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Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012

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2010-2011-2012

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Superannuation Legislation Amendment (Reducing Illegal Early Release and OTHER MEASURES) BILL 2012,

INCOME TAX RATES AMENDMENT (UNLAWFUL PAYMENTS FROM REGULATED SUPERANNUATION FUNDS) BILL 2012

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by the authority of the

Minister for Employment and Workplace Relations and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

 



Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Unlawful payments from regulated superannuation funds — promotion of illegal early release schemes........................................................ 9

Chapter 2               Roll-overs to self managed superannuation funds..... 17

Chapter 3               Administrative directions and penalties......................... 23

Chapter 4               Unlawful payments from regulated superannuation funds — income tax rates amendment........................................................................ 45

Index................................................................................................................. 49

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

AML/CTF Act

Anti-Money Laundering and Counter-Terrorism Financing Act 2006

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investments Commission

ATO

Australian Taxation Office

Bill

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

Commissioner

Commissioner of Taxation

Commonwealth

Commonwealth of Australia

ITAA 1997

Income Tax Assessment Act 1997

ITR Act

Income Tax Rates Act 1986

ITR Bill

Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012

Review

Super System Review

RIS

regulation impact statement

SIS Act

Superannuation Industry (Supervision) Act 1993

SIS Regulations

Superannuation Industry (Supervision) Regulations 1994

SMSF

self managed superannuation fund

TAA 1953

Taxation Administration Act 1953



Unlawful payments from regulated superannuation funds — promotion of illegal early release schemes

The Minister for Financial Services and Superannuation announced the Stronger Super reforms in Media Release No. 024 of 16 December 2010.

Stronger Super represents the Government’s response to the review of the governance, efficiency, structure and operation of Australia’s superannuation system, the Super System Review (Review).

To provide input on the design and implementation of the Stronger Super reforms, the Government undertook extensive consultations with industry, employer and consumer groups.  In addition, the Government established a specialised working group for reforms affecting self managed superannuation funds (SMSFs).

The Review found that stronger sanctions must exist to deter promoters of illegal early release schemes from undermining the Government’s retirement policy and harming members in the process.  The Review recommended that civil and criminal sanctions should be introduced to enable the Commissioner of Taxation (Commissioner) as Regulator, to seek civil and criminal penalties in order to discourage illegal early release scheme promoters. 

Schedule 1 to the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 (Bill) provides for civil and criminal penalties for the promotion of illegal early release schemes. 

Date of effect The civil and criminal penalties for the promotion of illegal early release schemes in Schedule 1 to the Bill commence on Royal Assent.

Proposal announced :  T he Minister for Financial Services and Superannuation announced the Stronger Super reforms in Media Release No. 024 of 16 December 2010.  In September 2011, the Minister released the Stronger Super Information Pack, outlining key aspects of the Stronger Super reforms.  On 13 July 2012, the Minister for Financial Services and Superannuation, Employment and Workplace Relations announced further details of these reforms including amended commencement dates for the measures contained in Schedule 1.

Financial impact : Commonwealth of Australia (Commonwealth) costs associated with implementation of the SMSF Stronger Super reforms relating to the promotion of illegal early release schemes, administrative directions and penalties contained in the Bill, and the income tax rates amendment contained in the Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 is $17.1 million over five years.  These costs will be offset by increases to the SMSF Supervisory Levy.

Human rights implications :  Schedule 1 to the Bill does not raise any human rights issues.  See each individual Statement of Compatibility with Human Rights , Chapter 1, paragraphs 1.31 to 1.37.

Compliance cost impact Nil.

Roll-overs to self managed superannuation funds

The Minister for Financial Services and Superannuation announced the Stronger Super reforms in Media Release No. 024 of 16 December 2010.

Stronger Super represents the Government’s response to the review into the governance, efficiency, structure and operation of Australia’s superannuation system, the Super System Review .  The Government released the Super System Review’s final report on 5 July 2010.

To provide input on the design and implementation of the Stronger Super reforms, the Government undertook extensive consultations with industry, employer and consumer groups.  The Government announced its decisions on the key design aspects of the Stronger Super reforms on 21 September 2011.

Schedule 2 to the Bill amends the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).

The amendment provides that a new designated service be included at Table 1 of section 6 of the AML/CTF Act to capture the roll-over of funds from a superannuation fund that is not a self managed superannuation fund (SMSF) (the transferring fund) to an SMSF (the receiving fund).

It is intended that this amendment will have the effect of requiring the transferring superannuation fund to comply with a range of obligations under the AML/CTF Act such as customer identification and verification of identity, on-going customer due diligence, reporting, record-keeping, and establishing and maintaining an AML/CTF program. 

Since trustees and members of an SMSF are generally the same, there is greater scope for assets, once received in the SMSF, to be diverted for illicit purposes.  The Super System Review recommended introducing a new designated service to apply to roll-overs of assets to an SMSF to ensure consideration is given to the money laundering/terrorism financing risks associated with the roll-over of assets, and that appropriate customer identification and reporting obligations exist when assets exit the prudentially regulated superannuation sector.

Date of effect 1 July 2013.

Proposal announced This measure was part of the Stronger Super reform package, announced by the Minister for Financial Services and Superannuation in Media Release No. 024 of 16 December 2010 as a response to the Super System Review

Financial impact :   This Schedule has no significant financial impact on Commonwealth expenditure or revenue.

Human rights implications :  This Schedule raises a human rights issue.  See Statement of Compatibility with Human Rights — Chapter 2, paragraphs 2.25 to 2.33.

Compliance cost impact :  A trustee of a superannuation fund effecting a roll-over to an SMSF will have to ensure that they meet the requirements of the AML/CTF Act.

Administrative directions and penalties

The Minister for Financial Services and Superannuation, announced the Stronger Super reforms in Media Release No. 024 of 16 December 2010.

Stronger Super represents the Government’s response to the review of the governance, efficiency, structure and operation of Australia’s superannuation system, the Super System Review .

To provide input on the design and implementation of the Stronger Super reforms, the Government undertook extensive consultations with industry, employer and consumer groups.  In addition, the Government established a specialised working group for reforms affecting self managed superannuation funds (SMSFs) and released the draft legislation for public comment.

The Review found that the existing penalty regime applicable to trustees of SMSFs limits the Commissioner of Taxation’s ability to achieve optimal regulation of the SMSF sector.  The Review concluded that additional tools (both punitive and educational), in conjunction with its existing powers are required to give it more flexibility to deal with non-compliance with the law.

Schedule 3 to the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 provides for administrative consequences for contraventions relating to SMSFs by introducing:

•        rectification and education directions which may be issued by the Commissioner for contraventions of the Superannuation Industry (Supervision) Act 1993 ( SIS Act) and the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations); and

•        an administrative penalty regime for SMSF trustees for certain contraventions of the SIS Act.

Date of effect The provisions apply to contraventions that occur on or after 1 July 2013.

Proposal announced The Minister for Financial Services announced the Stronger Super reforms in Media Release No. 024 of 16 December 2010.  In September 2011, the Minister for Financial Services and Superannuation in Media Release No. 131 of 2011 released the Stronger Super Information Pack, outlining key aspects of the Stronger Super reforms.  On 13 July 2012, the Minister for Financial Services and Superannuation announced that administrative penalties regime would commence from 1 July 2013. 

Financial impact :  Commonwealth costs associated with implementation of the SMSF Stronger Super reforms relating to the promotion of illegal early release schemes, administrative directions and penalties contained in the Bill, and the income tax rates amendment contained in the Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 is $17.1 million over five years.  These costs will be offset by increases to the SMSF Supervisory Levy. 

Human rights implications :  This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .  See Statement of Compatibility with Human Rights, Chapter 3, paragraphs 3.110 to 3.117.

Compliance cost impact Nil.

Unlawful payments from regulated superannuation funds — income tax rates amendment

The Minister for Financial Services and Superannuation announced the Stronger Super reforms in Media Release No. 024 of 16 December 2010.

Stronger Super represents the Government’s response to the review of the governance, efficiency, structure and operation of Australia’s superannuation system, the Super System Review (Review).

To provide input on the design and implementation of the Stronger Super reforms, the Government undertook extensive consultations with industry, employer and consumer groups.  In addition, the Government established a specialised working group for reforms affecting self managed superannuation funds (SMSFs).

The Review found that those individuals who gain illegal early access to their superannuation benefits should not enjoy the same tax treatment as those who legally gain early access to their superannuation benefits.  The Review recommended that amounts released early by illegal means should be subject to the superannuation fund non-complying tax rate of 45 per cent. 

The Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 (ITR Bill) amends the law to ensure that superannuation benefits received in breach of legislative requirements are taxed at 45 per cent.

