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Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012



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ISSN 1328-8091

BILLS DIGEST NO. 65, 2012-13 5 February 2013

Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012

Kai Swoboda Economics Section

Contents

Purpose of the Bill ................................................................................................................................... 3

Background ............................................................................................................................................. 4

Regulation impact statement .............................................................................................................. 5

Consultation and draft bills ................................................................................................................. 6

Committee consideration ....................................................................................................................... 7

Senate Standing Committee for the Scrutiny of Bills .......................................................................... 7

Policy position of non-government parties/independents..................................................................... 7

Position of major interest groups ........................................................................................................... 7

Financial implications .............................................................................................................................. 9

Statement of Compatibility with Human Rights ..................................................................................... 9

Key issues and provisions—Schedule 1 .................................................................................................. 9

Background .......................................................................................................................................... 9

Enforcement activities ....................................................................................................................... 10

Relevant provisions ........................................................................................................................... 12

Stakeholder comments .................................................................................................................. 12

Key issues and provisions—Schedule 2 ................................................................................................ 13

Background ........................................................................................................................................ 13

Relevant provisions ........................................................................................................................... 14

Stakeholder comments .................................................................................................................. 14

Key issues and provisions—Schedule 3 ................................................................................................ 15

Background ........................................................................................................................................ 15

2 Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012

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Relevant provisions ........................................................................................................................... 16

Stakeholder comments .................................................................................................................. 17

Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 3

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Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012

Date introduced: 29 November 2012

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-3 and Schedule 1 on Royal Assent; Schedules 2 and 3 on 1 July 2013

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose of the Bill

The purpose of the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 (the Bill) is to amend the Superannuation Industry (Supervision) Act 1993 (SIS Act)1, the Taxation Administration Act 1953 (TAA 1953)2 and the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act)3 to implement a range of measures relating to the regulation of self-managed superannuation funds (SMSFs) including:

 introducing penalties for a person who promotes schemes that can result in people receiving superannuation prior to being eligible to it (so-called ‘early release schemes’)

 requiring superannuation funds that roll over4 benefits to an SMSF to adhere to the existing reporting requirements for the anti-money laundering and counter-terrorism financing regime5 and

 providing the Commissioner of Taxation with the power to give directions to SMSF trustees and to impose administrative penalties for certain contraventions of the SIS Act.

1. The text of the Superannuation Industry (Supervision) Act 1953 can be viewed at: http://www.comlaw.gov.au/Details/C2012C00871/Download 2. The text of the Taxation Administration Act 1953 can be viewed at: http://www.comlaw.gov.au/Details/C2012C00710/Download 3. The text of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 can be viewed at:

http://www.comlaw.gov.au/Details/C2012C00915/Download 4. The term ‘roll over’ generally refers to superannuation amounts that are transferred between superannuation funds when the member elects to change superannuation provider. 5. Attorney-General’s Department website, ‘Australia’s anti-money laundering and counter-terrorism financing regime’,

viewed 3 January 2013, http://www.ag.gov.au/CrimeAndCorruption/AntiLaunderingCounterTerrorismFinancing/Pages/regime.aspx

4 Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012

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The Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 (the companion Bill) is a companion to this Bill.6 It supports the introduction of penalties for a person who promotes schemes that can result in people receiving superannuation prior to being eligible to it, by increasing for most taxpayers the relevant income tax rate on funds received from these activities.

Background

The amendments proposed by this Bill and the companion Bill are based on the recommendations of the Super System Review (also known as the ‘Cooper Review’ after the Chair of the Review Committee, Jeremy Cooper).7 Some of the measures recommended by the Cooper Review to improve the integrity of the SMSF framework that are part of the measures proposed by the Bills include:

 providing the Australian Taxation Office (ATO) with the power to issue administrative penalties against SMSF trustees on a sliding scale reflecting the seriousness of the breach. The penalties are not payable from the corpus of the fund, and may be applied jointly or severally against the trustees or trustee director8

 providing for criminal and civil sanctions to enable the ATO to penalise and discourage illegal early release scheme promoters9

 amending existing tax laws so that:

- amounts illegally early released be taxed at the superannuation non‐complying tax rate and

- an additional penalty, based on a sliding scale of penalties that takes into account the individual circumstances, should apply10

 requiring that rollovers to an SMSF be captured as a designated service under the AML/CTF Act.11

6. The Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 homepage can be viewed at: http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr4933%2 2

7. Review into the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System website, viewed 3 January 2013, http://www.supersystemreview.gov.au/content/content.aspx?doc=html/final_report.htm. The Cooper Review was chaired by former deputy commissioner of ASIC Jeremy Cooper and was conducted over the period 2009-2010. The Cooper Review covered a broad range of issues including the performance and governance of the superannuation industry and has formed the basis for a number of recent legislative changes under the Government’s ‘Stronger Super’ package of measures. The ‘Stronger Super’ website can be viewed at: http://strongersuper.treasury.gov.au/content/Content.aspx?doc=home.htm

