EXPLANATORY STATEMENT

Select Legislative Instrument 2005 No. 332

Issued by authority of the Minister for Revenue and Assistant Treasurer

Superannuation Industry (Supervision) Act 1993

Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 6)

 

Subsection 353(1) of the Superannuation Industry (Supervision) Act 1993 (the Act) provides that the Governor‑General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The purpose of the amending Regulations is to ensure that superannuation annuities split on marriage breakdown are given the same treatment as is currently applied to superannuation benefits split on marriage breakdown. 

Under family law legislation, married couples have been able to split their superannuation benefits on marriage breakdown since December 2002.  However this legislation did not apply to superannuation‑like annuity products purchased from life offices (and other organisations) with rolled‑over superannuation money.  The Government recently amended the family law legislation, in the Family Law Amendment (Annuities) Act 2004, to allow married couples to split such annuities on marriage breakdown in the same way as other superannuation benefits. 

The Regulations support changes made by the Tax Laws Amendment (2005 Measures No. 2) Act 2005 to the Income Tax Assessment Act 1936 to ensure consistent treatment of interests in superannuation‑like annuity products with other superannuation benefits. 

The Regulations benefit both the member spouse and the non‑member spouse by allowing the superannuation annuity to be varied or commuted to meet obligations arising under a family law split.

The Regulations also make minor technical amendments to the provisions relating to splitting defined benefit interests on marriage breakdown and to the operative time provisions in the existing Regulations.

Details of the Regulations are set out in the Attachment.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

Consultations were held with the Australian Taxation Office, the Attorney‑General’s Department, the Department of Veteran’s Affairs, the Department of Family and Community Services and representatives from the superannuation industry during the development of these Regulations.  The draft regulations were released to representatives from the superannuation industry for a period of one month during which time submissions were received and considered.

The Office of Regulation Review has advised that a regulation impact statement is not required to be included with the Regulations, as the changes are of a minor or machinery of government nature and do not substantially alter existing arrangements.

 

ATTACHMENT

Details of the Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 6)

Regulation 1 — Name of the Regulations

Regulation 1 specifies that the Regulations are the Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 6).

Regulation 2 — Commencement

Regulation 2 provides that regulations 1 to 3 and Schedule 1 commence on the day after the Regulations are registered; and that Schedule 2 commences on 1 July 2006.

Regulation 3 — Amendment of the Superannuation Industry (Supervision) Regulations 1994

Regulation 3 provides that Schedule 1 amends the Superannuation Industry (Supervision) Regulations 1994 (the Principal Regulations), and that Schedule 2 amends the Superannuation Industry (Supervision) Regulations 1994 as amended by the Superannuation Industry (Supervision) Amendment Regulations 2004 (No. 3).

Schedule 1 — Amendments

Superannuation annuities split on marriage breakdown

The following amendments to the Principal Regulations ensure that superannuation annuities split on marriage breakdown are given the same treatment as superannuation pensions split in similar circumstances.

Regulation 1.05 of the Principal Regulations currently defines superannuation annuities but does not make provision for the impact of an annuity being split under family law legislation.  In contrast regulation 1.06 of the Principal Regulations defines superannuation pensions and does make provision for the impact of pensions being split under family law legislation (for example, they allow pensions to be commuted in order to meet obligations arising under a family law split).

Items 2 to 13 make changes to regulation 1.05 of the Principal Regulations to provide that if an annuity is split under family law legislation, equivalent rules apply to those currently in existence for pensions.

The effect of items 2 to 5 is to ensure that lifetime annuities are treated consistently with lifetime pensions.

Items 2 and 3 insert a new subparagraph 1.05(2)(b)(iii), enabling the size of lifetime annuity payments to be varied to allow an amount to be paid under a payment split and reasonable fees in respect of the payment split to be charged. 

Items 4 and 5 insert a new subparagraph 1.05(2)(f)(v), enabling a lifetime annuity to be commuted to give effect to a payment split.

 

Item 6 ensures that allocated annuities are treated consistently with allocated pensions.  It amends paragraph 1.05(4)(f) so that payments made as a result of a payment split of an allocated annuity are included in the payment amounts subject to maximum and minimum limits prescribed under Schedule 1A of the Principal Regulations.  

Item 7 ensures that defined annuities are treated consistently with defined pensions.  It amends paragraph 1.05(6)(b), enabling the size of defined annuity payments to be varied to allow payments to be made under a payment split.

The effect of items 8 to 10 is to ensure that life expectancy annuities are treated consistently with life expectancy pensions.

Item 8 amends paragraph 1.05(9)(e), enabling the payments of a life expectancy annuity to be varied to allow an amount to be paid under a payment split and reasonable fees to be charged in respect of the payment split.

Items 9 and 10 insert subparagraph 1.05(9)(h)(vii), enabling a life expectancy annuity to be commuted to give effect to a payment split.

The effect of items 11 to 13 is to ensure that market linked annuities are treated consistently with market linked pensions.

Item 11 amends paragraph 1.05(10)(b) so that payments made under a payment split of a market linked annuity are included in the total amount of payments determined in accordance with Schedule 6 to the Principal Regulations.

Items 12 and 13 insert subparagraph 1.05(10)(d)(vi), enabling a market linked annuity to be commuted to give effect to a payment split.

Splitting superannuation interests in the growth phase

Items 14 and 17 amend the Principal Regulations to provide greater certainty to trustees regarding their power to split a member spouse’s interest before the first splittable payment becomes payable, that is, an interest in the growth phase. 

Item 14 amends paragraph 6.17(2B)(a) so that where a trustee takes action, and the purpose of doing so is to satisfy a payment split under the family law legislation, then the consequences of the trustee’s action do not breach the payment standards in Part 6 of the Principal Regulations. 