Date of effect The amendments in the ITR Bill to the Income Tax Rates Act 1986 (ITR Act) apply to assessments for the 2013-14 income year and later income years. 

Proposal announced :  T he Minister for Financial Services and Superannuation announced the Stronger Super reforms in Media Release No. 024 of 16 December 2010.  In September 2011, the Minister released the Stronger Super Information Pack, outlining key aspects of the Stronger Super reforms.  On 13 July 2012, the Minister for Financial Services and Superannuation, Employment and Workplace Relations announced further details of these reforms including amended commencement dates for the measures contained in the ITR Bill. 

Financial impact : Commonwealth costs associated with implementation of the SMSF Stronger Super reforms relating to the promotion of illegal early release schemes, administrative directions and penalties contained in the Bill, and the income tax rates amendment contained in the Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 is $17.1 million over five years.  These costs will be offset by increases to the SMSF Supervisory Levy.

Human rights implications :  The ITR Bill does not raise any human rights issues.  See each individual Statement of Compatibility with Human Rights , Chapter 4, paragraphs 4.16 to 4.19.

Compliance cost impact Nil.

 



Outline of chapter

1.1                   Schedule 1 to the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 (Bill) introduces penalties to deter and penalise persons who promote illegal early release schemes.

Context of amendments

1.2                   Superannuation legislation imposes restrictions on when and in what form a person can access their superannuation benefits.  Generally, access is based upon an individual attaining a certain age.  The law prescribes certain exemptions to this rule whereby superannuation benefits may be released early, prior to meeting the age restrictions.  Illegal early release refers to cases where superannuation benefits are withdrawn contrary to these restrictions and where the relevant exemptions do not apply.

1.3                   Illegal early release schemes are generally promoted to people as a means of accessing their superannuation benefits prior to being eligible to receive those benefits which undermines the Government’s retirement income policy. 

1.4                   Illegal early release schemes commonly involve requesting a fund regulated by the Australian Prudential Regulation Authority (APRA) to pay a member’s superannuation benefits to the bank account of a purported self managed superannuation fund (SMSF) that has been set up for the purpose of receiving such transfers and subsequently paying these out to participants of the scheme. 

1.5                   Promoters of illegal early release schemes have in the past exploited vulnerable people within the community by encouraging members to submit applications to rollover their superannuation balances to such purported SMSFs.  In these situations the promoters have taken commissions of up to 50 per cent of the member’s superannuation balance. 

1.6                   Some schemes have facilitated up to $8 million in illegal release of superannuation benefits and generated millions in commissions for promoters.  In some cases promoters have gone further and exploited identity data for other criminal purposes or actually stolen the entire balance. 

1.7                   There are no specific penalties for promoters of illegal early release schemes who are not themselves trustees of a regulated superannuation fund.  Often a promoter will not be a trustee of a purported superannuation fund used in a scheme, but instead recruits parties for this role.  This limits the Commissioner of Taxation’s (Commissioner’s) ability to pursue existing penalties in the Superannuation Industry (Supervision) Act 1993 (SIS Act).

1.8                   The Super System Review (Review) considered that the Commissioner should have access to additional civil and criminal penalties and is best placed to identify those promoting illegal early release schemes.

1.9                   Schedule 1 to the Bill implements the Government’s response to the Review’s recommendation and provides for civil and criminal sanctions to enable the Commissioner to seek civil and criminal penalties in order to discourage illegal early release scheme promoters. 

Summary of new law

1.10               Schedule 1 of the Bill provides that a person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with payment standards prescribed under subsection 31(1) of the SIS Act.  This is a civil penalty provision.

1.11               Part 21 of the SIS Act provides for civil and criminal consequences for contravening a civil penalty provision. 

Comparison of key features of new law and current law

New law

Current law

A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards prescribed under subsection 31(1) of the SIS Act.

No equivalent.

A person who promotes a scheme that has resulted, or is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards, contravenes a civil penalty provision.  The SIS Act provides for civil and criminal consequences of contravening a civil penalty provision.

No equivalent.

Detailed explanation of new law

1.12               A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards prescribed under subsection 31(1) of the SIS Act.  [Schedule 1, item 1, subsection 68B(1)]

1.13               Person is not defined in the SIS Act; however, it takes its meaning from section 2C of the Acts Interpretation Act 1901 to include a body corporate and an individual. 

Promote

1.14               Promote in relation to a scheme includes, but is not limited to, entering into a scheme, inducing another person to enter into a scheme, carrying out a scheme, commencing to carry out a scheme, and facilitating entry into, or the carrying out of, a scheme.  [Schedule 1, item 1, subsection 68B(3)]

1.15               Whether a person promotes a scheme will be determined on an objective case by case basis by considering the whole of the circumstances.  Factors which may indicate that a person has promoted a scheme include, but are not limited to:

•        the person markets the scheme (this may be marketing directly in the conventional sense, or otherwise) or encourages the growth or interest in it.  This may include (but is not limited to) conduct such as:

-       distributing marketing material in relation to such a scheme;

-       advising persons to consider entering into the scheme; or

-       employing or recruiting other persons to conduct or market the scheme;

•        the person devised or designed the scheme or part of the scheme.  This may include (but is not limited to) conduct such as:

-       setting up the legal or financial architecture of the scheme;

-       constructing or commissioning the production of documents that are to be used as part of the scheme; or

-       establishing mechanisms to obtain, or facilitate circumstances that may allow persons involved in the scheme the ability to obtain financial or other benefits in relation to the scheme;

•        the person facilitates the means by which the participants can participate in the scheme.  This may include (but is not limited to):

-       providing some or all of the necessary paperwork for participants to sign;

-       directing them to complete the necessary documents.

•        the person has provided information to the participants as how to undertake activities which ultimately result in the individual accessing their superannuation benefits without meeting a condition of release; and

•        the person undertakes the relevant activities with the intention that they will result or be likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.

1.16               Whether or not a person has received consideration in respect of the scheme is not determinative of whether a person has promoted the scheme.  If a person has received consideration in respect of a scheme it is an indication that they have promoted a scheme, however, this is not a necessary element to establish.  Often promoters of such schemes will deduct a portion of the superannuation benefits as either a ‘fee’ or on the basis that they will remit an amount for tax on behalf of the participant in the scheme.  Amounts purportedly deducted as tax are never remitted to the Australian Taxation Office (ATO).  In some cases, a promoter may take all of the superannuation benefits and not pass on any amount to a participant.

Scheme

1.17               Scheme means any agreement, arrangement, understanding, promise or undertaking, whether express or implied, or whether or not enforceable, or intended to be enforceable by legal proceedings, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.  [Schedule 1, item 1, subsection 68B(3)]

1.18               Whether a person has promoted a scheme will be determined on a case by case basis having regard to the whole of the circumstances.  In identifying whether a scheme exists, consideration should be given to a continuum, a sequence of events, a course of action and/or a course of conduct, rather than focusing on particular transactions at particular points in time.

Likely to result

1.19               A person will contravene section 68B if a scheme is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.

1.20               Therefore, the Commissioner may seek civil and criminal penalties if a scheme is likely to result, but has not actually resulted, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.

1.21               Whether a scheme is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards is determined by an objective analysis.

Example 1.1  

ABC Superannuation Fund receives a rollover request from John, a member of Smith Superannuation Fund, an SMSF.  ABC Superannuation Fund, as part of the rollover process, confirms with the ATO whether John is a member of the Smith Superannuation Fund.  The ATO advise that John is not a member and, as a result, ABC Superannuation Fund rejects the rollover request.  The Commissioner obtains information under his formal powers from ABC Superannuation Fund that identifies that Mr X is behind the rollover request from John.  Neither John nor Mr X receive any money.  Despite no money having been received by John or Mr X, penalties for a contravention of section 68B of the SIS Act may still be sought by the Commissioner.

Payment standards

1.22               A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.  [Schedule 1, item 1, subsection 68B(1)]

1.23               The payment standards are prescribed in Part 6 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).  The payment standards impose restrictions on when and in what form a person can access their superannuation benefits.

1.24               This provision will apply to cases where a scheme has resulted, or is likely to result in superannuation benefits being withdrawn contrary to these restrictions, for example, in cases where benefits are accessed prior to the member meeting a condition of release such as retirement or attaining preservation age.  The conditions of release are listed in Schedule 1 of the SIS Regulations.

Penalties

1.25               Currently, there are no specific penalties for promoters of illegal early release schemes who are not themselves trustees of a regulated superannuation fund.  Often promoters and those involved in promotion will not be trustees of a purported superannuation fund used in these schemes, and instead recruit parties for this role.  This limits the Commissioner’s ability to pursue existing penalties in the SIS Act.

