Australian master superannuation guide 2019/20 [23rd edition.] 9781925894288, 1925894282

Table of contents :
Product Information
List of Abbreviations
HIGHLIGHTS OF 2018/19 CHANGES
1 SUPERANNUATION IN AUSTRALIA
2 QUALIFYING FOR TAX CONCESSIONS
Superannuation Taxation
Superannuation Funds
Approved Deposit Funds
Pooled Superannuation Trusts
3 SIS PRUDENTIAL SUPERVISION OF SUPERANNUATION FUNDS
Prudential Requirements
Governing Rules and Trustee Rules
Fund Operation
Pension Standards
Investment Rules
RSE Licensing and Registration
Public Offer Entities and ERFs
Superannuation Service Providers
ADF Prudential Requirements
PST Prudential Requirements
Penalties
Powers of the Regulators
Superannuation Levies
4 FINANCIAL SERVICES REGULATION
Superannuation and FSR Regime
Financial Services Regulation
Financial Product Disclosure
Market Conduct and Prohibited Conduct
Licensing
Financial Services Disclosure
Conduct Rules
Design and Distribution Obligations • Product Intervention
ASIC Regulatory Documents and Guidelines
ASIC Levy
5 SELF MANAGED SUPERANNUATION FUNDS
Self Managed Superannuation
Regulation of SMSFs
Qualifying as an SMSF
Establishing an SMSF
Managing an SMSF
SMSF Administration and Audit
Duties and Obligations — Checklists
6 CONTRIBUTIONS TO SUPERANNUATION FUNDS AND RSAs
Superannuation Contributions — An Overview
Employer Superannuation Contributions
Personal Superannuation Contributions
Division 293 Tax
Transfer balance cap from 1 July 2017
Total Superannuation Balance
Excess Contributions
Treatment of Excess Concessional Contributions
Treatment of Excess Non-Concessional Contributions
Assessments of Excess Contributions Tax
Release Authorities
Commissioner’s Discretion to Disregard or Reallocate Contributions
Refund of Contributions Made By Mistake
Interaction with Tax File Number Rules
Government Co-Contribution
Low Income Superannuation Tax Offset
Spouse Contributions
Contributions Splitting
7 TAXATION OF SUPERANNUATION FUNDS, ADFs AND PSTs
Superannuation Taxation
Taxation of Complying Funds
Taxation of Non-complying Funds
Foreign Superannuation Funds
Government and Semi-Government Funds
Approved Deposit Funds
Pooled Superannuation Trusts
Goods and Services Tax
8 SUPERANNUATION BENEFITS • TERMINATION PAYMENTS
Superannuation Benefits and Termination Payments
Superannuation Benefits
Superannuation Member Benefits
Superannuation Death Benefits
Non-complying Superannuation Fund Payments
Trans-Tasman Retirement Savings Transfers
Payments to Former Temporary Residents
Benefits in Breach of Rules
Roll-overs
Termination Payments from an Employer
9 MYSUPER • SUPERSTREAM
MySuper Products
Authorisation to Offer MySuper Products
Fee Rules for MySuper Products
MySuper — Additional Trustee Obligations
Offences
Dashboard and Other Disclosure Requirements
APRA Prudential Standards
Reporting Standards — RSE
SuperStream — Data and Payment Standards
APRA Letters — MySuper Guidelines
10 RETIREMENT SAVINGS ACCOUNTS
The RSA Scheme
RSAs and RSA Institutions
Prudential Supervision of RSAs
Taxation of RSA Business
Contributions to and Payments from RSAs
11 TAX ADMINISTRATION • PAYG • TFNs
Self-assessment System for Superannuation Entities
Tax Returns for Superannuation Entities
Payment of Tax by Superannuation Entities under PAYG Instalment System
Superannuation and the PAYG Withholding System
Penalties, GIC and SIC
Objections
Australian Business Numbers
Tax File Numbers
12 SUPERANNUATION GUARANTEE SCHEME
Outline of SG Scheme
Constitutional Challenge to the SG Laws
Superannuation Clearing House
Payment and Data Standards for Employer Contributions
Interaction with Workplace Laws
Choice of Fund
Application of SG Scheme
Liability of Employers to SG Charge
Salary Sacrifice Arrangements
Calculation of SG Charge
Assessment and Payment of SG Charge
Proposed amnesty for non-compliant employers
Action against employers who fail to meet their SG obligations
Distribution of Shortfall Component
Record-keeping and Reporting Obligations
Penalties, Prosecution and General Interest Charge
Superannuation Holding Accounts Special Account
13 RESOLUTION OF COMPLAINTS
Resolution of Complaints
Complaints to AFCA
Complaints Procedural Matters
Conciliation of Complaints
Review of Decisions or Conduct
14 SUPERANNUATION AND FAMILY LAW
Introduction to Splitting Superannuation Interests
Adjustment of Property Interests Under the Family Law Act 1975
Applying s 79 (or s 90SM) to Superannuation
Procedures
Financial Agreements (Including Superannuation Agreements)
Taxation Consequences of Payment Splits
15 OTHER TRUSTEE OBLIGATIONS • ACCOUNTING STANDARDS
Superannuation Trustee Obligations
Anti-money Laundering and Counter-Terrorism Financing
Bankruptcy and Superannuation
Accounting and Auditing Standards
16 SUPERANNUATION AND TAX PLANNING
17 LEGISLATION REVIEW • PROPOSED REFORMS
18 INSTANT REFERENCE — RATES, THRESHOLDS AND CHECKLISTS
Income Tax Rates
Superannuation Benefits
Termination of Employment Benefits
Annuities and Foreign Pensions
Departing Australia Superannuation Payments
CGT Concessions
Superannuation Contributions
Contribution Caps — Tax and Charge
Indexation
Pensions and Annuities
Superannuation Guarantee Charge
Superannuation Levy
PAYG Withholding
Approved Forms and Guides
Checklists
SMSF Tax and Annual Return 2019
Addresses and Contact Details
Superannuation Calculators
Case Table
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
X
Y
Z
Decisions of Boards of Review and AAT
[Table 1]
Section Finding List
Rulings, Determinations & Circulars Finding List
Index
A
B
C
D
E
F
G
H
I
K
L
M
N
O
P
Q
R
S
T
U
V
W

Citation preview

Product Information Disclaimer No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

About Wolters Kluwer Wolters Kluwer is a leading provider of accurate, authoritative and timely information services for professionals across the globe. We create value by combining information, deep expertise, and technology to provide our customers with solutions that improve their quality and effectiveness. Professionals turn to us when they need actionable information to better serve their clients. With the integrity and accuracy of over 45 years’ experience in Australia and New Zealand, and over 175 years internationally, Wolters Kluwer is lifting the standard in software, knowledge, tools and education. Wolters Kluwer — When you have to be right. Enquiries are welcome on 1 300 300 224. First published....................................August 1997 13th edition....................................August 2009 2nd edition....................................July 1998

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12th edition....................................August 2008 ISBN 978-1-925894-28-8 © 2019 CCH Australia Limited All rights reserved. No part of this work covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, recording taping, or information retrieval systems) without the written permission of the publisher.

Preface

The regulation of superannuation in Australia and the income tax system with which it interacts are notoriously complex and changeable. The Australian Master Superannuation Guide explains the rules and answers your superannuation questions in the simplest possible way. Examples, tables, charts and checklists are used extensively. The 2019/20 Australian Master Superannuation Guide is the 23rd edition of this annual publication in Wolters Kluwer’s Master Guide series. The Guide is an invaluable handbook and essential reference on superannuation law and practice in Australia. It is designed to help trustees, accountants, auditors and other practitioners who face the perennial changes to superannuation regulation and taxation and need a clear analysis of the law. It serves as a handy first point of reference for specialist advisers and consultants who require a comprehensive and up-to-date resource. Academics and students will also find the Guide a useful text and companion. In 2018/19, as in each of the previous 22 years since the Guide was first published, numerous new superannuation and taxation measures were announced, legislated and then commenced. The 23rd edition of the Australian Master Superannuation Guide is an indispensable resource to help you understand these reforms. It incorporates all the major tax and superannuation changes up to 1 July 2019 and provides discussion on many foreshadowed but not yet implemented changes. Throughout, the Guide rests on the solid foundation of the legislation, supplemented by references to official rulings and court and tribunal decisions. Cross-references at the end of most numbered paragraphs provide links to additional information in other Wolters Kluwer loose-leaf and online services. For users who need to keep up to date with changes throughout the year, the online updating version of the Guide is the logical choice. That version is fully updated at least four times a year, with changes to the law and new developments incorporated into the relevant chapters. The online version of the Guide, in addition to having a superior searching capability via Wolters Kluwer’s CCH IntelliConnect™ platform, provides useful links to the legislation, cases and approved forms discussed in the commentary. Wolters Kluwer August 2019

Wolters Kluwer Acknowledgments Wolters Kluwer wishes to thank the following who contributed to and supported this publication: Regional Commercial Director Lauren Ma Head of Content APAC — Research and Learning Diana Winfield Books Coordinator Nathan Grice

About the Authors James Leow LLB (Hons) MTax (NSW) also writes for the Australian Master Tax Guide and the Australian Master Financial Planning Guide. He was previously the principal contributor to, and editor of, the full range of Wolters Kluwer superannuation products, including the Australian Superannuation Legislation book, Australian Superannuation Law & Practice, and the Australian Practical Guide to SMSFs. Shirley Murphy BA (Hons) LLB (Hons) has for many years lectured undergraduate and postgraduate tertiary students in the areas of taxation and superannuation. She also works as a superannuation consultant and has contributed to a wide range of Wolters Kluwer publications including the Australian Master Tax Guide, Australian Master Financial Planning Guide and Australian Superannuation Law & Practice. Author Acknowledgments

The authors would like to thank the following for their contribution to this edition of the Guide: Jacqueline Campbell, Partner, Accredited Family Law Specialist, Forte Family Lawyers; Allan Coe; and Kevin Johnson, Director, Kevdi Pty Ltd.

List of Abbreviations The following abbreviations are used extensively in this publication. AAT

Administrative Appeals Tribunal

ABN

Australian Business Number

ADF

Approved deposit fund

AFCA

Australian Financial Complaints Authority

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investments Commission

ATC

Australian Tax Cases (CCH), from 1969

ATO

Australian Taxation Office

AWOTE

Average weekly ordinary time earnings

CA

Corporations Act 2001

CGT

Capital gains tax

CR

Corporations Regulations 2001

EST

(Australian) Eastern Standard Time

FBT

Fringe benefits tax

FC of T

Federal Commissioner of Taxation

FHSA

First Home Saver Account

FITR

Wolters Kluwer Australian Federal Income Tax Reporter service

FLA

Family Law Act 1975

FSCDA

Financial Sector (Collection of Data) Act 2001

FTR

Wolters Kluwer Australian Federal Tax Reporter service

FW Act

Fair Work Act 2009

FWC

Fair Work Commission

GIC

General interest charge

GST

Goods and services tax

ITAA36

Income Tax Assessment Act 1936

ITAA97

Income Tax Assessment Act 1997

ITAR

Income Tax Assessment Regulations 1997

ITTPA

Income Tax (Transitional Provisions) Act 1997

PAYG

Pay As You Go

PST

Pooled superannuation trust

RSA

Retirement savings account

RSA Act

Retirement Savings Accounts Act 1997

RSAR

Retirement Savings Accounts Regulations 1997

RSE

Registrable superannuation entity

Sch

Schedule

SCT

Superannuation Complaints Tribunal

SG

Superannuation guarantee

SGAA

Superannuation Guarantee (Administration) Act 1992

SGAR

Superannuation Guarantee (Administration) Regulations 2018

SIS

Superannuation Industry (“Supervision”)

SISA

Superannuation Industry (Supervision) Act 1993

SISR

Superannuation Industry (Supervision) Regulations 1994

SLP

Wolters Kluwer Australian Superannuation Law & Practice service

SMSF

Self managed superannuation fund

SRC Act

Superannuation (Resolution Of Complaints) Act 1993

TAA

Taxation Administration Act 1953

TAR

Taxation Administration Regulations 1976

TFN

Tax file number

TR

Taxation Ruling

HIGHLIGHTS OF 2018/19 CHANGES ¶1 Highlights of 2018/19 changes This edition has been updated to reflect developments that occurred (or remain proposed) up to 30 June 2019. The notable developments include the following. CHAPTER 1 — SUPERANNUATION IN AUSTRALIA ▪ Superannuation fund assets and other statistics updated ¶1-100 Proposed measures ▪ Proposed legislation for objective of superannuation ¶1-000 CHAPTER 2 — QUALIFYING FOR TAX CONCESSIONS ▪ Table of income tax laws dealing with superannuation taxation and concessions updated ¶2-020 CHAPTER 3 — SIS PRUDENTIAL SUPERVISION OF SUPERANNUATION FUNDS ▪ Superannuation trustees must comply with covenants relating to annual outcomes assessments, promoting financial interests of beneficiaries and MySuper products, if applicable ¶3-100 ▪ SIS covenants are civil penalty provisions in the SISA ¶3-100 ▪ Superannuation funds can accept downsizer contributions from 1 July 2018 ¶3-220 ▪ Superannuation trustees are prohibited from providing death and disability insurance cover to choice and MySuper members whose accounts are inactive for a continuous period of 16 months, unless directed otherwise by the member ¶3-240 ▪ From 1 July 2019, a cap is imposed on administration fees, investment fees and prescribed costs charged to members by superannuation entities, and exit fees are prohibited ¶3-250 ▪ Superannuation providers are required to transfer choice or MySuper member accounts with balances below $6,000 which are inactive for a continuous period of 16 months to the Commissioner; the ATO is empowered to proactively consolidate ATO-held superannuation money into an active account for a member ¶3-390 ▪ SISA s 68, which prohibits superannuation trustees from offering inducements, is a civil penalty provision from 6 April 2019; an objective test applies to determine the intended effect of the trustee’s actions ¶3-475 ▪ APRA approval is required for a person to hold a controlling stake in a body corporate RSE licensee ¶3488 ▪ RSE licensees must hold an annual members meeting to discuss a superannuation fund’s performance and operations; the chair of the board of directors of the RSE licensee, individual trustees, executive officers and the fund’s actuary and auditor are required to attend the meeting ¶3-495 ▪ APRA may give certain directions to an RSE licensee in prescribed circumstances, including where APRA reasonably believes the RSE licensee either has or is likely to contravene its prudential obligations, or there are financial risks to members’ interests or the financial system more generally ¶3-855 ▪ From 1 July 2019, the provisions for protection of whistleblowers in the corporate and financial sector are located in Pt 9.4AAA of the Corporations Act 2001; the SISA whistleblower provisions have been repealed ¶3-880 ▪ Supervisory levies for 2019/20 updated ¶3-900 Proposed measures ▪ Trustees can only provide insurance to a choice or MySuper product member if directed by the member, where the member is under 25 years old and begins to hold a product on or after 1 October 2019, or

holds a product with a balance less than $6,000 ¶3-240 ▪ Bills in parliament (now lapsed) have proposed a wide range of regulatory and prudential measures ¶17520 ▪ Treasury has released various consultation papers on superannuation reforms, including binding death benefit nominations and kinship structures, universal terms for insurance within MySuper ¶17-600 CHAPTER 4 — FINANCIAL SERVICES REGULATION ▪ Exemption for superannuation platforms from the shorter PDS regime has been extended ¶4-130 ▪ Notification requirements to members with inactive accounts about the SISA insurance opt-out rules have been prescribed; ASIC has released guidelines on member communications in relation to insurance cancellation for inactive members or before inactive low balance accounts are transferred to the ATO ¶4175 ▪ The commencement date of the product dashboard publication and portfolio holdings disclosure rules has been deferred ¶4-250 ▪ The requirement for generic superannuation and retirement calculator to include the present value of future receipts and payments using an assumed rate of inflation has been deferred ¶4-658 ▪ Design and distribution obligations have been imposed in relation to financial products, applicable from 6 April 2021 ¶4-700, ¶4-710 ▪ ASIC has been given product intervention powers that it can use proactively to reduce the risk of significant detriment to retail clients resulting from financial products ¶4-700, ¶4-720 ▪ ASIC legislative instruments and regulatory guides affecting superannuation products and issuers updated ¶4-800, ¶4-850 ▪ ASIC Reports and Information Sheets updated ¶4-860 CHAPTER 5 — SELF MANAGED SUPERANNUATION FUNDS Proposed measures ▪ Legislation to increase the maximum membership in SMSFs from four to six members was omitted from the Bill before the legislation was passed by parliament ¶5-200 CHAPTER 6 — CONTRIBUTIONS TO SUPERANNUATION FUNDS AND RSAs ▪ From 1 July 2019, certain individuals aged 65 to 74 who wish to make superannuation contributions may benefit from a one-year exemption from the work test ¶6-320 ▪ The First Home Super Saver Scheme allows money saved in superannuation to be used for a first home purchase from 1 July 2018 ¶6-385 ▪ From 1 July 2018, individuals aged at least 65 may make up to $300,000 of non-concessional contributions from the proceeds of selling their home ¶6-390 ▪ From 1 July 2017, a reversionary income stream can be paid to a reversionary beneficiary whether or not a condition of release has been satisfied ¶6-425 ▪ The concessional contributions cap is $25,000 for all individuals from 1 July 2019 ¶6-505 ▪ Individuals with a total superannuation balance below $500,000 may make additional concessional contributions where, from 1 July 2018, they have unused cap amounts from the previous five years ¶6505 ▪ The non-concessional contributions cap is $100,000 from 1 July 2019 ¶6-540 ▪ The processes for a taxpayer to request and for the Commissioner to issue a release authority have been consolidated ¶6-640 ▪ Tax is imposed on no-TFN contributions income at the rate of 32% for 2019/20 ¶6-685 ▪ The low income threshold and higher income thresholds have been increased for 2019/20 for cocontribution purposes ¶6-700

Proposed measures ▪ The government proposes that individuals aged 65 and 66 could make voluntary superannuation contributions from 1 July 2020 without needing to meet the work test ¶6-320 ▪ A Bill proposes the inclusion of the outstanding balance of a limited recourse borrowing arrangement in a member’s total superannuation balance from 1 July 2018 ¶6-490 ▪ The government proposes that individuals aged 65 to 74 with unused concessional cap space could contribute under the concessional cap carry forward rules during a year they are exempt from the work test ¶6-507 ▪ The government proposes that that individuals aged 65 to 74 whose non-concessional contributions, excluding contributions made under the work test exemption, exceed $100,000 could access the bring forward arrangements ¶6-545 ▪ The government proposes that the age limit for benefiting from spouse contributions will increase from 69 to 74 from 1 July 2020 ¶6-820 CHAPTER 7 — TAXATION OF SUPERANNUATION FUNDS, ADFs AND PSTs ▪ CGT roll-over relief in Div 311 applies to transfers of members' accrued default balances to a MySuper product within the same fund structure or in another superannuation fund ¶7-140 ▪ The tax relief for merging superannuation funds in Div 310 has been extended until 1 July 2020 ¶7-140 ▪ The withholding tax exemption for superannuation funds for foreign residents has been restricted, subject to transitional rules ¶7-400 Proposed measures ▪ Superannuation funds with interests in both the accumulation and retirement phases will be allowed to choose their preferred method of calculating ECPI; the actuarial certificate requirement when calculating ECPI using the proportionate method will be removed for funds where their members are in the retirement phase for the whole income year ¶7-153 ▪ The non-arm's length rules will be amended to ensure that complying superannuation entities cannot circumvent the rules by entering into schemes involving non-arm's length expenditure ¶7-170 CHAPTER 8 — SUPERANNUATION BENEFITS • TERMINATION PAYMENTS ▪ The low rate cap amount for the taxation of a superannuation member benefit is $210,000 for 2019/20 ¶8-210 ▪ The untaxed plan cap amount for the taxation of the element untaxed in the fund is $1.515m for 2019/20 ¶8-240 ▪ The ETP cap amount for the taxation of employment termination payments is $210,000 for 2019/20 ¶8820 CHAPTER 9 — MYSUPER • SUPERSTREAM ▪ Authority to offer a MySuper product may be refused or cancelled if APRA considers there are one or more reasons why an RSE licensee may fail to comply with its obligations ¶9-100 ▪ The enhanced trustee obligations for RSEs covering annual outcomes assessments and promoting the financial interests of beneficiaries have been prescribed as SIS covenants which apply to all regulated superannuation funds that offer choice products or MySuper products ¶9-300 ▪ The trustee remuneration reporting requirements have been deferred ¶9-650 ▪ APRA prudential standards and prudential practice guides updated; draft SPS 515 ¶9-720 ▪ Events-based reporting using MAAS and MATs ¶9-795 ▪ APRA letters to RSE licensees in 2019 ¶9-810 CHAPTER 10 — RETIREMENT SAVINGS ACCOUNTS ▪ RSA providers can accept downsizer contributions from 1 July 2018 ¶10-110

