House of Representatives

Second Reading Speech

Senator HERRON (Minister for Aboriginal and Torres Strait Islander Affairs)

I table a revised explanatory memorandum relating to the bill and move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows-

Madam President, this bill amends the investment rules for superannuation funds, in line with the announcement in the 1998-99 Budget.

The investment rules are designed to limit the risks to superannuation savings and to ensure that superannuation is preserved for retirement income.

The existing investment rules restrict investments in employers and associates, prohibit superannuation funds from borrowing, prevent lending to members, prevent the acquisition of assets from members, and require that transactions be undertaken on an arm's length basis.

It has become clear that the legislation needs to be strengthened, in order to preserve the integrity of the investment rules.

Some superannuation funds have been investing in related trusts. This effectively allows superannuation savings to be transferred into entities that are controlled by the employer or a member, and which are not subject to the investment rules or other superannuation regulation.

The investment rules prohibit superannuation funds from borrowing. This limits the risk to superannuation savings from geared investments. This objective of limiting risk is not achieved if superannuation savings are simply transferred into a related trust that borrows.

The existing legislation does not prevent superannuation funds from leasing assets to related parties, nor does it prevent superannuation money being used in related trusts that lease assets to employers and members. In effect, this allows superannuation savings to be committed to the employer's business or used by the members for current day support.

In the absence of legislative change, such arrangements could be expected to increase over time.

The provisions in the bill address these arrangements by applying the in-house asset limit (which limits in-house assets to 5 per cent of total fund assets by 2000-01).

The in-house limit will now cover investments in and loans to employers, members and their associates. The in-house limit will also cover investments in trusts that are controlled by an employer-sponsor or a member of the fund. Assets leased by a superannuation fund to a related party will also be treated as in-house assets.

The anti-avoidance provisions for the in-house asset rules will be strengthened.

The rule that prevents a superannuation fund from acquiring assets from a member or relative will be extended to cover the acquisition of assets from an employer or other related parties.

The measures will help ensure that superannuation savings are preserved for retirement income. There are benefits to the community as a whole in maintaining the integrity of the superannuation system and ensuring that the billions of dollars of superannuation tax concessions provided each year are used for the intended purpose, thereby reducing the burden on future Age Pension outlays.

Superannuation funds with fewer than 5 members will be able to use up to 100 per cent of their assets to invest in real property leased to employers or members for business purposes. This provision recognises that land and buildings generally have an underlying value independent of the employer's business.

The legislation also contains a number of transitional arrangements to assist superannuation funds in adapting to the new arrangements. Investments and loans undertaken before 12 May 1998 and assets leased before that time are grandfathered. Transitional rules allow additional payments on partly paid shares and units and for reinvestment of earnings until 30 June 2009.

Investments, loans and leases undertaken between the Budget announcement and the time the bill receives Royal Assent will not be treated as in-house assets until 1 July 2001, if they would not have been in-house assets under the existing legislation.

The Government has taken account of concerns raised during consultation, about the need for transitional arrangements for related entities with geared investments.

In response to these concerns, superannuation funds with fewer than 5 members will be able to make additional investments and loans into a related company or unit trust until 30 June 2009, up to the amount of the entity's outstanding debt at 12 May 1998.

The measures are not expected to impact on Budget revenues or outlays in the forward estimates years. However, longer term benefits can be expected, including savings on future Age Pension outlays.

In conclusion, the goal of the Government in introducing this bill is to reduce the risk to superannuation savings and to ensure that superannuation is used for the intended purpose of retirement income.

I commend the bill to the Senate.

Ordered that further consideration of the second reading of this bill be adjourned till the first day of sitting in the summer sittings 1999, in accordance with standing order 111.