8. J Cooper (Chair), Super System Review, Final report: part 2 recommendation packages, Commonwealth of Australia, 2010, recommendation 8.2, p. 227, viewed 10 December 2012, http://www.supersystemreview.gov.au/content/downloads/final_report/part_two/Final_Report_Part_2_Consolidate d.pdf

9. Ibid., recommendation 8.24, p. 256. 10. Ibid., recommendation 8.25, p. 257.

Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 5

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Some of the other suggested measures relating to the integrity of the SMSF system that were recommended by the Cooper Review, but not covered by this Bill, included proof of identity checks for all people joining a new SMSF, recording the details of the person who has provided advice in relation to the establishment of new SMSFs to assist regulators conduct risk assessments and verification systems for large superannuation funds transferring funds to SMSFs.12

The Government response to the Cooper Review, released in December 2010, agreed with all of these recommendations13 and proposed the implementation of many of the measures from 1 July 2012.14

Regulation impact statement

While the Explanatory Memorandum includes the abbreviation ‘RIS’ to define ‘regulation impact statement’ in the glossary, there is no further mention of a RIS in the document.15

A regulation impact statement (RIS) was prepared for the Stronger Super package of changes and was assessed as adequate by the Office of Best Practice Regulation (OBPR).16 The Prime Minister granted exemptions from the requirements for a RIS in relation to two policy changes that are unrelated to the Bills.17

The RIS does not include any significant discussion on the particular aspects of the Stronger Super changes that are proposed by this Bill and the companion Bill, with those elements of the RIS examining SMSF issues restricted to the independence of SMSF auditors, transfers of assets between related parties and SMSFs and standard deeming provisions.18

11. Ibid., recommendation 8.26, p. 257. 12. Ibid., recommendations 8.20-8.24, pp. 254-256. 13. B Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation), Stronger super—government response to the Super System Review, December 2010, pp. 51-52, viewed 10 December 2012,

http://strongersuper.treasury.gov.au/content/publications/government_response/downloads/Stronger_Super.pdf 14. Ibid., pp. 12-13. 15. Explanatory Memorandum, p. 1. 16. Treasury, Regulation Impact Statement: Stronger Super implementation, September 2011, viewed 3 January 2013,

http://ris.finance.gov.au/files/2011/10/03-Stronger-Super-RIS.pdf; Office of Best Practice Regulation website, ‘Stronger Super reforms-Regulation Impact Statement and Prime Minister’s exemption-Treasury’, 17 October 2011, viewed 13 December 2012, http://ris.finance.gov.au/2011/10/17/stronger-super-reforms-%e2%80%93-regulation-impact-statement-and-prime-minister%e2%80%99s-exemption-%e2%80%93-treasury/ 17. That is, in relation to the ability of funds to offer tailored MySuper products to employees with more than 500

employees, and extension to the date by which trustees will be required to have transferred the balance of existing default funds into MySuper products. Ibid. 18. Treasury, Regulation Impact Statement: Stronger Super implementation, op. cit., pp. 59-69 and 83.

6 Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012

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During the recent passage of other superannuation Bills in the Parliament that implement different parts of the Stronger Super package, the Coalition has been critical of the exemptions from the requirements to provide a RIS and the completeness and currency of the RIS.19

Consultation and draft bills

Consultation with the superannuation industry about the Cooper Review recommendations continued following the initial Government response in 2010. An outcome of further consultations released in September 2011 acknowledged that some of the administrative measures would not be without compliance costs and that the measures that are proposed by this Bill and the companion Bill were supported by participants.20

Following this consultation, the Government announced in July 2012 that it would be introducing penalties to deter promoters of illegal early release superannuation schemes.21 In making this announcement, the Minister for Financial Services and Superannuation, Mr Shorten, noted that the commencement date for this change, as well as some of the others that are proposed by this Bill and the companion Bill, were generally being pushed back from 1 July 2012 to 1 July 2013.22

Draft versions of the proposed Bills and relevant explanatory materials were made available for consultation during mid-2012 as follows:

 administrative consequences and penalties for trustees of SMSFs23

 penalties for promoters of illegal early release schemes24 and

 roll-overs to self managed superannuation funds.25

19. Coalition Senators, Dissenting report, Inquiry into the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012, Parliamentary Joint Committee on Corporations and Financial Services, 9 October 2012, p. 74, viewed 13 December 2012, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed _inquiries/2010-13/mysuper_transparency/report/index.htm

20. Australian Government, Stronger Super: outcomes of consultation process, September 2011, pp. 27 and 31, viewed 12 December 2012, http://strongersuper.treasury.gov.au/content/publications/outcomes_of_consultation_process/downloads/Consultat ion_Process_Outcomes.pdf

21. B Shorten (Minister for Financial Service and Superannuation), Penalties for promoters of illegal early release superannuation schemes, media release, 13 July 2012, viewed 12 December 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F1829812%22