▪ An RSA provider must be a member of the AFCA scheme (within the meaning of the Corporations Act 2001) and must have an internal dispute resolution procedure that complies with the standards and requirements prescribed by that Act ¶10-220 ▪ AFCA has replaced the Superannuation Complaints Tribunal as the external dispute resolution body dealing with RSA complaints ¶10-220 Proposed measures ▪ From 1 July 2020, individuals aged 65 and 66 will be able to make voluntary superannuation contributions (both concessional and non-concessional) without being required to meet the work test ¶10110 CHAPTER 11 — TAX ADMINISTRATION • PAYG • TFNs ▪ From 1 July 2019, an income tax deduction is denied for certain payments where the notification and/or withholding requirements have not been met. ¶11-350, ¶11-360 ▪ Single touch payroll (STP) applies to all employers from 1 July 2019 ¶11-368 CHAPTER 12 — SUPERANNUATION GUARANTEE SCHEME ▪ The Productivity Commission recommends one default fund for new members to be chosen from a shortlist of up to 10 funds selected by an independent panel ¶12-050 ▪ Defences to director penalty provisions have been tightened ¶12-395 ▪ Single Touch Payroll reporting of payroll and superannuation information is extended to all employers from 1 July 2019 ¶12-525 ▪ From 1 July 2018, the Commissioner can issue directions to employers to pay unpaid SG liabilities with penalties for employers who fail to comply ¶12-550 ▪ From 1 July 2018, the Commissioner can issue an education direction to an employer to undertake an approved course relating to their SG obligations with an employer being penalised if they fail to comply ¶12-550 Proposed measures ▪ A Bill proposes that from 1 July 2018 certain high income individuals with multiple employers would be able to nominate that income from certain employers would not be subject to SG ¶12-070, ¶12-220 ▪ A Bill proposes that from 1 July 2020 an employer could not use salary sacrifice contributions to count as being in compliance with their SG obligations ¶12-180 ▪ A Bill proposes to tighten the law to combat illegal phoenix activities ¶12-395 ▪ The government proposed a 12-month SG amnesty for employers from 24 May 2018 ¶12-415 CHAPTER 13 — RESOLUTION OF COMPLAINTS ▪ AFCA commenced operations from 1 November 2018 and started receiving and resolving complaints from that date ¶13-005 ▪ ASIC cancelled the licences of two financial service providers that failed to become members of AFCA ¶13-005 ▪ AFCA is not able to provide compensation for non-financial loss in a superannuation complaint (AFCA superannuation determination — AFCASD 610019) ¶13-010 ▪ AFCA has published superannuation determinations and statistics on the number and types of complaints it receives ¶13-100, ¶13-610 CHAPTER 14 — SUPERANNUATION AND FAMILY LAW ▪ The Family Law Act 1975 (Cth) Pt VIIIB which deals with superannuation interests was renumbered from 23 November 2018. The chapter has been updated to include the renumbered section references ¶14-005 ▪ The Full Court of the Family Court set aside a superannuation splitting order as there had not been

procedural fairness given to the trustee of the superannuation fund. The wording of the superannuation splitting order did not comply with the Family Law Act 1975 s 90XT Pandelis & Pandelis [2018] FamCAFC 66 ¶14-045, ¶14-120 ▪ The Full Court of the Family Court upheld the finding of a de facto relationship. The appellant was married and maintained that he has having an affair and was not in a de facto relationship Nord & Van [2018] FamCAFC 75 ¶14-080 ▪ The Federal Circuit Court found that the failure of the wife’s solicitor to serve the trustee with a sealed copy of the court order which included a superannuation split amounted to the splitting order being impracticable. The order was varied Dalmans & Farber [2018] FCCA 2636 ¶14-095 ▪ A superannuation splitting order was made to enforce the payment of a cash sum due to the wife under a financial agreement Cummings & Warner (No 2) [2018] FCCA 2838 ¶14-130 ▪ The Full Court of the Family Court held that the trial judge could not make a superannuation splitting order without expert evidence on the nature, form and characteristics of a defined benefit fund interest Bulow & Bulow [2019] FamCAFC 3 ¶14-240 ▪ The Full Court of the Family Court held that the wife's contributions as a parent and homemaker were possibly indirect contributions to the husband's salary and therefore to the increase in his superannuation as a result of his eligibility for a hurt-on-duty pension Perrin & Perrin (No 2) [2018] FamCAFC 122 ¶14260 ▪ Updated rates of interest applied to the base amount of a superannuation split for the 2018/19 financial year ¶14-500 ▪ The uncertainty as to the meaning of the phrase “whenever a splittable payment becomes payable” was discussed but not determined by the Federal Circuit Court Dalmans & Farber [2018] FCCA 2636 ¶14-520 CHAPTER 16 — SUPERANNUATION AND TAX PLANNING ▪ Superannuation and financial planning — practitioner articles in 2018 and 2019 ¶16-700 CHAPTER 17 — LEGISLATION REVIEW • PROPOSED REFORMS ▪ Summary of Acts and legislative instruments in 2018/19 ¶17-330, ¶17-430 ▪ Lapsed Bills in parliament and draft legislation as at 30 June 2019 ¶17-520, ¶17-540 ▪ Proposed superannuation tax and regulation reforms ¶17-600 CHAPTER 18 — INSTANT REFERENCE — RATES, THRESHOLDS AND CHECKLISTS ▪ Superannuation rates and thresholds for 2019/20 ¶18-000 – ¶18-150 ▪ Approved forms — superannuation and taxation ¶18-730 – ¶18-745 ▪ 2019 SMSF annual return — what’s new ¶18-860 ▪ AFCA information page ¶18-933 ▪ ATO and ASIC calculators and online tools ¶18-960 – ¶18-970

1 SUPERANNUATION IN AUSTRALIA Objective of the superannuation system ¶1-000 Historical background

¶1-050

Superannuation industry profile

¶1-100

Regulation of superannuation industry

¶1-200

¶1-000 Objective of the superannuation system Superannuation generally comprises compulsory employer contributions under the superannuation guarantee (SG) scheme and voluntary member or salary sacrifice contributions. It is one pillar of the Australian retirement income system, together with the age pension and other voluntary savings. Over 80% of working age Australians have superannuation savings and superannuation makes up a significant proportion of all assets held by Australian households. Superannuation is a key component of the financial services industry and of the economy more broadly, with superannuation assets having increased from $245b in 1996 to $2.8 trillion in March 2019. Context for enshrining a superannuation objective in legislation The government considers that, as the superannuation system matures and superannuation assets increase, superannuation changes should be carried out in the framework of an objective that is enshrined in legislation. This is intended to promote consistency and confidence in the superannuation system. The Superannuation (Objective) Bill 2016, which was introduced into parliament on 9 November 2016, proposes the enactment of this government policy in a stand-alone Act. The introduction of the Bill followed a recommendation in the Financial System Inquiry (FSI) Final Report issued on 7 December 2014 for a clear statement of the objectives of the superannuation system to align policy settings, industry initiatives and community expectations. The Senate Economics Legislation Committee recommended in a report tabled on 14 February 2017 that the Bill be passed and that compliance of future superannuation reforms with the legislated objective be periodically assessed and reported on. The Committee considered that the objective as stated in the Bill would “enhance the stability of the superannuation system by creating a clear framework for assessing superannuation policy”. The Superannuation (Objective) Bill 2016 lapsed when parliament was prorogued for the May 2019 Federal election and will need to be reintroduced before it can become law. Objective “to provide income in retirement to substitute or supplement the age pension” The Superannuation (Objective) Bill 2016 proposes that the primary objective of the superannuation system is “to provide income in retirement to substitute or supplement the age pension”. This objective clarifies that the role of superannuation is to assist individuals to support themselves by providing income to meet their expenditure needs in retirement. Subsidiary objectives would provide a framework for assessing whether superannuation legislation is compatible with the primary objective. The following subsidiary objectives, as set out in the Exposure Draft — Superannuation (Objective) Regulation 2016, are proposed: • to facilitate consumption smoothing over the course of an individual’s life • to manage risks in retirement

• to be invested in the best interests of superannuation fund members • to alleviate fiscal pressures on the Australian government from the retirement income system, and • to be simple and efficient, and provide safeguards. The Objective Bill requires every Bill or regulation relating to superannuation to be accompanied by a statement of compatibility with the objective of the superannuation system. The statement must include an assessment of whether the Bill or regulation is compatible with the primary and the subsidiary objectives of the superannuation system.

¶1-050 Historical background In Australia, retirement incomes are funded privately through superannuation savings (both voluntary and compulsory) or publicly through the age pension. The SG scheme underpins the national retirement incomes framework by extending superannuation coverage generally across the workforce. The policy of superannuation for all Australians is a significant part of our tax and superannuation systems. Among the concessions and benefits provided by the Commonwealth through the tax system, superannuation is the second largest expense. Tax concessions have, for many years, encouraged employers to make superannuation contributions on behalf of their employees. Individuals have also been encouraged to provide for their own retirement, although tax concessions have particularly favoured high-income earners. Historical survey Before 1983, superannuation tax concessions were extremely generous — generally, contributions were deductible and earnings on the contributions were exempt from tax as long as the fund satisfied certain conditions. Lump sum benefits paid on retirement were virtually tax-free because only 5% was included in assessable income. The 1983 amendments resulted in benefits still being taxed at a concessional rate but less generously than before. The nature of the concession changed from virtually a tax exemption to a tax deferral, in that tax on the savings was postponed until they were withdrawn from the fund. From 1 July 1986, responsibility for regulating superannuation funds was transferred from the Commissioner of Taxation to the then Insurance and Superannuation Commissioner (ISC) through the introduction of the Occupational Superannuation Standards Act 1987 (see ¶1-200). In 1988, changes designed to tax retirement savings on an accruals basis and to reduce deferral advantages were introduced. Tax was imposed on fund income and on deductible contributions, generally at a flat rate of 15%. Until the 1990s, occupational superannuation generally only existed for white collar employees. The SG scheme which was introduced in 1992 made superannuation available to employees regardless of the type of their employment. Choice of fund rules, which commenced on 1 July 2005, gave most employees the right to choose the fund to receive the SG contributions made by their employer on their behalf. The matching of voluntary contributions made by low-income earners with a government co-contribution was introduced in 2003 (¶6-700). Surcharges on deductible contributions made by or on behalf of high-income earners and on “golden handshakes” by employers were imposed from 1997. These imposts were tempered by initiatives to allow tax rebates for contributions on behalf of non-working spouses, a savings rebate (abolished, however, after 12 months), and a tax exemption for the proceeds from the sale of a small business where the proceeds are used for retirement. The surcharges were abolished from 1 July 2005. From 1 January 2006, members may split with their spouse contributions made on their behalf in the previous year. Contributions splitting allows the couple to build two superannuation accounts, and this may have favourable tax consequences. Simplified superannuation from 1 July 2007

The taxation of superannuation was significantly reformed in a package of 11 Bills that were introduced into parliament in December 2006 and February 2007 and that generally commenced operation on 1 July 2007. These Bills changed and rewrote the law on contributions to superannuation entities, taxation of superannuation entities and benefits paid from superannuation entities. All the superannuation provisions in the Income Tax Assessment Act 1936 (ITAA36) were repealed and the rewritten law incorporated into the Income Tax Assessment Act 1997 (ITAA97). The simplified superannuation laws aim to overcome the complexity of the pre-1 July 2007 taxation of eligible termination payments, which included both lump sum superannuation benefits and employer termination payments. From 1 July 2007, there are two distinct taxing regimes: • one for the taxation of superannuation benefits, whether paid as a lump sum or an income stream, and whether paid to a member or to someone else because of the member’s death, and • one for the taxation of employment termination payments. Superannuation benefits received by a member aged at least 60 are generally tax-free, whether paid as a lump sum or as an income stream. Superannuation benefits paid to a member aged under 60 also receive concessional tax treatment. The reasonable benefit limits (RBL) system, which previously limited the amount of superannuation and similar benefits that a person could receive on a concessionally taxed basis, was abolished from 1 July 2007. The RBL system was replaced by ceilings on the amount of concessional (generally deducted) contributions and non-concessional (undeducted) contributions that can be made for a member in a year. A member may be liable to penalties if contributions made for them exceed the contributions cap for the year. The current taxation of superannuation entities is similar to their pre-1 July 2007 tax treatment, although there is a new category of taxable income — no-TFN contributions income — which may be taxed at the top tax rate. The introduction of no-TFN contributions income is tied to other measures that encourage members to quote their TFN to their fund and penalises those who fail to do so.

¶1-100 Superannuation industry profile Quarterly and annual statistics published by the Australian Prudential Regulation Authority (APRA) give information that can be used to assess the overall performance of the superannuation system. Among other things, APRA publications provide data on assets held by various superannuation entities, earnings performance, fees and taxes, membership profile, the offering of investment options and the development of MySuper products. Current APRA publications relating to the performance of the superannuation system are: 1. Quarterly MySuper Statistics which contains data on MySuper products — information on the product profile, product dashboard measures, asset allocation targets and ranges, investment performance, fees disclosed for MySuper products, or where relevant, for the lifecycle stages underlying MySuper products with a lifecycle investment strategy, and MySuper URLs 2. Annual MySuper Statistics which provides detailed data for all MySuper products, and allows users to analyse APRA-regulated MySuper products across a range of measures 3. Annual Fund-level Superannuation Statistics which contains detailed profile and structure, financial performance and financial position, conditions of release, fees and membership information for APRA-regulated superannuation funds with more than four members and eligible roll-over funds, as well as profile and structure information for the trustees of these superannuation funds 4. Quarterly Superannuation Performance Statistics which provides industry aggregate summaries of financial performance, financial position, key ratios and asset allocation, and 5. Annual Superannuation Bulletin which contains statistics that provide policymakers, regulators, trustees and the community with information to assess the overall performance of the superannuation

system. Superannuation industry overview for the year to 31 March 2019 The statistics below are taken from APRA’s Quarterly Superannuation Performance Statistics, March 2019, released on 28 May 2019. Since September 2013, the statistics in this publication have generally been for superannuation entities with more than four members. In the March 2019 quarter, this captures 209 superannuation entities, comprising 190 APRA-regulated superannuation entities and 19 exempt public sector schemes. Superannuation assets totalled $2.8 trillion at the end of the March 2019 quarter. Over the 12 months from March 2018, there was a 6.7% increase in total superannuation assets. Assets in MySuper products totalled $713.3b at the end of the March 2019 quarter. Over the 12 months from March 2018, there was a 10.8% increase in total assets in MySuper products. Entities with more than four members The statistics below are based on superannuation entities with more than four members. Contributions, benefit transfers and benefit payments There were $26.7b of contributions in the March 2019 quarter, up 3.5% from the March 2018 quarter ($25.8b). Total contributions for the year to 31 March 2019 were $113.2b. Outward benefit transfers exceeded inward benefit transfers by $0.4b in the March 2019 quarter. There were $19.0b in total benefit payments in the March 2019 quarter, an increase of 8.6% from the March 2018 quarter ($17.5b). Total benefit payments for the year ending March 2019 were $75.1b. Lump sum benefit payments ($9.5b) were 49.9% and pension benefit payments ($9.5b) were 50.1% of total benefit payments in the March 2019 quarter. For the year ending 31 March 2019, lump sum benefit payments ($36.6b) were 48.7% and pension benefit payments ($38.5b) were 51.3% of total benefit payments. Net contribution flows (contributions plus net benefit transfers less benefit payments) totalled $7.3b in the March 2019 quarter, a decrease of 6.5% from the March 2018 quarter ($7.8b). Net contribution flows for the year ending March 2019 were $35.4b. Financial performance and asset allocation In terms of financial performance, the annual industry-wide rate of return (ROR) for entities with more than four members for the year ending 31 March 2019 was 6.9%. The five-year average annualised ROR to March 2019 was 6.9%. Over the March 2019 quarter, total assets increased by 5.7% (or $106.6b) to $2.0 trillion. At the end of the March 2019 quarter, 50.5% of the $1.8 trillion investments were in equities, with 22.1% in Australian listed equities, 24.4% in international listed equities and 4.0% in unlisted equities. Fixed income and cash investments accounted for 31.4% of investments, with 21.2% in fixed income and 10.1% in cash. Property and infrastructure accounted for 14.2% of investments and 3.9% were invested in other assets, including hedge funds and commodities. Superannuation industry quarterly estimates The table below shows the estimated number of superannuation entities and their assets as at 31 March 2019. Fund type

Assets ($ billion)

Number of entities

APRA-regulated Entities with more than four members 1,834.0

190

Single member ADFs

0.0

10

Small APRA funds

2.2

1,777

Pooled superannuation trusts

141.3

28

746.6

598,429

Exempt schemes

144.0

19

Balance of life office statutory funds

55.7

‐

2,782.6

600,453

ATO-regulated Self-managed superannuation funds Other

Total Retirement savings accounts

There were 117 RSE licensees and 11 retirement savings accounts with $1.7b in assets at the end of March 2019. MySuper products At 31 March 2019, assets in MySuper products totalled $713.3b, and the proportion of assets in a MySuper product was 39%. At 31 March 2019, 84 entities offered a MySuper product, and the proportion of entities offering a MySuper product was 47%. The total number of MySuper products was 98, of which 84 were generic MySuper products, 13 were large employer products and one a material goodwill product.

¶1-200 Regulation of superannuation industry Over recent years there has been considerable upheaval in the regulation of the superannuation industry. The Superannuation Industry (Supervision) Act 1993 replaced the Occupational Superannuation Standards Act 1987 from 1 July 1994, providing a comprehensive regime, administered by the ISC, for the regulation of superannuation funds and related entities. Since 1 July 1997, the Retirement Savings Accounts Act 1997 has provided a parallel regulatory regime for RSA providers. The regulatory regime was completely overhauled again in 1998, with the ISC being replaced by new regulatory authorities — the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) (from 1 July 1998) and the Commissioner of Taxation (from 8 October 1999). APRA is responsible for the prudential regulation of banks and other deposit-taking institutions, life and general insurance companies, superannuation funds and RSA providers. ASIC is responsible for consumer protection and market integrity across the financial system, including the areas of insurance and superannuation. From 1 October 2001, ASIC is also responsible for the financial services regulatory regime in Ch 7 of the Corporations Act 2001 (¶4-000). This regime has a direct impact on superannuation products and entities, imposing standards for product disclosure and for the licensing and conduct of financial services providers and financial markets. Superannuation entities must comply with the regulatory requirements imposed by the Financial Sector (Collection of Data) Act 2001 and Corporations Act. ASIC is responsible for the administration of the resolution of complaints scheme. Before 1 November 2018, the Superannuation Complaints Tribunal was the body to which most superannuation complaints could be made about the decisions and conduct of trustees of superannuation entities (other than SMSFs) (¶13-000). From 1 November 2018 the Tribunal’s role in settling complaints about superannuation has been taken over by the new Australian Financial Complaints Authority (AFCA), which is an ombudsman scheme rather than a statutory tribunal. AFCA is the external dispute resolution body for the financial services industry generally, replacing the Financial Ombudsman Service, Credit and Investments Ombudsman and the Superannuation Complaints Tribunal. Since 8 October 1999, the ATO has been primarily responsible for the regulation of SMSFs (¶5-000). These are funds with fewer than five members and where all the members actively participate in the fund’s management. Funds with fewer than five members but which do not come within the definition of

an SMSF remain the responsibility of APRA and ASIC. From 1 November 2011, the Chief Executive Medicare replaced APRA and the Commissioner in the administration of the scheme for the early release of superannuation benefits on compassionate grounds, but the regulator role has since been transferred back to the Commissioner (¶3-280). From 1 July 2004, trustees of APRA-regulated superannuation entities (registrable superannuation entities) must be registered by APRA. Trustees must apply to APRA for a licence that imposes minimum standards of fitness and propriety and requires the maintenance of risk management strategies and plans for funds under the trustee’s control (¶3-480). The ATO replaced Medicare in the administration of the Small Business Superannuation Clearing House from 20 February 2014 (¶12-010). The Fair Work Commission is responsible for the default superannuation fund process (¶12-051).

2 QUALIFYING FOR TAX CONCESSIONS SUPERANNUATION TAXATION Taxation of superannuation entities

¶2-000

Income Tax Assessment Act 1997

¶2-020

Tax Act provisions dealing with superannuation

¶2-050

SUPERANNUATION FUNDS Qualifying conditions for complying superannuation funds ¶2-100 What is a “superannuation fund”?

¶2-120

Resident regulated superannuation fund

¶2-130

Complying superannuation fund under the SIS Act

¶2-140

Notification of complying or non-complying status

¶2-150

Public sector superannuation schemes and EPSSSs

¶2-170

APPROVED DEPOSIT FUNDS Qualifying conditions for complying ADFs

¶2-300

What is an “approved deposit fund”?

¶2-320

Resident ADFs

¶2-330

Complying ADFs under the SIS Act

¶2-340

Notification of ADF status

¶2-350

POOLED SUPERANNUATION TRUSTS Qualifying conditions for PSTs

¶2-400

What is a “pooled superannuation trust”?