1.26               Currently, promoters are principally dealt with by the Australian Securities and Investments Commission which relies on its powers to take action against them, often on the grounds that they are providing unlicensed financial advice.  The Commissioner’s current activity focuses on other compliance methods that disrupt and/or close down schemes from operating, such as freezing the assets of the SMSF under its powers in section 264 of the SIS Act.  It is intended that the operation of these powers will remain unchanged.

1.27               A person who promotes a scheme that has resulted, or is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards contravenes a civil penalty provision.  [Schedule 1, item 1, subsection 68B(2), item 2, paragraph 193(ca)]

1.28                The SIS Act contains a number of civil penalty provisions (refer to section 193).  Contravention of a civil penalty provision may result in a fine not exceeding 2,000 penalty units (refer to subsection 196(3) of the SIS Act).  A penalty unit is defined in section 4AA of the Crimes Act 1914 .  Subsection 4B(3) of the Crimes Act 1914   provides that where a body corporate is convicted of an offence a Court may impose a pecuniary penalty up to five times the amount of the maximum penalty. 

1.29               Contravention of a civil penalty provision may be an offence punishable on conviction by imprisonment for not longer than five years.  (refer to subsection 202(1) of the SIS Act).

Application and transitional provisions

1.30               The amendments made by Schedule 1 to the Bill apply to actions occurring after Royal Assent.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

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

1.31               Schedule 1 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.32               Schedule 1 to the Bill amends the Superannuation Industry (Supervision) Act 1993 to prohibit a person from promoting a scheme that has resulted, or is likely to result, in the illegal early release of superannuation benefits.  The provision is a civil penalty provision.  The consequences of contravening a civil penalty provision are provided for in the Superannuation Industry (Supervision) Act 1993 under a provision of general application that applies to all civil penalty provisions.

1.33               A civil penalty may only be imposed by a court, on application by the Regulator.  Where a court is satisfied that a person has contravened a civil penalty provision, a court may impose a monetary penalty up to a maximum 2,000 penalty units. 

1.34               Contravention of a civil penalty provision may constitute an offence where a court is satisfied a person has contravened a civil penalty provision either dishonestly and intending to gain an advantage for a person, or intending to deceive or defraud someone.  An offence is punishable on conviction by imprisonment for a maximum of five years.

1.35               The Attorney-General’s Department have been consulted in the use of a civil penalty provision for this measure.

Human rights implications

1.36               This Schedule does not engage any of the application rights or freedoms.

Conclusion

1.37               This Schedule is compatible with human rights as it does not raise any human rights issues.

Minister for Financial Services and Superannuation, the Hon Bill Shorten



Outline of chapter

2.1                   Schedule 2 to the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 amends subsection 6(2) of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) to require that superannuation benefits that are rolled over into self managed superannuation funds (SMSFs) are captured as a designated service.  This chapter explains this requirement which will assist in reducing the risk that superannuation benefits that are rolled over into SMSFs are used for illicit purposes.

Context of amendments

2.2                   The Super System Review (Review) noted that as trustees and members of SMSFs are generally the same, there is greater scope for assets, once received in the SMSF, to be diverted for illicit purposes.

2.3                   The Review therefore recommended that roll-overs to SMSFs be captured as a designated service under the AML/CTF Act (recommendation 8.26).

2.4                   Under the AML/CTF Act, AUSTRAC is Australia’s financial intelligence unit and AML/CTF regulator with supervisory, monitoring and enforcement functions.

2.5                   The roll-over of superannuation benefits to an SMSF is currently not captured as a designated service under the AML/CTF Act.

2.6                   By capturing roll-overs into SMSFs as a designated service under the AML/CTF Act, the transferring fund will be required to develop an AML/CTF program which includes a risk assessment of the customer requesting the roll-over.

2.7                   The customers of this designated service are the member of the transferring fund who requests the roll-over and the SMSF that is receiving the roll-over.

2.8                   If the transferring fund assesses that the member requesting the roll-over or the receiving SMSF is of high money laundering/terrorism financing risk, it will be required to undertake a greater range of customer due diligence measures, such as requiring the customer to provide more information in regard to identification and verification.

2.9                   However, if the transferring fund assesses that the member is of medium or lower money laundering/terrorism financing risk, it will have the option of using safe harbour procedures for customer identification and verification.  The ability to use the safe harbour procedures will mean that the transferring fund will not have to collect and verify the full range of customer information that would otherwise be required under the AML/CTF rules.

2.10               The transferring fund will be required to submit a suspicious matter report to AUSTRAC where a suspicion is formed about the customer and the criteria listed in section 41 of the AML/CTF Act are met.

2.11               Under the AML/CTF rules, customer identification procedures are also required to be undertaken in so far as a reporting entity has any customer who acts in the capacity of a trustee of an SMSF.

2.12               To roll-over assets into an SMSF, the transferring fund is also required to meet the requirements set out in the Superannuation Industry (Supervision) Regulations 1994 .

Example 2.1  

ABC is an Australian Prudential Regulation Authority (APRA)-regulated superannuation fund.  Nadia, aged 50, has been a member of ABC superannuation fund for 25 years.  Nadia’s employer has made regular contributions to ABC over this time.

Nadia requests ABC to transfer her total superannuation balance of $350,000 into her SMSF.  Nadia provides the required proof of identity documentation outlined in the roll-over request form to ABC.

Prior to actioning the roll-over request, ABC applies its risk assessment developed as part of its AML/CTF program to Nadia’s circumstances.  The roll-over to Nadia’s SMSF is categorised as being of low money laundering/terrorism financing risk.

ABC uses the safe-harbour provisions to identify Nadia.  It also collects and verifies Nadia’s SMSF in accordance with the customer identification and verification procedures in the AML/CTF Rules.

ABC has met its AML/CTF obligations.

Example 2.2  

XYZ is an APRA-regulated superannuation fund.  Chris, aged 23, has been a member of XYZ superannuation fund for 6 months.  Chris has received no contributions over this time and his balance is $100,000.

Chris requests XYZ to transfer his total superannuation balance into his SMSF.  Chris provides the required proof of identity documentation outlined in the roll-over request form to XYZ.

Prior to actioning the roll-over request, XYZ applies its risk assessment developed as part of its AML/CTF program and determines that the roll-over to Chris’ SMSF falls into the high money laundering/terrorism financing risk category.

In this circumstance, XYZ will be required to undertake further assurance by applying enhanced customer due diligence measures that it has developed as part of its AML/CTF program.  This could include requesting further identification documentation from Chris.

If XYZ has formed a suspicion in accordance with the criteria set out in section 41 of the AML/CTF Act, XYZ must submit a suspicious matter report.

XYZ also collects and verifies Chris’ SMSF in accordance with the customer identification and verification procedures in the AML/CTF Rules.

XYZ has met its AML/CTF obligations.

2.13               Schedule 2 to the Bill implements the Government’s response to the Super System Review and amends Table 1 at subsection 6(2) of the AML/CTF Act to include a new designated service at item 42A to capture the roll-over of superannuation benefits to an SMSF.

Summary of new law

2.14               Schedule 2 to the Bill amends Table 1 of subsection 6(2) of the AML/CTF Act by inserting a new designated service at item 42A concerning the roll-over of funds from a regulated superannuation fund that is not an SMSF (the transferring fund) to an SMSF (the receiving fund).

2.15               This amendment will have the effect of requiring the transferring superannuation fund to comply with a range of obligations under the AML/CTF Act, including the customer identification requirements under Part 2 and the reporting obligations under Part 3.

Comparison of key features of new law and current law

New law

Current law

A roll-over to an SMSF from a superannuation fund that is not an SMSF is a ‘designated service’.  This will mean that regulated superannuation funds that are not SMSFs are required to meet certain obligations when they roll-over assets to an SMSF.

A roll-over to an SMSF from a superannuation fund is not a designated service.

Detailed explanation of new law

2.16               A roll-over of superannuation benefits from a regulated superannuation fund (and which is not an SMSF) to an SMSF will be a designated service under the AML/CTF Act.  [Schedule 2, item 1]

2.17               The AML/CTF Act imposes a number of obligations on reporting entities when they provide designated services, which include: customer identification and verification of identity; record-keeping; establishing and maintaining an AML/CTF program; ongoing customer due diligence; and reporting (suspicious matters, threshold transactions and international funds transfer instructions).

2.18               The AML/CTF Act and the supporting AML/CTF Rules together implement a principles-based and risk-based approach to regulation.  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.

