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SELECT COMMITTEE ON SUPERANNUATION AND FINANCIAL SERVICES - 13/11/2000 - Family Law Legislation Amendment (Superannuation) Bill 2000

CHAIR —Welcome. Do you have an opening statement?

Dr Anderson —I have a brief outline of our position. At the outset, I would like to congratulate the government for addressing this area of much needed reform. ASFA supports the government's objectives to assist people whose marriages have broken down to deal equitably with the division of property, including any superannuation interests. I should say that personally I am quite delighted to be part of this because I have worked in this area for probably seven years now, and to actually be sitting here looking at legislation is a triumph.

Bearing in mind the complexity of this area and the differing benefit designs of funds, ASFA's view remains that we should strive for a simple system which will cater for most cases—by that I probably mean accumulation funds—but with the flexibility to take account of complicated situations. ASFA believes that the proposed legislation represents a reasonable approach in light of the constitutional and legal constraints and, in general, meets the objectives set out in the government's 1998 discussion document. ASFA supports the following outcomes in the legislation. They are that the parties to a separation are encouraged to agree on their own solution, and that both parties separating and the Family Court will have information on the value of the superannuation interests which will help them deal with property splits. I think that goes to something that was said here this morning about whether they actually needed a proper valuation of those interests, and I will talk about that later. I believe that there is provision for a clean break within the legislation in relation to accumulation interests, but I do think we need to have a look at whether it is a little more complicated than it needs to be. But there is definitely a provision there for the separating people to go for a clean break. Special arrangements deal with defined benefit schemes, including the development of actuarial calculation factors by the government actuary and the flagging of a required division when a benefit is paid. I think there is definitely some work that needs to be done in that area.

The bill and the associated amendments to family law and SIS regulations will have a significant impact on the operation of many superannuation funds. Most of the problems with the proposed legislation that are identified in our detailed submission have already been raised with officers of Treasury and the Attorney-General's department. Many of these issues, I believe, relate to a clumsiness of drafting which makes it difficult to see whether the intention is achieved. I have to say that I am seeing some of the best minds in the industry struggle with this legislation, and I think we have seen it here this morning. I think it is fair to say that some provisions do not achieve their objectives elegantly, if at all. There is also quite an amount of unfinished business, and the unfinished business leads me to the first point that I want to make: while we understand the urgency in sections of the community to implement a more useful regime in this area, we urge the government to honour its intention to provide time for consultation and implementation. So far I think we have done very well, but your own experience here this morning will show that there is need for more work on this legislation.

The consultation process with industry must continue over the next few months to ensure that the legislation that is finally set in place is workable. Having said that, at the end of this, once we have got legislation set in place, we need at least a year between the gazetting of the final bit of regulation and when these provisions operate, because it will take that long to get systems changes. Systems changes for superannuation funds are one part of it, but I think for the community to come to understand what this is all about and for superannuation fund trustees to understand their obligations, let alone their systems, we will need that period of time.

Turning to the second part, besides the consultation to bed the thing down, the second issue that really worries ASFA is the remaining legal questions hanging over. We have just had one session with the Law Council, which questioned the relationship between the trustee and the non-member spouse. And I think there are other questions there that we still have. The association stressed in its 1998 submission to Treasury and, more recently, with officers of the Attorney-General's department, that constitutional and legal issues must be fully resolved—or as fully resolved as they can be—in the bill and subordinate legislation. It is important that trustees of superannuation funds in particular and the community in general have full confidence in the robustness of the legislation. Indeed, ASFA is conscious of the fact that, with the best will of industry and successive governments in bringing about this most necessary reform, many years have passed to get to this point, and a major issue has always been how to make it work within the constitutional and legal constraints.

We understand that advice has been sought to support the approach that is being taken in the legislation, and officers of Attorney-General's and Treasury have indicated that they are confident that there is no remaining issue in this regard. While we are not saying that we have actually seen specific incidents, we think that the industry generally would feel much more comfortable if the argument supporting the legality of the approach taken in the bill were known. I think the committee could play a significant role in seeking some illumination in this area. This of course would provide trustees with more confidence that they can implement the provisions without fear of breaching their duty to members and thus being subject to challenge.

