Senate

Explanatory Memorandum

(Circulated by authority of the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator the Hon Jane Hume)

Chapter 1 - Self Managed Superannuation Fund membership limit

Outline of chapter

1.1 This Bill amends the SIS Act, Corporations Act, ITAA 1997 and SUMLMA to increase the maximum number of allowable members in SMSFs from four to six. This Bill also amends provisions that relate to SMSFs and small APRA funds. These amendments ensure continued alignment with the increased maximum number of members for SMSFs.

1.2 All legislative references in this Chapter are to the SIS Act, unless otherwise stated.

Context of amendments

1.3 The increase to the maximum number of allowable members for SMSFs was announced in the 2018-19 Budget.

1.4 Increasing the allowable size of these funds increases choice and flexibility for members. SMSFs are often used by families as a vehicle for controlling their own superannuation savings and investment strategies. For families with more than four members, currently the only real options are to create two SMSFs (which would incur extra costs) or place their superannuation in a large fund. This change will help large families to include all their family members in their SMSF.

1.5 The primary definition of 'self managed superannuation fund' is contained in section 17A of the SIS Act.

1.6 This definition requires SMSFs to have 'fewer than 5 members'. The definition also requires all trustees of an SMSF to be members of the SMSF (either individually, or as the directors of a trustee that is a body corporate). The Commissioner of Taxation has administrative and supervisory responsibility for SMSFs.

1.7 The SIS Act also contains provisions dealing with small superannuation funds, with the threshold for small funds set at the same level as the member limit for SMSFs (that is, fewer than five members). Some of these provisions apply to all superannuation funds that have fewer than five members (including SMSFs). Other provisions are limited to small funds that are not SMSFs. Small funds that are not SMSFs are regulated by APRA and are usually referred to in general terms as 'small APRA funds'.

1.8 Provisions in the income tax and superannuation laws that apply to SMSFs refer directly to the 'self managed superannuation fund' definition in the SIS Act. Provisions that apply to small APRA funds generally mirror the approach taken in the SIS Act by referring to funds that have fewer than five members and that are not SMSFs. The majority of provisions that apply to SMSFs or small APRA funds are contained in the ITAA 1997 and the SUMLMA.

Summary of new law

1.9 The amendments increase the maximum number of allowable members for SMSFs from four to six.

1.10 The amendments also make changes to provisions that relate to SMSFs and small APRA funds. These changes ensure continued alignment with the increased maximum number of members for SMSFs.

Comparison of key features of new law and current law

Detailed explanation of new law

Self managed superannuation funds

1.11 The amendments increase the number of members referred to in the definition of 'self managed superannuation fund' in the SIS Act from 'fewer than 5 members' to 'no more than 6 members'. [Schedule 1, item 1, paragraph 17A(1)(a)]

1.12 This change means that an SMSF can have a maximum of six, rather than four, members.

1.13 In some instances, the number of individual trustees that a trust can have may be limited to less than five or six trustees by State legislation. Such rules could prevent some or all members of a fund with five or six members from being individual trustees. In such cases, the members of a fund can use a corporate trustee in order for the superannuation fund to meet, or continue to meet, the amended definition of an SMSF.

1.14 As the update is done at the definitional level, it applies to Acts and Regulations that refer to the definition of 'self managed superannuation fund' in the SIS Act (for example, the definition of 'self managed superannuation fund' in subsection 995-1(1) of the ITAA 1997).

1.15 The amendments also update the sign off requirements in the SIS Act about the accounts and statements that the trustees of an SMSF must ensure are prepared for each income year. These changes ensure that these requirements continue to apply correctly after the increase to the maximum number of members (and therefore, to the maximum number of directors or trustees).

1.16 Currently, if an SMSF has more than one director member, its accounts and statements for a year of income must be signed by at least two members in their capacity as individual trustee or as a director of a corporate trustee. As there cannot be more than four members of an SMSF under the current rules, these requirements ensure that all members sign the accounts and statements of SMSFs with one or two members. For SMSFs with three or four members, at least half of the members must sign its accounts and statements for an income year.

