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Family Law Legislation Amendment (Superannuation) Bill 2000

CHAIR —The committee will resume the taking of evidence.

Mr Pragnell —Today I am representing both CPA Australia and the Institute of Chartered Accountants in Australia.

CHAIR —I invite you to make an opening submission or comment.

Mr Pragnell —Thank you. Unfortunately I was unable to attend the morning session so I hope that in my opening statement I do not replicate comments that have already been made. CPA Australia is Australia's largest professional body with 92,000 members very active in the superannuation industry who are leaders in business, finance and accounting. CPA Australia is very pleased to be able to make this submission to the Senate Select Committee on Superannuation and Financial Services on the Family Law Legislation Amendment (Superannuation) Bill 2000 and associated regulations. Both CPA Australia and the Institute of Chartered Accountants are supportive of the social policy outcome that this reform is intended to achieve. As I am sure many of the earlier presenters have noted, superannuation is for many Australians the first if not the second most significant asset of those individuals. As well, divorce is a very real fact on our social terrain with one in three marriages ending in divorce. These two simple sets of figures lead us to conclude that such a reform is quite necessary. As well, there have been several studies over the past 15-odd years that have been calling for such a reform, and we are supportive of the government pushing ahead on reform in this very important area.

However, despite our overarching support for the intent of this policy initiative, we do have some more modest concerns—some of which are more modest and some of which are probably quite significant—regarding this measure. I will not necessarily go into much detail about all of them but I would like to highlight two important measures quite quickly to the committee. One is the concerns regarding the constitutionality of the measure. As has been noted in many of the earlier discussion papers regarding such reform, the issue of the constitutionality of such an initiative has been raised, most recently in the government's own 1998 position paper on superannuation and family law where it was highlighted that there were certain constitutional reforms regarding the ability of the Family Court to direct a party other than a party of a marriage breakdown to engage in certain actions and, as well, whether or not splitting of entitlements represented acquisition of property by the Commonwealth on unjust terms. We are concerned that in the explanatory memorandum of the bill, and in terms of our discussions with both Treasury and the Attorney-General's office, we have not received any clear and conclusive clarification regarding the constitutionality of this measure and to what degree any earlier constitutional concerns have been addressed. We have been told that constitutionality is not an issue; however, we feel that for all the parties involved any such advice or further detail on the decisions regarding the constitutional rightness of this measure would probably assist the parties who are intended to implement this feel somewhat more confident when they undertake the reforms and changes required.

The other high level issue I would like to touch on very briefly is the fact that we had hoped that this change would have been made within the context of a wider review and reform of superannuation and retirement income policy. Many of the complexities that have arisen in this reform are as a result of the existing complexities within our superannuation system. A wide ranging and comprehensive reform of superannuation and retirement income policy would have enabled a somewhat simpler, cleaner and more transparent system to be designed. Unfortunately, given the current complexities and the need to introduce this change, we have had proposed a rather complex system. We do have some other issues further down the line regarding issues like preservation, prescription of fees and capital gains tax, but I will leave my opening comments there and look forward to your questions.

CHAIR —So the capital gains tax is where you have a big asset and you have to sell the asset for the purpose of making a distribution?

Mr Pragnell —We have discussed this issue with Treasury and the Attorney-General's Department, and we would like to note that, at points 71 and 72 of the Treasury background paper, they do intend to provide for capital gains tax rollover relief and for transfers of assets between superannuation funds, which would hopefully not require the trustees of, say, a self-managed superannuation fund to necessarily dispose of assets to enable the splitting of the benefits. We would be very supportive of such a measure. We have noted that there is support for such changes as those in the Treasury background paper. However, these changes are not included in this bill, and we would hope that the government would move quickly to provide for such relief going forward.

CHAIR —So there are really three aspects of capital gains tax that can be looked at. Don't you think it is necessary to try to limit prescribed fees—otherwise, there might be some outrageous fees charged?

Mr Pragnell —The point that we are trying to make in that component of our submission is that prescription of fees is generally not a feature of our current superannuation policy or our current superannuation framework. Superannuation funds are generally allowed to set fees in accordance with what the market will bear. The system primarily functions on the basis of disclosure so that members are able to make certain decisions. If there was concern about prescribing fees, I think we would probably have appreciated a bit more explanation as to why the $100 per transaction was selected. There was a bit of a concern that that was probably selected on somewhat of an arbitrary basis. As well, the prescription of fees is actually levying fees on members and non-member spouses. This is in the family law regulations—division 6.6, regulation 115. The fees in that instance are actually paid by the member or non-member spouse to the trustee. This does not really have a precedent in current superannuation practice, particularly in accumulation funds where fees would be drawn out of a member's account rather than the member actually having to write a cheque to the trustee. This is a new component and obviously funds would therefore have to set up some sort of facility so that they could actually accept cheques from members and from non-member spouses and process things such as setting up a flag, accepting an agreement and so forth.