¶2-420

PSTs under the SIS Act

¶2-430

Notification of PST status

¶2-440

Superannuation Taxation ¶2-000 Taxation of superannuation entities Income tax legislation is administered by the Commissioner of Taxation. A table showing the principal ITAA97 and other tax provisions dealing with superannuation taxation, concessions and operations is set out in ¶2-020. Scheme for the taxation of superannuation entities Division 295 in Pt 3-3 of Ch 3 in ITAA97 provides for the taxation of superannuation funds, approved deposit funds (ADFs) and pooled superannuation trusts (PSTs) (superannuation entities) from 1 July 2007. In addition, many provisions in other tax laws (eg ITAA36, ITAA97, ITTPA and TAA) which generally apply for taxation purposes to taxpayers may also applicable in the assessments of superannuation entities.

Division 295 provides concessional tax treatment to entities which comply with the conditions specified in the SIS Act and SIS Regulations for complying superannuation funds, complying ADFs and PSTs (¶2100, ¶2-300, ¶2-400), regardless of whether they are established by an Australian law, by a public authority constituted by or under such a law, or in some other way. Superannuation funds and ADFs which do not comply with the SIS conditions are also subject to Div 295, but are taxed on a nonconcessional basis as non-complying funds, while PSTs which do not comply are taxed as trusts under the general trust provisions in ITAA36 Pt III. The concessional taxation of superannuation can be grouped under the three main areas — the concessional taxation of superannuation entities, tax treatment of superannuation contributions and concessional taxation of superannuation benefits. The Occupational Superannuation Standards Act 1987 (OSSA) and Regulations (OSSR) were previously the governing legislation for superannuation funds, ADFs and PSTs which sought to qualify for concessional tax treatment. The OSSA has been renamed three times since July 1994 — as the Superannuation Entities (Taxation) Act 1987, the Superannuation (Excluded Funds) Taxation Act 1987 and the Superannuation (Self Managed Superannuation Funds) Taxation Act 1987. The Act, as currently named, provides for the assessment and collection of the superannuation supervisory levy from SMSFs (¶3-920). Concessional taxation of superannuation entities Many tax concessions are available to complying superannuation funds, complying ADFs and PSTs. The main concession is that the income of complying entities is taxed at 15%, except for non-arm’s length income which is taxed at 45% (see ¶18-000). Superannuation funds which have commenced to pay certain types of pensions to their members (ie pension funds or funds in the pension phase, as opposed to funds in the accumulation phase) enjoy additional tax concessions by way of a tax exemption on the ordinary and statutory income derived from fund assets supporting income streams in the retirement phase and a CGT exemption when the assets supporting the income streams are disposed of (¶7-153). These income streams are generally pensions and annuities which comply and are paid in accordance with the standards prescribed by the SIS Regulations or RSA Regulations. Other tax concessions for complying entities and PSTs include modified CGT provisions and eligibility for the 33⅓% CGT discount, exemption from the trust loss and debt deduction rules, and entitlement to receive venture capital franking tax offsets for investments in pooled development funds and to claim a refund of excess franking credits under the imputation system. Commentary on the taxation of superannuation entities is found in Chapter 7 of the Guide. Tax treatment of superannuation contributions Employers and other persons (eg spouses, employees and individuals) who make superannuation contributions are entitled to tax concessions (eg a deduction, tax offset or co-contribution) where certain conditions in ITAA97 are met. Conversely, a tax or charge may be payable where excessive contributions are made in a year. Superannuation contributions are discussed in Chapter 6. Concessional taxation of superannuation benefits Concessional tax treatment applies to superannuation benefit payments (including death benefits), both lump sums and income streams, from superannuation entities. This is discussed in Chapter 8. Prudential regulation Commentary on the prudential regulation regime for superannuation entities under the SIS Act and other regulatory Acts is found in Chapters 3, 4, 5 and 9. The SIS prudential regime applies to the superannuation entities which are “regulated” under the SIS Act (¶2-150, ¶2-300, ¶2-400) regardless of whether they have satisfied the relevant conditions for concessional tax treatment under ITAA97 as complying superannuation funds, complying ADFs or PSTs in a particular year. The SIS legislation is administered jointly by APRA, ASIC and the Commissioner of Taxation (referred to in the SIS Act as “Regulators”) to the extent to which administration of the Act is conferred upon them. The division of SIS Act administration among the Regulators is discussed at ¶3-005.

[FITR ¶268-000ff; SLP ¶2-150]

¶2-020 Income Tax Assessment Act 1997 The ITAA97 commenced on 1 July 1997 and it applies to assessments of the 1997/98 and subsequent income years. Since its commencement, ITAA97 has concurrent operation with ITAA36 for assessments. ITAA97 is the result of the rewrite of the income tax law under the Tax Law Improvement Project (TLIP) to progressively replace ITAA36. The complete replacement of ITAA36 was originally planned to take place in instalments over three years from the 1997/98 year, with the law being rewritten and enacted progressively in that period. The rewrite is incomplete and ITAA36 continues to be relevant for assessments (see “TLIP tax law rewrite update” below). Under the TLIP, each instalment of ITAA97 is accompanied by consequential amendments which terminate the operation of the corresponding ITAA36 provisions and is supported by provisions of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) and regulations (where applicable) to provide for the transition of the former tax laws to the rewritten laws in ITAA97. It had been anticipated that when the final instalment of ITAA97 is eventually completed, ITAA36 will cease to have any ongoing operation except under residual rules. With the TLIP in abeyance, the ITAA36 and ITAA97 operate concurrently and neither is complete in itself. It is therefore necessary to work with both Acts. Reflecting this, the expression “this Act” is defined in each Act to include the other Act, as well as the relevant objection, review and appeal provisions of the Taxation Administration Act 1953 (TAA) (ITAA97 s 995-1(1); ITAA36 s 6(1)). However, definitions in the Dictionary to ITAA97 apply only to ITAA97, not ITAA36 or TAA (s 995-1(2)), and definitions in ITAA36 do not apply to ITAA97 unless expressly adopted. See also “Continuing interaction with ITAA36, operation of judicial precedents, rulings” below. TLIP tax law rewrite update Major instalments of the rewritten income tax law were completed under the TLIP. The first instalment established the structure and framework for ITAA97 and the second covered areas of tax law which affected a broad cross-section of taxpayers (such as the general depreciation provisions and specialist topics relevant to specific groups, eg landholders). The third instalment covered areas of tax law which are significant for a broad range of taxpayers or specialist groups (such as capital gains and losses, company bad debts, intellectual property, horticultural plants, averaging of primary producers’ tax liability, environmental protection and above-average special professional income). The fourth instalment completed the rewrite of the remaining CGT provisions previously contained in ITAA36 former Pt IIIA, covering the small business replacement assets roll-over relief and retirement exemption provisions (ITAA36 former Div 17A and 17B), and the share value shifting provisions (ITAA36 former Div 19A). The fifth instalment covered the rewrite of certain provisions dealing with imputation credits and the enactment of the simplified imputation provisions from 1 July 2002. The sixth instalment is the most significant for superannuation entities, taxpayers receiving superannuation benefits and superannuation tax concessions generally. To give effect to the simplified superannuation reforms which came into effect from 1 July 2007 (¶1-000), the sixth instalment repealed all the superannuation-related provisions contained in ITAA36 and inserted equivalent or new provisions under the simplified superannuation regime into ITAA97 (see below and ¶2-050). The ITAA97 has continued to grow in volume and coverage since, as all new tax provisions are added to the Act. At the time of writing, ITAA97 and ITTPA and their regulations already contain most of the provisions which are relevant to taxpayers and superannuation entities generally, such as the provisions dealing with general or ordinary income, statutory income, exempt income, non-assessable non-exempt income, deductions, tax offsets and CGT. Together with the TAA and other tax imposition Acts, the ITAA97 provisions provide for the tax treatment of superannuation entities, superannuation contributions and superannuation benefit payments, including assessment, collection and tax administration generally (see ¶2-050).

Structure and numbering system of ITAA97 ITAA97 is divided into “Chapters”, with each Chapter divided (in descending order) into Parts, Divisions, Subdivisions and sections (see below). The Act is specifically designed as a “pyramid-like” structure, reflecting the principle of moving from the general case to the particular (ITAA97 s 2-5). The top of the pyramid, therefore, contains the core provisions (Ch 1) and checklists, followed by the liability rules of general application (Ch 2), specialist liability provisions (Ch 3), international aspects of tax provisions (Ch 4), administration provisions (Ch 5) and a “dictionary” of defined terms (Ch 6). The collection and recovery provisions (previously contained in former Ch 4) have since been relocated to the TAA. Numbering system An appreciation of the numbering system requires an understanding of the structure of the ITAA97, represented by the constituent elements “Chapter”, “Part”, “Division”, “Subdivision” and “section”. ITAA97 s 2-25 refers to these constituent elements as “units at different levels”. The numbering system for each of these units is as follows. • Each Chapter is given a single-component identifier consisting of a number, eg Ch “2”, Ch “3” (this level, incidentally, did not appear at all in ITAA36). Each Chapter contains Parts (and their lower constituent components). • Each Part has a two-component identifier. The first component is the number of the Chapter in which the Part is contained. This is separated by a dash from the second component, which is the number of that Part, eg Pt “3-30” refers to Pt 30 in Ch 3. Each Part contains Divisions (and their lower constituent components). • Each Division has a single-component identifier consisting of a number, eg Div “295”. This number is not related to the Part or the Chapter in which the Division appears. The Divisions are numbered sequentially from the start of the Act to the end. Unlike ITAA36, their numbering does not start afresh with each Part. Each Division contains Subdivisions (and their lower constituent components) but note that not all Divisions have Subdivisions. • Each Subdivision has a two-component identifier. The first component is the number of the Division of which it forms a part of. This is separated by a dash from the second component, which is a capital letter identifying the Subdivision, eg Subdiv “295-C” is Subdiv C of Div 295. Each Subdivision contains sections (and their lower constituent components). • Each section has a two-component identifier. The first component is the number of the Division of which the section forms a part of. This is separated by a dash from the second component, which is the number of the section, eg s “295-95” is section number 95 in Div 295. Each section may itself be divided into numbered subsections (eg s 295-95(2)), which may be divided into paragraphs (identified by lower case letters, eg s 295-95(2)(c)), which may themselves be divided into subparagraphs (identified by lower case roman numbers, eg s 295-95(2)(c)(ii)). The above numbering system means that a reader who knows a ITAA97 Part number will also know the relevant Chapter. Similarly, a reader who knows the section or Subdivision number will also know the relevant Division. By contrast, under ITAA36 there was no necessary link between the numbering of any of the components. Gaps appear in the numbering sequence of Parts, Divisions, Subdivisions and sections (but not Chapters). The gaps allow for future insertion of sections, Subdivisions, Divisions and Parts. Another special feature of ITAA97 is the inclusion of “Guides” at the start of many Divisions and Subdivisions (for an example, see s 295-1). Guides often include a boxed theme statement, some simplyexpressed introductory sections, and sometimes flow charts, diagrams and other explanatory material. They are intended to provide the reader with an indication of the scope and nature of the operative provisions which follow. Although the Guides actually form part of the Act, they have limited effect in interpretation (ITAA97 s 950-150). Further assistance to readers is provided by notes and examples which accompany some sections (for an

example, see s 295-95(1)). These notes and examples (however described), but not footnotes and endnotes, form part of the Act itself. The notes commonly act as cross-references to related provisions. Section 2-35 of ITAA97 draws a distinction between the “operative provisions” and “non-operative material” which is contained in the Act. The term “operative provisions” is not defined, but would refer to the provisions which contain substantive law. The non-operative material, which includes Guides, notes and examples, is designed to help the reader identify and understand relevant provisions (ITAA97 s 2-40; 2-45). Section 950-100 to 950-150 provide an expansive explanation of what forms or does not form part of ITAA97 and the role of Guides in interpreting the Act. Numbering of regulations Regulations made under ITAA97 are contained in the Income Tax Assessment Regulations 1997 (ITAR). These regulations adopt a numbering system which is intended to link them to the specific provisions in ITAA97 to which they relate. For example, ITAR reg 295-465.01 is directly relevant to ITAA97 s 295-465 which deals with a superannuation fund’s deductible portion of insurance premiums for a financial year (¶7-147). The decimal addition “.01” indicates that it is the first regulation made for the purposes of that section. Each regulation may itself be divided into numbered subregulations (eg reg 295-465.01(5)), which may be divided into paragraphs (identified by lower case letters, eg reg 295-465.01(5)(a)). Also, a paragraph of a subregulation may itself be divided into subparagraphs (identified by lower case roman numbers, eg reg 292-25.01(4)(b)(ii)) and into sub-subparagraphs (identified by upper case letters, eg reg 292-25.01(4)(b) (ii)(C)) and into sub-sub-subparagraphs (identified by upper case roman numbers, eg reg 292-25.01(4)(b) (ii)(C)(II)). Continuing interaction with ITAA36, operation of judicial precedents, rulings Specific provisions in ITAA97 ensure that differences in the style of ITAA97 do not affect its meaning and preserve the continuing value of judicial precedents built up over years of interpreting ITAA36. In particular, ITAA97 s 1-3 provides that if ITAA36 expresses an idea in a particular form of words, and ITAA97 “appears to have expressed the same idea” in a different form of words in order to use a simpler or clearer style, the ideas are not taken to be different because different words are used. In addition, a legislative note to s 1-3 directs the reader’s attention to TAA Sch 1 s 357-85, which provides that a public or private ruling about a relevant provision (as specified in TAA Sch 1 s 357-55) that has been re-enacted or remade (with or without modifications, and whether or not that provision has been repealed) is taken also to be a ruling about that provision as re-enacted or remade so far as the two provisions express the same ideas. Notwithstanding that note, the ATO has undertaken the rewriting of existing public rulings affected by, or to reflect, provisions of the ITAA97. Note also that ideas in a taxation provision are not necessarily different because different forms of words are used (Acts Interpretation Act 1901, s 15AC). For the Commissioner’s views of the introduction of ITAA97 (and consequential amendments to the TAA) on the implications for the taxation rulings system, in particular how a ruling on an ITAA36 provision applies to a rewritten provision in ITAA97, see Rulings TR 2006/10 (public rulings) and TR 2006/11 (private rulings). Continuing consultation and review of income tax laws and issues The ATO works closely with Treasury in developing new tax policy and legislation, and may refer matters to Treasury if the tax law is not consistent with policy or produces unintended consequences or significant compliance costs. In his regard, the ATO undertakes consultation with taxpayers, tax advisers, professional associations and industry stakeholders to improve the ATO’s understanding of the business environment and current tax issues they face. The ATO’s key forums for consulting with public and international groups are the Large Business Liaison Group and National Tax Liaison Group. This consultation assists the ATO to identify the right areas to reduce red tape, minimise compliance costs, improve the administration of the tax and superannuation systems and increase willing participation (www.ato.gov.au/business/publicbusiness-and-international/transparency/engaging-with-you-to-administer-the-system). A summary of the ATO consultation framework with the tax and superannuation industry and

professionals is set out at ¶18-905. The ATO’s Program Blueprint for Change and Addendum is available at www.ato.gov.au/AboutATO/Managing-the-tax-and-super-system/Strategic-direction/Program-blueprint-summary/. [FTR ¶1-100]

¶2-050 Tax Act provisions dealing with superannuation The table below provides a quick guide to the location of key provisions in the tax Acts dealing with superannuation taxation, concessions and operations. Tax imposition, rates and related Acts are noted in a separate table further below. Superannuation taxation, concessions and operations

Provisions dealing with:

ITAA36 (generally up to 30 June 2007)

ITAA97, ITTPA, TAA and others (general from 1 July 2007 or later)

Taxation of superannuation entities generally

Superannuation funds, ADFs, PSTs ITAA36 Pt IX

Superannuation funds, ADFs, PSTs ITAA97 Pt 3-30 Div 280, 285 and 295 ITTPA Pt 3-30 Div 295

Roll-over and loss relief for merging funds (from 25 March 2010)

No equivalent in ITAA36

CGT roll-over relief ITAA97 Pt 3-30 Div 310 and 311

Look-through treatment for assets acquired under limited recourse borrowing arrangements by regulated superannuation funds (from 2007/08)

No equivalent in ITAA36

CGT and income tax lookthrough treatment ITAA97 Div 235 Subdiv 235-I s 235-810 to 235-845 ITTPA Div 235 Subdiv 235-I s 235-810

Taxation of superannuation benefits and related payments

Eligible termination payments, superannuation pensions, unused leave payments ITAA36 Pt III Div 2 Subdiv A and AA

Employment termination payments and unused leave payments ITAA97 Pt 2-40 Div 80, 82 and 83 ITTPA Pt 2-40 Div 82 Superannuation benefits — lump sums and pensions ITAA97 Pt 3-30 Div 280, 285, 301 to 307 ITTPA Pt 3-30 Div 301 to 307

Excess concessional No equivalent in ITAA36 contributions tax (from 2007/08 to 2012/13) This tax was replaced by the excess concessional contributions charge (see below)

Superannuation contributions ITAA97 Pt 3-30 Div 291 ITTPA Pt 3-30 Div 291 TAA Sch 1 Pt 2-35 Div 95 to 97 (up to 30 June 2018)

Excess concessional contributions charge (from 2013/14): – tax offset – taxpayer election to release of excess concessional

Superannuation contributions Assessable income and tax offset ITAA97 Pt 3-30 Div 291 ITTPA Pt 3-30 Div 291 TAA Sch 1 Pt 2-35 Div 95 to 97

No equivalent in ITAA36

contributions

(up to 30 June 2018) and Div 131 (from 1 July 2018) (see “Releasing money from superannuation” below)

Excess non-concessional contributions tax (from 2007/08) – taxpayer election to release of excess non-concessional contributions and earnings (from 2013/14)

No equivalent in ITAA36

Superannuation contributions ITAA97 Pt 3-30 Div 292 ITTPA Pt 3-30 Div 292 TAA Sch 1 Pt 2-35 Div 95 to 97 (up to 30 June 2018) and TAA Sch 1 Pt 2-35 Div 131 from 1 July 2018: see “Releasing money from superannuation” below

Releasing money from superannuation – to pay Division 293 tax assessments – following an ATO excess contributions determination or non-concessional contributions determination (ie releasing excess concessional contributions or excess nonconcessional contributions and earnings) – following an FHSS determination

No equivalent in ITAA36

ATO release authority TAA Sch 1 Pt 2-35 Div 131 from 1 July 2018 (replaced TAA Sch 1 former Pt 2-35 Div 95 to 97)

Division 293 tax on concessional No equivalent in ITAA36 contributions (from 2012/13)

Superannuation contributions — Division 293 tax ITAA97 Pt 3-30 Div 293 ITTPA Div 293 TAA Sch 1 Pt 3-20 Div 133 TAA Sch 1 Pt 3-20 Div 135 (up to 30 June 2018) and TAA Sch 1 Pt 2-35 Div 131 from 1 July 2018: see “ATO release authority” above

Transfer balance cap (from 2017/18) Excess transfer balance tax (from 2017/18)

No equivalent in ITAA36

Division 294 — Transfer balance cap ITAA97 Pt 3-30 Div 294 TAA Sch 1 Pt 3-20 Div 136 (Excess transfer balance — Determinations, Commutation authorities) Subdiv 303-A and 303-B (Defined benefit income, special circumstances) ITTPA Pt 3-30 Div 294

Total superannuation balance (from 2017/18)

No equivalent in ITAA36

Total superannuation balance ITAA97 s 307-230

Taxation of no-TFN contributions No equivalent in ITAA36 income and tax offset (from 2007/08)

No-TFN contributions ITAA97 Pt 3-30 Subdiv 295-I and 295-J

ITTPA Subdiv 295-I Departing Australia Superannuation Payments (DASPs)

DASPs ITAA36 Pt III

DASPs ITAA97 Pt 3-30 Subdiv 301-D

Trans-Tasman portability of superannuation (from 2013/14)

No equivalent in ITAA36

Superannuation transfers ITAA97 Pt 3-30 Div 312 SISR Pt 12A

Deductions for employer and personal superannuation contributions

Superannuation contributions ITAA36 Pt III Div 3 Subdiv AA and AB

Superannuation contributions — Deductions ITAA97 Pt 3-30 Div 290 Subdiv 290-A, 290-B (employer contributions) and 290-C (personal contributions) ITTPA Pt 3-30 Div 290

Tax offsets for superannuation Tax offsets benefits and contributions ITAA36 Pt III Div 17 Subdiv AAA, – Government co-contributions AAB and AACA and tax offsets are also available under the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (see below)

Tax offsets Spouse contributions ITAA97 Pt 3-30 Div 290 Subdiv 290-D ITTPA Pt 3-30 Div 290 Superannuation benefits — see above ITAA97 Pt 3-30 Div 301 Subdiv 301-B and 301-C