2.19               Designated services are listed in section 6 of the AML/CTF Act.

2.20               Under the AML/CTF Act, a reporting entity which offers a designated service to a customer must first carry out a procedure to identify and verify the customer before providing a designated service to the customer.  That is, the reporting entity must have appropriate risk-based systems and controls in place to ensure it is reasonably satisfied that the customer is who they claim to be.

2.21               The trustee of a superannuation fund (other than an SMSF) effecting the roll-over is the provider of the designated service.

2.22               The customers of this designated service are the member of the transferring fund who requests the roll-over and the SMSF that is receiving the roll-over.

2.23               This measure is intended to ensure consideration is given to the money laundering/terrorism financing risks associated with the roll-over of assets to an SMSF and that appropriate customer identification and reporting obligations exist when assets exit the prudentially regulated superannuation sector.

Application and transitional provisions

2.24               The measure will apply to roll-overs to SMSFs made on or after 1 July 2013.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Roll-overs to self managed superannuation funds

2.25               Schedule 2 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.26               This Schedule amends the AML/CTF Act to capture the roll-over of funds from a superannuation fund that is not an SMSF to an SMSF as a designated service.

2.27               The amendment will have the effect of requiring the transferring superannuation fund to comply with a range of existing obligations under the AML/CTF Act.

Human rights implications

2.28               This Schedule engages with the human right to privacy.

2.29               Before a superannuation fund (that is not an SMSF) can roll-over assets into an SMSF, it will need to comply with a range of obligations under the AML/CTF Act.  These include customer identification and verification of identity, record-keeping, establishing and maintaining an AML/CTF program, ongoing customer due diligence and reporting (suspicious matters and threshold transactions).  Complying with these obligations will involve the collection of personal information on the member requesting the transfer.

2.30               Since trustees and members of an SMSF are generally, the same, there is greater scope for assets, once received in the SMSF, to be diverted for illicit purposes.  Ensuring that superannuation funds comply with the AML/CTF obligations will significantly reduce the risk of assets being rolled over into SMSFs that will use them illicitly.

2.31                The AML/CTF Act obligations already exist for a number of reporting entities when they provide designated services.  The AML/CTF Act and the supporting AML/CTF Rules together implement a principles-based and risk-based approach to regulation.

2.32               The Privacy Act 1988 contains rules on how organisations are allowed to collect and handle personal information and these rules will apply to the obligations that superannuation funds will have to comply with before rolling over assets into an SMSF.

Conclusion

2.33               This Schedule is compatible with human rights because the limitation it places is reasonable and proportionate.

Minister for Financial Services and Superannuation, the Hon Bill Shorten



               

Administrative directions and penalties

Outline of chapter

3.1                   This chapter outlines the administrative consequences for contraventions relating to self managed superannuation funds (SMSFs) including:

•        rectification directions;

•        education directions; and

•        administrative penalties.

3.2                   All references in this chapter are to the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Context of amendments

3.3                   SMSFs are a form of superannuation fund where membership is restricted to a maximum of four members and all members must also be trustees or directors of the corporate trustee. 

3.4                   At the time of the Super System Review (Review), there were approximately 423,000 SMSFs in Australia and since this time, the number has increased.  In June 2012, there were approximately 478,000 SMSFs.  The Review noted that although most SMSF trustees seek to operate their funds properly to secure their own retirement, in an industry of this size there will be a proportion of SMSFs that disregard the rules.

3.5                   The Commissioner of Taxation (Commissioner) is responsible for the regulation of SMSFs (Regulator).  The Review concluded that the Regulator needs to have and apply effective, flexible and proportionate powers to address non-compliance with superannuation laws.

3.6                   Currently, the Regulator has a limited number of tools available to address instances of non-compliance including:

•        making an SMSF non-complying for taxation purposes;

•        applying to a court for civil penalties to be imposed.  A person may also face criminal penalties for more serious breaches of the law;

•        accepting  an enforceable undertaking in relation to a contravention; and

•        disqualifying a trustee of an SMSF.

3.7                   The Review acknowledged the benefits that the current penalty regime provides in dealing with and deterring non-compliance.  However, it did highlight some areas of the current regime which limit the Regulator’s ability to achieve optimal regulation.

3.8                   Applying current penalties can be costly and time-consuming and the potential consequences can be disproportionately high.  The Regulator is unlikely to use his existing range of powers except in cases of significant non-compliance with the law.

3.9                   The absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening conduct by simply rectifying the conduct when it is detected.  This may be appropriate in certain circumstances, but it is not appropriate that trustees can continue to contravene the law and for their actions to have no consequences.

3.10               The Review recommended that the Regulator be given additional tools, both educational and punitive, in conjunction with its existing powers.  Credible and proportional penalties will support the ongoing integrity of the system.

3.11               The power to give directions and impose administrative penalties for contraventions of the SIS Act will provide the Regulator with effective, flexible and cost-effective mechanisms to issue sanctions that reflect the seriousness of the breach. 

3.12               It is the intention that the power to issue administrative directions and penalties will form an integral part of the suite of options already available to the Regulator to respond to non-compliance with the law. 

3.13               The Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 (Bill) implements the Government’s response to the Review’s recommendations in relation to penalties for SMSF trustees.

Summary of new law

3.14               Schedule 3 to this Bill introduces administrative consequences for contraventions relating to SMSFs including:

•        giving the Regulator the power to give rectification directions and education directions; and

•        imposes administrative penalties for certain contraventions.

3.15               This Schedule provides the Regulator with the ability to give a rectification direction and/or an education direction where it reasonably believes that a trustee or director of a corporate trustee of an SMSF has contravened a provision of the SIS Act or Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).

3.16               A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time and provide the Regulator with evidence of the person’s compliance with the direction.

3.17               An education direction will require a person to undertake a specified course of education within a specified time frame and provide the Regulator with evidence of completion of the course.  Trustees and directors of corporate trustees will also be required to sign or re-sign the SMSF trustee declaration form to confirm that they understand their obligations and duties as trustees (or directors of corporate trustees) of an SMSF.

3.18               The Regulator may approve courses of education for the purposes of the education direction.  A fee must not be charged for an approved course, undertaken in compliance with an education direction.

3.19                A person will be liable to an administrative penalty if certain provisions of the SIS Act are contravened in relation to an SMSF.  The amount of the penalty is an amount specified in the law.

3.20               An administrative penalty must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed.

Comparison of key features of new law and current law

New law

Current law

A rectification direction is a written direction requiring a person to take specified action to rectify the contravention and provide the Regulator with evidence of the person’s compliance with the direction.

No equivalent.

A rectification direction may be given to a person where the Regulator reasonably believes that person has contravened a provision of the SIS Act or SIS Regulations in relation to the fund, having regard to any financial detriment to be suffered by the fund as a result of the person’s compliance with the direction, and the nature and seriousness of the person’s contravention.

No equivalent.

A rectification direction must not be given to a person in relation to a contravention if the Regulator has accepted an undertaking by any person under section 262A of the SIS Act in relation to the contravention and the undertaking has neither been withdrawn nor varied such that the contravention is no longer covered by it.

No equivalent.

The rectification direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances.

No equivalent.

An education direction is a written direction requiring a person to undertake a specified course of education and to provide the Regulator with evidence of completion of the course.

No equivalent.

An education direction may be given to a person where the Regulator reasonably believes a person has contravened a provision of the SIS Act or SIS Regulations in relation to the fund.

No equivalent.

The education direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances.

No equivalent.

The Regulator may approve a course, in writing, for the purpose of giving education directions.  A fee must not be charged for the course undertaken in compliance with an education direction.

No equivalent.

The Regulator may at any time, vary or revoke a rectification direction or an education direction by giving written notice to the person to whom the direction was given.

No equivalent.

A person to whom a rectification direction or education direction is given may request the Regulator to vary the direction.  The Regulator must make a decision within 28 days, or the Regulator is taken to have refused the request. 

No equivalent.

If a person contravenes a section of the SIS Act specified in the table in section 166, the person is liable to an administrative penalty. 

No equivalent.

An administrative penalty must not be paid or reimbursed from the assets of the SMSF. 

No equivalent.