22. Ibid.; Treasury website, ‘Self Managed Superannuation Funds (SMSF): new commencement dates for SMSF Stronger Super measures’, viewed 12 December 2012, http://strongersuper.treasury.gov.au/content/Content.aspx?doc=reforms/delayed_measures.htm

23. Treasury website, ‘Administrative consequences and penalties for trustees of SMSFs’, viewed 12 December 2012, http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2012/Administrative-Penalties 24. Treasury website, ‘Penalties for promoters of illegal early release schemes’, viewed 12 December 2012, http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2012/Promoter-Penalties 25. Treasury website, ‘Roll-overs to SMSFs’, viewed 12 December 2012,

http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2012/Roll-overs-to-SMSFs

Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 7

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Committee consideration

At its meeting of 28 November 2012, the Senate Selection of Bills Committee determined that this Bill and the companion Bill not be referred for inquiry and report.26

Similarly, the House of Representatives Selection Committee has not referred the Bills for inquiry and report.27

The Parliamentary Joint Committee on Human Rights has not commented on the Bills at the time of writing.28

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Bills Digest the Senate Standing Committee for the Scrutiny of Bills had not commented on this Bill or the companion Bill.

Policy position of non-government parties/independents

At the time of writing, neither the Coalition, the Australian Greens nor any independents had expressed any views regarding the policy proposals contained in the Bills.

Position of major interest groups

The peak body representing the SMSF sector, the Self Managed Superannuation Funds Professionals’ Association of Australia (SPAA), is broadly supportive of the policy intent proposed by this Bill and the companion Bill.29

Other superannuation industry bodies including the Association of Superannuation Funds of Australasia (ASFA), the Australian Institute of Trustees (AIST) and Financial Services Council (FSC) and professional groups such as the Institute of Public Accountants (IPA) and the Institute of Chartered

26. Selection of Bills Committee, Report No. 16 of 2012, Senate, Canberra, 29 November 2012, p. 4, viewed 10 December 2012, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=selectionbills_ctte/reports/20 12.htm)

27. Selection Committee, Report No. 73: Private Members’ business and referral of bills to Committees, House of Representatives, Canberra, 29 November 2012, viewed 3 January 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=selc/repor ts.htm

28. Parliamentary Joint Committee on Human Rights website, Committee Reports, Examination of legislation in accordance with the Human Rights (Parliamentary Scrutiny) Act 2011, viewed 4 February 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=humanrights_ctte/reports/ind ex.htm

29. Self Managed Superannuation Funds Professionals’ Association of Australia, Submission to Treasury, Stronger Super SMSF draft legislation, 14 September 2012, p. 1, viewed 13 December 2012, http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/Adminstrative%20Penalties/ Submissions/PDF/SPAA.ashx

8 Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012

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Accountants of Australia (ICAA) are generally supportive of the policy measures included in the Bills.30

There is, however, some disagreement within superannuation industry participants on the merits and the methods of implementing those measures which are aimed at bringing roll-overs to SMSFs within the AML/CTF Act. While supporting the measure, the SPAA considers that the risks of SMSFs being used for money laundering or terrorism are overstated.31 Both ASFA and the IPA consider that the risks are sufficiently low to avoid this requirement or for another method to be considered.32 The Financial Services Council (FSC) considered that the proposed start date would be difficult to achieve.33

30. Association of Superannuation Funds of Australasia, Submission to Treasury, exposure draft, Tax Laws Amendment (Stronger Super Self Managed Superannuation Funds) Bill 2012: administrative penalties; Tax Laws Amendment (2012 Measures 2 No. 6) Bill 2012: Unlawful payments from regulated superannuation funds; Income Tax Rates Amendment (Unlawful Payments from regulated superannuation funds) Bill 2012, 17 September 2012, viewed 17 December 2012, http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/Promoter%20Penalties/Sub missions/PDF/ASFA.ashx; Australian Institute of Superannuation Trustees, Submission to Treasury, exposure draft, Tax Laws Amendment (Stronger Super Self Managed Superannuation Funds) Bill 2012: administrative penalties, 14 September 2012, viewed 17 December 2012; http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/Adminstrative%20Penalties/ Submissions/PDF/AIST.ashx; Australian Institute of Superannuation Trustees, Submission to Treasury, exposure draft, Tax Laws Amendment (2012 Measures No. 6) Bill 2012: roll-overs to self managed superannuation funds, 14 September 2012, p. 1, viewed 17 December 2012, http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/Roll-overs%20to%20SMSFs/Submissions/PDF/Australian_Institute_of_Superannuation_Trustees.ashx; Institute of Chartered Accountants Australia, Submission to Treasury, exposure draft, Tax Laws Amendment (Stronger Super Self Managed Superannuation Funds) Bill 2012: administrative penalties, 18 September 2012, viewed 17 December 2012, http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/Adminstrative%20Penalties/ Submissions/PDF/ICAA.ashx; Institute of Public Accountants, Submission to Treasury, exposure draft, Tax Laws Amendment (Stronger Super Self Managed Superannuation Funds) Bill 2012: administrative penalties, op. cit.; Institute of Public Accountants, Submission to Treasury, exposure draft, Tax Laws Amendment (Stronger Super Self Managed Superannuation Funds) Bill 2012: administrative penalties; Tax Laws Amendment (2012 Measures 2 No. 6) Bill 2012: Unlawful payments from regulated superannuation funds; Income Tax Rates Amendment (Unlawful Payments from regulated superannuation funds) Bill 2012, 19 September 2012, viewed 17 December 2012, http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/Promoter%20Penalties/Sub missions/PDF/Institute_of_Public_Accountants.ashx

