Senate

Revised Explanatory Memorandum

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

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:

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the right to justice under Article 14 of ICCPR; and

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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:

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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;

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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.

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:

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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.