Detailed explanation of new law

3.21               The Commissioner has general administration of Part 20:  Administrative consequences for contraventions relating to SMSFs.  [Schedule 3, item 1, section 4; item 2, subparagraph 6(1)(e)(v)]

Definitions

3.22               Item 3 inserts a definition for ‘education direction’ as having meaning given by subsection 160(2).  [Schedule 3, item 3, subsection 10(1)]

3.23               Item 4 inserts a definition for ‘rectification direction’ as having meaning given by subsection 159(2 ).  [Schedule 3, item 4, subsection 10(1)]

3.24               A superannuation fund is treated as an SMSF for the purposes of Part 20 if it has ceased being a SMSF for the purposes of the rest of the SIS Act and the trustee of the fund is not a registrable superannuation entity licensee.  [Schedule 3, item 5, subsection 10(4)]

3.25               Item 5 is intended to ensure that penalties may be imposed on trustees and directors of corporate trustees of funds that fail the definition of an SMSF in section 17A of the SIS Act, but are none the less treated as an SMSF and remain regulated by the Commissioner.  This will ensure that trustees and directors who contravene the SIS Act or SIS Regulations do not escape any sanction due to the fund no longer meeting the definition of an SMSF under section 17A of the SIS Act.

3.26               Administrative penalties are imposed for contraventions of specified provisions of the SIS Act.  Items 6 to 8, 10 to 15, 18 to 22, and 24 to 26 insert notes to each provision to explain that section 166 imposes an administrative penalty for contraventions of the relevant provisions in relation to an SMSF.  [Schedule 3, items 6 to 8, 10 to 15, 18 to 22, and 24 to 26, subsections 34(1) and 35B(6), section 35B, subsections 65(1), 67(1) and 84(1), section 103, subsection 104(1), 104A(2), 105(1), 106(1), 106A(1), 124(1), 254(1) and 347A(5)]

Indemnification from assets of the SMSF

3.27               It is intended that any of the associated costs that may be incurred as a result of an education direction or a liability under the new administrative penalty regime are payable personally by the person to whom the direction is issued or who has committed the breach, and will not be paid or reimbursed from assets of the SMSF.

3.28               A provision in the governing rules of an SMSF is void in so far as it would have the effect of exempting a trustee of the SMSF from, or indemnifying a trustee or a director of the trustee of the SMSF against:

•        liability for the costs of undertaking a course of education in compliance with an education direction; or

•        liability for an administrative penalty imposed by section 166.

[Schedule 3, item 9, paragraphs 56(2)(c) and (d) and 57(2)(c) and (d)]

Trustee declaration

3.29               A trustee or a director of a corporate trustee of an SMSF who undertakes a course of education in compliance with an education direction, is required to sign a declaration that he or she understands his or her duties as a trustee of a SMSF (or as director of a body corporate that is such a trustee) no later than 21 days after completing the course of education.  [Schedule 3, items 16 and 17, paragraph 104A(1(c) and subparagraph 104A(2)(ba)]

3.30               It is intended that trustees and directors of a corporate trustee who undertake a course of education in compliance with an education direction will gain a better understanding of their obligations and responsibilities as trustees and prevent them from contravening the law again in the future.

3.31               These trustees and directors will be required to confirm that they understand their obligations and responsibilities as trustees or directors of a corporate trustee by signing a declaration to that effect.

3.32               Trustees and directors who fail to sign the declaration in accordance with section 104A will be liable to an administrative penalty imposed by section 166.

Administrative consequences for contraventions relating to SMSFs

3.33               Schedule 3 inserts Part 20 — Administrative consequences for contraventions relating to SMSFs.  [Schedule 3, item 23, Part 20]

3.34               Schedule 3 inserts Division 1 — Object and Scope of this Part.  [Schedule 3, item 23, Division 1]

Object and scope of Part 20

3.35               The object of Part 20 is to provide administrative consequences for contraventions of the SIS Act or the SIS Regulations that relate to SMSFs.  Part 20:

•        gives the Regulator power to give rectification directions and education directions; and

•        imposes administrative penalties for certain contraventions of the SIS Act.  [Schedule 3, item 23, section 157]

3.36               Part 20 only applies to SMSFs that are regulated superannuation funds.  ‘Regulated superannuation fund’ is defined in section 19 of the SIS Act.  [Schedule 3, item 23, section 158]. 

Directions

3.37               Schedule 3 inserts Division 2 — Directions.  [Schedule 3, item 23, Division 2]

3.38               A direction under Division 2 may not be given in relation to a contravention of the superannuation data and payment regulations and standards in Part 3B of the SIS Act.  [Schedule 3, item 23, subsections 159(1) and 160(1))]

Rectification directions

3.39               Currently, rectification of contraventions commonly occurs through the enforceable undertaking process under section 262A of the SIS Act.  Enforceable undertakings rely on a person initiating the enforceable undertaking with the Regulator.  The Regulator then has the ability to accept or decline the enforceable undertaking that has been offered.  If accepted and not complied with, the Regulator must apply to the Court to have it enforced.  The Review found this process inefficient and time consuming.

3.40               Unlike enforceable undertakings where a person is not limited to the undertaking it may offer the Regulator, a rectification direction given by the Regulator will be restricted to rectifying contraventions of the SIS Act or SIS Regulations. 

3.41               A rectification direction may be given if the Regulator reasonably believes that a person who is a trustee or a director (of a body corporate that is a trustee) of an SMSF has contravened the SIS Act or SIS Regulations in relation to the fund.  [Schedule 3, item 23, subsection 159(1)]

3.42               Provisions contained in the SIS Act and SIS Regulations must be adhered to by all trustees (individual trustees and corporate trustees) of SMSFs.  Additionally, certain provisions in the SIS Act or SIS Regulations may apply directly to directors of body corporates that are trustees of SMSFs, for example, section 104A.  A trustee or director who does not adhere to these provisions and contravenes the Act may be given a rectification direction.

3.43               A rectification direction may therefore be given to:

•        an individual trustee of an SMSF that has contravened the SIS Act or SIS Regulations;

•        a body corporate that is the trustee of an SMSF that has contravened the SIS Act or SIS Regulations; and/or

•        a director of a body corporate trustee of an SMSF that has contravened the SIS Act or SIS Regulations.

3.44               The Regulator may give a person a rectification direction requiring the person to take a specified action to rectify the contravention and to provide the Regulator with evidence of the person’s compliance with the direction.  [Schedule 3, item 23, subsection159(2)]

3.45               The term ‘rectify’ is defined in subsection 10(1) of the SIS Act and will generally involve putting into operation managerial or administrative arrangements that could reasonably be expected to ensure that there are no further contraventions of a similar kind.

3.46               Some contraventions only occur in the year of income the transaction took place.  However, certain transactions, if not rectified, may cause trustees to contravene the SIS Act or SIS Regulations over a number of financial years.  For example:

•        Section 67 of the SIS Act prohibits an SMSF trustee from borrowing money or maintaining an existing borrowing of money except under limited circumstances.  Trustees may contravene this provision in:

-       the year of income that the borrowing is undertaken (this will result in a contravention of paragraph 67(1)(a)); and

-       each year of income the borrowing is maintained (this will result in contraventions of paragraph 67(1)(b)).

In these circumstances, it may be appropriate for the Regulator to give a rectification direction to the trustee of the SMSF specifying that the trustee must ensure that the borrowing is paid off over a specified period of time.  Such action will ensure that the trustee does not continue to maintain a borrowing in contravention of paragraph 67(1)(b).

•        Where the market value of a fund’s in-house assets exceeds five per cent at the end of an income year, subsection 82(1) requires the trustees of a fund to prepare a written plan before the end of the following income year that sets out:

-       the amount by which the market value ratio of the fund’s in-house assets exceeds 5 per cent; and

-       the steps that the trustees will take to ensure that in-house assets are disposed of and that the value of those assets disposed of will return the fund to a market value ratio of five per cent or less.

If the Regulator determines that the trustees have not carried out the steps of the plan they prepared within the relevant time period, the Regulator may issue a direction to dispose of assets in accordance with the plan prepared by the trustees.

3.47               In deciding whether to give a person a rectification direction, the Regulator should have regard to:

•                any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person’s compliance with the direction;

•                the nature and seriousness of the person’s contravention; and

•                any other relevant circumstances.

These factors do not limit the matters that the Regulator may have regard to in determining whether to issue a rectification direction.  [Schedule 3, item 23, subsection 159(3)]

3.48               In relation to the financial detriment that might reasonably be expected to be suffered by the fund, it is intended that the significance of the financial detriment, whether issuing a rectification direction will have a major impact on the retirement savings of the members of the fund, and whether there are other pecuniary compliance mechanisms that might be more appropriate in the circumstances would be considered.  [Schedule 3, item 23, paragraph 159(3)(a)]

3.49               In deciding to give a person a rectification direction, the Regulator is to also have regard to the nature and seriousness of the person’s contravention.  [Schedule 3, item 23, paragraph 159(3)(b)]

3.50               The nature and seriousness of a contravention will always be a question of fact and degree and each case will need to be considered in light of its particular circumstances.  The Regulator should consider all the facts relating to the contravention including but not limited to:

•        the provision contravened and the nature of the contravention;

•        the behaviour and circumstances of the person who contravened the act, including the past compliance history; and

•        the value of the assets involved.