31. Self Managed Superannuation Funds Professionals’ Association of Australia, op. cit., p. 2. 32. Association of Superannuation Funds of Australasia, Submission to Treasury, exposure draft, Tax Laws Amendment (2012 Measures 2 No. 6) Bill 2012: roll-overs to self-managed superannuation funds, 17 September 2012, pp. 1-2, viewed 17 December 2012,

http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/Roll-overs%20to%20SMSFs/Submissions/PDF/Association_of_Superannuation_Funds_of_Australia.ashx; Institute of Public Accountants, Submission to Treasury, exposure draft, Tax Laws Amendment (2012 Measures No. 6) Bill 2012: roll-overs to self managed superannuation funds, 19 September 2012, p. 1, viewed 17 December 2012, http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/Roll-overs%20to%20SMSFs/Submissions/PDF/Institute_of_Public_Accountants.ashx 33. Financial Services Council, Submission to Treasury, exposure draft, Tax Laws Amendment (2012 Measures No. 6) Bill

2012: roll-overs to self managed superannuation funds, 14 September 2012, viewed 17 December 2012,

Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 9

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Specific issues raised by major interest groups on the Bills are discussed in the ‘Key issues and provisions’ sections of this Bills Digest.

Financial implications

The Explanatory Memorandum notes that the measures proposed by the Bills will cost $17.1 million over five years and that these costs will be offset by increases to the SMSF supervisory levy.34 The increase in the SMSF supervisory levy—an annual fee paid by each SMSF on lodgement of an annual return—was announced in the 2011-12 Budget and applied from the 2010-11 income year.35

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.36

Key issues and provisions—Schedule 1

Schedule 1 of this Bill prohibits the promotion of illegal early release schemes. The provisions of the companion Bill impose a 45 per cent rate of taxation on those amounts which are released under such schemes.

Background

The overriding objective of superannuation regulatory arrangements is to limit a person’s early access to their accumulated superannuation savings so as to maximise the benefits available to them on their retirement. Access is limited first, by way of a statutory preservation age before which a person cannot access their superannuation—that is, age 55 for those born prior to 1 July 1960 increasing incrementally to age 60 for those born after 30 June 1960.37 Second, access to superannuation is limited to those persons who satisfy the statutory conditions that constitute ‘retirement’.38

http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/Roll-overs%20to%20SMSFs/Submissions/PDF/Financial_Services_Council.ashx 34. Explanatory Memorandum, pp. 4-7. 35. Australian Government, Budget measures: budget paper no. 2: 2011-12, Commonwealth of Australia, Canberra, 2011, p. 324, viewed 13 December 2012, http://www.budget.gov.au/2011-12/content/bp2/download/bp2.pdf 36. The Statement of Compatibility with Human Rights can be found at pages 15, 16, 21, 22, 42 and 43 of the Explanatory Memorandum to the Bill. 37. Australian Taxation Office website, ‘Key superannuation rates and thresholds: preservation age’, viewed 3 January 2013, http://www.ato.gov.au/smsf/content.aspx?doc=/content/60489.htm&page=10&H10 38. Under subregulation 6.01(7) of the Superannuation Industry (Supervision) Regulations 1994, ‘retirement’ cannot happen before the age of 55 but, after the age of 60, retirement may be taken to have occurred upon cessation of

10 Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012

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Notwithstanding the overriding objective to limit a person’s access to superannuation funds prior to retirement, there are, nevertheless, a range of circumstances in which early access to superannuation is available. These are set out in regulations and include, but are not limited to:

 circumstances where a person is suffering from a terminal medical condition

 circumstances where a person is in severe financial hardship and

 where compassionate grounds exist.39

Early release of superannuation is tightly regulated, with applications for early release required to be made to Medicare Australia, except in the case of severe financial hardship, where applications can be made directly to the relevant superannuation fund.40

Enforcement activities

The existing early release arrangements have provided an opportunity for unscrupulous individuals to establish SMSFs for the purpose of accessing the superannuation savings of complicit or unknowing superannuation fund members.

