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

CHAIR —Thank you for coming forward to help the committee, Mr Davis. We always look forward to your presentations. They usually have an element of something a little bit provocative with something for us to think about. No doubt you will address the constitutionality issues that have been raised by others.

Mr Davis —I come in peace on this bill because I am a supporter of it, so the comments I make are really directed at trying to make it a more secure bill—one that will survive and perhaps one that will cause fewer administrative problems for trustees and fewer problems for divorcees. Inevitably there will be some problems with it. We cannot anticipate what all of them will be, but I want to mention a few of them. As to the constitutionality of it, the Attorney-General and his department apparently are of the view that there are no constitutional problems with it and that it will survive any challenge. That may well be the case but I think that is not entirely clear. I mentioned, in the written submission I have put in, a case that was decided some time ago—back in 1981—in the High Court. It is called the Ascot Investments case. Justice Gibbs in that case made some comments about some provisions in the Family Law Act and said, in effect, that if those provisions had the effect that third parties such as trustees of superannuation funds would be bound to do things that they were not otherwise required to do by law, then it would have been necessary for the court to consider the constitutional effectiveness of those provisions. In particular, with regard to some earlier cases to which he referred, he said that those cases:

... do not establish that any such order—

made by the court—

may be made if its effect will be to deprive a third party of an existing right or to impose on a third party a duty which the party would not otherwise be liable to perform.

He was referring there to trustees of superannuation funds, and that is the kind of issue that will arise where, in a contested case—and most property cases in family law are contested cases—somebody will seize on that and take the point that there is a lack of constitutional validity in some provisions in the legislation. I am not sure that that possibility can be overcome entirely, but I think the risk of it happening could be reduced by taking a different approach. When I say `the risk' of it, I think the risk is quite considerable in the sense that if, in five years time, a decision is made by a court that some of these provisions directing trustees to do things are constitutionally invalid, then there will have been a whole host of invalid orders made prior to that date that will have been acted upon which will be very difficult to reverse. That is why I think as much thought as possible needs to be given to the constitutional aspects of it before this legislation is put in place because of the difficulties in unwinding situations that will have occurred if some parts of it are held to be invalid ultimately.

The way in which I think that risk can be minimised is not just to rely on the marriage power in the Constitution. The Family Law Act is based on the marriage power, and that is why Justice Gibbs raised in that case the issue as to whether third parties who are not parties to the marriage can be made the subject of valid orders by courts in legislation made under the marriage power. What I want to suggest to the committee is that consideration be given to tightening the constitutional validity by amending the SI(S) Act to state in there that a regulated superannuation fund which is governed by the SI(S) Act must comply with any agreement or order under the Family Law Act. That would then, in my perception, take it outside just relying on the marriage power. What would then be able to be pointed to is the corporations power on which the regulated funds provisions are based where the trustee is a company or on the old age pension power where the trustees of funds are individuals. That part is a little more dodgy, I think, than the corporations power part of the SI(S) Act. Nevertheless, it is there, and could support this act.

So, if regulated funds are bound to give effect to agreements or orders under the Family Law Act, the position would no longer be that which Justice Gibbs referred to in the Ascot Investments case of the trustee being ordered to do something that the trustee is not legally bound to do. Making the amendment to the SI(S) Act would elevate it to a position where the trustee is legally bound to give effect to it; legally bound because the trustee has elected to be the trustee of a regulated fund and therefore has elected to be subject to whatever things the SI(S) Act imposes on the trustee. Schedule 1 of the Family Law Legislation Amendment (Superannuation) Bill 2000 already contains a couple of amendments to the SI(S) Act, and it will be a matter of expanding those amendments to state that a regulated fund must comply with such an order or agreement. That is really all I want to say about the constitutional provisions.

CHAIR —It would not be a problem just to put that safety measure in, would it?

Mr Davis —I cannot see that it would give rise to any problems.

Senator CONROY —Obviously you have put this to the government in the consultation process?

Mr Davis —No, I have not been involved in the consultation process.

Senator CONROY —Are you still persona non grata?

Mr Davis —I beg your pardon?

Senator CONROY —You are not still persona non grata over the surcharge, are you?

Mr Davis —No, I do not think so—I do not think I ever was. I am putting this, for the first time, as something for the committee to consider in its report.

CHAIR —We certainly will.

Mr Davis —I will talk briefly about some other things. The Law Council—through its superannuation committee—I assume made submissions to you earlier in the day. I am on that committee, and therefore am not going to go over the same ground.

CHAIR —You may have to. There are a number of other issues that they want to re-examine and come back to the committee on, so I would appreciate your continued input there.