3.51               In considering all the relevant facts, the Regulator may determine that a rectification direction is not the appropriate action.  The Regulator may consider that other action, such as issuing a notice of non-compliance under section 40 of the SIS Act, is more appropriate.

3.52               A rectification direction must specify the period within which the person must comply with the direction, which must be reasonable in the circumstances.  [Schedule 3, item 23, subsection 159(4)]

3.53               In determining the period of time to specify in the direction, the Regulator should have regard to factors including, but not limited to:

•        the type of action specified in the direction; and

•        the circumstances of the person to whom the direction is issued. 

3.54               The Regulator must not give a rectification direction in relation to a particular contravention if the Regulator has accepted an enforceable undertaking given by a person in relation to the contravention, the contravention is covered by that undertaking and the undertaking has neither been withdrawn nor varied in a way that means the contravention is no longer covered by it.  [Schedule 3, item 23, subsection 159(5)]

3.55               The introduction of rectification directions does not affect the operation of enforceable undertakings under section 262A.  However, if an enforceable undertaking has been accepted by the Regulator in relation to a contravention, the Regulator cannot subsequently issue a rectification direction in relation to that same contravention unless the undertaking has been withdrawn or varied in a way that means the contravention is no longer covered by the undertaking.

3.56               A person to whom a rectification direction is given must comply with the direction before the end of the period specified in the direction.  If the person fails to comply with the direction within that period, the person commits an offence of strict liability and is liable for a maximum of 10 penalty units.  [Schedule 3, item 23, subsections 159(6) and (7)]

3.57               Making a failure to comply with a rectification direction an offence of strict liability is consistent with offences relating to the contravention of other regulatory provisions contained in the SIS Act and SIS Regulations and is necessary to ensure the integrity of the regulatory regime. 

3.58               ‘Strict liability’ is defined in section 6.1 of the Criminal Code Act 1995 .  The strict liability relates to the lack of action by a person to whom the direction was issued, and who is personally liable for the offence.  This is designed to discourage careless non-compliance.  Additionally, the penalty is less than 60 penalty units and does not include imprisonment. 

3.59               The Regulator is not prevented from giving a rectification direction in relation to a contravention if an administrative penalty applies in relation to a particular contravention under section 166 of the SIS Act.

3.60               Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving an education direction or issuing a notice of non-compliance, if the rectification direction is not complied with.

Education directions

3.61               An education direction may be given to:

•        a trustee of an SMSF, if the Regulator reasonably believes that the trustee has contravened a provision of the SIS Act or the SIS Regulations in relation to the fund; or

•        a director of a body corporate that is trustee of an SMSF if the regulator reasonably believes that:

-       the director has contravened a provision of the SIS Act or the SIS Regulations in relation to the fund; or

-       the trustee which is a body corporate has contravened a provision of the SIS Act or the SIS Regulations in relation to the fund.  [Schedule 3, item 23, subsection 160(1)]

3.62               Provisions contained in the SIS Act and SIS Regulations must be adhered to by all trustees (individual trustees and corporate trustees) of SMSFs.  Additionally, certain provisions in the SIS Act or SIS Regulations may apply directly to directors of body corporates that are trustees of SMSFs.  A trustee or director who does not adhere to these provisions and contravenes the Act may be given an education direction.

3.63               The Regulator may give a person an education direction requiring the person to undertake a specified approved course of education and provide the Regulator with evidence of completion of the course.  [Schedule 3, item 23, subsection 160(2)]

3.64               It would be appropriate for the Regulator to issue an education direction to a person where the person’s lack of knowledge and/or understanding of their obligations has contributed to them contravening the SIS Act or SIS Regulations.

3.65               It is intended that an approved course of education will provide trustees and directors with appropriate knowledge relating to the contravention that has occurred.  Additionally, this will also provide an opportunity for trustees and directors to gain and refresh their overall knowledge of relevant superannuation laws and should reduce the likelihood of trustees and directors committing contraventions in the future.

3.66               An education direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances.  [Schedule 3, item 23, subsection 160(3)]

3.67               In determining the period of time to specify in the direction, the Regulator should have regard to factors including, but not limited to:

•        the nature of the education course specified in the direction; and

•        the circumstances of the person to whom the direction is issued. 

3.68               A person to whom an education direction is given must comply with the direction before the end of the specified period.  If the person fails to comply with the direction within that period, the person commits an offence of strict liability.  [Schedule 3, item 23, subsections 160(4) and (5)]

3.69               Making a failure to comply with an education direction an offence of strict liability is consistent with offences relating to the contravention of other regulatory provisions contained in the SIS Act and SIS Regulations and is necessary to ensure the integrity of the regulatory regime.

3.70               ‘Strict liability’ is defined in section 6.1 of the Criminal Code Act 1995 .  The strict liability relates to the lack of action by a person to whom the direction was issued, and who is personally liable for the offence.  This is designed to discourage careless non-compliance.  Additionally, the penalty is less than 60 penalty units and does not include imprisonment.

3.71               The Regulator is not prevented from giving an education direction in relation to a contravention if an administrative penalty is imposed for that contravention by section 166 of the SIS Act.

3.72               Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving a rectification direction or issuing a notice of non-compliance, if a contravention of the same kind occurs in the future. 

Approval of courses of education

3.73               The Regulator may, in writing, approve one or more courses of education for the purpose of giving education directions.  [Schedule 3, item 23, subsection 161(1)]

3.74               An approved course may be provided by the Regulator or another entity whose course has been approved by the Regulator.  However, it must be a course for which no fees are charged in respect of persons who undertake the course.  [Schedule 3, item 23, subsection 161(2)]

3.75               An approved course of education is intended to provide trustees and directors of a corporate trustee with the appropriate knowledge relating to their compliance obligations under SIS Act and SIS Regulations, and not to impose a monetary penalty.  Other sanctions such as administrative penalties imposed by section 166 will impose a monetary penalty for the contravention.  It is therefore considered appropriate that trustees and directors of a corporate trustee should not be subject to fees from providers for undertaking an education course specified in the direction. 

3.76               Subsection 161(3) is included to assist readers and make it clear that an approval of an education course given by the Regulator is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 [Schedule 3, item 23, subsection 161(3)]

Costs of course of education

3.77               Section 162 clarifies that notwithstanding that an approved course must be a course for which no fees are charged; none of the costs that may be associated with undertaking the course may be paid or reimbursed from the assets of the fund in relation to which the education direction was given.  For example, trustees and directors may incur costs in complying with the education direction such as travel costs, costs incurred in notifying the Regulator that the education direction has been complied with and expenses related to using the internet if the course is undertaken on-line.  This is in keeping with the broad intention that costs incurred under the new administrative penalty regime are payable personally by the person who has committed the breach and not paid or reimbursed from assets of the SMSF.  [Schedule 3, item 23, section 162]

Review rights

Variation or revocation on the Regulator’s own initiative

3.78               The Regulator may, at any time, vary or revoke a rectification direction or an education direction by written notice given to the person to whom the direction was given.  [Schedule 3, item 23, section 163]

3.79               The Regulator is not limited in when he or she may vary or revoke a rectification direction or an education direction.  This provision is intended to give the Regulator flexibility in administering the law.

Variation on request

3.80               Section 164 allows a person, to whom rectification direction or an education direction is given, to request the Regulator to vary the direction.  [Schedule 3, item 23, subsection 164(1)]

3.81                Section 164 provides an alternative mechanism for a person to apply to the Regulator to vary a direction.  Section 164 does not affect the ability for a person to, under section 165, object against the Regulator’s decision to give the direction or vary one under section 163.

3.82               A person may request the Regulator to vary the direction in any way.  For example, the person may request a variation to the period specified in the notice if the person requires more time to undertake a course of education or take action to rectify a contravention.

3.83               The request must be made by written notice to the Regulator before the end of the period specified in the rectification direction or education direction within which the person must comply with the direction.  [Schedule 3, item 23, subsection 164(2)]

3.84               A person cannot request the Regulator to vary the direction under section 164 if the period specified in the rectification direction or education direction has passed.