Reasonable benefit limits (RBLs) RBLs ITAA36 Pt III Div 14

No equivalent (the RBLs have been abolished from 1 July 2007)

First Home Super Saver Scheme No equivalent in ITAA36 (FHSS Scheme)

See “First home super saver scheme” below

Making downsizer contributions

Downsizer contributions and cap ITAA97 s 292-102

No equivalent in ITAA36

Other operations and concessions The ITAA97 and TAA provisions below are relevant to taxpayers and superannuation practitioners and entities generally or in a particular case: • ITAA97 Pt 3-3 Div 152 — small business CGT concessions, in particular Subdiv 152-B dealing with the small business 15-year exemption and Subdiv 152-D dealing with the small business CGT retirement exemption • ITAA97 Pt 3-35 Div 310 — superannuation business of life insurance companies, and • TAA Sch 1 Div 389 — single touch payroll (STP) reporting from 1 July 2018. Tax imposition and rates Acts Act

Dealing with

Superannuation (Excess Concessional Contributions Tax) Act 2013

Excess concessional contributions tax (repealed from 1 July 2013)

Superannuation (Excess Concessional Contributions Charge) Act 2013

Excess concessional contributions charge

Superannuation (Excess Non-Concessional Contributions Tax) Act 2013

Excess non-concessional contributions tax

Superannuation (Excess Untaxed Roll-over Amounts Tax) Act 2007

Excess untaxed roll-over amounts

Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Act 2013

Division 293 tax

Superannuation (Excess Transfer Balance Tax) Imposition Act 2017

Excess transfer balance tax

Income Tax (Fund Contributions) Act 1989

Tax on contributions to superannuation funds

Income Tax (Former Complying Superannuation Funds) Act 1994

Tax on former complying superannuation funds

Income Tax (Former Non-resident Superannuation Tax on former non-resident superannuation funds Funds) Act 1994 Superannuation (Departing Australia Superannuation Payments) Act 2007 — Withholding tax

Rates of withholding tax

Income Tax Rates Act 1986

Tax rates

First Home Super Saver Tax Act 2017

Tax on individuals under the FHSS scheme (see below)

Income tax regulations Regulations made pursuant to ITAA97, ITAA36, ITTPA and TAA are as below: • ITAA97 — Income Tax Assessment Regulations 1997 • ITAA36 — Income Tax Assessment (1936 Act) Regulation 2015 (remake and repeal of former Income Tax Regulations 1936) • ITTPA — Income Tax (Transitional Provisions) Regulations 2010 • TAA — Taxation Administration Regulations 2017 (remake and repeal of former Taxation Administration Regulations 1976). Superannuation (Government Co-contribution for Low Income Earners) Act 2003 — cocontribution and tax offset Provisions dealing with:

Co-contribution Act 2003

Government co-contribution

Part 2 – from 2003/04

Low income superannuation tax offset

Part 2A – from 2017/18

Low income superannuation contribution Former Pt 2A (2012/13 to 2016/17) First home super savers scheme Provisions dealing with:

Legislation

First Home Super Saver (FHSS) scheme (from 2018/19)

ITAA97 Div 313 — First Home Super Saver scheme TAA Sch 1 Div 138 — FHSS scheme and Div 131 — Releasing money from superannuation First Home Super Saver Tax Act 2017

First home savers accounts (FHSA) scheme (from 1 October 2008 to 30 June 2015)

ITAA97 Former Pt 3-45 Div 345 — taxation of FHSA business • First Home Savers Accounts Act 2008 (repealed) • Income Tax (First Home Saver Accounts Misuse Tax) Act 2008 (repealed)

Superannuation Funds ¶2-100 Qualifying conditions for complying superannuation funds A superannuation fund is eligible for concessional tax treatment as a “complying superannuation fund” under ITAA97 Div 295 (see ¶7-000) if APRA (or the Commissioner in the case of an SMSF) has given the fund a notice under s 40 of the SISA stating that it is a complying superannuation fund (¶2-150) (SISA s 45). Under the SIS Act, a superannuation fund (¶2-120) will receive a complying fund notice from APRA or the Commissioner if: • the fund is a resident regulated superannuation fund (ie a regulated superannuation fund that is an Australian superannuation fund within the meaning of ITAA97: ¶2-130) • the fund has met the prescribed conditions to be a complying superannuation fund for the purposes of the SIS Act (SISA s 42: ¶2-140). A fund that is, or is part of, an exempt public sector superannuation scheme is taken to be a complying superannuation fund for the purposes of ITAA97, and is entitled to concessional tax treatment as such, without having to be a regulated superannuation fund or being subject to the SIS Act (¶2-170). The taxation treatment of complying and non-complying superannuation funds is discussed in Chapter 7. A “constitutionally protected fund” is exempt from income tax (ITAA97 s 50-25, item 5.3). [SLP ¶2-160]

¶2-120 What is a “superannuation fund”? There are two similar, but different, definitions of “superannuation fund” in the tax legislation. Subject to a contrary intention, a “superannuation fund” is defined in ITAA97 to have the meaning given in the SIS Act (ITAA97 s 995-1(1)). Also, subject to a contrary intention, a “superannuation fund” is defined in ITAA36 as a scheme for the payment of “superannuation benefits” (ie individual personal benefits, pensions or retiring allowances) upon retirement or death, or a superannuation fund as defined in the SIS Act (ITAA36 s 6(1)). What is relevant for both definitions, therefore, is the definition of “superannuation fund” in s 10 of the SIS Act. In the SIS Act, a “superannuation fund” means: • a fund that is an indefinitely continuing fund and is a provident, benefit, superannuation or retirement fund, or • a public sector superannuation scheme (SISA s 10(1)). As defined, a superannuation fund for tax purposes thus covers any resident or non-resident superannuation arrangement which is formed for the specified purposes, whether funded (as in the case of private sector superannuation schemes) or unfunded (eg public sector schemes). Meaning of “indefinitely continuing fund” The expression “indefinitely continuing fund” is not defined in the SIS Act, and there is no definitive

authority explaining its meaning. In Cameron Brae Pty Ltd (2007) 161 FCR 468; [2007] FCAFC 135, Stone and Allsop JJ, after noting that there had been no argument about the meaning of the expression, observed at 480 [32] that the ordinary meaning of the word “indefinite” is “without distinct limitation of being or character; indeterminate, vague, undefined; of indetermined extent, amount or number”. Jessup J stated at 507–508 ([108]–[109]): “The term is not defined in the SIS Act, and has not been the subject of judicial exposition. Some light may be thrown on what was intended by s 14 of the SIS Act, which provided that the existence in the rules of a fund of a provision to avoid ‘a breach of a rule of law relating to perpetuities’ would not prevent the fund in question from being an ‘indefinitely continuing’ one. That tends to suggest that the legislature otherwise had something rather lengthy in mind. On the other hand, I doubt that ‘indefinitely’ could be given a meaning effectively equivalent to ‘forever’, since the rules of every fund would have to contain, one would have thought, reasonable and practical provisions for the fund to be wound up where it had to be. … It may be that the relevant statutory meaning of ‘indefinitely’ is ‘undefined’ rather than ‘unlimited’, but, in the absence of argument on the subject, I am not disposed to extend to the appellant the favour of adopting that meaning.” To be “indefinitely continuing” generally means that the fund must not be one which will terminate or be wound up after a specified period. A provision in the governing rules of the fund to avoid a breach of the rules relating to perpetuities does not prevent the fund from being treated as an indefinitely continuing fund for the purpose of the definition of “superannuation fund” (SISA s 14; Cameron Brae Pty Ltd (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178). In Baker 2015 ATC ¶10-399, picking up on the observations in Cameron Brae, the AAT (Senior Member O’Loughlin) said at [10]: “… The sentiment to the effect that indefinite is not meant to be forever has a certain attraction to it as many contemporary superannuation funds, eg self-managed superannuation funds, implicitly, have an end date upon exhausting assets from which benefits may be paid but are nevertheless accepted as superannuation funds which entails acceptance that they are indefinitely continuing.” The SIS Act also provides that the rules of law relating to perpetuities do not apply, and are taken never to have applied, to the trusts of any superannuation entity, regardless of when the entity was established (SISA s 343). (The meaning of “indefinitely continuing fund” is also relevant to the definition of “approved deposit fund”: ¶2-320.) Meaning of “provident, benefit, superannuation or retirement fund” The expression “provident, benefit, superannuation or retirement fund” in the SIS Act definition of “superannuation fund” is not defined but the expression has been the subject of judicial consideration. The courts have held that for a fund to be a “provident, benefit, superannuation or retirement fund”, the fund’s sole purpose must be to provide superannuation benefits, ie benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment (Scott (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ; Baker 2015 ATC ¶10-399). In Cameron Brae, at 481 [34], after referring to those cases and others, Stone and Allsop JJ expressed the “confident conclusion that a trust is only a superannuation fund if its sole purpose is for the payment of superannuation benefits”. In the same case, Jessup J summarised the position as follows, at 505 [102]: “Thus, as a matter of common understanding, it would seem that a superannuation fund is a fund which has as its sole purpose the provision of benefits to participating employees upon their reaching a prescribed age (per Windeyer J [in Scott (No. 2)]) or upon their retirement, death or other cessation of employment (per Kitto J [in Mahony on appeal])”. In Case 3/2018, 2018 ATC ¶1-095; [2017] AATA 3058, the AAT relying on the above authorities, held that a Samoan entity in that case, which was enmeshed in a complex web of entities, transactions, payments and relationships that traversed Samoa, New Zealand, the United Kingdom and the United States, was not a superannuation fund for tax purposes. It was not a superannuation fund within the ordinary meaning

of that expression, and therefore not a superannuation fund for the purposes of the ITAA97. It was also not a superannuation fund for the purposes of the ITAA36. Rather, the AAT agreed with the Commissioner’s submission that the entity was a resident trust estate because the central management and control of the trust estate was in Australia (pursuant to ITAA36 s 95(2)). Interaction with sole purpose test in the SIS Act Section 62 of the SIS Act which prescribes the approved purposes for which a superannuation fund must be maintained — the “sole purpose test” — provides guidance on the test (see ¶3-200). A breach of the sole purpose test does not automatically disqualify an entity as a superannuation fund, as was previously the case because the test then formed part of the definition of “superannuation fund” in the then governing regulatory Act (namely, the Occupational Superannuation Standards Act 1987). The sole purpose test, however, is a civil penalty provision in the SIS Act, and any breach is taken into account when determining whether the fund is a complying superannuation fund under the SIS Act (¶2-140). In addition, any person responsible for the breach may be liable to civil and criminal sanctions under SIS Act (¶3-800). Public sector superannuation scheme In SIS Act, a “public sector superannuation scheme” means a scheme for the payment of superannuation, retirement or death benefits that is established: (a) by or under a Commonwealth, state or territory law (b) under the authority of the Commonwealth or a state or territory government, or (c) under the authority of a municipal corporation, another local governing body or a public authority constituted by or under a Commonwealth, state or territory law (see further ¶2-170). Use of the expression “superannuation fund” in the tax law The term “superannuation fund” is also used for the purpose of the taxation rules in ITAA97 Div 301 to 306 generally, and for determining what is a “superannuation fund payment” for the purpose of the taxation of lump sum and income stream benefits (ITAA97 s 307-1; 307-5). The meaning of “superannuation fund” was examined in Baker 2015 ATC ¶10-399 (see above). There, the AAT held that an Individual Retirement Account (IRA) in the USA was not a “foreign superannuation fund” (or a scheme payment “in the nature of superannuation”) for the purposes of concessional tax treatment under s 305-80 of the ITAA97. A payment that is made from the IRA would not be treated as being paid either from a “foreign superannuation fund” or from “a scheme for the payment of benefits in the nature of superannuation upon retirement or death” under ITAA97 s 305-55(1) or (2) for the purposes of making a choice under s 305-80 to have the amount paid to an Australian complying fund (¶7-120, ¶8370). [SLP ¶2-165]

¶2-130 Resident regulated superannuation fund A “resident regulated superannuation fund” means a “regulated superannuation fund” (as defined in the SIS Act) that is an “Australian superannuation fund” (within the meaning of the ITAA97) (SISA s 10(1)). Regulated superannuation fund A regulated superannuation fund is a superannuation fund (¶2-120) which complies with the requirements of SISA s 19(2) to (4), as below: • the fund must have a trustee • either the trustee is a constitutional corporation pursuant to a requirement in the governing rules or the governing rules provide that the sole or primary purpose of the fund is the provision of “old-age pensions”

• the trustee must give APRA (or such other body or persons as prescribed by the SIS Regulations) an irrevocable election in the approved form signed by the trustee for the SIS Act to apply to the fund. The above process of becoming a “regulated superannuation fund” provides the legislative basis for the superannuation fund to be subject to regulation under the corporations and/or pensions powers of the Constitution (see below) by the Commonwealth. In a similar manner, ADFs (¶2-320) and PSTs (¶2-420), which by definition must have a corporate trustee, are subject to regulation under the SIS Act by virtue of the corporations power. Exempt public sector superannuation schemes do not have to become regulated superannuation funds in accordance with SIS Act in order to be complying superannuation funds (see ¶2170). All superannuation funds make the election to become regulated funds using the ATO approved form, the “Application for ABN registration for superannuation entities”, which also serves as the entity’s application for a TFN and ABN, and for GST registration, where applicable (¶5-300). Corporations route or pension route A “constitutional corporation” is a trading or financial corporation (within the meaning of para 51(xx) of the Constitution) formed within the limits of the Commonwealth. Therefore, foreign corporations cannot be the trustees of regulated superannuation funds. A corporate trustee of a superannuation fund is a financial corporation by virtue of its activity as trustee of the fund. An “old-age pension” has the same meaning as in para 51(xxiii) of the Constitution. Basically, it means a pension or annuity commencing at normal retiring age. The pension need not be a life pension (eg it may be an allocated pension), and the pension may be payable by the fund or the fund may use the member’s benefit entitlements to purchase a pension or annuity for the member from a provider (eg an insurance company or another superannuation fund). The corporate trustee of a fund is a separate legal entity and, together with its directors and officers, are subject to all the duties, obligations and penalties under the Corporations Act 2001 (CA) as well as those imposed by the SIS legislation. Trustee protection or indemnities may be available in certain circumstances under CA or SIS Act (¶3-150). To address concerns from the decision in Hanel v O’Neill [2003] SASC 409, which held that directors of corporate trustees could be personally liable in any case where there are insufficient assets to discharge the liabilities of the trust, s 197(1) of the Corporations Act 2001 provides for personal liability to be imposed on a director of a corporate trustee where the corporation’s right of indemnity as trustee is lost through disentitling conduct on the part of the corporation (eg a breach of trust or ultra vires conduct) or through a restriction in the terms of the trust that purports to deny a right of indemnity against trust assets. For a fund pursuing the pensions route, the mere insertion of the words “the sole or primary purpose of the fund is the provision of old-age pensions” in its governing rules is by itself insufficient. Guidelines for a fund pursuing the pensions route are as follows: • the main benefit provided by the fund, which must be available to all members, must be an old-age pension • the fund may also provide incidental benefits (eg benefits payable on death, disability, retirement or redundancy of a member), subject to the sole purpose test (see ¶3-200) • the rules of the fund cannot provide for lump sum benefits alone, but may permit members when they become entitled to an old-age pension to elect to take a lump sum benefit instead, with the lump sum being derived or commuted from the pension entitlement. While the choice of the corporations or pensions route is optional, some superannuation funds have no choice by virtue of their set-up or structure as they are required by the SIS Act to have a corporate trustee in all cases, eg a public offer superannuation fund (¶3-500) or a small superannuation fund with fewer than five members that is not an SMSF (¶5-650). Superannuation trustee company A “superannuation trustee company” is a company incorporated under the Corporations Act 2001 where

the sole purpose of the company is to act as a trustee of a regulated superannuation fund (a “special purpose company”). Other special purpose companies (home unit company and not-for-profit company) are not relevant for superannuation purposes. The company’s constitution must have a clause prohibiting the company from distributing income or property to its members (see the definition of “special purpose company” in reg 3 of the Corporations (Review Fees) Regulations 2003 for further information). Among other things, a special purpose company qualifies for certain concessions, for example, paying a reduced annual review fee to the ASIC. A company can advise ASIC that it is a special purpose company at the time of registration on the Form 201 “Application for registration as an Australian company”, or at a later date on Form 484 “Change to company details” supported by a Superannuation Trustee Company Declaration (see ¶18-745). Registered companies that meet the definition of special purpose company under para (a), (b) or (c) of reg 3 are not required to lodge a Form 484 with a declaration to notify their special purpose status as they are automatically recognised by ASIC as special purpose companies upon registration. Some benefits or advantages of a superannuation fund having a corporate trustee include protection from business creditors, fewer opportunities for mistakes and administrative ease when trustees change (Practitioner article “Why your SMSF should have a sole purpose corporate trustee” by Bryce Figot, Senior Associate, and Tina Conitsiotis, Consultant, DBA Lawyers: Wolters Kluwer Australian Super News Issue 9, September 2011, ¶131). Australian superannuation fund To be a complying superannuation fund in relation to a year of income, a regulated superannuation fund must be an Australian superannuation fund at all times during the year of income when it was in existence. Where applicable, the fund may be a resident ADF (¶2-330) for a part of the year of income and a resident regulated superannuation fund for the remaining part of the year of income (SISA s 42(1) (a)). Such a situation arises when an ADF converts to a superannuation fund during the year. A fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if: (1) the fund was established in Australia or any asset of the fund is situated in Australia at that time (2) at that time, the central management and control of the fund is ordinarily in Australia (3) at that time, either the fund had no active member, or at least 50% of the following is attributable to superannuation interests held by active members who are Australian residents: (i) the total market value of the fund’s assets attributable to superannuation interests held by active members, or (ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members (ITAA97 s 295-95(2)(a) to (c)). The three tests must be satisfied at the same time. A fund that fails to satisfy any one of the tests at a particular time is not an Australian superannuation fund at that time, even if the other tests are met. ATO ruling on residency tests Taxation Ruling TR 2008/9 provides guidance on the definition of “Australian superannuation fund” in s 295-95(2) (see also “ATO ruling on company residency” below). Some key points from TR 2008/9 on the three tests are noted below. Test 1: fund established in Australia or assets in Australia (s 295-95(2)(a)) The requirements in the first test must be read disjunctively. That is, the test will be satisfied if the superannuation fund is or was established in Australia, or at a particular time any asset of the fund is situated in Australia.

A superannuation fund is established in Australia if the initial contribution made to establish the fund is paid to and accepted by the trustee or trustees of the fund in Australia. The establishment of the fund requirement is a once and for all test. Once it is determined that a fund was established in Australia, this requirement is met at all relevant times and the fact that no asset of the fund is situated in Australia does not affect this conclusion. For a superannuation fund that is not established in Australia, at least one asset of the fund must be situated in Australia at the relevant time. The location of an asset is determined by reference to the type of asset and the common law rules established by the courts for assets of that kind. It is a question of fact in each case whether or not these rules are satisfied. The general common law rules established by the courts for determining the site or location of particular types of assets are as below. • Land — land and interests in land are situate in the place where the land lies. • Leases — the general rule for land applies to any leasehold interest in land, ie it is deemed to be situate in the place where the land over which the lease is held lies. • Shares — shares in a company are situate where, according to the law of the place where the company was incorporated, the shares can be dealt with effectively as between the owner for the time being and the company. The law of the place of incorporation of the company decides how shares in the company may be transferred. If they may be transferred only by registration on a particular register, they will be regarded as situate at the place where the register is kept. • Beneficial interest under a trust — if the beneficiary is given a beneficial interest in the trust property, the beneficiary’s interest in the trust is located in the country where the trust property is situated. If the beneficiary merely has a right of action against the trustees, the beneficiary’s interest is located where the action may be brought, ie at the trustees’ place of residence. • Simple contract debts — a debt is deemed to be situate where the debtor resides, irrespective of the location of the documentary evidence recording the debt. • Specialties (debts created by deed) — a specialty (eg a policy of insurance) has been held to be located where the deed itself is to be found because, by reason of the deed itself, the debt is taken to have some tangible existence. • Bank accounts — a bank account is a debt, being a single chose in action. The bank is the relevant debtor in the relationship. The rules that apply to determine the location of debts therefore apply to bank accounts. • Negotiable instruments and securities transferable by delivery — for taxation purposes, bonds, bills of exchange and other securities which can be validly and effectively transferred by delivery, with or without endorsement, are situate in the country where the paper representing the security is itself from time to time found. • Chattels — movable goods, but used in a wider sense to denote any kind of personal property, in contrast to real property (eg artwork, jewellery, a boat, and so on). Chattels are situate where they lie, ie they are situate in the place where they happen to be at the relevant time. Test 2: central management and control of fund (s 295-95(2)(b)) The central management and control (CMC) of a superannuation fund is “ordinarily” in Australia at a time even if the CMC is temporarily outside Australia for a period of not more than two years (s 295-95(4): see below). The CMC of a fund is usually where the trustees (or directors of the corporate trustee) attend to the business of the fund. It is possible that if the individual trustees (or directors of the corporate trustee) are located overseas (eg they work overseas) over long periods, the CMC condition cannot be met (see examples below).