The ATO has issued a number of warnings about promoters of early release schemes since 2002. At that time the ATO noted that promoters had advertised that they could arrange for early access to an individual’s superannuation prior to retirement for personal uses and that such schemes could contravene provisions of the SIS Act.41 Further advices were issued in later years by both the Australian Securities and Investments Commission (ASIC)42 and the ATO.43

gainful employment even if the person subsequently re-enters gainful employment. The text of the Superannuation Industry (Supervision) Regulations 1994 can be viewed at: http://www.comlaw.gov.au/Details/F2012C00888/Download 39. The conditions for the release of benefits from a regulated superannuation fund are set out in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994. 40. Paragraph 6(1)(ba) of the Superannuation Industry (Supervision) Act 1993. 41. Australian Taxation Office, Access to preserved superannuation, TA 2002/3, Taxpayer Alerts, viewed 6 December 2012, http://law.ato.gov.au/atolaw/view.htm?locid='TPA/TA20023/NAT/ATO' 42. Australian Securities and Investments Commission, ASIC campaign to stamp out illegal access to super schemes, media release, 21 September 2004, viewed 19 December 2012, http://www.asic.gov.au/asic/asic.nsf/byheadline/04-302+ASIC+campaign+to+stamp+out+illegal+access+to+super+schemes?openDocument 43. Australian Taxation Office, Superannuation illegal early release arrangements, TA 2009/1, Taxpayer Alerts, viewed 19 December 2012, http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~early~basic~exact:::AND~release~basic~exact&targ et=ZG&style=java&sdocid=TPA/TA20091/NAT/ATO/00001&recStart=1&PiT=99991231235958&Archived=false&recnu m=3&tot=3&pn=ALL:::ZG

Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 11

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Amendments were made to tax rates applying on amounts received through illegal early release schemes in June 2002, when the tax rate on these amounts changed from being taxed at a concessional rate, to being taxed at the taxpayer’s marginal rate.44

Under current arrangements, enforcement action against promoters of illegal early release schemes is based on the provisions of the Corporations Act 2001 (Corporations Act)45 and the SIS Act which relate to the licencing of financial service providers and the operating requirements for superannuation funds. Recent examples of successful enforcement activities include:

 banning an individual from providing services for six years after he arranged the unlawful early release of approximately $1.7 million of superannuation benefits46 and

 imprisonment of an individual for failing to ensure that his SMSF—which was being used to rollover the superannuation benefits of 192 superannuants which were then withdrawn and released—was maintained in accordance with the sole purpose test under the SIS Act.47

In addition to these cases, recent ATO annual reports point to the effect of regulatory action in preventing the operation of illegal early release schemes:

 in 2011-12, the ATO claimed to have prevented 298 funds from entering the system and removed 427 existing funds where they suspected illegal access was planned. The ATO also audited 35 promoters and 492 participants of earlier-year illegal schemes, with tax and penalties totalling $6.7 million raised and prosecution action progressing against a number of the promoters. The ATO noted that no new schemes or promoters were detected48 and

 in 2010-11, the ATO claimed to have stopped 373 funds from operating and a further 243 funds from registering because of their connection with schemes to facilitate the illegal release of superannuation. The ATO also audited 966 individuals and 33 promoters involved in illegal early release schemes and raised over $14.4 million in liabilities.49

44. The text of the Income Tax Amendment Regulations 2002 (No. 5) can be viewed at: http://www.comlaw.gov.au/Details/F2002B00164. Concessional taxation on eligible termination payments were based on the taxpayer’s age and included lifetime thresholds. These were generally lower than the tax rates that applied at the time, including the top personal marginal tax rate of 47 per cent.

45. The text of the Corporations Act 2001 can be viewed at: http://www.comlaw.gov.au/Details/C2013C00003/Download 46. Australian and Securities Investments Commission, ASIC bans Melbourne financial adviser for unlawful early release of superannuation, media release, 25 September 2012, viewed 19 December 2012, http://www.asic.gov.au/asic/asic.nsf/byheadline/12-

235MR+ASIC+bans+Melbourne+financial+adviser+for+unlawful+early+release+of+superannuation?openDocument 47. Australian and Securities Investments Commission, Sydney man sentenced on early access to super charges, media release, 29 March 2010, viewed 19 December 2012, http://www.asic.gov.au/asic/asic.nsf/byheadline/10-

66AD+Sydney+man+sentenced+on+early+access+to+super+charges?openDocument 48. Australian Taxation Office, Annual report 2011-12, 2012, p. 90, viewed 19 December 2012, http://annualreport.ato.gov.au/uploadedFiles/Content/Downloads/n0995-10-2012_js23899_w.pdf 49. Australian Taxation Office, Annual report 2010-11, 2011, p. 90, viewed 19 December 2012,

http://www.ato.gov.au/content/downloads/cr00295453ar1011.pdf

12 Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012

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Relevant provisions

Item 1 of Schedule 1 to the Bill inserts proposed section 68B into Part 7 of the SIS Act to prohibit a person from promoting a ‘scheme’ that has resulted in, or is likely to result in, a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards that are set out regulations in accordance with subsection 31(1) of the SIS Act.50 These standards include the specification of the preservation age (the age at which superannuation account balances can be accessed) as well as other specific and limited conditions for the early release of superannuation.51