If there are policy concerns regarding the prescription of fees, we would rather allow the market to work and then, if there is a problem, maybe there would be a need for the industry to sit down with government and prescribe fees. We would hope that any fees that were set would not necessarily create a barrier for individuals to exercise their rights. Prescribing the $100 fee is not necessarily going to do that. It does not necessarily address issues, for example, where there may be fees elsewhere that might actually be subject to the member, such as exit fees and so forth on leaving a superannuation fund.

Senator HOGG —What sorts of fees do you see applying under this new regime? If you feel that the $100 figure may just have been plucked out of the air, so to speak, could you give us some realistic assessment as to what the fees might be? Will they be fees solely borne by the individuals taking part in the separation? Will they be charges that are borne by the fund itself? We heard this morning that just the set-up costs of some of the administrative facilities that will be necessary to manage this will be quite expensive indeed.

Mr Pragnell —In terms of the type of activities where fees are prescribed, it would depend on the fund. I am not intending this as a bit of a cop-out, but we would expect that in employer sponsored funds—particularly employer sponsored defined benefit funds—the employer would probably just wear the cost in terms of any additional administration; whereas if you are looking at an accumulation fund, particularly an accumulation fund that is not necessarily employer sponsored, more than likely any of the fees would be drawn out of the member's account. In terms of the actual cost, for some funds the fee might be somewhat higher and for some funds the fee might be somewhat lower. I would think that generally a large fund with very efficient administration, with cutting edge IT and administration systems, would probably be able to do these types of activities very cheaply; whereas smaller funds would probably be somewhat more expensive per transaction. If you were, say, a very large industry fund or a very large master trust with hundreds of thousands of members, there would be more than enough of your members who are being divorced—terrible way to describe it—where there would be certain economies of scale in the setting of fees.

Senator HOGG —I do not think you improve the situation.

Mr Pragnell —Am I allowed to withdraw that last statement?

Senator HOGG —No, you go right ahead! We are enjoying it.

Senator CONROY —You are on the record!

Mr Pragnell —So I think the point for us is more that prescription of fees does not really have much of a precedent in current superannuation practice, and we would be a bit concerned to see, firstly, fees being prescribed without there necessarily being communicated formally through the explanatory memorandum why fees are being prescribed; secondly, the fact that fees are actually going to be levied on members and non-member spouses, rather than being drawn from members' accounts or absorbed by the employer, if that is what the employer wants to do; and, thirdly, the $100 per transaction. Where did that come from? Basically, those are our three concerns about the prescription of fees.

Senator HOGG —I take you to the question of constitutionality. In your original submission your second and third paragraphs are quite strong. I do not know if your position has weakened slightly today. You say:

In the time since these concerns have been raised, there has been no major constitutional change nor, in our view, has there been any legal precedent that fundamentally addresses such concerns.

These concerns remain, yet neither the bill's explanatory memorandum nor the background papers accompanying the draft regulations fully address these issues of constitutionality.

Is the CPA still of that view?

Mr Pragnell —I do not claim to be a constitutional lawyer.

Senator HOGG —Neither do I, so that stands us both in good stead to start off with.

Mr Pragnell —Definitely. We can be self-appointed experts on this.

CHAIR —Except that you have raised a different dimension to the constitutionality issue that was raised previously. You were saying:

... whether splitting entitlements represents acquisition of property by the Commonwealth on unjust terms.

I do not think the Commonwealth is acquiring the property; it is just putting in a process whereby the property is transferred from one party to another.

Mr Pragnell —In terms of previous discussions—and this is going back several years—I have been at industry forums where that issue has been raised, in terms of the fact that the Family Court directing the fund trustees to take certain actions could be considered as acquisition of property by the Commonwealth on unjust terms. Again, I do not claim to be a constitutional lawyer, but I know that in previous industry forums that has been raised.

CHAIR —But that would apply to any transfer of property without superannuation being involved.