3.85               The request must set out the reasons for making the request.  This will assist the Regulator in making a decision on the request.  [Schedule 3, item 23, subsection 164(3)]

3.86               The Regulator must decide whether or not to vary the direction in accordance with the request, vary the direction otherwise than in accordance with the request, or to refuse to vary the direction.  [Schedule 3, item 23, subsection 164(4)]

3.87               If the Regulator does not make a decision on the request before the end of the period of 28 days after the day on which the request was made, the Regulator is taken, at the end of that period to have refused the request.  The time for compliance with the direction in this case will be affected by Regulator’s written notification of the deemed decision under subsection 164(7).  [Schedule 3, item 23, subsection 164(5)]

3.88               If the Regulator makes a decision within 28 days the Regulator must notify the person of his or her decision.  If the decision is to vary the direction, the Regulator must give the person a copy of the varied direction.  If the decision is to refuse to vary the direction, or to vary the direction otherwise than in accordance with the request, the Regulator must give the person written reasons for the decision.  [Schedule 3, item 23, subsection 164(6)]

3.89               If a person makes a request under section 164, then the period specified in a rectification direction or an education direction within which the person must comply with the direction is extended by one day for each day in the period beginning the start of the day on which the request was made, and ending at the end of the day that the Regulator notifies the person of the decision that has been made on the request [Schedule 3, item 23, subsection 164(7)] The Regulator has the power to vary or revoke the direction on their own initiative if the Regulator considers that the period for compliance with the direction following the decision on the request is unreasonable in the circumstances.

Taxation objections

3.90               A person may object against a decision of the Regulator in the manner set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953).  [Schedule 3, item 23, section 165]

3.91               A person may lodge an objection if they are dissatisfied with a decision of the Regulator:

•        to give a rectification direction or education direction;

•        to refuse to vary a direction; or

•        to vary a direction otherwise than in accordance with a request under section 164.

3.92               The manner and timeframe within which an objection must be made is provided for in Part IVC of the TAA 1953. 

Administrative penalties

3.93               Schedule 3 inserts Division 3 — Administrative penalties.  [Schedule 3, item 23, Division 3]

3.94               If a person contravenes a provision of the SIS Act specified in the table in section 166, the person is liable to an administrative penalty.  The amount of the penalty is the amount specified in the table for the provision.  [Schedule 3, item 23, subsection 166(1)]

3.95               An administrative penalty is not imposed for all contraventions of the SIS Act, only those listed in the table in subsection 166(1).  Additionally, administrative penalties are only imposed by section 166 in relation to SMSFs.

3.96               Persons on whom an administrative penalty may be imposed on are:

•        a trustee of an SMSF (including an individual trustee or a corporate trustee); or

•        a director of a body corporate that is a trustee of an SMSF.

[Schedule 3, item 23, subsection 166(2)]

3.97               Provisions listed in the table in subsection 166(1) must be adhered to by all trustees (individual trustees and corporate trustees) of SMSFs.  Additionally, certain provisions in the table apply directly to directors of body corporates that are trustees of SMSFs, for example, see section 104A.  A trustee or director who contravenes these provisions will be liable to an administrative penalty.

3.98                 Collection and recovery of administrative penalties imposed by section 166 is dealt with in Part 4-15 of Schedule 1 to TAA 1953.  Division 298 provides machinery provisions for penalties.  The term ‘entity’ is used in Schedule 1 of the TAA 1953 is defined by section 960-100 of the ITAA 1997, and provides that the term ‘entity’ may refer to the different capacities in which a person does things.  Subsection 166(3) clarifies that if a trustee of an SMSF on whom a penalty is imposed by section 166 is an individual, a reference in Part 4-15 of Schedule 1 or Division 298 of the TAA 1953 to an entity is taken to be a reference to that individual in their personal capacity.  [Schedule 3, item 23, subsection 166(3)]

Administrative penalty and civil penalty

3.99               Despite the operation of section 166, the Regulator may cause proceedings against a person to commence for a contravention of a civil penalty provision.  Section 167 ensures that whether or not such proceedings are withdrawn, the person is not liable to pay the administrative penalty.  If an amount of the administrative penalty has been paid, then it is to be refunded or applied by the Regulator in total or partial discharge of another tax-related liability.  [Schedule 3, item 23, section 167]

3.100           For the avoidance of doubt, section 8ZE of the TAA 1953 deals with the situation of a person against whom a criminal prosecution is instituted.

Penalty must not be reimbursed from the fund

3.101           An administrative penalty imposed by section 166 must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed.  [Schedule 3, item 23, section 168]

3.102           Penalties imposed under the new administrative penalty regime are payable personally by the person who has committed the breach and must therefore not be paid or reimbursed from assets of the SMSF.

Joint and several liability of directors of corporate trustees

3.103           If a trustee that is a body corporate becomes liable to an administrative penalty under section 166, then the directors of that body corporate are jointly and severally liable to pay the amount of the penalty imposed on the body corporate.  [Schedule 3, item 23, section 169]

3.104           The power to control the management of a company, its property and affairs is vested collectively in the board of directors.  Directors are therefore responsible for the actions of a corporate trustee, and it is appropriate that they are jointly and severally liable to an administrative penalty.  This is consistent with the treatment of a corporate trustee of a SMSF in section 284-95 of the TAA 1953.

Example 3.1 : Corporate trustee that contravenes a provision

Stuart and Alison are members and the directors of a body corporate that is the trustee of Green SMSF.  Stuart and Alison fail to ensure that accounts and statements for Green SMSF are prepared for the 2013-14 year of income.  As a result, the corporate trustee has contravened section 35B.

An administrative penalty of 10 penalty units is imposed on the body corporate that is the trustee of the Green SMSF.  Stuart and Alison as directors of the body corporate become jointly and severally liable to an administrative penalty of 10 penalty units imposed on the body corporate.

Example 3.2 : Individual trustees that contravene a provision

Jill and Merryn are members and individual trustees of Yellow SMSF.  Jill and Merryn fail to ensure that accounts and statements for Yellow SMSF are prepared for the 2013-13 year of income.  As a result, each individual trustee has contravened section 35B.

An administrative penalty of 10 penalty units is imposed on each individual trustee of Yellow SMSF in their personal capacity.  Jill and Merryn are each liable to an administrative penalty of 10 penalty units.

Example 3.3 : Director of corporate trustee that contravenes a provision

Marita and Peter become directors of a body corporate that is trustee of Blue SMSF.  Peter fails to sign a trustee declaration and contravenes subsection 104A(2).

An administrative penalty of 10 penalty units is imposed on Peter.  Peter is liable to an administrative penalty of 10 penalty units.

Example 3.4 : Individual trustees that contravene a provision

Cameron and Rohan are individual trustees of Red SMSF.  Cameron fails to sign a trustee declaration and contravenes subsection 104A(2).

An administrative penalty of 10 penalty units is imposed on Cameron in his personal capacity.  Cameron is liable to an administrative penalty of 10 penalty units.

Taxation Administration Act 1953

3.105           The machinery provisions for penalties in Division 298 of the TAA 1953 will apply to an administrative penalty imposed by section 166 of the SIS Act.  [Schedule 3, item 27, Schedule 1, paragraph 298-5(d)]

3.106           The machinery provisions in Division 298 deal with:

•        how the Regulator must notify a person of their liability of an administrative penalty;

•        due date for payment of the administrative penalty;

•        ability for the Regulator to remit all or part of the administrative penalty and objection rights; and

•        the imposition of general interest charge on unpaid penalties.

3.107           A liability to an administrative penalty imposed by section 166 of the SIS Act is a tax-related liability for the purposes of Subdivision 255-A of Schedule 1 of the TAA 1953.

3.108           The collection and recovery rules contained in Part 4-15 of Schedule 1 of the TAA 1953 will apply to administrative penalties imposed by section 166.

Application and transitional provisions

3.109           The amendments made by Schedule 3 apply to contraventions that occur on or after 1 July 2013.  [Schedule 3, item 28]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. 

3.110           Schedule 3 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview of the Bill

3.111           Schedule 3 to the Bill amends the Superannuation Industry (Supervision) Act 1993 to give the Commissioner the power to issue directions and impose administrative penalties on trustees and directors of corporate trustees of SMSFs.

3.112           An education direction will require a person to undertake a specified course of education and a rectification direction will require a person to undertake specified action to rectify a contravention of the superannuation law within a specified time period that is reasonable in the circumstances.  A person commits an offence of strict liability if they do not comply with a direction within the specified time period.  The penalty is 10 penalty units.  A person who is dissatisfied with a decision of the Commissioner of Taxation to issue a direction may object against the decision in the manner set out in Part IVC of the TAA 1953, which provides the general framework for taxation objections.

3.113           A trustee or director of a corporate trustee is liable to an administrative penalty for the contravention of specified provisions in the SIS Act.  The amount of the administrative penalty is specified in the law.  Collection and recovery of administrative penalties is dealt with under the general framework contained in Part 4-15 of Schedule 1 to the TAA 1953.  