Item 2 of Schedule 1 to the Bill amends section 193 of the SIS Act so that the prohibition outlined above is a civil penalty provision. Contravention of a civil penalty provision may result in a fine not exceeding 2000 penalty units.52 In addition, section 202 of the SIS Act provides that where a person contravenes a civil penalty provision, either dishonestly and intending to gain an advantage for that, or any other person, or intending to deceive or defraud someone, then the person is guilty of an offence punishable on conviction by imprisonment for not longer than five years.53

Stakeholder comments

Commenting on the draft Bill (which is in the same terms as this Bill), the IPA expressed some concern that the prospect of a fine of 2000 penalty units may be more of a deterrent to a superannuation fund with a low balance than to those funds with balances in the hundreds of thousands of dollars.54 The IPA suggested that an alternative was to have a penalty set at a multiple of two or more times the amount released.55

The SPAA, also commenting on the draft Bill, noted that the wording of proposed section 68B—in particular the prohibition on promoting a scheme that is likely to result in a payment being made

50. The term ‘promote’ is defined in proposed subsection 68B(3) of the Superannuation Industry (Supervision) Act 1993. To ‘promote’ a scheme includes to enter into the scheme, to induce another person to enter into the scheme, to carry out the scheme, to commence to carry out the scheme and/or to facilitate entry into, or the carrying out of, the scheme.

51. Conditions of release are specified in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994 and cover circumstances such as death, attaining a specified preservation age and early access for a number of specified circumstances such as on compassionate grounds, terminal medical condition and severe financial hardship.

52. For those offences committed before 28 December 2012, section 4A of the Crimes Act 1914 provides that a penalty unit is equivalent to $110. This means that the maximum penalty amounts to $220 000. However, for those offences committed after 28 December 2012, section 4A of the Crimes Act 1914 provides that a penalty unit is equivalent to $170. This means that the maximum penalty amounts to $340 000. The text of the Crimes Act 1914 can be viewed at: http://www.comlaw.gov.au/Details/C2012C00890/Download

53. Section 203 of the Superannuation Industry (Supervision) Act 1993 provides that criminal proceedings for an offence constituted by a contravention of a civil penalty provision cannot be begun if a person has already applied for a civil penalty order in relation to the same contravention, even if the application has been finally determined or otherwise disposed of.

54. Institute of Public Accountants, Submission to Treasury, exposure draft, Tax Laws Amendment (Stronger Super Self Managed Superannuation Funds) Bill 2012: administrative penalties, op. cit. 55. Ibid.

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from a regulated superannuation fund otherwise than in accordance with the payment standards—may, in some cases, inadvertently capture financial advisors who have recommended that their clients commence a transition to retirement pension once they have attained their preservation age.56 The SPAA recommended that to avoid such a situation, a new paragraph be inserted in the Explanatory Memorandum that noted a person would not contravene section 68B if, subject to an objective analysis, an illegal payment was paid which was not the purpose of the arrangement, or it was unintended.57

However, subsection 221(2) of the SIS Act already provides that if it appears to the court that a person has, or may have, contravened a civil penalty provision but that the person has acted honestly and having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention, the court may relieve the person either wholly or partly from a liability that might otherwise be imposed on the person because of the contravention. That being the case, an amendment to the Explanatory Memorandum would appear to be unnecessary.

Key issues and provisions—Schedule 2

Schedule 2 of the Bill provides that rollovers of funds from that are not self-managed superannuation funds into a self-managed superannuation fund will be subject to the provisions of the AML/CTF Act.

Background

The AML/CTF Act58 imposes a range of obligations on businesses in selected sectors to fulfil Australia’s international obligations to combat and address anti-money laundering and counter-terrorism financing activities in Australia.59 Where a service provider provides a specific ‘designated service’ under the AML/CTF Act, the service provider is required to comply with a range of obligations, including customer identification requirements60 and reporting suspicious matters.61

56. Self Managed Superannuation Funds Professionals’ Association of Australia, op. cit., pp. 5-6. 57. Ibid., p. 6. 58. Information about the operation of, and rationale for, the AML/CTF Act is contained in S Harris Rimmer and B Jaggers, Anti-Money Laundering and Counter-Terrorism Financing Bill 2006, Bills Digest, no. 60, 2006-07, Parliamentary

Library, Canberra, 2006, viewed 4 January 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2FJGML6%2 2

59. These international obligations arise, in part, from Australia’s involvement in the Financial Action Task Force which is an inter-governmental body established to set standards promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. Financial Action Task Force website, viewed 4 January 2013, http://www.fatf-gafi.org/pages/faq/moneylaundering/. Other relevant international obligations are listed in subsection 3(2) of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

60. Part 2 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. 61. Division 2, Part 3, Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