The trustee’s actions could include the creation of a new interest for a non‑member spouse, or the transfer or roll‑over of an amount to another fund or to a retirement savings account for the benefit of the non‑member spouse.

A fund’s governing rules may allow for the creation of a new interest for a non‑member spouse in a fund different to the fund in which the original interest is held.  For example, the non‑member spouse’s entitlement may be held in a different fund from the member spouse’s fund.

 

Item 17 amends paragraph 13.16(2)(f) to allow a member’s benefit to be altered in the following circumstances;

•                to give effect to a payment split; and

•                where a trustee takes action under Division 2.2 of the Family Law (Superannuation) Regulations 2001 and as a consequence of that action, or as a consequence of the operation of the fund’s governing rules, a future payment in respect of the superannuation interest of the member spouse would not be a splittable payment.

This item clarifies that a trustee may alter a member’s benefits to satisfy a superannuation agreement, flag lifting agreement or splitting order.  A flag lifting agreement lifts a payment flag (which prevents the trustee from making any splittable payment to any person in respect of the interest) and contains a mechanism to split the superannuation.  

Operative times provisions

The operative time is defined in section 90MD of the Family Law Act 1975.  In relation to a payment split under a court order, the operative time means the time specified in the order.  In relation to a payment split under a superannuation agreement or flag lifting agreement, the operative time is the beginning of the fourth business day after the day on which a copy of the agreement is served on the trustee.  If the fund is a self managed superannuation fund (SMSF), the operative time is when the agreement is served on the trustee.

As the operative time can be specified in a court order, it may be a date in the past.  A backdated operative time may result in a trustee inadvertently breaching certain provisions of the Act, or may create an obligation for the trustee that arises before the trustee is aware of the obligation.  This will not occur for a payment split under a superannuation agreement as the operative time is specified with reference to when the agreement is served on the trustee.

Items 1, 15 and 16 amend the operative times provisions of the Principal Regulations to ensure that a trustee is able to satisfy those provisions when the operative time is backdated. 

Item 1 amends subregulation 1.04AAA(2) so that the non‑member spouse is treated as a member of the fund from the later of the operative time for the payment split and the time that the trustee receives the agreement or order.

This amendment prevents a trustee from inadvertently breaching the provisions of the Act relating to SMSFs, lending to fund members and the in‑house asset rules as a consequence of a backdated operative time. 

A SMSF is a fund with fewer than five members, all of whom are trustees of the fund.  Under the Act, a superannuation fund is not permitted to lend money or provide financial assistance to a fund member or member’s relative.  Nor is the fund permitted to lend to, invest in or lease assets to a related party if the amounts or assets exceed 5 per cent of the market value of the fund’s total assets.

If the number of members of an SMSF exceeds four as a result of a non‑member spouse interest being created, the fund ceases to be an SMSF.  Similarly, a fund could be in breach of the restrictions on lending to members or the in‑house asset rules if the non‑member spouse becomes a member of the fund.

Item 1 also amends subregulation 1.04AAA(3) so that the non‑member spouse is treated as a member of the fund from the later of the end of 6 months after the operative time for the payment split and the end of 6 months after the time that the trustee receives the agreement or order.   

This amendment effectively ensures self managed superannuation funds and small Australian Prudential Regulation Authority (APRA) funds have sufficient time to restructure their affairs if a court order specifies a date in the past, so that they are not in breach of the Act.

Where the trustee has created a non‑member spouse interest at or after the operative time for the payment split (subregulation 7A.03B(1) of the Principal Regulations ensures that the trustee cannot create a non‑member spouse interest before the operative time), subregulation 7A.03B(7) and subregulation 7A.03H(5) require the trustee to take certain actions within a specified time after the operative time.  If the operative time is backdated, the trustee may not become aware of these obligations until after the specified time has passed.

Item 15 amends subregulation 7A.03B(7) so that the trustee must provide a written notice to the member spouse and the non‑member spouse either at the time that the payment split notice is given or, if a notice is not required, within 28 days after the later of the operative time and the time when the trustee creates the non‑member interest.

Item 16 amends subregulation 7A.03H(5) so that the trustee must either roll‑over or transfer the non‑member spouse’s withdrawal benefit or provide written advice to the non‑member spouse within six months after the later of the operative time and the time when the trustee creates the non‑member interest.

The effect of items 15 and 16 is to ensure that the trustee is able to satisfy these obligations within the specified time.

Schedule 2 — Amendment

Section 121A of the Act makes it an offence for a person to be, or act as, a trustee of a superannuation entity that is a superannuation fund with fewer than five members that is not a self managed superannuation fund unless the person is an approved trustee.  The Superannuation Safety Amendment Act 2004 replaces the licensing of APRA‑regulated superannuation entities with the new registrable superannuation entity (RSE) licensing regime, and repeals section 121A of the Act at the end of the licensing transition period (30 June 2006).  At that time, the arrangements for trustee approval will be replaced by the new RSE licensing regime.

Subregulation 1.04AAA(3) of the Principal Regulations as amended by the Superannuation Industry (Supervision) Amendment Regulations 2004 (No. 3) provides an interpretation of the definition of 'member' for the purposes of subsection 17A(5) and section 121A of the Act.  This definition will continue to be relevant for subsection 17A(5) of the Act as it relates to SMSFs.  SMSFs are not affected by either of the trustee approval or trustee licensing regimes.  However, the reference to section 121A of the Act will become redundant at the end of the licensing transition period, as section 121A will be repealed by the SSAA 2004.

Item 1 of Schedule 2 amends subregulation 1.04AAA(3) from 1 July 2006 to account for the repeal of section 121A of the Act from 30 June 2006.