The alternative to the CMC test that applied before 1 July 2007 (under ITAA36 former s 6E) contained a specific “two-year temporary absence rule” where the two-year period could recommence if the trustees returned to Australia for a continuous period of more than 28 days. This reset rule is not included in the test from 1 July 2007. According to the ATO, the CMC of a superannuation fund involves a focus on “the who, when and where of the strategic and high level decision-making processes and activities of the fund”. These include performance of the following duties and activities: • formulating the investment strategy for the fund • reviewing and updating or varying the fund’s investment strategy as well as monitoring and reviewing the performance of the fund’s investments • if the fund has reserves, the formulation of a strategy for their prudential management, and • determining how the assets of the fund are to be used to fund member benefits (TR 2008/9, para 19). In the majority of cases, the other principal areas of a fund’s operation, such as acceptance of contributions, the actual investment of the fund’s assets, administrative duties and the preservation, payment and portability of benefits are not of a strategic or high level nature to constitute CMC. Rather, these activities form part of the day-to-day or productive side of the fund’s operations. Who Establishing who is exercising the CMC is a question of fact to be determined with reference to the circumstances of each case. While the fund trustees have the legal responsibility or duty to exercise CMC, the mere duty to exercise CMC does not, of itself, constitute CMC. That is, the trustees must in fact perform the high level duties and activities to be considered as exercising CMC of the fund in practice. If a person other than the trustees independently and without any influence from the trustees performs those duties and activities that constitute CMC, that person is exercising the CMC of the fund. Using an investment manager to carry out part or all of the investment management function does not mean that the investment manager is in any sense exercising CMC of the fund. Where The location of the CMC of the fund is determined by where the high level and strategic decisions of the fund are made and where the high level duties and activities are performed. Whether CMC is ordinarily in Australia at a particular time is to be determined by the relevant facts and circumstances of each case. This involves determining whether, in the ordinary course of events, the CMC of the fund is regularly, usually or customarily exercised in Australia. There must be some element of continuity or permanence for CMC of the fund to be regarded as being “ordinarily” in Australia. If CMC is being temporarily exercised outside Australia, this will not prevent the CMC of the fund being “ordinarily” in Australia at a particular time. Temporarily outside Australia As noted above, s 295-95(4) provides that, to avoid doubt, the CMC of a superannuation fund is ordinarily in Australia at a time even if that CMC is temporarily outside Australia for a period of not more than two years. TR 2008/9 states that the effect of s 295-95(4) is to provide one set of circumstances in which a fund’s CMC will be taken to be “ordinarily” in Australia at a time for the purposes of s 295-95(2)(b) (ie it operates as a “safe harbour” rule), and that s 295-95(4) does not otherwise restrict the meaning of “ordinarily” so that CMC can only be outside Australia for a period of two years or less. If the CMC of a fund is outside Australia for a period greater than two years, the fund will satisfy the CMC test if it satisfies the “ordinarily” requirement in s 295-95(2)(b). However, while the CMC can be outside Australia for a period greater than two years, the period of absence of CMC must still be temporary. Furthermore, if the CMC of the fund is not temporarily outside Australia, it will not be “ordinarily” in Australia at a time even if the period of absence of the CMC is two years or less. The CMC of a fund will be “temporarily” outside Australia if the person or persons who exercise the CMC

are outside Australia for a relatively short period of time. The duration of the absence must either be defined in advance or related (both in intention and fact) to the fulfilment of a specific, passing purpose. Whether a period of absence is considered to be relatively short involves considerations of questions of degree which must be decided by reference to the circumstances of each particular case. Whether an absence is temporary must be determined objectively by reference to all the relevant facts and circumstances on a “real time” basis. That is, it cannot be established in retrospect (TR 2008/9, para 29– 34). Example: trustees are overseas for a period greater than two years, but CMC is still “ordinarily” in Australia (adapted from TR 2008/9) Joseph and his wife Marian are the trustees and members of their SMSF (JM SMSF), which was established in Australia in August 2006. Joseph and Marian exercise the CMC of the fund at trustee meetings at their home in Sydney. Joseph was seconded to his employer’s London office on 1 July 2008 for a period of two years. It was always the intention of both Joseph and his employer that the duration of his secondment would actually be two years and that Joseph would return to working in Australia at the end of that period. However, due to unforeseen business pressures, Joseph was required to remain in London for an extra year. Joseph’s wife accompanied him for the duration of his secondment. They rented out the family home in Australia and lived in a furnished house in London provided by Joseph’s employer. Both Joseph and Marian continued to maintain bank accounts and private health insurance cover in Australia during the period of Joseph’s secondment. They travelled back to Australia for a holiday during the Christmas 2009 period. During the period of Joseph’s secondment, the CMC of the JM SMSF was exercised at trustee meetings at the house in London. In these circumstances, it is considered that the CMC of the fund remains ordinarily in Australia during the period of Joseph’s secondment as the trustees’ absence from Australia was temporary. The factors supporting this conclusion include the following: • Joseph and Marian intended to return to Australia at the expiration of the two-year period of secondment and never abandoned that intention • the entire period of the absence, including the additional year, was related to the fulfilment of a specific purpose • they did not establish a home outside Australia, and • they continued to maintain their home and other assets in Australia which indicates a durability of association with Australia. Accordingly, the CMC of the JM SMSF remained ordinarily in Australia within the meaning of s 295-95(2)(b) during the period that the trustees were in London.

The AAT has held an SMSF was not a resident fund as it did not satisfy the CMC test in ITAA36 former s 6E(1)(c)(i). Although s 6E(1B) modified the CMC test, the taxpayer was not “temporarily absent from Australia” after 1 July 2000 and the continuous period for which she was outside Australia exceeded two years. Accordingly, the fund was not a resident regulated superannuation fund at all times during the relevant year (CBNP Superannuation Fund 2009 ATC ¶10-105; 09 ESL 12). Delegation of trustee’s duties and powers – enduring power of attorney If permitted by the trust deed, a person who has an enduring power of attorney in respect of an SMSF member may be the trustee or director of the body corporate trustee of the SMSF, in place of the member (SISA s 17A(3)(b); SMSF Ruling SMSFR 2010/2: ¶5-220). Where permitted by the trust deed or in the circumstances prescribed in the trustee legislation of the relevant state or territory, and consistent with the SIS Act provisions, the individual trustees and director trustees of a superannuation fund may delegate all or any of their duties and powers. Taxation Ruling TR 2008/9 states that where individual trustees or directors of a corporate trustee of a superannuation fund delegate their duties and powers to another person, the delegate will be exercising the CMC of the fund if he/she independently and without influence from the trustees, performs those duties and activities that constitute CMC of the superannuation fund. For example, in all jurisdictions, the trustee legislation permits a trustee to delegate the execution of the trust where he/she is absent from the jurisdiction or about to depart from it. In accordance with the Corporations Act 2001, the directors of a corporate trustee may also delegate their duties and powers. However, if the trustees continue to participate in the strategic and high level decision-making and activities of the fund, it cannot be said that the delegate is exercising the CMC of the fund. The trustees

may continue to participate in such activities by reviewing or considering the decisions and actions of the delegate before deciding whether any further action is required (TR 2008/9, para 123–125). Example: delegation of trustee duties (adapted from TR 2008/9) Henry and Eleanor are the trustees of their SMSF, the “Plantagenet Family Superannuation Fund”, which was established in New South Wales (NSW). The members of the Plantagenet Family Superannuation Fund are Henry and Eleanor. On 29 September 2009, Henry and Eleanor travel to France to take up management of Eleanor’s family business interests in Europe. They do not have an expected return date although they do intend to return to Australia at some point in the future. They take their children with them to France, and they move into Eleanor’s family home. The children are enrolled in local schools in France. Henry and Eleanor return to Australia permanently on 22 September 2012. Prior to moving overseas, Henry and Eleanor validly delegate to Richard, an Australian-based resident, their trustees’ duties. The trust deed of the Plantagenet Family Superannuation Fund permits the delegation of all or any of the duties and powers of the trustee, provided that the delegation is consistent with the requirements under the NSW trustee legislation. The activities delegated to Richard include: • monitoring and reviewing the performance of the fund’s investments • re-balancing the investment portfolio, and • altering the fund’s investment strategy. During Henry and Eleanor’s absence from Australia, Richard undertakes these activities without reference to Henry and Eleanor. Furthermore, Henry and Eleanor did not participate in any of these high level decision-making activities while overseas. In these circumstances, the CMC of the Plantagenet Family Superannuation Fund continues to be ordinarily in Australia within the meaning of ITAA97 s 295-95(2)(b) at all times by virtue of Richard exercising the CMC in Australia during Henry and Eleanor’s absence from Australia.

Test 3: active members of fund (s 295-95(2)(c)) The active member test in s 295-95(2)(c) is satisfied if, at the relevant time: • the fund has no “active member” (see below) • at least 50% of the total market value of the fund’s assets attributable to superannuation interests held by active members is attributable to superannuation interests held by active members who are Australian residents (s 295-95(2)(c)(i)) • at least 50% of the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members is attributable to superannuation interests held by active members who are Australian residents (s 295-95(2)(c)(ii)). A member is an “active member” of a superannuation fund at a particular time if the member is a contributor to the fund at that time, or is an individual on whose behalf contributions have been made other than an individual: (i) who is a foreign resident (ii) who is not a contributor at that time, and (iii) for whom contributions made to the fund on the individual’s behalf after the individual became a foreign resident are only payments in respect of a time when the individual was an Australian resident (s 295-95(3)). Example Harvey is a resident and a member of his employer’s superannuation fund. Harvey’s employer makes a contribution for him in July. Harvey ceases to be a resident in August, and from that time does not have any contributions made to the fund on his behalf. Harvey is not an active member from that time. In October, Harvey’s employer makes a contribution for him in relation to work done in July. Although both the July and October contributions relate to a period when Harvey was a resident, as he is now a non-resident he does not become an active member because of the contributions.

A member of a fund will also be an active member if the member’s employer is on a “contributions holiday” (ie where a defined benefit superannuation scheme is in surplus and the employer is not required to make contributions to the scheme for the member because of the surplus). Contributions and contributor The term “contributor” is not defined in ITAA97. The term therefore has its ordinary meaning in the context in which it appears. The ATO states that the concept of “contributor” within the context of the active member test is directed at establishing the status of a member as a contributor at a particular point in time, not on the specific act of contributing. In establishing that status, reference must be had to the circumstances of each case, including a reference to the member’s intention to make further contributions to the fund. The status of the member as a contributor continues over the relevant period of time until the member decides to cease making contributions. When a member ceases to be a contributor is a question of fact to be determined with reference to the circumstances of each case (TR 2008/9, para 66). The active member test must be monitored continually to ensure that if there is at least one active member at the relevant time, the 50% accumulated entitlement requirement is met. Conversely, if the fund does not have an active member at the relevant time, the 50% requirement is not applicable and the fund will be an Australian superannuation fund at the relevant time if the first two conditions in s 295-95(2) are met. Example A single member SMSF meets the first two conditions in s 295-95(2). The member goes overseas and ceases to be an Australian resident, but continues to make contributions to the SMSF. The fund will not meet the definition of Australian superannuation fund as the third condition is not met.

Example A two-member SMSF meets the first two conditions in s 295-95(2). The fund’s assets are attributable equally to the superannuation interests of the members (ie 50% each). One member goes overseas and ceases to be an Australian resident, but does not make any superannuation contributions while overseas and no contributions are made on the member’s behalf. The second member continues to make superannuation contributions to the fund. The SMSF is an Australian superannuation fund. The third condition that “more than 50% of the assets attributable to active members” is met as 100% of the assets attributable to active members are attributable to a member who was at all times an Australian resident.

Example: not an active member (adapted from TR 2008/9) Ally, who is the single member of her SMSF goes overseas on a holiday in July 2009 for an indefinite period of time. She ceases to be an Australian resident in July 2011. Before travelling overseas, Ally was an employee, but her employer failed to make any superannuation contributions in respect of the period of work performed by Ally in the quarter prior to her departure (April to June 2009). In August 2012, Ally’s former employer pays the superannuation guarantee charge to the ATO which then distributes the shortfall component of the charge to Ally’s SMSF in September 2012. Ally makes no personal contributions to her SMSF during her absence from Australia. As Ally is not a resident of Australia from July 2011 and the contribution (ie the shortfall component of the charge) was made to the SMSF on her behalf in respect of the April to June 2009 period when she was a resident, Ally does not become an active member because of the contribution.

Example: whether member of fund is a “contributor” to the fund at a particular time (adapted from TR 2008/9) Isabella, one of two members/trustees of an SMSF, has been making personal contributions to the fund on a monthly basis since the fund was established on 1 July 2007. Isabella makes the contributions through an automatic deduction from her bank account. On 1 July 2010, Isabella departs Australia for a two-year working holiday in Spain. She returns to Australia on 30 June 2012. Before her departure from Australia, Isabella decided that she would not make any personal contributions to the SMSF during her period of absence from Australia. She therefore instructed her bank to stop the regular transfer of funds to her SMSF. She makes no further contributions to the SMSF until her return to Australia. In these circumstances, Isabella is a “contributor” to the fund within the meaning of s 295-95(3) throughout the entire period from 1 July 2007 to 30 June 2010. As evidenced by her instruction to her bank to stop the regular transfers, she ceased to be a contributor from 1 July 2010. Since Isabella made no further contributions until her return to Australia, she ceased to be a contributor from that time until her return to Australia.

Practitioner and ATO guidelines on SMSF residency For practitioner articles which examine the tests and issues raised in TR 2008/9 and the use of an enduring power of attorney to meet the CMC test, see: • “SMSFs: the importance of being Aussie!” and “SMSFs: have power of attorney, will travel?” in the Wolters Kluwer Australian Super News Issue 8, 15 September 2008, and • “Strategies for satisfying the Australian ‘residency’ tests for SMSFs” by Rhys Cormick, University of Canberra, Taxation in Australia, Journal of the Tax Institute, Vol 47(5), November 2012. SMSFR 2010/2 provides guidelines on cases where a person is appointed as a superannuation fund trustee under an enduring power of attorney and the obligations of the donor and donee of the power of attorney (see ¶5-220). ATO ruling on company residency Taxation Ruling TR 2018/5 provides guidance on how to apply the CMC test of company residency in s 6(1)(b) of ITAA36 following Bywater Investments Limited & Ors v FC of T; Hua Wang Bank Berhad v FC of T [2016] HCA 45; 2016 ATC ¶20-589 (Bywater). Under para (b) of the definition of “resident or resident of Australia” in s 6(1), a company not incorporated in Australia is a resident of Australia if it carries on business in Australia, and has either its CMC in Australia, or its voting power controlled by shareholders who are residents of Australia. Foreign superannuation funds A superannuation fund is a “foreign superannuation fund” if it is not an Australian superannuation fund. A foreign superannuation fund cannot be a “complying superannuation fund” under the ITAA97 as it automatically fails the basic condition that it must be a “resident regulated superannuation fund” under the SIS Act. The tax treatment of foreign superannuation funds is discussed at ¶7-400. A foreign superannuation fund which becomes an Australian superannuation fund during an income year must include its net previous income in respect of previous years of income in its assessable income in the year in which the residency status changed (¶7-450). [SLP ¶2-183]

¶2-140 Complying superannuation fund under the SIS Act A superannuation fund (¶2-120) must comply with the conditions prescribed in SISA s 42 (see below) in order to qualify to receive a notice from the Regulator stating that it is a “complying superannuation fund” for SIS and tax purposes (¶2-150). Section 42 incorporates a “culpability test” (see below). For SMSFs, broadly similar conditions prescribed in SISA s 42A determine whether an SMSF is a complying superannuation fund, the difference being that a “compliance test” rather than the culpability test applies (see “SISA s 42A conditions — SMSFs” below). SISA s 42 conditions — funds that are not SMSFs An entity that is not an SMSF is a complying superannuation fund in relation to a year of income if: • either the entity was an Australian regulated superannuation fund (¶2-130) at all times during the year of income when it was in existence, or it was a resident ADF (¶2-330) for a part of the income year and a resident regulated superannuation fund for the remaining part of the income year • either the trustee did not contravene any “regulatory provision” (see below) in relation to the entity in respect of the year of income, or the trustee did contravene a regulatory provision on one or more occasions and the entity did not fail the “culpability test” in relation to any of the contraventions (s 42(1)). Culpability test

An entity fails the culpability test in relation to a particular contravention of a regulatory provision if: • either: – all members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention, or – some (but not all) members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention, and none of the “innocent members” would suffer “any substantial financial detriment” if the entity were to be treated as a non-complying superannuation fund in relation to the year of income concerned, and • APRA believes, after considering the taxation consequences that would arise if the entity were to be treated as non-complying, the seriousness of the contravention and all other relevant circumstances, that a notice should be given to the entity stating that it is not a complying superannuation fund in relation to the year of income (s 42(1A)). The terms “contravention” and “regulatory provision” are discussed below. The question of whether a person was in any way directly or indirectly knowingly concerned in, or party to, a particular contravention is decided on a balance of probabilities. In QX971 v APRA 99 ESL 1, a superannuation fund which contravened the in-house asset rules was found to be a non-complying fund as it had also failed the culpability test. Newly established funds A new superannuation fund, or a superannuation fund converted from an existing resident ADF, is a complying superannuation fund in relation to a year of income under s 42 if: • it complies with the requirements to become a resident regulated superannuation fund and lodges an election to become regulated under the SIS Act (¶2-130) within 60 days of its establishment or conversion, or any defect in the purported election of the fund is rectified within 28 days • either it did not contravene a regulatory provision or, if it did, it did not fail the culpability test in respect of the “pre-lodgment period” (ie the period when it came into existence to the time it lodged its election to become regulated) or the “rectification period” (ie the period when it lodged the purported election to the time it complied with the election requirements) • it remains a resident regulated superannuation fund at all times after the end of the pre-lodgment or rectification period, and either it did not contravene a regulatory provision or, if it did, it did not fail the culpability test in respect of the year after the end of the pre-lodgment or rectification period (s 42(1AA), (1AC)). SISA s 42A conditions — SMSFs An entity that is an SMSF during a year of income is a complying superannuation fund if it complies with the conditions in s 42A. An SMSF throughout the year An entity that was an SMSF at all times during a year of income is a complying superannuation fund in relation to that year of income if: • either: – the entity was a resident regulated superannuation fund (¶2-130) at all times during the year of income when it was in existence, or – the entity was a resident ADF (¶2-330) for a part of the year of income and a resident regulated superannuation fund for the remaining part of the year of income when it was in existence, and • the entity passes the “compliance test” (see below) set out in s 42A(5) in relation to the year of income (s 42A(1)).

