty provisions contained in the Schedule are not 'criminal' for the purposes of human rights law. While a criminal penalty is generally punitive, these provisions are regulatory and intended to deter non-compliance. Further, the provisions do not apply to the general public, but to a sector or class of people who should reasonably be aware of their obligations under the SIS Act (for example, trustees of a registrable superannuation entity).

4.28 Imposing the civil penalty will enable an effective disciplinary response to non-compliance. The civil penalty amount is reasonable and consistent with existing penalties that apply for existing civil penalty provisions in the SIS Act. The cumulative effect and the nature and severity of the civil penalties in the Schedule is not 'criminal' for the purposes of human rights law.

4.29 Schedule 3 engages but does not limit the right to justice in Article 14 of the ICCPR.

New criminal offences for contravening additional best financial interests duty requirements set out in the regulations

4.30 Where a contravention of the new civil penalty provision is for failing to comply with the additional requirements and where it involves dishonesty or intention to deceive or defraud, that contravention is punishable on conviction by imprisonment for a maximum of 5 years. This may be considered to engage the right to justice in Article 14 of the ICCPR and the right not to be convicted of something that was not a crime when the activity took place in Article 15 of the ICCPR.

4.31 The introduction of the criminal offences do not amend any of the criminal process or procedural rights that currently exist and are upheld in accordance with Article 14 of the ICCPR.

4.32 The maximum penalty amounts of imprisonment for a maximum of 5 years are adequate to sanction misconduct for the worst possible cases of non-compliance that involve dishonesty and intention to deceive or defraud. The new offences are consistent with the existing penalty regime in the SIS Act that provides for when a contravention of a civil penalty provision is an offence.

4.33 The penalty will apply to offences committed after Schedule 3 commences, and therefore apply prospectively, therefore upholding Article 15 of the ICCPR.

4.34 Schedule 3 engages but does not limit the right to justice in Article 14 of the ICCPR and the right not to be convicted of something that was not a crime when the activity took place in Article 15 of the ICCPR.

New strict liability offence

4.35 Schedule 3 introduces a strict liability offence. This may be considered to engage the right to justice in Article 14 of the ICCPR and the right not to be convicted of something that was not a crime when the activity took place in Article 15 of the ICCPR. The Schedule makes amendments to introduce a new strict liability offence. Section 34(2A) is 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.

4.36 A strict liability offence for contravening section 34(2A) is appropriate and consistent with the requirements in the Guide to Framing Commonwealth Offences which suggests an appropriate penalty for a strict liability offence is 60 penalty units for an individual. The new strict liability offence is not punishable by imprisonment and the fine for the offence does not exceed 60 penalty units for individuals. Strict liability offences reduce non-compliance and act as an appropriate determent. The penalty amount is reasonable and consistent with existing penalties for similar record-keeping obligations in the SIS Act.

4.37 Furthermore, strict liability offences preserve the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for the person who may be accused of committing such an offence.

4.38 The Schedule engages but does not limit the right to justice in Article 14 of the ICCPR.

4.39 The penalty for this offence applies prospectively, therefore upholding article 15 of the ICCPR. The Schedule engages but does not limit the right not to be convicted of something that was not a crime when the activity took place in Article 15 of the ICCPR.

Reversal of evidential burden

4.40 Schedule 3 reverses the evidential burden for civil proceedings relating to the duty to act in the best financial interests of beneficiaries. The burden is only reversed for the best financial interests duty for trustees of registrable superannuation entities. The reverse onus does not apply to additional best financial interest duty requirements prescribed by regulations. The reversal of the evidential burden may be considered to engage the right to justice in Article 14 of the ICCPR.

4.41 It is appropriate in these instances that the onus is reversed and placed on a defendant to adduce or point to evidence to establish a relevant matter exists or does not exist. Knowledge of matters relating to a mistake of fact, or any exemption, excuse, qualification or justification provided by the law creating the civil penalty provision, is peculiarly within the knowledge of the defendant. Placing this burden on the defendant is further justified because it would be significantly more difficult and costly for a regulator to disprove elements that are squarely within the knowledge of the defendant.

4.42 The reversal of evidential burden is reasonable as a trustee should readily be able to point to evidence that they considered the likely financial impact on beneficiaries of a decision to make a payment to a third party and how such payment was in the best financial interests of beneficiaries. For example, 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.

4.43 The evidential burden is not reversed for criminal proceedings because the effect would not be proportionate due to the serious consequences of being held liable for a criminal offence.

4.44 In reversing the evidential burden, Schedule 3 engages but does not limit the right to justice in Article 14 of the ICCPR.

Conclusion

4.45 Schedule 3 is compatible with human rights, because to the extent Schedule 3 may limit human rights, those limitations are reasonable, necessary and proportionate.