1.17 Under the updated requirements, an SMSF with one or two directors or individual trustees must have its accounts and statements signed by all of those directors or trustees. For all other SMSFs (that is, those with between three and six directors or trustees), the accounts and statements of the SMSF must be signed by at least half of the directors or individual trustees. [Schedule 1, item 2 , subparagraphs 35B(3)(a)(i) and (ii) and subparagraphs 35B(3)(b)(i) and (ii)]

1.18 This approach maintains the standard under the previous provisions for funds that have between one and four directors or trustees, and extends the requirement that at least half of the directors or trustees sign the accounts and statements of an SMSF with either five or six directors or trustees.

Consequential amendments

Small APRA funds

1.19 Part 2 in Schedule 1 to the Bill contains amendments to provisions of the Corporations Act, ITAA 1997, SIS Act and the SUMLMA that refer to the number of members that a superannuation fund has. These provisions apply to superannuation funds that are not SMSFs (small APRA funds), to both SMSFs and small APRA funds, and to superannuation funds that are neither SMSFs or small APRA funds.

1.20 In general terms, the amendments in Part 2 increase various member thresholds from 'fewer than 5' to 'no more than 6' to maintain alignment with the increased threshold in the definition of 'self managed superannuation fund' in the SIS Act. Amendments are also made to ensure that existing provisions continue to operate as intended.

Income Tax Assessment Act 1997

1.21 The amendments increase the member limit in the definition of 'small superannuation fund' in the ITAA 1997 from '4 or fewer members' to 'no more than 6 members'. [Schedule 1, item 9, subsection 995-1(1) (definition of small superannuation fund) of the ITAA 1997]

1.22 This change ensures continued alignment between the member limit in the definition, and the definition of 'self managed superannuation fund'.

1.23 The amendments increase the member threshold in the provision in Division 294 of the ITAA 1997 that provides when a transfer balance credit arises in a transfer balance account when a repayment is made under certain limited recourse borrowing arrangements. They achieve this by replacing the specific reference to the members of a fund with a reference to the updated definition of 'small superannuation fund'. [Schedule 1, items 4 and 5, paragraph 294-55(1)(c) and subsection 294-55(4) of the ITAA 1997]

1.24 The amendments increase the member threshold in the definition of 'disregarded small fund assets' contained in Division 295 of the ITAA 1997. Under that Division, SMSFs and small APRA funds with disregarded small fund assets are prevented from using the segregated current pension assets method of claiming exempt current pension income. This change is achieved by replacing the specific reference to the members of a fund with a reference to the updated definition of 'small superannuation fund'. [Schedule 1, item 6, subparagraph 295-387(2)(a)(ii) of the ITAA 1997]

1.25 The amendments increase the membership threshold in the provisions in subdivision 307-F of the ITAA 1997 which requires the members of small superannuation funds to include a share of the outstanding balance of a limited recourse borrowing arrangement entered into by the fund in their total superannuation balance. This change is achieved by replacing the specific reference to the members of a fund with a reference to the updated definition of 'small superannuation fund'. [Schedule 1, items 7 and 8, paragraph 307-231(1)(d) and subsection 307-231(4) of the ITAA 1997]

1.26 Using the updated definition of 'small superannuation fund' facilitates better use of consistent terminology throughout the ITAA 1997. Although the previous provisions differentiated between SMSFs and small APRA funds, the references in the amended provisions to 'small superannuation funds' covers both types of fund.

Superannuation Industry (Supervision) Act 1993

1.27 The amendments increase the member threshold for the provisions in the SIS Act that currently apply the same member threshold as the definition of 'self managed superannuation fund' (that is, fewer than five members).