As we have heard here this morning, we are very mindful of the kinds of legal challenges and the way they can upset our industry. When trustees are left not knowing whether they should or should not act and who is going to complain whichever way they go, this is not a situation we want to see repeated, and I think we are walking on more delicate territory here. We are talking about times when the people involved are more emotionally vulnerable. We do not really want trustees caught up in that emotionally vulnerable state. So we would urge the committee to take note of some of the concerns and to use its inquiry powers to ensure, as far as possible, that the proposed legislation is soundly based, thus providing trustees with confidence that they can implement the provisions.

I will now turn to a number of issues to do with the legislation itself. I said that we thought that this legislation should provide for splitting a benefit in most of the cases that are fairly simple, and that is accumulation schemes. ASFA considers that flagging a benefit, not splitting it, would result in a more equitable outcome for both parties, particularly if the member is close to retirement. In a flagging situation, you just put a notice on the benefit that something is going to happen to it. When it is paid, the trustee has to notify the parties and they, at that time, have to make some decision about how to split it. For a number of reasons, we see flagging as the preferred option for defined benefit schemes. Having said that, I do not think that we want to remove entirely the ability of the parties to make a payment splitting agreement for a defined benefit interest at the time of marriage breakdown. It may be appropriate in some situations, but, if you are going to do that, the question of advice to the parties is going to be very important and we should not underestimate the kind of advice that people who are going to try to split a defined benefit fund are going to have to go through.

One of the important points from the fund's point of view has always been that there should be no increase in the total benefit payable because there has been a split. I know that that is the objective of this legislation. ASFA members who have read it are not so sure that it actually achieves that. So it is a question of whether it achieves its objective.

I will now look at some operational issues. The question of valuation has come up here before, and I think it has been suggested that we should not use the word `must' in the legislation because some people might have to do things quickly and might like to just guess at it. We would support the need for valuation for the simple reason that, for most accumulation cases, it is going to be a fairly simple process. For anyone contemplating either trading off or even a flagging situation, you want to know what you are talking about. It has probably been difficult even for the courts not to know what the value is of something that they are going to be dealing with. We would support the need for a proper valuation.

CHAIR —Their emphasis was only in relation to consent arrangements to speed it up.

Dr Anderson —I actually believe that you are going to need a valuation—full stop. It has been one of those areas where the non-member is probably at risk if you do not allow for a valuation to be publicly available from another party. Yes, in some cases you may have the last member statement, which might tell you what was in your accumulation fund, but there are cases where there is vesting and various other things about the fund which either party—but particularly the non-member spouse—may not be aware of. The valuation does more than just tell you the number; it, in fact, gives you an opportunity to see what the situation is in full. I think that is going to be important. As I said, it is going to be a fairly simple matter for a fully vested accumulation fund. It is more problematic for a defined benefit scheme and a defined contributions scheme that is not fully vested.

One of the problems we have at the moment is that the valuation factors that have been prepared by the Australian Government Actuary need more work. I think that is something that the Institute of Actuaries will probably be talking about. From ASFA's point of view, we would have to say that getting those factors right and also getting into the legislation factors to deal with not fully vested accumulation schemes—they are not even there at all at the moment—need to be given priority by the Australian Government Actuary, so that we can actually get the industry to comment on what is going to be there. At the moment we have something that is going to change, and that is not good to comment on. In the other case, as I said, we have something that is not there, and you cannot comment on that.

We also understand that it is the intention to allow funds to have their own valuation factors approved by the Australian Government Actuary, and we support that flexible approach. But there is absolutely nothing in the bill at the moment about that, and it has to be there—it is as simple as that. For most defined benefit funds that are relatively simple—if you can say that—having a standard put there by the Australian Government Actuary is a good move, but there are some weird funds out there. The trustees and their actuaries know those funds and they will have to deal with those. It is not a big issue as far as putting the whole measure in place. We should not dwell on it as being: `Oh dear, this is the end of the world,' but it is something that needs to be in there for strange funds. Importantly, at the moment, it is in some of those strange funds and some of those old funds where most of the money is. This is why they need to be able to deal with their own situation.