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Superannuation funds (excluding SMSFs) are already included as a ‘designated service’ for some types of transactions, including accepting contributions, roll-overs or transfers for new or existing members and cashing the whole or part of a member’s account.62

In the five years to 30 June 2009, net inward roll overs to SMSFs totalled around $36 billion.63

The Cooper Review noted that roll-overs of a superannuation benefit to another fund, including SMSFs, were not captured as a designated service under the AML/CTF Act because such a transaction—which kept funds within the superannuation system—represented a ‘very low risk’ of being used for money laundering or terrorism financing.64 However, the Cooper Review considered that there was greater scope within SMSFs for assets to be diverted for illicit purposes.65

Relevant provisions

Schedule 2 of the Bill amends the AML/CTF Act to require that superannuation benefits that are rolled over into SMSFs are captured as a ‘designated service’. This amendment is to commence on 1 July 2013.

Item 1 adds an additional item to the table in subsection 6(2) of the AML/CTF Act which lists those financial services that are defined as a ‘designated service’ for the purpose of the AML/CTF Act. The additional item operates so that the roll-over of a superannuation account that is not an SMSF to a SMSF will be a designated service.

It is difficult to ascertain what the compliance cost impact on superannuation funds of this measure will be. The Explanatory Memorandum makes clear that:

… where a reporting entity provides a designated service to a customer, the reporting entity is required to determine, on a risk-sensitive basis, the appropriate measures proportionate to the perceived risk of money laundering or terrorism financing. 66

It does not, however, quantify the cost impact on superannuation fund trustees of complying with the arrangements.67 Also, as noted previously, the RIS for the ‘Stronger Super’ package does not cover this particular measure.

Stakeholder comments

In commenting on the draft legislation, the FSC considered that the 1 July 2013 start date was difficult to achieve as an industry and that a transition period in the order of 12 months was required

62. Section 6(2) of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. 63. Australian Taxation Office website, ‘Self-managed super funds: a statistical overview 2009’, viewed 17 December 2012, http://www.ato.gov.au/corporate/content.aspx?menuid=49810&doc=/content/00301485.htm&page=6&H6 64. J Cooper (Chair), Super System Review, op. cit., p. 257. 65. Ibid. 66. Explanatory Memorandum, p. 20. 67. Ibid., p. 5.

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to allow entities to manage the change.68 A number of industry parties also questioned the need for including roll overs to SMSFs as a designated service:

 ASFA noted that the problem of illegal early release from SMSFs has improved significantly over the past two years and that, as an alternative, proposed amending existing regulations to reflect elements of existing APRA guidance relating to roll overs to SMSFs69 and

 the IPA considered that the costs of the measure were ‘excessive and disproportionate to the threat highlighted and will only serve to complicate the roll-over of legitimate funds’.70

Key issues and provisions—Schedule 3

Schedule 3 to the Bill amends the SIS Act to provide a range of administrative directions and penalties which will be available to the Commissioner of Taxation in the event of contraventions to that Act in relation to SMSFs.

Background

Under existing arrangements, some of the key enforcement options available to the Commissioner of Taxation in regulating SMSFs are:

 to make the SMSF non-compliant for superannuation tax concessions (known as the ‘nuclear option’)

 to accept a court-enforceable undertaking from trustees of contravening funds71 and

 to apply to the court for civil penalties to be imposed for certain breaches of the SIS Act.72

Concerns over the ‘nuclear option’ of existing penalty provisions applying to the trustees of SMSFs and illegal early access to superannuation were addressed by the Cooper Review.73 The rationale for a more flexible regulatory regime was noted by the Review:

The Panel agrees with the views expressed in a number of submissions that the framing and application of the current penalty regime reflects an ‘all or nothing approach’ that is not optimal. The absence of an option for the ATO to apply graduated penalties results in the vast majority of contravening trustees avoiding any sanction by simply rectifying their contravention if and when it is detected. Rectification is, of course, appropriate, but it is not appropriate that trustees can continue to contravene and for their actions

68. Financial Services Council, op. cit., p. 1. 69. Association of Superannuation Funds of Australasia, Submission to Treasury, exposure draft, Tax Laws Amendment (2012 Measures 2 No. 6) Bill 2012: roll-overs to self-managed superannuation funds, op. cit., p. 2. 70. Institute of Public Accountants, Submission to Treasury, exposure draft, Tax Laws Amendment (2012 Measures No. 6)

Bill 2012: roll-overs to self managed superannuation funds, op. cit., p. 1. 71. Section 262A of the Superannuation Industry (Supervision) Act 1993. 72. Section 197 of the Superannuation Industry (Supervision) Act 1993. 73. Super System Review, Self-managed super solutions: phase three - preliminary report, 29 April 2010, p. 39, viewed

10 December 2012, http://www.supersystemreview.gov.au/content/downloads/self_managed_solutions/self_managed_super_solutions.

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to have no consequences. This works counter to the principles of compliance and deterrence‐based regulation and the Panel believes that credible and proportional penalties are required to support the ongoing integrity of the system.