Human rights implications

Presumption of innocence

3.114           Article 14(2) of the International Covenant on Civil and Political Rights protects the right of a person charged with a criminal offence ‘to be presumed innocent until proved guilty according to law’.

3.115           The use of strict liability offences in respect of rectification and education directions in Schedule 3 to the Bill interacts with this presumption as there are no fault elements for any of the physical offences of a strict liability offence.

3.116           A strict liability offence is considered appropriate in the case of non-compliance with a rectification or education direction as the offence is regulatory and the regulatory supervision of SMSFs is compliance based.  Further, the level of the penalty is at the lower end of the penalty scale and does not include imprisonment.  The guidelines provided by the Criminal Justice Division of the Attorney-General’s Department have been considered in framing the offence.

Conclusion

3.117           This Schedule is compatible with human rights because to the extent that it interacts with the presumption of innocence, those interactions are reasonable, necessary and proportional to a legitimate aim of encouraging trustees and directors of corporate trustees of SMSFs to comply with their obligations under the superannuation law.

Minister for Financial Services and Superannuation, the Hon Bill Shorten



Chapter 4          

Unlawful payments from regulated superannuation funds — income tax rates amendment

Outline of chapter

4.1                   The Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 (ITR Bill) ensures superannuation benefits received in breach of legislative requirements are taxed at 45 per cent.

Context of amendments

4.2                   Section 304-10 of the Income Tax Assessment Act 1997 (ITAA 1997) operates to ensure superannuation benefits received in breach of legislative requirements are included in a person’s assessable income.  Currently, these amounts are taxed at a person’s marginal tax rate.

4.3                   The Super System Review (Review) considered this an inequitable outcome as those who gain illegal access to their superannuation benefits are subject to similar taxation treatment as those who are able to legally access their benefits early.

4.4                   The Review noted that people who have illegally accessed their superannuation will still benefit from the amount they are left with after being taxed at marginal rates.  Some people will not pay tax at all due to their level of income.  A percentage of the population may be willing to forfeit a portion of their superannuation to tax (and promoter fees where applicable) to access a portion of their superannuation benefits.

4.5                   The Review recommended that amounts illegally released should be taxed at the superannuation fund non-complying rate of 45 per cent.  This is to deter people from accessing their superannuation benefits contrary to the law and to ensure that those who do access their benefits early in this manner do not enjoy the same treatment as those who legally gain early access to their superannuation.  

4.6                   The ITR Bill implements the Government’s response to the Review’s recommendation that amounts illegally released be taxed at 45 per cent.

Summary of new law

4.7                   The rate of tax on amounts included in assessable income under section 304-10 of the ITAA 1997 is 45 per cent.

Comparison of key features of new law and current law

New law

Current law

Unlawful early payment remainder of taxable income means so much of taxable income as is included in assessable income under section 304-10 of the ITAA 1997.

No equivalent.

The rate of tax for a resident taxpayer for the unlawful early payment remainder (if any) of taxable income is 45%.

No equivalent.

The rate of tax for a non-resident taxpayer for the unlawful early payment remainder (if any) of taxable income is 45%.

No equivalent.

Detailed explanation of new law

4.8                   Section 304-10 of the ITAA 1997 operates to ensure superannuation benefits received in breach of legislative requirements are included in a person’s assessable income. 

4.9                   These amendments to the Income Tax Rates Act 1986 will ensure that these amounts are taxed at a rate of 45 per cent.  As these amounts are also included in a person’s taxable income under section 4-15 of the ITAA 1997, the amount is also subject to the Medicare levy.

4.10               The Commissioner has the discretion to not include the amount of superannuation illegally accessed in a person’s assessable income under section 304-10 of the ITAA 97, where it is unreasonable to do so having regard to the nature of the fund and the circumstances of release.  Where this discretion is exercised, the amount of superannuation illegally accessed early would be subject to the same taxation treatment as superannuation amounts that have been legally accessed early. 

4.11               Unlawful early payment remainder of taxable income is defined to mean so much of taxable income as is included in assessable income under section 304-10 of the ITAA 1997.  [Schedule 1 to the ITR Bill, item 2, subsection 3(1)]

4.12               A rate of tax of 45 per cent applies to resident taxpayers for the amount included as unlawful early payment remainder of taxable income.  [Schedule 1 to the ITR Bill, item 3, Part 1 of Schedule 7, paragraph (ab)]

4.13               A rate of tax of 45 per cent applies to non-resident taxpayers for the amount included as unlawful early payment remainder of taxable income.  [Schedule 1 to the ITR Bill, item 4, Part II of Schedule 7, paragraph (ab)]

4.14               The definition of ordinary taxable income is amended to ensure ordinary taxable income does not include any amounts that are included in assessable income as unlawful early payment remainder of taxable income.  [Schedule 1 to the ITR Bill, item 1, subsection 3(1)]

Application and transitional provisions

4.15               The amendments made by Schedule 1 apply to assessments for the 2013-14 income year and later income years.  [Schedule 1 to the ITR Bill, item 5]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012

4.16               The Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 (ITR Bill) is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

4.17               The ITR Bill amends the Income Tax Rates Act 1986 to impose a rate of taxation of 45 per cent on superannuation benefits that are received in breach of legislative requirements. 

Human rights implications

4.18               This Bill does not engage any of the applicable rights or freedoms.

Conclusion

4.19               This Bill is compatible with human rights as it does not raise any human rights issues.

Minister for Financial Services and Superannuation, the Hon Bill Shorten

 



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

Schedule 1: Unlawful payments from regulated superannuation funds

Bill reference

Paragraph number

Item 1, subsection 68B(1)

1.12, 1.22

Item 1, subsection 68B(2), item 2, paragraph 193(ca)

1.27

Item 1, subsection 68B(3)

1.14, 1.17

Schedule 2: Roll-overs to self managed superannuation funds

Bill reference

Paragraph number

Item 1

2.16

Schedule 3: Administrative consequences for contraventions relating to self managed superannuation funds

Bill reference

Paragraph number

Item 1, section 4; item 2, subparagraph 6(1)(e)(v)

3.21

Item 3, subsection 10(1)

3.22

Item 4, subsection 10(1)

3.23

Item 5, subsection 10(4)

3.24

Items 6 to 8, 10 to 15, 18 to 22, and 24 to  26, subsections 34(1) and 35B(6), section 35B, subsections 65(1), 67(1) and 84(1), section 103, subsection 104(1), 104A(2), 105(1), 106(1), 106A(1), 124(1), 254(1) and 347A(5)

3.26

Item 9, paragraphs 56(2)(c) and (d) and 57(2)(c) and (d)

3.28

Items 16 and 17, paragraph 104A(1(c) and subparagraph 104A(2)(ba)

3.29

Item 23, Division 1

3.34

Item 23, Division 2

3.37

Item 23, Division 3

3.93

Item 23, Part 20

3.33

Item 23, section 157

3.35

Item 23, section 158

3.36

Item 23, subsections 159(1) and 160(1))

3.38

Item 23, subsection 159(1)

3.41

Item 23 subsection159(2)

3.44

Item 23, subsection 159(3)

3.47

Item 23, paragraph 159(3)(a)

3.48

Item 23, paragraph 159(3)(b)

3.49

Item 23, subsection 159(4)

3.52

Item 23, subsection 159(5)

3.54

Item 23, subsections 159(6) and (7)

3.56

Item 23, subsection 160(1)

3.61

Item 23, subsection 160(2)

3.63

Item 23, subsection 160(3)

3.66

Item 23, subsections 160(4) and (5)

3.68

Item 23, subsection 161(1)

3.73

Item 23, subsection 161(2)

3.74

Item 23, subsection 161(3)

3.76

Item 23, section 162

3.77

Item 23, section 163

3.78

Item 23, subsection 164(1)

3.80

Item 23, subsection 164(2)

3.83

Item 23, subsection 164(3)

3.85

Item 23, subsection 164(4)

3.86

Item 23, subsection 164(5)

3.87

Item 23, subsection 164(6)

3.88

Item 23, subsection 164(7)

3.89

Item 23, section 165

3.90

Item 23, subsection 166(1)

3.94

Item 23, subsection 166(2)

3.96

Item 23, subsection 166(3)

3.98

Item 23, section 167

3.99

Item 23, section 168

3.101

Item 23, section 169

3.103

Item 27, Schedule 1, paragraph 298-5(d)

3.105

Item 28

3.109

Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012

Schedule 1: Unlawful payments from regulated superannuation funds

Bill reference

Paragraph number

Items 1 and 2, subsection 3(1)

4.11, 4.14

Item 3, Part 1 of Schedule 7, paragraph (ab)

4.12

Item 4, Part II of Schedule 7, paragraph (ab)

4.13

Item 5

4.15