An SMSF during only part of the year An entity that was an SMSF during a part or parts of a year of income is also a complying superannuation fund in relation to that year of income if: • either the entity was a resident regulated superannuation fund at all times during the year of income when it was in existence, or it was a resident ADF for a part of the year of income and a resident regulated superannuation fund for the remaining part of the year of income when it was in existence, and • both: – the entity passes the compliance test in respect of the part or parts of the year of income during which it was an SMSF – if the trustee contravened a regulatory provision in respect of any other part or parts of the year of income, the entity did not fail the culpability test in relation to any of those contraventions (s 42A(2)). Newly established funds A new superannuation fund (including a resident ADF that converted to a superannuation fund) that was an SMSF at the time of coming into existence, or that became an SMSF at a later time in the year of income, is also a complying superannuation fund in relation to the year of income if: • it complied with the requirements to become a resident regulated superannuation fund (¶2-130) and lodged the election to become regulated under the SIS Act within 60 days of its establishment or conversion • either: – the trustee did not contravene a regulatory provision during the pre-lodgment period (ie the period from the time the entity came into existence or became a superannuation fund, as the case may be, until the time when the entity became regulated), or – the trustee contravened a regulatory provision during the pre-lodgment period on one or more occasions, but the trustee satisfied APRA that, because of special circumstances that existed in relation to the fund during the pre-lodgment period, it would be reasonable for the fund to be treated as if it had satisfied the regulatory provisions • it was a resident regulated superannuation fund at all times during the year of income after the prelodgment period • after the pre-lodgment period, it passed the compliance test in that part or parts of the year of income occurring after the pre-lodgment period during which it was an SMSF • after the pre-lodgment period, if the trustee contravened a regulatory provision in respect of any part or parts of the year of income occurring after the pre-lodgment period during which it was not an SMSF — it did not fail the culpability test in relation to any of the contraventions (s 42A(3)). Where election to become regulated is defective An SMSF is also a complying superannuation fund in relation to a year of income if: • the trustee of the entity has purported to make an election to become a regulated superannuation fund • the requirements of SISA s 19(2) to (4) were not complied with when the election was made, but were complied with within 28 days after the trustee found out about them • the entity complied with all the other requirements specified in s 42A(4). Compliance test

An entity passes the compliance test in s 42A(5) in relation to a year of income or part of a year of income if: • the trustee did not contravene a regulatory provision during the year of income or the part of the year of income, or • the trustee contravened a regulatory provision, and the Commissioner thinks that a complying superannuation fund notice should nevertheless be given to the entity in relation to the year of income after considering: – the taxation consequences of treating the entity as a non-complying fund – the seriousness of the contravention (see below) – all other relevant circumstances (see below). For the purposes of s 42A(5), the “circumstances” must be relevant, not necessarily special or unique. The Commissioner must consider what circumstances are relevant in light of each particular case. For example, these may include whether the contraventions have been rectified, the fund’s compliance history, the events leading to the contravention and whether they influenced the trustee’s decision (see “ATO guidelines on compliance test” and “All other relevant circumstances” below). In Triway Superannuation 11 ESL 12, the AAT said that s 42A(5) is a relieving discretion and two principles need to be observed: • first, discretions that are remedial or beneficial in nature ought be given a construction that allows the fullest relief which is open on a fair reading of their term, and • second, in exercising a discretion, it is necessary to have regard to whether its exercise in a particular instance will achieve or frustrate the ends, objects or purposes of the SIS Act. That case involved a three-member SMSF (father, mother and their son) where the son had a drug addiction and took almost all of the fund’s money and spent it or gave it away. On advice from a registered tax agent, the trustees concealed the true nature of the use and loss of this money for five years. The Commissioner decided to treat the SMSF as a non-complying fund. In affirming the Commissioners’ decision not to exercise the s 42A(5) discretion in the SMSF’s favour, the AAT stated: “27. In the present matter, the breaches of the standards required of superannuation funds to be concessionally taxed, are particularly serious. 28. While tragic, the circumstances of the case are not those in which a discretion ought be exercised consistently with the principles governing exercise of discretionary powers. To do so would frustrate the wider objects of the SIS Act by relieving those responsible for superannuation funds of tax imposts where all of the assets of a superannuation fund are deployed inappropriately, and lost as a consequence. Therefore, exercising a discretion in these circumstances was not consistent with the objects of the SIS Act.” In JNVQ 09 ESL 08, the AAT reviewed the application of the compliance test and upheld the Commissioner’s decision to issue a notice of non-compliance after weighing all the relevant factors in s 42A(5). In that case, the fund had breached the in-house asset rules and the seriousness of the contravention and the length of time taken to redress it weighed heavily against the fund (see also Case 7/2009 2009 ATC ¶1-011 and CBNP Superannuation Fund 2009 ATC ¶10-105; 09 ESL 12). In Pabian Park 2012 ATC ¶10-253, the AAT said that the following observations made in Re JNVQ in respect of the exercise of the discretion under s 42A(5) are apposite: “… Any exercise of discretion must have regard to considerations of unfairness in a particular case, but must be applied in a manner consistent with the objects of the relevant Act. It is important to have regard to whether, by exercising the discretion in a particular case, the decision-maker will be achieving or frustrating those objects.”

In Pabian, despite various breaches by the SMSF (in-house asset rules, loans prohibition), the AAT accepted that there were “mitigating circumstances” (the trustees were unwell, they did not understand the seriousness of the breaches, “the case is finely balanced”). In these and after weighing up all the factors, the AAT was satisfied that it would not be inconsistent with the objects of SIS Act to exercise the discretion in favour of the fund. Accordingly, it set aside the Commissioner’s decision to issue a noncompliance notice to the fund. The non-compliance notice was “taken never to have been given” with the effect that fund remained a complying superannuation fund for each of the years of income covered by that notice (s 40(3): see ¶2-150). The ATO said that it was open to the AAT to reach its decision on the facts. The ATO, however, noted that in doing so, the AAT has accepted and followed the general approach taken in PS LA 2006/19 (see “Options available to the Commissioner” below) (ATO Decision Impact Statement). Other cases where the AAT considered the application of the compliance test are: ZDDD 11 ESL 01; [2011] AATA 3; XPMX 08 ESL 10; [2008] AATA 981; Shail Superannuation Fund 2011 ATC ¶10-228; The R Ali Superannuation Fund 2012 ATC ¶10-231; 12 ESL 01; Montgomery Wools Pty Ltd Superannuation Fund 2012 ATC ¶10-233; 12 ESL 02; ATO Decision Impact Statement. ATO guidelines on compliance test Practice Statement Law Administration PS LA 2006/19 provides guidelines on the application of the compliance test in s 42A(5), in particular, the seriousness of a contravention and the relevant circumstances to be considered (see below). Basically, a non-compliance notice will not be given to an SMSF in two situations: • if the Commissioner has accepted an undertaking (including an informal arrangement) by the trustee to rectify a contravention, provided the trustee is genuinely attempting to satisfy the terms of the undertaking, or • if the Commissioner is satisfied that the trustee has wound up the fund and fund money has been rolled over to another independently managed fund (para 16, 17). For the first situation, the Commissioner may, under SISA s 262A, accept a written undertaking by a person in connection with a matter where the Commissioner has a function or power under the Act, and may apply to court for orders to enforce a breach of the undertaking (see ¶3-850). The court’s powers under s 262A are very wide, including deeming a fund to be complying in an appropriate case (Interhealth (No 2) 12 ESL 09). In the second situation, a notice of non-compliance is inappropriate because any money in the fund has effectively been placed in a position where it will no longer be at risk from further contraventions by the trustee. Where this is not the case and there is a risk of future non-compliant behaviour by the trustee, action will be taken in accordance with Practice Statement Law Administration PS LA 2006/17 (dealing with the disqualification of a trustee: see ¶3-850). If the Commissioner finds that the trustees’ actions preceding a winding-up were such that it is appropriate to give an SMSF a notice of non-compliance, he is not precluded from doing so on the basis that the SMSF has been wound up. The compliance test applies to an entity that is an SMSF throughout a year of income, and to an entity that was not an SMSF for the whole year in respect of any part of the year of income during which it was an SMSF. In respect of that part of the year of income when the entity was not an SMSF, the culpability test (see above) applies. If a compliance notice has already been given to a fund in relation to a year of income and has not been revoked under SISA s 40 (¶2-150), a second compliance notice does not need to be given for the purposes of s 42A(5). Options available to the Commissioner In making the decision on whether to give an SMSF a notice of non-compliance for a year of income, the Commissioner must have regard to the factors set out in s 42A(5) (see above). PS LA 2006/19 outlines the factors that the Commissioner will consider in deciding whether a notice of non-compliance should be given to an SMSF under SISA s 40(1) where the trustee has contravened one or more of the regulatory provisions.

The Regulators (APRA or the Commissioner) have a range of options under the SIS Act to deal with contraventions (¶3-850). For example, where a contravention occurs, the Commissioner may use one or more of the options below: • make the fund a non-complying superannuation fund by giving the fund a notice of non-compliance (s 40(1): ¶2-150) • accept an undertaking from the trustee to rectify the contravention (s 262A: ¶3-850) (see ZDDD 11 ESL 01, where an enforceable undertaking was not accepted by the ATO in view of the seriousness of the contraventions) • disqualify individuals as trustees, thereby prohibiting them from acting as an individual trustee or as a responsible officer of a corporate trustee of a superannuation fund (s 126A: ¶3-130) • suspend or remove the trustee of a superannuation fund, and appoint an acting trustee (s 133: ¶3130) • give the trustees a rectification and/or education direction, and impose administrative penalties for certain contraventions (¶3-845, ¶5-550) • freeze the assets of the fund if there is a risk of the members’ benefits being eroded (s 264: ¶3-850), and • seek civil and/or criminal penalties through the courts (Pt 21: ¶3-800–¶3-820). Seriousness of a contravention The seriousness of a contravention is a question of fact and degree, and each case will need to be considered in light of its particular circumstances. In all cases, the ATO’s response to a contravention must be appropriate and proportionate. In determining the seriousness of a contravention when applying the compliance test in s 42A(5) (see above), the Commissioner will consider the factors below. • The behaviour of the trustee in relation to the contravention (see APRA v Derstepanian and Anor [2005] FCA 1121; 60 ATR 518). A contravention resulting from recklessness or intentional disregard for a regulatory provision is likely to be considered more serious than a contravention resulting from an honest mistake. “Recklessness” and “intentional disregard” are well-established concepts. The courts have long recognised that the ordinary meaning of “recklessness” involves something more than mere inadvertence or carelessness. For example, an entity’s conduct clearly shows disregard of, or indifference to, consequences or risks that are reasonably foreseeable as being a likely result of the entity’s actions. In other words, recklessness involves the running of what a reasonable person would regard as an unjustifiable risk. “Intentional disregard” is more than just disregard for the consequences or reckless disregard. The facts must show that an entity consciously decided to disregard clear obligations under a law, of which the entity was aware. An example is the production of false records (see PS LA 2012/15; MT 2008/1). • The extent to which the contravention affects the fund’s assets (see Case 47/94 94 ATC 417; AAT Case 9689 29 ATR 1086). The greater the proportion of the fund’s assets affected by the contravention, the more serious the contravention is likely to be. • The extent to which the fund’s assets are exposed to financial risk and whether there is any loss to the value of the fund. The greater the proportion of the fund’s assets exposed to financial risk and the greater the loss suffered by the fund, the more serious the contravention is likely to be. However, a contravention may still be serious if a significant proportion of the fund’s assets has been put at risk, even though the fund has not suffered any actual loss (see Re QX971 and APRA [1999] AATA 6). • The frequency and duration of contraventions over a period of time (see Re Preuss and APRA [2005] AATA 748; (2005) 60 ATR 1137). A single contravention on its own may not be considered serious,

but a number of contraventions taken together may make the situation more serious. In addition, the longer a contravention continues without any attempt to rectify it, the more serious it is likely to be. • The nature of the contravention in the overall scheme of SIS regulatory regime (see APRA v Holloway and Anor [2000] FCA 1245; (2000) 45 ATR 278). For example, a contravention involving an artificial arrangement intended to undermine a regulatory provision is likely to be considered a serious contravention. In Sutherland v Woods 11 ESL 08, the ATO had written to the trustees of the SMSF which had contravened various SIS Act and SIS Regulations provisions outlining the steps required to be taken to rectify the reported contraventions, or face prosecution or disqualification as trustees of the fund. The court concluded that there was no dispute that the SMSF was held to be a non-complying superannuation fund. The AAT, in JNVQ 09 ESL 08, said that the seriousness of the contravention in that case militates against any exercise of the discretion in the compliance test in s 42A(5) (see above). However, no factor is taken alone and the AAT must consider the particular mitigating circumstances upon which the applicants rely, which are part of “all other relevant circumstances” (see below). All other relevant circumstances In addition to the taxation consequences and the seriousness of the contravention, the Commissioner is required to consider “all other relevant circumstances” when applying the compliance test in s 42A(5) (see above). The circumstances do not necessarily have to be special or unique; they only have to be relevant. Some circumstances that may be relevant in a particular case include the following. • Whether the trustee has rectified the contravention, entered into an enforceable undertaking to rectify the contravention, or taken any action (where possible) to prevent the contravention from occurring again. Actions or behaviours that indicate a willingness to comply with the law will be considered favourably. • The trustee’s level of skill and knowledge. The higher the level of skill and knowledge of the trustee in managing a fund, the more likely it is that they are expected to understand the impact of their action or inaction. A trustee with a more comprehensive understanding is expected to meet a higher standard of behaviour in order to demonstrate that the fund should be given another opportunity to improve compliance before being made a non-complying fund. • The compliance history of the fund before and after the contravention. A fund with a good compliance record will be treated more favourably than a fund with a history of non-compliance. • The events which led to the contravention and whether these influenced the trustee’s decision. Examples include serious illness or death of a trustee or close relative, and natural disasters. • In the event that the ATO may have facilitated or contributed to the trustee’s adopting a course of action, see ATO Practice Statement PS LA 2011/27 (on matters that the Commissioner considers when determining whether the ATO view of the law should only be applied prospectively) as the principles discussed in that practice statement are relevant in deciding whether to give an SMSF a notice of non-compliance (PS LA 2009/19, para 36). Compliance with provisions in other Acts As a condition for obtaining or maintaining its “complying fund” status under SIS Act and ITAA97, superannuation entities have to comply with the wider definition of “regulatory provision” (see below), rather than just the SIS provisions as was the case in pre-2002 years. This is because certain prudential requirements previously imposed by SIS Act or SIS Regulations have been replaced by equivalent requirements in CA (eg the reporting and disclosure obligations to members) and TAA, and by the enactment of FSCDA covering the reporting obligations of APRA-regulated entities. Regulatory provisions Superannuation entities are granted complying fund status only if the trustee of the entity does not contravene a regulatory provision, or the trustee contravenes one or more regulatory provisions but does

not fail the culpability or compliance test, as the case may be (see above). A “regulatory provision” in relation to a superannuation entity is defined in SISA s 38A as: • a provision of the SIS Act or Regulations • a provision of the Financial Sector (Collection of Data) Act 2001 (FSCDA) (not applicable to SMSFs) • any of the following provisions in Sch 1 to the TAA (applicable to SMSFs only) – s 284-75(1) and (4) (making a statement that is false or misleading in a material particular, whether because of things in it or omitted from it) (or former s 288-85 (giving false or misleading statements) – s 284-95 (liability to an administrative penalty under s 284-75(1) and (4) by the directors of the corporate trustee of an SMSF) – Div 390 (reporting to the ATO about contributions and roll-overs) – s 136-80(1) (commutation of income stream and payment of commutation lump sum under an ATO commutation authority), or • any of the following provisions of the Corporations Act 2001 as applying in relation to financial products that are interests in the superannuation entity: s 1013K(1) or (2); 1016A(2) or (3); 1017B(1); 1017C(2), (3) or (5); 1017D(1); 1017DA(3); 1017E(3) or (4); 1020E(8) or (9); 1021C(1) or (3); 1021D(1); 1021E(1); 1021O(1) or (3); 1041E; 1041F(1); 1043A(1) or (2); any other provisions as specified in the regulations for the purposes of SISA s 38A(b), or • any of the following provisions of the Corporations Act 2001: s 1021NA(1), (2) or (3); 1021NB(1), (2) or (3). The above CA provisions deal with licensing, disclosure of information and market conduct (see Chapters 4 and 9). The requirements under the FSCDA are discussed in ¶9-740. Meaning of “contravention” The trustee of a regulated superannuation fund must comply with all regulatory provisions that are relevant to it (see above). The compliance requirements are discussed in Chapters 3, 4, 5 and 9. For the purpose of determining a superannuation fund’s compliance status under SISA Pt 5 Div 2, a contravention of a regulatory provision is to be ignored unless the contravention is: • an offence • a contravention of a civil penalty provision, or • a contravention of TAA Sch 1 s 284-75(1), (4), s 284-95 or Div 390 (SISA s 39(1)). If a regulatory provision states that a person commits an offence by engaging in or failing to engage in specified conduct, the person is taken to have contravened the provision by engaging in or failing to engage in that conduct (s 39(1A)). To avoid doubt, conduct giving rise to an administrative penalty under s 284-75(1) or (4) (or 288-85 for things done before 4 June 2010) is treated as a contravention of that section (SISA s 39(1B)). For the purposes of Div 2, it is sufficient if a contravention is established on the balance of probabilities (s 39(2)). The less onerous “balance of probabilities” civil standard of proof is used, even though certain offences can arise only if it has been established under the criminal standard of proof (ie beyond reasonable doubt) that the offence has been committed. This is because a decision on the compliance status of a fund is a reviewable decision (¶2-150). Except where a contravention of a provision gives rise only to civil liability action (eg an action against

trustees for failure to comply with a SIS Act covenant: ¶3-100, ¶3-820), a contravention is generally an offence (¶3-810). Trustee duties and penalties under SIS Act are discussed further in ¶3-800–¶3-820. [SLP ¶2-180]

¶2-150 Notification of complying or non-complying status The “Regulator” is the Commissioner of Taxation for notices given to SMSFs, and APRA for notices given to all other funds (SISA s 6(4)). The Regulator may give a written notice to the trustee of a superannuation fund stating whether it is, or is not, a complying superannuation fund in relation to a year of income specified in the notice. A notice stating that a fund is not a complying superannuation fund must set out the reasons for the decision. APRA must also give the particulars of any notice it has issued to a fund to the Commissioner (SISA s 40; 45). When must a complying notice be given? The Regulator must give the trustee of a superannuation fund a complying fund notice in relation to a year of income if the fund has satisfied all the conditions relevant to a complying superannuation fund (as discussed in ¶2-140) and: • it has not received a notice of compliance in relation to a previous year of income, or • it has received a notice of non-compliance in relation to a previous year of income and has not received a notice of compliance for a year of income later than that previous year of income and earlier than the current year of income (SISA s 41(2)). Annual notices of compliance or non-compliance are no longer issued to superannuation funds (or ADFs or PSTs), as was previously the case under the former Occupational Superannuation Standards Act 1987 (OSSA). Instead, a fund is a complying superannuation fund (or complying ADF or PST) for tax purposes if it has received a notice of compliance in respect of a year of income (including a notice under the former OSSA in relation to a pre-1994/95 income year) which has not been revoked by a subsequent notice of non-compliance in respect of that income year or a later income year (SISA s 45(1)). Funds which are already complying funds therefore will not receive any notices from the Regulator unless their complying fund status is revoked. New funds which satisfy the conditions in the SIS Act for complying superannuation funds will receive a first notice of compliance in respect of the year of establishment and, after that, will not be issued further notices unless they are later found to be noncomplying. If a notice of compliance is revoked, or the decision to give the notice is set aside, the notice is taken never to have been given (s 40(4); 41(4)). This has the effect that the fund is treated as a non-complying fund for each of the years of income covered by that notice (s 40(3)). The Commissioner can amend the fund’s assessment in respect of those years to give effect to the fund’s change of status. Where the Regulator has decided that a fund did not fully satisfy the SIS Act conditions to be a complying superannuation fund for a particular year, that decision can be reversed in light of information not considered at the time. In that event, the trustees (and the Commissioner, as required) are notified accordingly and the fund will be a complying fund for the year. The correct notice must be given In XPMX 08 ESL 10, the AAT decided that a notice of non-compliance given to a superannuation fund was invalid and ineffective as the fund in question was an SMSF at all times during the relevant year (year ended 30 June 1998). The notice of non-compliance given was expressed to be based upon the fund’s failure to satisfy conditions in SISA s 42(1) (the culpability test: see ¶2-140) which does not apply to SMSFs. The decision to issue the notice would have been sustainable had the decision been based upon SISA s 42A(1) and 42A(5), the provisions applicable to SMSFs (the compliance test: see ¶2-140). The ATO does not agree with the AAT decision. The ATO considers that the fund was not an SMSF in respect of the 1998 year of income, and as the trustees failed to satisfy the conditions in s 42(1), the ATO

was entitled to issue the notice of non-compliance in respect of that year under the transitional provisions in SISA Pt 24B Div 3. In any case, a decision to issue a notice is made under SISA s 40 which authorises the giving of notices stating whether a fund is complying or non-complying, rather than under the specific provision under which non-compliance arises. Accordingly, the ATO’s view is that a decision to give a notice of non-compliance is valid if justified under either SISA s 42 or 42A (ATO Decision Impact Statement on XPMX case). However, the ATO decided against an appeal in view of the limited ongoing relevance of the decision (the issues in the case would only arise in respect of notices issued for the 1998 and 1999 years of income) and the range of compliance strategies which are currently available to the ATO (see Practice Statement Law Administration PS LA 2006/19 in ¶2-140). Review of Regulator’s decision The Regulator’s decision to give a notice stating that a fund is or is not a complying superannuation fund, or the refusal to give such a notice, is a “reviewable decision” (SISA s 10(1)). The trustees may request the Regulator to review a reviewable decision by giving written notice, setting out their reasons for making the request, within 21 days after receiving notice of the decision. The Regulator can confirm, vary or revoke the decision, and advise the trustees accordingly. If the Regulator does not confirm, vary or revoke the decision within 60 days after receiving the request for review, the decision under review is deemed to have been confirmed (SISA s 344). An application for review of a decision that a fund is non-complying does not affect the operation of the decision. Notice of the decision that the fund is a non-complying superannuation fund can be given to the Commissioner. However, the trustees can apply to the AAT to stay the operation or implementation of the decision (Administrative Appeals Tribunal Act 1975 (AAT Act), s 41). Superannuation trustees that are dissatisfied with the Regulator’s decision (or deemed decision) after the review can apply to the AAT for a review of the decision (s 344(8)). Proceedings before the AAT are governed by the AAT Act, subject to various modifications which apply specifically to taxation reviews. An application to the AAT for review must be made within 28 days after notification of the Regulator’s decision on review, although the AAT may grant an extension of time (AAT Act s 29). If the Regulator’s decision after review is a deemed confirmation of an earlier decision, the time for applying to the AAT commences on the date of the deemed decision (60 days after the date of the original request for review) and ends on the 28th day after the date of the deemed decision (s 344(9)). Proceedings before the AAT take place in private (s 344(11)). The AAT has discretion on a case-by-case basis to determine whether confidentiality should be provided through a private hearing under AAT Act s 35(2). An appeal against an AAT decision may be made to the Federal Court, but only on a question of law. Merits review by AAT Administrative decisions by APRA with respect to APRA-regulated funds and by the Commissioner with respect to SMSFs are subject to merits review by the AAT, consistent with the guidelines developed by the Administrative Review Council. Merits review aims to ensure that all persons affected by a decision receive fair treatment, and to improve the transparency of administrative decisions where the Regulators are seen to make consistent and well-formulated decisions. These decisions are specified in the definition of “reviewable decision” in SISR reg 1.03(1), for example, a decision to refuse to grant or revoke a licence, a decision to refuse to determine certain SIS Act provisions do not apply, and decisions to ensure compliance with minimum standards and decisions giving directions to trustees. [SLP ¶2-190, ¶4-820]

¶2-170 Public sector superannuation schemes and EPSSSs A public sector superannuation scheme for tax purposes is defined in ITAA97 s 995-1(1) to have the meaning in the SISA (see ¶2-120).