1.28 These provisions relate to the:

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carve-out for small superannuation funds from the requirement for a licensee of registerable superannuation entity to hold annual member meetings; [Schedule 1, item 11, paragraph 29P(7)(a)]

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the part of the obligation that APRA has to authorise, or cancel the authorisation of, a superannuation fund to offer MySuper products related to superannuation funds that are not small superannuation funds; [Schedule 1, items 12 and 13, subparagraphs 29T(1)(d)(i) and (ii) and subparagraphs 29U(2)(g)(i) and (ii)]

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carve-out for small superannuation funds from the requirement that the governing rules of a fund must not permit its trustee to be subject to directions from any other person; [Schedule 1, item 16, subsection 58(1)]

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exception for small superannuation funds from the covenants included in the governing rules of a superannuation fund about making annual outcomes assessments and promoting the financial interests of beneficiaries; [Schedule 1, items 14 and 15, subsections 52(9) and (12)]

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carve-out from the general prohibition on related party acquisitions for small superannuation funds that acquire business real property at market value; [Schedule 1, item 17, paragraph 66(2)(b)]

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the carve-out for small superannuation funds to the prohibition on superannuation funds from taking out insurance for its members as well as notes to other provisions in respect of that carve-out; [Schedule 1, items 18 to 22, subsection 68AAA(1) (note), subsection 68AAB(1) (note), subsection 68AAC(1) (note), section 68AAD (heading) and section 68AAD]

•

part of the definition of 'Part 8 associate' that applies to small superannuation funds; [Schedule 1, item 23, paragraph 70B(b)]

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meaning of 'in house-asset' that applies to small superannuation funds; [Schedule 1, item 24, paragraph 71(1)(g)]

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transitional rules for employer-sponsored funds whose members increase to more than six, but fewer than 50, members; [Schedule 1, items 27 and 28, subsections 92(1) and (13)]

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transitional rule for small employer-sponsored superannuation funds whose members increase to more than 49 members; [Schedule 1, item 29 and 30, paragraphs 93(5)(a) and (b)]

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carve-out for small superannuation funds from the general duty of the trustees of employer-sponsored funds to establish a procedure for appointing member representatives; and [Schedule 1, item 31, subsection 107(1)]

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basic condition that determines when Part 24B applies (Part 24B applies to small superannuation funds). [Schedule 1, item 34, subsection 252A(1)]

1.29 The amendments make consequential changes to update the summary of provisions in section 4 that refers to Part 24B, the Part and Division headings in Part 24B, and the heading to section 92. [Schedule 1, items 10, 26, 32 and 33, section 4 (table item dealing with Part No. 24B, column headed "Matter dealt with")].

1.30 The amendments also make consequential changes to various headings to reflect the increased member limit for SMSFs and small APRA funds. [Schedule 1, items 26, 32 and 33, section 92 (heading), Part 24B (heading) and Division 1 of Part 24B (heading)]

Superannuation (Unclaimed Money and Lost Members) Act 1999

1.31 This Bill increases the member threshold for the carve-out for small superannuation funds from the requirements under the SUMLMA to give statements to the Commissioner. [Schedule 1, items 35, 39, 41 and 37, paragraphs 16(2B)(a), 20QB(4)(a), 24C(4)(a) and subparagraph 20QA(1)(a)(i) of the SUMLMA]

1.32 The amendments also update various notes to provisions in the SUMLMA that refer to those carve-outs. [Schedule 1, items 35, 38 and 40, subsections 16(2A) (note), 20QB(3) (note) and 24C(3) (note) of the SUMLMA]

Corporations Act 2001

1.33 This Bill updates the definition of 'small APRA fund' in subsection 1017BB(6) of the Corporations Act to ensure continued alignment with the increased SMSF member limit. [Schedule 1, item 3, subsection 1017BB(6) (definition of small APRA fund) of the Corporations Act]

Application and transitional provisions

1.34 The amendments provided by the Bill are to commence from the start of the first quarter (being the first 1 January, 1 April, 1 July or 1 October) that begins after the day the Act receives Royal Assent. [Subclause 2(1), table item 1]