Mr Davis —I want to mention the subject of whether a non-member spouse becomes a member of a superannuation fund and what sorts of issues arise there. The policy intention apparently is that the non-member spouse does not become a member of the fund for all purposes. Indeed, it appears the intention is that that person does not become a member at all, but rather just has limited rights. An issue with that is that many trust deeds or governing rules of superannuation funds contain a provision somewhat along the lines of: if a person has an entitlement to a benefit from the fund, that person becomes a member of the fund. So we will have a situation in relation to some funds where the legislation is saying that the non-member spouse does not become a member, but the governing rules of the fund will be saying that the person does become a member of the fund.

That will inevitably cause confusion for trustees. It will cause me confusion in advising them. I wonder whether in the legislation that situation could be better covered by some more specific provision as to what is to be the case. If the trust deed has the effect that the non-member spouse becomes a member, then the trustee has to comply with all the legislative requirements that apply to members of the fund in dealing with the non-member spouse; for example, obtaining the consent of the non-member spouse to amendments to the trust deed, entitlements to surpluses and so on. I do not have a solution to that, but I raise it as an issue and I think some further thought ought to be given to that, as to whether the position could be better clarified in the legislation.

Senator CONROY —It cannot be fixed up in the same way as you suggested for the previous problem under the corporations SI(S) Act, by requiring the funds to amend their deeds so that they have a second class or a subsidiary class? Call it whatever you will. Is that a possible way?

Mr Davis —That is an option, for the trustees to amend their trust deeds. Against my own interests, I was endeavouring to come up with a solution whereby trustees did not have to yet again amend their trust deeds in order to deal with this legislation. But, if that particular issue cannot be better dealt with than it already is in the bill, the inevitable effect will be that some trustees will have to amend their trust deeds to try to sort out the confusion as to whether that person is or is not a member.

Senator CONROY —If it does not go down that sort of path, in your view what are the dangers of having a Commonwealth act to try to direct trusts which may be more state based?

Mr Davis —The issue then will be this: if the trust deed says that this person with an entitlement to a benefit becomes a member, does the Commonwealth act override that? I am not sure that it does, and that is why I said there could be confusion about that issue.

CHAIR —Trustees certainly do have a problem if a non-member spouse maintains an interest in the spouse's account, particularly over a length of time; that is why I intervened earlier. If it is merely a mechanism to get a transfer to a separate account, then the trustees do not need to discriminate between any types of beneficiary at all. So there does appear to be a need for a mechanism to overcome the problem of maintaining a continuing interest in another member's account—because there will be a number of unintended consequences that would arise from that, I should think.

Mr Davis —Yes. That, I think, has to be left flexible in that, if there were a provision in the bill which said that the non-member spouse does not acquire an interest in the fund but rather the separated amount automatically gets transferred out, that would not suit the trustees of many of the publicly offered funds, for example. A lot of those would, no doubt, be quite happy to have the non-member spouse's benefit remaining in the fund. Employer sponsored funds on the other hand probably, in the main, will not want non-member spouses as members of the fund; but there has to be the flexibility to deal with both situations.

CHAIR —And how do you suggest we address that, from the fund point of view?

Mr Davis —I think it is already addressed by the bill by, in effect, giving the non-member spouse the ability to request a transfer out and giving the trustee the ability to transfer out the non-member spouse without that person's consent to an eligible rollover fund.

CHAIR —Is that automatic?

Mr Davis —It is not automatic, but if the trustee makes that decision then the transfer takes effect.

Senator CONROY —If a member becomes, as you say, a full member—I have tried to ask this question earlier, probably not particularly clearly—does that mean they become entitled to death and disability benefits? I am particularly concerned about a defined benefit situation. Do they have an amount set aside for them that continues to accumulate so that they can take out their regular contributions? In a defined benefit fund you have one person paying in and therefore you have death and disability out of that one person. If someone just has an interest but is deemed to be a full member, do they have death and disability under the terms of the same fund? Are the other members therefore subsidising, if you like, an extra unit that has been put into the fund, without making any contributions themselves?

Mr Davis —Most defined benefit funds operate on the basis that death and disability benefits are also defined, so that if a person does become a full member of the fund that person is entitled to whatever the defined death or disability benefit is. If the trust deed states, for example, that the death benefit is three times salary and the disability benefit is three times salary, however salary is defined, then that becomes the entitlement of the non-member spouse if the non-member spouse becomes a full member. The trustee will generally want to insure against that liability.

CHAIR —And be paid for it.

Senator CONROY —That is what I am saying. An extra charge is going to be incurred by everybody else in the fund as spouses effectively get put into it.

Mr Davis —Generally, in defined benefit funds, expenses such as those come out of the general fund, unless there is a provision in the trust deed allowing them to be debited in some way to the particular member.