A public sector superannuation scheme is a complying superannuation fund and is entitled to concessional tax treatment as such a fund under ITAA97 Div 295, if it is either a regulated superannuation fund (as discussed at ¶2-130) or an exempt public sector superannuation scheme (SISA s 45(6)). An “exempt public sector superannuation scheme” (EPSSS) means a public sector superannuation scheme that is prescribed in SISR Sch 1AA (SISR reg 1.04(4A) to (4E)). EPSSSs are subject to a different prudential regime from other regulated superannuation funds as they are not regulated under the SIS legislation. Instead, these schemes are subject to supervision under their respective enabling Commonwealth, state or territory Acts or governing rules which effectively reflect the principles of the SIS legislation for prudential regulation purposes. An EPSSS may choose to be regulated by the APRA, in which case it would cease to be an EPSSS (see below). It should be noted that the provisions in SISA dealing with TFNs only apply to an EPSSS which has a corporate trustee or has the provision of old-age pensions as its sole or primary purpose (Chapter 11). Also, certain EPSSSs are taken to be regulated superannuation funds for the purposes of the Superannuation (Resolution of Complaints) Act 1993 (SRC Act) and, therefore, are subject to the jurisdiction of the Superannuation Complaints Tribunal (SRC Act s 4A) (Chapter 13). By virtue of SISA s 46, an EPSSS is taken to be a complying superannuation fund for the purposes of SGAA. A scheme ceases to be an EPSSS at the time it is registered as a registrable superannuation entity (¶3495) and it becomes an APRA-regulated entity. These schemes are subject to regulation under SIS Act regardless of whether Sch 1AA has been amended to remove them from the list of EPSSSs (SISR reg 1.04(4AA)). [SLP ¶2-110]

Approved Deposit Funds ¶2-300 Qualifying conditions for complying ADFs An entity is eligible for concessional tax treatment as a complying ADF under ITAA97 Div 295 (see ¶7600) if it satisfies the following conditions specified in the SIS Act: • the entity is an “approved deposit fund” (as defined in the SIS Act: ¶2-320) and is resident in Australia (¶2-330) • the fund has met the prescribed requirements to be a complying ADF for the purposes of the SIS Act (¶2-340) • the trustee of the fund has received a notice from APRA stating that the fund is a complying fund, and has not received a notice in a later year stating that it is non-complying (¶2-350). An ADF that does not satisfy the conditions to be a complying ADF is taxed under Div 295 as a noncomplying ADF (¶7-650). [SLP ¶2-220]

¶2-320 What is an “approved deposit fund”? An “approved deposit fund” means a fund that is an indefinitely continuing fund and is maintained by a registrable superannuation entity (RSE) licensee that is a constitutional corporation solely for approved purposes (SISA s 10(1)). The meaning of “indefinitely continuing fund”, as discussed in relation to a superannuation fund (¶2-120), applies similarly to an ADF. The meaning of “RSE licensee” is discussed at ¶3-480.

Approved purposes The “approved purposes” of an ADF are: • receiving on deposit: (i) roll-over superannuation benefits (¶8-600) (ii) directed termination payments (within the meaning of ITTPA s 82-10F: these are permitted rollovers of employment termination payments) (iii) amounts paid under SISA Pt 24 (these are roll-overs from eligible rollover funds), and (iv) amounts paid under SGAA s 65 (these are payments of the shortfall component of a SG charge: ¶12-500) • dealing with the above amounts in accordance with the fund rules to enhance the value of, or render profitable, the property of the fund • repaying deposits and accumulated earnings upon request by the depositor (or by the executor, etc, of a deceased depositor), subject to any restrictions imposed by the ADF operating standards (¶3650) • such other purposes as may be approved by APRA (SISA s 10(1); 15). ADFs are principally superannuation roll-over vehicles with special features. For example, they cannot accept contributions directly from contributors in the same way as superannuation funds. They must pay out members’ benefits when the members reach age 65 and they cannot pay a pension. The special features of ADFs, in particular those dealing with their operation and regulation, are discussed in ¶3-650 onwards. [SLP ¶2-225]

¶2-330 Resident ADFs A fund is a resident ADF at a particular time if all of the following conditions are met: • either the fund was established in Australia or any asset of the fund is situated in Australia • the central management and control of the fund is in Australia • the accumulated entitlements of resident members are 50% or more of the total assets of the fund. The “accumulated entitlements of resident members” is the sum of the value of the fund’s assets that are attributable to all deposits made to the fund for members who are residents and total earnings on those deposits. The “total assets of the fund” is the value of the fund’s assets at that particular time. A “member” includes a depositor, and “resident” has the same meaning as in ITAA36 (SISA s 20A). During a year of income, a resident ADF may convert to a resident regulated superannuation fund (¶2130) without endangering its eligibility for concessional tax treatment in that year (SISA s 42(1)(a)(ii)). [SLP ¶2-225]

¶2-340 Complying ADFs under the SIS Act An entity is a complying ADF in relation to a year of income if, at all times during the year of income when it was in existence, it was a resident ADF (¶2-330) and any of the following conditions are met: • the trustee did not contravene any regulatory provision (¶2-140) in relation to the entity in respect of the year of income • the trustee contravened a regulatory provision on one or more occasions and each contravention was

rectified within 30 days (or such further period allowed by APRA) after the trustee became aware of the contravention • the trustee contravened a regulatory provision on one or more occasions and APRA is satisfied that the seriousness or frequency, or both, of the contraventions do not warrant giving the entity a notice stating that it is not a complying ADF • APRA, after considering all relevant circumstances, thinks that a notice should be given to the entity stating that it is a complying ADF (SISA s 43). For the above purposes, a contravention of a regulatory provision is ignored unless the contravention is an offence or a contravention of a civil penalty provision (SISA s 39). The meaning of “contravention”, as discussed at ¶2-140 in relation to superannuation funds, applies equally to ADFs. The principal prudential requirements for ADFs are discussed in Chapters 3 and 4. [SLP ¶2-230]

¶2-350 Notification of ADF status APRA may give a written notice to the trustee of a fund stating whether it is, or is not, a complying ADF in relation to a year of income specified in the notice. A notice stating that a fund is non-complying must set out reasons for APRA’s decision (SISA s 40). APRA must also give the particulars of any notice issued to a fund to the Commissioner (SISA s 40(3)). APRA is obliged to give a notice to an entity stating that it is a complying ADF in relation to a year of income if it has satisfied all the complying ADF conditions (as discussed at ¶2-340) and: • it has not received a notice of compliance in relation to a previous year of income, or • it has received a notice of non-compliance in relation to a previous year of income and has not received a notice of compliance for a subsequent year of income (SISA s 41(2)). As with superannuation funds, APRA no longer issues annual notices of compliance or non-compliance to ADFs. An APRA decision on the complying or non-complying status of an ADF is a reviewable decision. The review and appeal process for reviewable decisions is the same as for superannuation funds (¶2150). [SLP ¶2-235]

Pooled Superannuation Trusts ¶2-400 Qualifying conditions for PSTs An entity is eligible for concessional tax treatment as a PST under ITAA97 Div 295 (see ¶7-700) if it satisfies the following conditions specified in the SIS Act: • the entity is a “pooled superannuation trust” (as defined in the SIS Act: ¶2-420) • the trust has met the prescribed requirements for PSTs for the purposes of the SIS Act (¶2-430) • the trustee has received a notice from APRA stating that the trust is a PST and has not received a notice in a later year stating that it is not a PST (¶2-440). Unit trusts which are not PSTs, or which do not satisfy prescribed conditions in the SIS Act for PSTs, are taxed in accordance with the general trust provisions of ITAA36. [SLP ¶2-255]

¶2-420 What is a “pooled superannuation trust”?

For tax purposes, a “pooled superannuation trust” is defined by reference to its meaning in SISA s 48, ie a PST which satisfies the conditions for concessional tax treatment set out at ¶2-400. A PST is defined in the SIS Act as a resident unit trust (the trustee of which is a trading or financial corporation formed within the limits of the Commonwealth) that is used only for investing the following kinds of assets: • assets of a regulated superannuation fund, an ADF or a PST • complying superannuation assets or segregated exempt assets of a life insurance company (generally assets supporting life policies issued by the company and the annuity business of the company in respect of complying superannuation business) (SISR reg 1.04(5)). A “unit trust” generally means any trust estate, whether or not the interests in it are unitised. The general rules in ITAA97 apply to determine residency of the unit trust. To come within the definition of a PST, the trustee of the unit trust must also give APRA confirmation in writing of its intention for the trust to be treated as a PST. The special features of PSTs, in particular those dealing with their operation and regulation, are discussed in ¶3-700 onwards. [SLP ¶2-255]

¶2-430 PSTs under the SIS Act An entity is a PST for the purposes of the SIS Act in relation to a year of income if, at all times during the year of income when it was in existence, it was a PST as defined (¶2-420) and any of the following conditions are met: • the trustee did not contravene any regulatory provision (¶2-140) in relation to the entity in respect of the year of income • the trustee contravened a regulatory provision on one or more occasions and each contravention was rectified within 30 days (or such further period allowed by APRA) after the trustee became aware of the contravention • the trustee contravened a regulatory provision on one or more occasions and APRA is satisfied that the seriousness or frequency, or both, of the contraventions do not warrant giving the entity a notice stating that it is not a PST • APRA, after considering all relevant circumstances, thinks that a notice should be given to the entity stating that it is a PST (SISA s 44). For the above purposes, a contravention of a regulatory provision is to be ignored unless the contravention is an offence or a contravention of a civil penalty provision (SISA s 39). The meaning of “contravention”, as discussed at ¶2-140 in relation to superannuation funds, applies equally to PSTs. The principal prudential requirements for PSTs are discussed in Chapters 3 and 4. [SLP ¶2-260]

¶2-440 Notification of PST status APRA may give a written notice to the trustee of a unit trust stating whether it is, or is not, a PST in relation to a year of income specified in the notice. A notice stating that a unit trust is not a PST must set out reasons for APRA’s decision (SISA s 40). APRA must also give the particulars of any notice issued to a unit trust to the Commissioner (SISA s 40(3)). APRA is obliged to give a notice to an entity stating that it is a PST in relation to a year of income if it has

satisfied all the PST conditions (as discussed at ¶2-430) and: • it has not received a notice of compliance in relation to a previous year of income, or • it has received a notice of non-compliance in relation to a previous year of income and has not received a notice of compliance for a subsequent year of income (SISA s 41(2)). As with superannuation funds, annual notices of compliance or non-compliance are no longer issued to PSTs. An APRA decision on the complying or non-complying status of a PST is a reviewable decision. The review and appeal process for reviewable decisions is the same as for superannuation funds (¶2150). [SLP ¶2-265]

3 SIS PRUDENTIAL SUPERVISION OF SUPERANNUATION FUNDS PRUDENTIAL REQUIREMENTS Regulation of superannuation entities

¶3-000

Superannuation Regulators

¶3-005

Entities covered by the SISA

¶3-010

Spouse, child and relative in the SISA ¶3-020 GOVERNING RULES AND TRUSTEE RULES Governing rules and trustee covenants

¶3-100

Trustee representation rules

¶3-120

Trustee appointment and removal — disqualified persons

¶3-130

Governing rules and SISA requirements

¶3-140

Service providers and conflicts of interest

¶3-145

Protection for trustees in governing rules

¶3-150

Defined benefit and pension funds must have 50 members

¶3-160

FUND OPERATION Sole purpose test

¶3-200

Acceptance of contributions and accruals

¶3-220

Minimum benefits of members

¶3-230

Insurance cover and standards

¶3-240

Insurance operating standards

¶3-243

General fees rules

¶3-245

Fee cap and prohibition of exit fees

¶3-250

Assignment of members’ interest and charge on fund assets

¶3-260

Members’ rights to accrued benefits

¶3-270

Preservation of benefits

¶3-280

Portability of benefits

¶3-284

Payment of benefits

¶3-286

Illegal early release of superannuation

benefits

¶3-287

Death benefit nominations — meaning of “dependant”

¶3-288

Providing information to members and others ¶3-290 Dealing with members’ inquiries and complaints

¶3-300

Providing information to the Regulators

¶3-310

Accounts, audit and reporting by superannuation entities

¶3-315

Financial management

¶3-330

Other trustee duties and administration obligations

¶3-340

Dealing with surpluses

¶3-350

Splitting superannuation interests on marriage breakdown

¶3-355

Amalgamation of funds — successor funds

¶3-360

Winding up fund

¶3-370

Lost members and unclaimed superannuation benefits

¶3-380

Transferring inactive low-balance accounts to ATO

¶3-385

PENSION STANDARDS Minimum standards for income streams

¶3-390

INVESTMENT RULES Investment strategy standard — covenants, insurance, and reserves

¶3-400

Investment controls

¶3-405

Borrowings by superannuation funds

¶3-410

Limited recourse borrowing arrangements

¶3-415

Loans/financial assistance to superannuation fund members

¶3-420

Acquisition of assets from a related party

¶3-430

Fund investments — arm’s length rule ¶3-440 In-house asset rules

¶3-450

Related party

¶3-470

Trustees must not offer inducements

to influence employers

¶3-475

RSE LICENSING AND REGISTRATION Trustee licensing and RSE registration

¶3-480

Applying for an RSE licence

¶3-485

Approval to hold controlling stake in an RSE licensee

¶3-488

Registering an RSE

¶3-490

RSE licensees must provide information about RSE at AMM

¶3-495

PUBLIC OFFER ENTITIES AND ERFs RSE licensing and other rules

¶3-500

ERF prudential requirements

¶3-520

SUPERANNUATION SERVICE PROVIDERS Auditors and actuaries

¶3-600

Investment managers and custodians ¶3-620 ADF PRUDENTIAL REQUIREMENTS Prudential requirements for ADFs

¶3-650

ADFs providing information to the Regulators

¶3-658

Minimum benefits of ADF members

¶3-660

Preservation and payment of benefits by ADFs ¶3-662 ADF investment rules and controls

¶3-680

PST PRUDENTIAL REQUIREMENTS Prudential requirements for PSTs

¶3-700

PSTs providing information to the Regulators

¶3-710

PST investment rules and controls

¶3-730

PENALTIES SIS penalty regime

¶3-800

Application of the Criminal Code

¶3-810

SIS penalty provisions

¶3-820

Infringement notices

¶3-840

Administrative directions and penalties for SMSF contraventions

¶3-845

POWERS OF THE REGULATORS Role of the Regulators and powers

¶3-850

Powers of APRA to give directions

¶3-855

Prudential regulation by ASIC

¶3-860

Protection for whistleblowers

¶3-880

SUPERANNUATION LEVIES Superannuation supervisory levy

¶3-900

Levy payable by SMSFs

¶3-920

Financial assistance funding levy

¶3-930

Prudential Requirements ¶3-000 Regulation of superannuation entities The Superannuation Industry (Supervision) Act 1993 (SISA) and its Regulations (SISR) are the governing legislation for the regulation of superannuation funds, ADFs and PSTs in Australia. Compliance with the prudential regime in the SIS legislation is a prerequisite for superannuation entities which seek concessional tax treatment for the 1994/95 and subsequent years (¶2-100). The SISA is administered by APRA, ASIC and the Commissioner of Taxation (referred to as “Regulators” in SISA). The division of SISA administration among the Regulators is summarised in ¶3-005. The Regulators have extensive powers (regulatory and investigative) for the administration of the SISA and SISR provisions under their charge (¶3-850). The SISA is based on the pensions and corporations powers under the Constitution. Funds and trusts must be regulated under one of those powers in order to be eligible for tax concessions as a complying superannuation fund, complying ADF or PST. With limited exceptions, a superannuation fund must make an irrevocable election under the SISA to become a regulated superannuation fund (¶2-130) and comply with the regulatory provisions relevant to it. Similarly, an ADF or a PST must come within the meaning of those terms in the SISA and comply with the regulatory provisions relevant to it (¶2-320, ¶2-420). A “regulatory provision” means a provision of the SIS legislation, the Financial Sector (Collection of Data) Act 2001 (FSCDA) and certain provisions of the Corporations Act 2001 (CA) or the Taxation Administration Act 1953 (TAA) (see below and ¶2-140). A complying fund or PST must also be an Australian resident fund or trust (¶2-130). This chapter covers the large number of the SIS prudential requirements that are common to all regulated superannuation funds, ADFs or PSTs (referred to as a “superannuation entity” in the SISA). It also covers the additional requirements or rules that specifically apply to particular types of superannuation funds (eg public offer funds, standard employer-sponsored funds and SMSFs), ADFs or PSTs, and to other entities in connection with their superannuation operations (eg employers and service providers), and the SISA trustee licensing and registrable superannuation entity (RSE) registration regime (¶3-480). The disclosure and licensing obligations of superannuation entities under the CA are discussed in Chapter 4 of the Guide, and SMSF-specific issues and rules are discussed in Chapter 5. In addition to the above, RSEs and RSE licensees which are authorised to offer MySuper products have additional prudential and reporting obligations under SISA and FSCDA (see Chapter 9 of the Guide). For tax purposes, compliance with relevant regulatory provisions in SISA and other Acts constitutes one of the conditions for an entity to qualify as a complying superannuation fund, complying ADF or PST (see Chapter 2). These requirements take the form of specific duties and conditions imposed under the SIS legislation, as well as operating standards that are prescribed, and the obligations under the CA, FSCDA and TAA (see “Compliance with provisions in other Acts” in ¶2-140). A failure to comply may result not only in the entity losing its concessional tax status but in penalties being imposed on those responsible for non-compliance (eg trustees, investment managers and employers). These penalties include a civil and/or criminal penalty such as a fine or term of imprisonment, or civil liability action by an aggrieved person (¶3-820). There are exemptions from some or all of the above prudential regulatory requirements for

superannuation funds with fewer than five members (ie SMSFs and small APRA funds), certain public sector superannuation schemes, or ADFs with a single beneficiary. However, once a superannuation entity is subject to regulation under the SISA and other Acts, all of the prudential requirements relevant to it (including the penalty regime) apply at all times even if the entity fails in a particular year to be eligible for concessional tax treatment under ITAA97 as a complying fund. APRA and ATO guidelines APRA “Superannuation Prudential Practice Guides” (PPGs) provide guidance on APRA’s view of sound practice in particular areas and discuss the prudential requirements based on the SIS legislation and APRA’s prudential standards (www.apra.gov.au/superannuation-standards-and-guidance) (¶9-720). In addition, APRA issues letters and various forms of guidance notes and advices to superannuation trustees from time to time. The ATO’s website contains a range of tax and SMSF rulings, determinations, guidance notes and interpretative decisions as well as fact sheets on the application of the SIS and tax legislation (¶16-090). Different levels of protection apply to those who rely on ATO rulings, etc and other Regulators’ releases or guidelines as some of these do not have the force of law and are based on the Regulators’ interpretation of the relevant legislation. In addition, users should also exercise caution when replying on the releases and guidelines as they may be affected by legislation changes subsequent to their issue. Other regulatory and related Acts A number of other Acts complement the SIS regulatory regime. The Superannuation (Resolution of Complaints) Act 1993 established a complaints resolution scheme and the Superannuation Complaints Tribunal (SCT) to provide the forum for the resolution of complaints of members and beneficiaries of regulated superannuation funds (other than SMSFs) and ADFs, and holders of RSAs and certain superannuation policy holders. The AFCA has replaced the SCT as the external dispute resolution forum from 1 November 2018, with the SCT carrying on residual operations for complaints received by it before that date. The Complaints Act will be repealed on a date to be fixed by proclamation or, if no date is fixed, on 6 February 2022 (Chapter 13). The Superannuation (Unclaimed Money and Lost Members) Act 1999 provides a scheme for regulated superannuation funds, ADFs and RSA providers to deal with unclaimed superannuation money and benefits of lost members (¶3-380). The Corporations Act 2001 and its Regulations provide the regulatory regime for financial products (eg an interest in a superannuation fund) and their providers consequential upon the reforms made by the Financial Services Reform Act 2001 (¶4-050) (the “FSR regime”). For superannuation, the FSR regime is relevant in many areas such as product disclosure, licensing and conduct of superannuation providers and advisers. The SISA provisions in product disclosure and member information, in particular, have been replaced, generally from March 2002, by equivalent provisions in the CA. The FSR regime is discussed in Chapter 4. APRA’s powers dealing with the collection of data under the SISA and the Retirement Savings Accounts Act 1997 (RSA Act) (and various other Acts) have been consolidated into the FSCDA 2001 to harmonise and improve the efficiency of APRA’s data collection regimes. Accordingly, the SISA (and RSA Act) provisions dealing with the provision of data by superannuation entities (other than SMSFs) to APRA have been mainly replaced by equivalent provisions in the FSCDA (¶9-740). The Criminal Code Act 1995 applies to offences against the SISA and other federal Acts (¶3-800). Levy Acts The Superannuation (Financial Assistance Funding) Levy Act 1993 imposes a levy on superannuation funds and ADFs for the purpose of funding the financial assistance provided to funds which have suffered losses as a result of fraudulent conduct or theft. The Superannuation Supervisory Levy Imposition Act 1998 and Superannuation (Self Managed Superannuation Funds) Supervisory Levy Imposition Act 1991 impose a levy on superannuation entities for the purpose of recouping the Regulators’ costs of supervision of the superannuation industry (¶3-900). The Superannuation Auditor Registration Imposition Act 2012 imposes fees for certain matters in

connection with registration of SMSF auditors (¶5-508). Accounting and audit standards for superannuation funds A superannuation fund that is a reporting entity is required to prepare its general purpose financial report in accordance with AASB 1056 “Superannuation Entities” for annual reporting periods beginning on or after 1 July 2016, unless adopted earlier, and auditors of superannuation entities must comply with auditing standards (¶15-640, ¶15-650). Practical issues Practitioner articles published in the Wolters Kluwer Australian Tax Week and Australian Superannuation Tracker and Australian Financial Planning Tracker services discuss many SIS compliance and taxation issues faced by superannuation entities and professionals, as well as developments in the law. Recent articles may be found at ¶16-700. Superannuation legislation changes and reforms Legislation changes in 2018/19 and Bills which propose major changes affecting the regulation and operation of the superannuation industry, registrable superannuation entities (RSEs) and other superannuation providers are discussed in ¶17-330 and ¶17-520. Draft legislation and other government announcements proposing changes and reforms (including APRA consultations) are noted at ¶17-540 and ¶17-600. [FTR ¶790-550; SLP ¶2-100, ¶2-800]