It has also been mentioned here that the adjusted base amount and that way you adjust it for defined benefit schemes using the bond rate is inappropriate. I think that is some unfinished business that the industry and the government need to look at. We are not actually sure that the whole section that deals with how to adjust the base amount actually works properly. We understand what it is doing but again, whether it is a question of drafting or whatever, it just needs some more work. In the same area, the sections dealing with pensions generally are a bit of a worry. It would probably be true to say that we are not sure that they work properly, and that we need at least some clearer drafting and explanation of intent there.

In relation to information to non-member spouses, we have had some representation from members of industry wanting more prescription there. I think it is down to some fear about what you can say and what you cannot say, and trustees in this area would rather just be told what they have to do than try and make it up as they go along, especially at a time when the parties getting the information are in a fairly sensitive state. So we would like as much as possible for the trustees just to really do as they are told. Doing as they are told, though, actually costs money, so a question we have is whether we have identified all the costs, except for some initial set-up costs, and we are not sure what they might be. But, if it is user pays, as it should be, so that those who are separating pay for the services that they are getting, we are not sure that all the points of costs arising have been identified and we are not sure that the current $100 prescribed amount would be enough to cover it. Some of those strange old defined benefit funds that I mentioned may need some special actuarial work. As someone who has worked in a fund and actually asked actuaries to do some valuation for one person, I know that can be fairly costly. I think there may need to be some leeway there for the abnormal, if you like, fund that is going to have some heavy professional costs to do this.

Also mentioned was the question of member protection. We believe that the amount that both parties end up with should not be requiring member protection. That is probably what was generally intended, but I do not think it happened at the end. Just saying that the amount to be split should not be below the member protection threshold is not enough; you actually have to have the two final amounts not needing member protection.

In general, we support the proposals for taxation, but there are some unresolved issues around RBLs and I think that needs a whole lot of work. We do not think the surcharge liability remaining with the member is workable. We have come up with some scenarios where we cannot see where the money is going to be to pay the debt. We do support the CGT relief where a payment made from a superannuation fund is made to a non-member spouse under a payment splitting agreement. In the same vein, we support rollover relief for in specie transfers for small funds.

We believe that there is a lot of need for information and education. As most couples would probably attempt negotiated settlements, in the first instance at least, it is ASFA's view that they should have easy access to useful information in written or electronic form. We are very prepared to help with the preparation of any generic information that is there. We have, in the past, helped with forms that are used, so we are very willing to help in the future.

CHAIR —If you have $50,000 which is going to be split, say, down the middle so that you have $25,000, would it be equitable if the surcharge comes out at 15 per cent—which would be $3,750—leaving the member with $21,250 as against $25,000 for the non-member spouse?

Dr Anderson —There are probably others here who will talk more about the equity of it. My problem with this is if the non-member spouse takes most of the benefit and there is not enough left there to pay the tax. It is at that stage I am looking at the problem for trustees. The problems that trustees are left with are the ones that I am trying to focus on here. There may be equity questions there, but for me the question is whether the trustee is left with the problem.

Senator CONROY —This would be an extreme argument, but could it be argued to the tax office that in that circumstance technically your salary had fallen below the surcharge limits, because the way the benefit was accumulating was not to you, and you were incurring this? Clearly your salary at the end and what you paid was incorrect. Could you try to force a recalculation on the surcharge benefit, possibly to zero? I am not suggesting that this could become a form of tax avoidance, although it is always inventive for people to find a way to suddenly separate so that they avoid paying a surcharge. That is the danger of trying to be more equitable in doing that. Do you see a circumstance in which, given my final payout is actually only this and you have been taxing as if it was this, I could ask: how can you do that?

Dr Anderson —I think there are a number of ways that you could probably argue your way out of the surcharge in this instance, but it might lead to a greater number of divorces. It is not an area that has yet been dealt with. The sort of bland statement there that `the debt will be borne by the member' perhaps showed a naivete of how the thing worked, for which you could forgive people because the complexity of surcharge is now a third-year study at most universities I think.

Senator CONROY —I was just wondering if you could expand on your concerns about the base amount being adjusted by I think the bond rate.

Dr Anderson —In the defined benefit where you establish the base amount you have to grow that. It is not a separate interest in the fund; it is something tacked onto the side. It grows at a set rate and the bond rate is the one that is there. The bond rate is not a rate that is likely to be comparable to how the benefit is growing. So there are scenarios in which you could see the non-member spouse taking most of the benefit at the end. That is because at the end you have only the total amount minus what this separate amount has been growing to. If it is a bond rate, then it may be that there is a completely different outcome from what the people who were doing the split at the start thought. The only reason for that is that there has been an inappropriate growth put in there.