Senator CONROY —So the fund could technically be up for, say, two death benefits if both partners die before they actually get out. There will be two amounts paid out of the fund whereas previously there was only one.

Mr Davis —That is right. I will move onto a different subject, which appears to me to be a technical deficiency in the bill that may well give rise to some problems. In relation to benefit splits, the bill adopts the concept of splittable payments. The main operative provision is in proposed section 90MT, which says that a court can make an order that `whenever a splittable payment becomes payable', the split can be made. Then the non-member spouse becomes entitled to an amount and there is a corresponding reduction in the entitlement of the member. The key words there are that an order can be made `whenever a splittable payment becomes payable'. It is not clear to me why the words `whenever a splittable payment becomes payable' are in there.

If I were advising somebody contesting a prospective order of the court, I would argue that the meaning of that is that the court does not have any power to split a benefit until the time when the benefit ultimately becomes payable. There may be something I am not seeing as to why it is framed in that way, but at the moment I do not understand why it is. I think it will give rise to situations where people will adopt the argument that I have just mentioned. It is not clear to me why the bill just cannot say that a court can make an order that an interest be split instead of relating to `whenever a splittable payment becomes payable'.

There may be something I am not seeing as to why it is framed in that way, but at the moment I do not understand why it is. I think it will give rise to situations where people will adopt the argument that I have just mentioned. It is not clear to me why the bill cannot just say that a court can give an order that an interest be split, instead of relating it to when a splittable payment becomes payable. As I said, I may be overlooking something as to why it has been framed in that way, but I think there are risks in the way it has been framed that a court may decide that a benefit payable at a future time, as all superannuation benefits are, is not something that can currently be split.

The valuation provisions in the regulations are fairly difficult to come to terms with and I am not going to attempt to do that. It seems there are some problems with defined benefits funds and I think the Institute of Actuaries is far better placed than I am to make submissions to you on that. That is an important area and the fee issue that was the subject of debate earlier obviously comes into that. I want to mention preservation of benefits. There is an issue here—I think quite an important issue, because it is an issue of equity.

CHAIR —Before you go to that, Mr Davis, subsection 90MT(2), the splitting order, says:

Before making a splitting order in relation to a superannuation interest, the court:

(a) must determine the overall value ...

Your colleagues from the Law Council indicated that, in terms of consent agreements, `must determine' could really hold up proceedings and cause some problems.

Mr Davis —Yes, I agree with that.

CHAIR —My colleague suggested to another witness that that may turn out to be inequitable because uninformed parties may not have any idea at all as to the quantum of the value.

Mr Davis —Yes. Well, like my colleagues, I would prefer to see that not framed in the way it is because it is really not anticipating that a lot of court orders, particularly in family law, are consent orders, where the court does nothing more than rubber stamp the agreement between the parties.

Senator CONROY —I am concerned, particularly in the partially vested circumstances where the non-contributing spouse may have no idea about the scheme, how it is set up and when the benefits flow. It could be the next week; it could be 10 years away. I am not sure that disclosure necessarily happens without some sort of mandatory requirement to get a genuine independent assessment. With accumulation funds it is easy, notwithstanding the argument about whether or not your statement is six months out of date. We are not talking enormous amounts, particularly in vested benefits where you are only partially vested and there are triggers which happen. Our own is a partially vested superannuation fund and it is only at certain points that you trigger and move up a step. I am concerned that a non-contributory spouse—who may have had nothing to do with the fund, may never have been in a superannuation fund of their own and may have been at home the whole time—may not have the technical knowledge. As you say, the court really is a rubber stamp in those circumstances. Its job is not to test whether that looks like a fair dinkum split in superannuation. I am wavering on that one a bit.

Mr Davis —Yes and, because of the lack of legal aid, people in Family Court proceedings increasingly are unrepresented. So it is not even necessarily the case that there is a lawyer taking some interest on that person's behalf. Like my colleagues, I think something needs to be done with subsection (2) so that it is not dependent on the court determining the value.

On the preservation of benefits issue, the bill and the regulations at the moment proceed on the basis that, in splitting an interest, first of all you split it out of the unpreserved benefits but the then split benefit becomes a preserved benefit in the hands of the non-member spouse. To a significant extent unpreserved benefits are members' own personal contributions that were non-deductible pre 1 July last year. It seems to me to be inherently unfair to use divorce as the means of converting unpreserved benefits into preserved benefits. It also seems to me to be unfair to require the benefit being split to be firstly split out of the unpreserved benefits. I think a fairer way to do it would be, firstly, for the preserved benefits to get applied to the split so that the member who has made the undeducted contributions retains the benefit of those to the extent possible. So the two elements of it are: firstly, I think it should be preserved benefits that are split and, secondly, to the extent that unpreserved benefits do get split, they should not be converted to preserved benefits because of it. I think divorce is the wrong reason to be bringing about a conversion.