Mr Pragnell —I do not claim to endorse or unendorse the validity of such claims. Such claims have been made in the past as well. The main issue comes down to the fact that constitutionality has always been raised as the main impediment to following through on this reform. We have had about half a dozen discussion papers from the Australian Law Reform Commission, and the Attorney-General's position paper, going back over a 15-year period. Within many of those papers, the issue of constitutionality was continuously raised. In the most recent discussion paper, in 1998, on page 74, constitutionality is raised.

In terms of constitutionality, what has changed? I have heard some industry debate—and this is sheer industry speculation—that the Breckler decision regarding the Superannuation Complaints Tribunal has somehow created a precedent to allow trustees to be directed by the Family Court to undertake certain actions. Breckler, as I am sure most of you are aware, was a High Court decision regarding the Superannuation Complaints Tribunal. The issue of the constitutionality of the Superannuation Complaints Tribunal was raised. Again, this is a very crude explanation but the explanation of it was that, by becoming a regulated, complying superannuation fund, you were opting into the SIS regime. There is no requirement for a super fund to enter this regime; you voluntarily enter this regime and, as such, are bound by its requirements. One of those requirements is that members are allowed to make complaints to the Superannuation Complaints Tribunal and you are bound by the determinations of that tribunal. If that is the precedent upon which the Family Court can make orders that bind superannuation fund trustees, then that should be clearly articulated—and I do not think that has been.

In terms of this line of argumentation, this is sheer industry speculation. This is people having long talks about this at ASFA. We did talk business at ASFA; it was not all just fun and games. In terms of the speculation about why the constitutionality is no longer an issue, that is the best explanation that people whom I have spoken to in the industry have come back with. Again, I do not claim to be a constitutional lawyer. I cannot say that Breckler creates a precedent that says if you opt into SIS you are bound by the entire regime and therefore you are bound by the decisions of the Family Court, including decisions to split a superannuation benefit. So we may have a precedent, but I think it needs to be a bit more clearly explained so that the industry feels confident to push forward with the implementation of this.

CHAIR —I think the Attorney-General's Department have attempted to draft this because they are obviously very conscious of addressing this issue in the manner in which the framework was presented. I think that was perhaps one of the reasons why it was just a little more convoluted than what a lot of people might otherwise have required. As I read it, it was precisely to address this constitutionality.

Mr Pragnell —That would be my understanding of it too; that part of the complexity of this is to meet the constitutional concerns.

CHAIR —For the Hansard record, the representative from Attorney-General's does tend to agree with that.

Mr Pragnell —There remain residual concerns within the industry regarding constitutionality and I think it would be beneficial to allaying such fears if attorneys-general at least provided greater clarification regarding the issue of the constitutionality. I think it is just the fact that we have had, like I said, a series of discussion papers on this issue. Constitutionality has always been raised as an important issue and in some instances has been raised as the defining barrier to implementing this reform.

CHAIR —I must put your remarks in the context of the overall framework of superannuation and how you ensure that superannuation is constitutionally valid. Particularly in the more blatant sort of area where it was more likely to be challenged, we have not seen a presentation before the courts yet. Until that really happens—

Mr Pragnell —I agree. If someone wants to challenge the constitutionality of it, it is their prerogative to do so. I think, though, it comes down to the fact that, as I say, there are residual concerns within the industry about this issue, and until we get more clarification people will be concerned about the cost.

Senator CONROY —Your supplementary submission talked about the entitlement to a future share of a defined benefit, that the non-member spouse should not be prohibited from receiving a safety net allowance from the time of flagging and the time of the split. At the moment, if you are over 55 and you are entitled to access your super, the Commonwealth requires you to draw down on your super. Are you looking for that to be exempted in that same sort of age period, though not in the early ones when you obviously cannot get access? Is that what you are looking to avoid?

Mr Pragnell —I would have to take that question on notice. That is contained in the Institute of Chartered Accountants submission and I do not feel confident enough to know exactly what they intended out of this to provide an answer on that, but I can take it on notice and get someone from the ICAA to get back to you on that one. Generally, we did not have a strong view on social security, though we would hope that social security considerations are taken into account. I think our major issue regarding preservation had to do more with the fact that the Commonwealth needs to find a balance between the desire to preserve superannuation for retirement purposes and the fact that divorce obviously creates financial pressures on the parties and whether or not we review the early release provisions, particularly for severe financial hardship. We are not necessarily saying that that needs to be done; we are saying that we would hope that the Commonwealth would keep that in mind when pushing forward.

CHAIR —Thank you very much, Mr Pragnell. You are always welcome to the committee.

[2.47 p.m.]