Senator CONROY —It is like when you mention RSA—de facto.

Dr Anderson —Yes. For defined benefit funds, as I understand it, there is no way of separating them, of making them their own account—this is not legally possible—so you are left with defined benefit funds having to go through this strange process or, as I said, `flag', where you actually do not do anything until there is a benefit payable and all these issues then go away. But, for an accumulation fund, we have heard, `We'd like a clean break.' I believe there is provision for a clean break within this legislation. It is probably not as elegant as we would like, though, and I think perhaps we need to look at whether it could be more elegant. If there are legal reasons it has to happen, we have got to wear it. But, if there are not any of the same sorts of problems that defined benefit funds have, it probably could be tweaked a bit so that it is a little more simple. But, basically, what can happen is that, once you have got that base amount established, there is provision for the member spouse to say, `I want to transfer out as much as my ex-spouse wants, and it can go into their'—the non-member spouse's—`fund. Therefore, it's a clean break.' Or, if there is not that sort of cooperation, the non-member can actually say, `Give me an interest in this fund up to this amount,' and then they have got the provision to take that money elsewhere. It is very important from ASFA's point of view, from the fund's point of view, that the trustee can say, `Yes, here's your interest, now go. We're not a fund that wants to have you in here.' That would be especially the case with corporate funds, because you do not want non-employees in there.

So there is a provision there for the clean break. But, if within that 28 days—which we do not think is long enough, but at the moment it is set at 28 days—if, in that window of opportunity, either the member or the non-member spouse acts, you have got your clean break. If nobody acts, there must have been some real problem with the education, because nobody would act in that way and have that base amount still attached to the ex-spouse and growing—it just does not make sense. So it seems to me that there is a clean break unless there is bad education.

Senator CONROY —I want to ask a question on a separate issue—the preservation issue and the question of the money being paid out. Firstly, the money being paid out of the non-preserved area of the member into the non-member area: you are supporting that, I think, from what I read?

Dr Anderson —Yes. We can understand the equity argument that has been put to us; we can also understand that it will not be a popular outcome. We have said we understand it, but we would probably see it as being a policy decision by government that might upset quite a few people.

Senator CONROY —I am thinking in terms of the fact that superannuation is meant to be for retirement after 55. Giving the non-preserved part across first for, possibly, current consumption is defeating the purpose of us giving them a tax concession to put it into super. Yes, if they did unpreserve it, there would be some tax liability. But, fundamentally, the objective is to try to provide for people's retirement and not allow them to find ways to, in general, convert their future retirement income into current consumption.

Dr Anderson —We do have one problem. The ASFA policy has been that this money is for retirement; therefore, we support preservation and the increasing of preservation. We do have one problem though. A number of ASFA members who have close contact with members of funds have talked about people who are close to retirement—

Senator CONROY —Loading up?

Dr Anderson —Here we are talking about the non-member spouse, usually a woman who has not been in the work force and who cannot satisfy any condition of release until she is 65. The condition of release in that whole area of nearing retirement probably needs to be looked at. We have suggested that it needs to be looked at in a wider context of flexibility around being able to make contributions or to draw down part of your retirement income as an income stream when you are working part time, for example—a sort of slowing down to retirement notion. The worry around this area of people close to retirement and whether they can use the money seems to me to fall within the larger issue. So, while we would say, `Yes, preserve,' we would say, `Yes, preserve, but there is a larger issue here that needs to be looked at in terms of winding down to retirement.' Retirement is not necessarily walking out of the office on Friday and being retired on Monday. A lot of people work in blocks of time, work for a few days a week, and are not completely retired from the work force, and we need to take that into account.

Senator CONROY —I guess you could possibly argue then that the voluntary contributions are forgone consumption that could have benefited the non-member spouse at the time whether they were forgone consumption, indirect consumption or another form of investment which would have been more immediately accessible under another circumstance.

Dr Anderson —That is right. Yes, there is an issue there, but I suspect it is bigger than just divorce and super.

CHAIR —Thank you, Dr Anderson.

[12.33 p.m.]