The Panel considers that the existing penalty regime limits the ATO’s ability to achieve optimal regulation. It believes that additional tools (both punitive and educational), in conjunction with its existing powers, are required to give it more flexibility. 74

Relevant provisions

Item 23 of Schedule 3 to the Bill inserts proposed Part 20 into the SIS Act to allow the Commissioner of Taxation to make rectification directions and education directions and to impose administrative penalties for certain contraventions. Proposed sections 159-165 of the SIS Act deal with the giving of directions.

The Commissioner of Taxation may, where he, or she, has a reasonable belief that a trustee of an SMSF, or a director of a body corporate that is a trustee of an SMSF has contravened a provision of the SIS Act or regulations in relation to the fund:

 issue a rectification direction requiring the person to take specified action within a specified time to rectify the contravention and to provide evidence that the direction has been complied with: proposed section 159 and

 issue an education direction requiring the person to undertake a specified approved course of education within a specified time and to provide evidence of completion of the course: proposed section 160.

A person who does not comply with a rectification direction or an education direction within the specified period, commits an offence of strict liability. Importantly, the imposition of strict liability will not criminalise honest errors and a person cannot be held liable if he, or she, had an honest and reasonable belief that they were complying with relevant obligations.75 The penalty for the offence is 10 penalty units.76

The Commissioner of Taxation may approve in writing one or more courses for the purposes of giving education directions. In that case, the course is to be provided free of charge for persons who undertake the course in compliance with an education direction: proposed section 161. Where a person undertakes a course of education in compliance with an education direction, the costs associated with undertaking the course must not be reimbursed by the assets of the fund in relation to which the direction was given: proposed section 162.

74. Ibid., p. 10. 75. Attorney-General, A guide to framing Commonwealth offences, infringement notices and enforcement powers, September 2011, p. 22. 76. For those offences committed before 28 December 2012, section 4A of the Crimes Act 1914 provides that a penalty

unit is equivalent to $110. This means that the penalty amounts to $1100. However, for those offences committed after 28 December 2012, section 4A of the Crimes Act 1914 provides that a penalty unit is equivalent to $170. This means that the penalty amounts to $1700.

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A person to whom a rectification direction or an education direction has been given may make a written request the Commissioner of Taxation to vary the decision. The request must be made within the time specified for action in the direction. The Commissioner of Taxation must, within 28 days of the day that the request was made, decide to vary the decision (either in accordance with the request or in some other way) or refuse to vary the decision. If the Commissioner of Taxation does not make a decision within that time, he or she is taken to have refused the request: proposed section 164.

Where a person is dissatisfied with a decision of the Commissioner of Taxation to give a direction, to refuse to vary a direction in accordance with a request or to refuse to vary a direction at all, the person may object against the decision as in accordance with the provisions of Part IVC of the Taxation Administration Act 1953.77

Proposed sections 166-169 of the SIS Act deal with the liability for administrative penalties. Proposed section 166 outlines the specific provisions of the SIS Act which, when contravened, will attract administrative penalties. The penalties range from a low of 5 penalty units78 for breaching requirements related appointing investment managers in writing79 to 60 penalty units80 for breaches relating to the general prohibition on borrowing and lending by superannuation funds.81 Proposed section 168 provides that an administrative penalty must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed.

Stakeholder comments

In their submission on the draft Bill in relation to the level of penalties (the provisions are the same as those in this Bill), the Institute of Chartered Accountants Australia argued that while the Commissioner of Taxation has some discretion to reduce or remit a penalty, the ‘penalty units assigned to certain breaches may be excessive’.82

The SPAA noted in their submission on the draft Bill that there was some uncertainty over the level of penalties that apply to corporate trustees, as subsection 4B(3) of the Crimes Act 1914 can effectively increase the administrative penalty by a factor of 5 compared to that imposed on a natural person.83 The SPAA commented that:

… increased penalties for body corporates have an important place in the regulation of corporate entities, but we believe that this principle is not suitable for the regulation of SMSFs. SMSFs normally have a small

77. The text of the Taxation Administration Act 1953 can be viewed at: http://www.comlaw.gov.au/Details/C2012C00710/Download 78. For those offences committed before 28 December 2012, the penalty is equivalent to $550. For those offences committed after 28 December 2012, the penalty is equivalent to $850. 79. Section 124(1) of the SIS Act. 80. For those offences committed before 28 December 2012, the penalty is equivalent to $6600. For those offences

committed after 28 December 2012, the penalty is equivalent to $10 200. 81. Subsections 65(1) and 67(1) of the Superannuation Industry (Supervision) Act 1993. 82. Institute of Chartered Accountants Australia, op. cit., p. 2. 83. Self Managed Superannuation Funds Professionals’ Association of Australia, op. cit., p. 2.

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number of directors and the function and purpose of the fund has no difference whether it has natural persons as trustees or a corporate trustee with directors who are the SMSFs members. 84

84. Ibid.

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