Senator CONROY —Have you been able to identify a policy intent from any discussions you have had?

Mr Davis —No; I have not had any discussions about it and it is not evident to me from the materials that have been released as to what the policy intent is. There is a general thrust evident of making superannuation benefits into preserved benefits, hence the change of legislation from 1 July last year, but I do not know that the unfortunate event of divorce is the right circumstance to be causing that to happen.

Senator CONROY —The early thought that I have had on it during the day is that voluntary contributions are forgone consumption that would have otherwise been available in terms of either consumption at the time or investment in an alternative vehicle that may have been more readily accessible. The way you would then convert it to preserved escapes me, but that is the only policy I have been able to rack my brain on.

Mr Davis —I think you can test the fairness of that by saying that, if a person does not get divorced, do their unpreserved benefits get converted to preserved? The answer is no. Why should that happen just because divorce occurs? I also want to mention a provision on mandatory payment of benefits, which seems to me to also have an unfair element to it. This is in regulation 7A.17 of the proposed SIS regulations. It says that, if a non-member spouse has satisfied a condition of release and is thus entitled to receive the benefit, the trustee must pay the benefit to the non-member spouse. Test that against a member spouse who satisfies a condition of release. Generally such a person has an option to leave the benefit in the fund or not. Why should a non-member spouse be forced to take the benefit and not have the option of leaving it in the fund purely because that person is a non-member spouse rather than a member spouse? I do not understand the policy behind that. I would have thought that people should be encouraged to leave their benefits in the superannuation system for as long as possible rather than be bound to take them out because of a benefit payment event then having occurred. That is all I wanted to say, Senators.

CHAIR —That certainly gives us some food for thought.

Senator CONROY —What sort of conditions of release are you envisaging there, that would trigger that? Is that being past age 55, or are there other things?

Mr Davis —Yes, a classic example is retirement from the work force having got past 55 or whatever the preservation age is. Many people do not take their benefits out when that happens. They leave them in the fund—assuming they can afford to.

Senator CHAPMAN —I was wondering whether you can help me with some views as to how this legislation would apply in different jurisdictions. For instance, if the member spouse was in Australia and the non-member spouse was offshore, what would the effect be of this legislation on them?

Mr Davis —Obviously, for this legislation to be operating, the non-member spouse must be making an application in Australia to share in the superannuation benefit. Assuming a benefit split order or agreement is made or reached, then the trustee of that fund has an international non-member spouse in the fund and that is a sort of circumstance, I would think, where the trustee would transfer the benefit out to an eligible rollover fund. The eligible rollover fund then has the difficulty of dealing with somebody who is not a resident. But that is not unique. That is already the case in some eligible rollover funds. But it is the sort of reason why we have a lot of lost members in those funds, who just cannot be traced. That is all I can think of in relation to that issue.

Senator CHAPMAN —What about the reverse situation, if the member spouse was offshore and the non-member was onshore?

Mr Davis —The trustee then has a non-member spouse coming into the fund. If it is a public offer fund; the trustee may well want to retain that non-member spouse in the fund, particularly given it is a resident; or alternatively, again, it can transfer it to an eligible rollover fund. So I do not see too much difficulty with that reverse situation.

Senator CHAPMAN —If both were offshore, would they still come under the jurisdiction of the act, or not?

Mr Davis —That is a `conflicts of law' sort of issue, which the Family Court sometimes has to deal with, as to whether it has jurisdiction in relation to people, and that is covered by the general law. So there are no new problems, I think, brought in by that.

CHAIR —Thank you very much, Mr Davis. No doubt you will be conferring with your colleagues from the Law Council in terms of the deliberations that they are about to embark on, and we look forward to a presentation—

Senator CONROY —Sorry; I have one more question. It was suggested earlier, I think by Mr Pragnell, that some in the industry have argued that the constitutionality question was fixed up by the High Court decision on the tribunal. Would you concur with that, or do you still think that there is sufficient—

Mr Davis —I do not think it is clear.

Senator CONROY —My colleague is dying to know: how is the surcharge case going?

Mr Davis —It is still moving along, slowly.

Senator CONROY —The Commonwealth have not folded yet?

Mr Davis —No.

CHAIR —Thank you very much again, Mr Davis, for coming down and presenting your views so succinctly to the committee. It has been very valuable.

Proceedings suspended from 3.45 p.m. to 3.56 p.m.