¶3-005 Superannuation Regulators General administration of SISA is shared by APRA, ASIC and the Commissioner of Taxation as specified in SISA s 6. The term “Regulator” is used in the SISA to mean APRA, ASIC or the Commissioner, as the case may be, for the purposes of the provisions administered by them. APRA and ASIC became the Regulators from 1 July 1998, replacing the defunct Insurance and Superannuation Commissioner (ISC). From 8 October 1999, the Commissioner of Taxation was added as a Regulator, primarily for the administration of the SIS legislation to the extent that it relates to SMSFs (¶3-005). From 1 November 2011 until 30 June 2018, the Chief Executive Medicare was also a Regulator under SISA and was primarily for administration of the early release of superannuation benefits on compassionate grounds, replacing APRA and the Commissioner for that part of SIS administration during that period (¶3-280). That responsibility was transferred to the Commissioner from 1 July 2018, and the Chief Executive Medicare has ceased to be a Regulator. The Regulators have extensive powers (regulatory and investigative) for the administration of the SISA and SISR provisions under their charge (¶3-850, ¶3-860). As part of the superannuation regulatory regime, Regulators have additional administration responsibility of related Acts as below: • APRA also has administration responsibility of the Financial Sector (Collection of Data) Act 2001 (¶9740) • APRA and ASIC also have joint responsibility for the administration of the RSA Act 1997, which regulates RSA providers and RSA business (¶10-015) • ASIC has administration responsibility of the Corporation Act 2001, to the extent that it applies to superannuation entities and their activities (see Chapter 4), as well as the external resolution of complaints regime under that Act and under the Superannuation (Resolution of Complaints) Act 1993 (see Chapter 13), and • the Commissioner of Taxation also has general administration responsibility of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶3-380). Financial services reforms

The Financial Services Reform Act 2001 and related legislation amended the Corporations Act 2001 (CA) and the Australian Securities and Investments Commission Act 2001 to provide for: • a single licensing regime for financial sales, advice and dealings in relation to financial products • a consistent and comparable financial product disclosure • a single authorisation procedure for financial exchanges and clearing and settlement facilities (¶4050). Most of the provisions dealing with product disclosure requirements that were previously in the SISR were repealed from 11 March 2002 (the general commencement date of the FSR regime) and replaced by the disclosure regime for financial products in the CA. The residual disclosure rules still covered by the SISR are noted at ¶3-290. The FSR regime is discussed in Chapter 4. Collection of data and provision of returns to Regulators The FSCDA is the principal legislation governing the collection of data from, and provision of returns by, APRA-regulated superannuation entities from 2001 (¶9-740). That Act empowers APRA to make determinations which prescribe the reporting standards applicable to superannuation entities (other than SMSFs) for the provision of annual and periodic returns and other specific data. The SIS legislation continues to require superannuation entities (including SMSFs) to comply with other reporting and provision of information requirements in particular circumstances or in relation to specific fund operations (¶3-310). Resolution of superannuation complaints The Superannuation (Resolution of Complaints) Act 1993 provides for the establishment of the Superannuation Complaints Tribunal (SCT) as the external dispute resolution (EDR) scheme for superannuation complaints. In 2018, the Treasury Laws Amendment (Putting Consumers First — Establishment of the Australian Financial Complaints Authority) Act 2018 (Act No 13 of 2018) amended the Corporations Act 2001 to establish the Australian Financial Complaints Authority (AFCA) as the common EDR scheme for all disputes about products and services provided by financial firms (Corporations Act 2001 Pt 7.10A, and Div 3 — Additional provisions relating to superannuation complaints). All Australian Financial Services Licensees, Australian Credit Licensees, superannuation trustees and financial firms are generally required to become members of AFCA by law. AFCA commenced accepting complaints from 1 November 2018. The SCT continues to operate beyond AFCA’s commencement to resolve the existing complaints it received up to 31 October 2018 (see Chapter 13).

¶3-010 Entities covered by the SISA In the SIS legislation, an “entity” means any of the following — an individual, a body corporate, a partnership or a trust. Superannuation funds are entities providing or offering superannuation products or engaging in superannuation business. These entities are subject to SISA and are required to comply with all of the prudential requirements under the SIS legislation which apply to them regardless of whether they qualify for concessional tax treatment in a particular year. Examples of superannuation providers that are not subject to SISA include funds which do not become “regulated superannuation funds” (see below) and public sector superannuation schemes which are subject to their own enabling Acts (eg Commonwealth schemes). The regulatory regime for Commonwealth superannuation schemes is not covered by this Guide. Likewise, RSA providers are subject to a separate (but broadly similar) prudential regime under the RSA legislation (see Chapter 10). Prudential regulation under the SISA also extends to employers and certain service providers of regulated superannuation entities, eg auditors, actuaries, investment managers and custodians (see “Regulation of other entities engaged in the superannuation industry” below). Specifically, these entities must comply

with prescribed prudential requirements under the SISA in relation to their dealings with superannuation entities. This, in addition to whatever obligations they may have under the laws by which they are constituted or their respective professional bodies. The SISA describes entities that are regulated under the Act by way of a generic term or a particular expression which groups the entities by their function, size, benefit design or funding, or by the contributors to the entity. This classification allows all regulated entities to come under common rules, while allowing particular types of entities to be subject to additional rules relevant only to their operation (eg accumulation funds), or to regulation by a different Regulator (eg regulation of SMSFs by the Commissioner). The SISA also requires registration of superannuation entities and licensing of trustees operating APRAregulated entities. Various generic terms in the SISA describe the entities and licences involved (see “RSE licensee and RSE” below) as well as the MySuper products in regulated superannuation funds (see Chapter 9). In addition, there is a separate regime under SISA for the registration of persons who wish to be approved SMSF auditors (¶5-508). Regulation of other entities engaged in the superannuation industry Section 3(3) of SISA provides that “The Act does not regulate other entities engaged in the superannuation industry”. The government’s view is that this means the SISA does not regulate funds that are not “regulated superannuation funds” (as defined in the Act: see ¶2-130), or are not ADFs or PSTs (¶2-320, ¶2-420). Employers (and other persons such as auditors and actuaries) are not, in this sense, “entities engaged in the superannuation industry” since they do not themselves act as superannuation funds, ADFs or PSTs. On this view, s 3(3) does not prevent the regulation of employers when they interact with regulated superannuation funds, for example, under s 64 (employers to remit deductions from salary and wages promptly: ¶3-220), s 299C (employers to inform funds of employees’ TFNs: ¶11750) and Pt 29B (employers to give information about contributions: ¶12-520), or the regulation of service providers in the superannuation industry (auditors and actuaries: ¶3-600; investment managers and custodians: ¶3-620). Superannuation entity The generic term “superannuation entity” is widely used in SISA. It means a regulated superannuation fund, an ADF or a PST (SISA s 10(1)). Regulated superannuation fund A “regulated superannuation fund” is a “superannuation fund” (¶2-120) which has a corporate trustee, or whose sole or primary purpose is to provide old-age pensions, and whose trustee has elected for the SISA to apply to the fund. A superannuation fund cannot receive tax concessions unless it is a resident regulated superannuation fund (¶2-130). A “superannuation fund” is defined widely to mean an indefinitely continuing fund that is a provident, benefit, superannuation or retirement fund or a public sector superannuation scheme (¶2-120). A superannuation fund is established by governing rules in the form of a trust deed for a private sector fund or an act of parliament or ordinance for a public sector fund (for convenience all governing rules will be referred to as a trust deed in this paragraph). A superannuation fund is administered by trustees appointed in accordance with the deed (and any applicable SISA requirement). The trust deed specifies who is to make contributions to the fund and defines how those contributions are to be determined. It also specifies who is to receive benefits from the fund, the circumstances in which benefits are to be paid and how benefits are to be calculated. Benefits may take the form of a lump sum, usually paid on or after retirement or termination of employment, or a pension, usually payable from the time of retirement. The trust deed provides for the investment of monies held in the fund so as to generate returns which are added to the fund. Benefits are generally paid from the accumulated contributions and returns to the fund. In many cases, the benefits payable to a member’s dependants on the death of the member are covered by an insurance policy arranged by the trustees with a life insurance company, with the premiums paid from fund monies. The day-to-day management of the fund, including the making of investments, is often handled by a fund manager and investment manager(s) appointed by the trustees and paid for from monies in the fund.

These managers are usually companies which specialise in providing fund management, administration and investment services. A regulated superannuation fund may be an “accumulation fund” or a “defined benefit fund” (see below). Approved deposit fund An “approved deposit fund” means an indefinitely continuing fund maintained by a registrable superannuation entity (RSE) licensee (see below) that is a constitutional corporation, which has the purpose of receiving, holding and investing certain types of roll-over funds until such funds are withdrawn or the beneficiary reaches age 65 or dies (¶2-320). Pooled superannuation trust A “pooled superannuation trust” means a unit trust maintained by an RSE licensee that is a constitutional corporation, which is used only for investing assets of regulated superannuation funds, ADFs and life offices (¶2-420). Complying superannuation fund, ADF and PST These are funds and trusts that comply with all the requirements and prudential standards relevant to them under the SISA, or whose non-compliance is disregarded by the Regulator (¶2-140). Complying funds and trusts will receive a notification of their complying status under the SISA, and this entitles them to concessional tax treatment. In addition, complying superannuation funds may accept contributions for the purposes of the SG scheme (¶12-000) and, together with complying ADFs, RSAs and certain policies issued by life insurance companies, are approved roll-over vehicles. SMSF An SMSF is a superannuation fund with fewer than five members where all members are trustees, the trustee structure conforms with specific SISA requirements and the trustees are not remunerated for their services (¶5-200). The term “SMSF” replaced the term “excluded superannuation fund” from 8 October 1999 (see below). Like the former “excluded superannuation fund”, an SMSF is a regulated superannuation fund in all respects but is subject to less onerous prudential supervision under the SIS legislation. SMSFs are regulated principally by the Commissioner, rather than by APRA. The SMSF regime is discussed in Chapter 5. Excluded superannuation fund — small APRA fund The concept of an “excluded superannuation fund” was abolished from 8 October 1999 with the commencement of the SMSF regime (¶5-000). An “excluded superannuation fund” previously referred to a regulated superannuation fund with fewer than five members. The fund was not required to meet other conditions, unlike SMSFs (see above). Funds with fewer than five members are now regulated under the SISA as SMSFs or small APRA funds for SIS prudential regulation purposes. The expression “small APRA fund” is not defined in the SISA. Small APRA funds are regulated by APRA and, like SMSFs, are exempted from certain SIS prudential requirements (¶5-650). Excluded ADF An “excluded approved deposit fund” is an ADF in which there is only one beneficiary, and the fund: • was established before 1 July 1994, or was established on or after 1 July 1994 and before 1 July 2007 using eligible termination payments (within the meaning in ITAA36 as in force when the fund was established) of the fund’s beneficiary that had an initial value of at least $400,000, or • is established on or after 1 July 2007 using a superannuation lump sum or an employment termination payment of the fund’s beneficiary that had an initial value of at least $400,000 (SISR reg 1.04(4)). Public offer entity A “public offer entity” is a public offer superannuation fund, an ADF that is not an excluded ADF or a PST. A “public offer superannuation fund” is basically a superannuation fund which conducts at least some of its business by issuing interests to the public or which elects to be treated as a public offer fund.

The trustee of a public offer entity must be an approved trustee (¶3-500) or an RSE licensee that is a constitutional corporation. Public offer entities are subject to additional rules under the SISA (¶3-520). Standard employer-sponsored fund A “standard employer-sponsored fund” is a regulated superannuation fund that has at least one employersponsor who contributes to the fund under an arrangement with the trustee, rather than under an arrangement with members. A standard employer-sponsored member is a member of a regulated superannuation fund for whom an employer-sponsor contributes under an arrangement with the trustee (¶3-120). With employer-sponsored funds, the employer makes contributions to the fund for the benefit of the employees (who are members of the fund) and is generally allowed a tax deduction for those contributions (¶6-100). In many cases, the employees themselves also make contributions to the fund and are entitled to a tax deduction (in certain cases) or a government co-contribution (¶6-300, ¶6-700). Benefits are usually payable from the fund when an employee leaves the employment of the sponsoring employer, subject to the preservation requirements which limit the circumstances in which benefits can actually be paid to a member (¶3-280). Employer-sponsored funds fall into two main groups — defined benefit funds and defined contribution funds or accumulation funds, as discussed below. Eligible rollover fund An “eligible rollover fund” (ERF) is a regulated superannuation fund or ADF which is required to treat all members as protected members and every member’s benefits as minimum benefits (¶3-520). The existence of ERFs allows superannuation funds and ADFs which do not wish to comply with the member protection operating standards (¶3-230) to transfer the benefit entitlements of the affected members to ERFs. Public sector and private sector funds A “public sector fund” is a superannuation fund that is part of a public sector superannuation scheme (SISA s 10(1)). A “private sector fund” is a superannuation fund that is not a public sector fund. A “public sector superannuation scheme” is a scheme for the payment of superannuation, retirement or death benefits, which is established: (a) under a Commonwealth, state or territory law; or (b) under the authority of the Commonwealth, state or territory government, or a municipal corporation, another local governing body or a public authority that is constituted by or under a Commonwealth, state or territory law. There are three main types of private sector superannuation funds. (1) Employer-sponsored funds, established for the benefit of employees of the sponsoring employer(s) (see “Standard employer-sponsored fund” above). (2) “Productivity” (or industry) funds, established for the purposes of one or more industrial agreements or awards. (3) Personal superannuation funds. A public sector fund is of the first and second types. Exempt public sector superannuation scheme An “exempt public sector superannuation scheme” (EPSSS) is a public sector superannuation scheme that is prescribed in SISR Sch 1AA. Such a scheme is a complying superannuation fund for income tax and SG purposes, and is subject to prudential requirements imposed by the legislation under which it is established, rather than the SISA (¶2-170). Defined benefit fund A “defined benefit fund” means (SISR reg 1.03(1)): • a public sector superannuation scheme that is a regulated superannuation fund and has at least one

defined benefit member, or • a regulated superannuation fund (other than a public sector superannuation scheme) that has at least one defined benefit member, and some or all of the contributions (out of which, together with earnings on those contributions, the benefits are to be paid) are not paid into or accumulated in a fund in respect of any individual member but are paid into and accumulated in a fund in the form of an aggregate amount. For specific provisions of SISR, a fund is taken to be a defined benefit fund if at least one member of the fund receives a defined benefit pension (reg 1.03AAA). A “defined benefit member” is a member who is entitled, on retirement or termination of his/her employment, to be paid a benefit defined, wholly or in part, by reference to either or both: • the amount of: – the member’s salary at a particular date, being the date of the member’s termination of employment or retirement or an earlier date, or – the member’s salary averaged over a period before retirement, or • a specified amount. The definitions of “defined benefit fund” and “defined benefit member” are modified for certain provisions of the SISR. The modified definitions allow for superannuation funds which are paying pensions (except pensions wholly through the purchase of annuities issued by registered life offices or allocated pensions) to be subject to certain additional requirements such as annual actuarial certifications (¶3-330). Accumulation fund An “accumulation fund” (or “defined contribution fund”) is a regulated superannuation fund that is not a defined benefit fund. With an accumulation fund, the employer’s contributions to the fund in respect of each member are usually based on a percentage of the member’s salary. Those contributions, together with contributions by members (if any), are invested and the final retirement benefit payable to a member is the amount accumulated in the fund in respect of the member. RSE licensee and RSE The SISA licensing regime for superannuation trustees is different from the licensing of entities providing financial services under the Corporations Act 2001 (discussed in Chapter 4). Under the SISA, an entity (a body corporate or group of individuals) must obtain a licence from APRA before acting as a trustee of an APRA-regulated superannuation entity, ie a superannuation entity other than an SMSF or a public sector superannuation scheme (¶3-485). An “RSE licensee” means a constitutional corporation, body corporate, or group of individual trustees that holds an RSE licence granted under SISA s 29D. A registrable superannuation entity (RSE) means a regulated superannuation fund (other than an SMSF), an ADF or a PST. For the registration of RSEs under SISA by an RSE licensee, see ¶3-490. MySuper product A class of beneficial interest in a regulated superannuation fund is a MySuper product if an RSE licensee is authorised under SISA s 29T to offer that class of beneficial interest in the fund as a MySuper product (¶9-000). Superannuation system The term “superannuation system” in SISR reg 5.01(1) is used to cover the entities and/or products which may be involved when a member’s superannuation benefits are paid, transferred or rolled over in accordance with the SIS legislation (¶3-284). The superannuation system comprises regulated superannuation funds, ADFs, RSAs, EPSSSs, annuities (including deferred annuities), and the

Commissioner as the maker of payments to a superannuation provider under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (from 18 December 2008). The ATO, ASIC and state authorities, as repositories of unclaimed money under SISA provisions which have now been repealed, were part of the system until 17 December 2008 (¶3-284). Trustee A trustee in relation to a fund, scheme or trust means: • if there is a trustee (within the ordinary meaning of that expression) of the fund, scheme or trust — the trustee, or • in any other case — the person who manages the fund, scheme or trust (SISA s 10(1)). Member Subject to a contrary intention, the term “member” in the SISA has its ordinary meaning and is affected by modifications in the SISR (SISA s 10(1); 15B). Without limiting the meaning of the expression “member” in the SISA, s 10(3) provides that a “member” in relation to an SMSF includes a person who receives a pension from the fund or who has deferred his/her entitlement to receive a benefit from the fund. A non-member spouse of a member of a superannuation fund may be treated as a member in the application of particular SISA provisions (SISR reg 1.04AAA: ¶3-355). A “member spouse” and “nonmember spouse”, in relation to a superannuation interest that is subject to a payment split, mean the member spouse and non-member spouse, respectively, in relation to the interest under Pt VIIIB of the Family Law Act 1975 (s 10(1)). Dependant, spouse, etc Other key terms which are used in the SIS legislation in relation to particular prudential rules, such as “dependant”, “spouse”, “child” and “relative”, are discussed in ¶3-020. [SLP ¶2-110]

¶3-020 Spouse, child and relative in the SISA Subject to a contrary intention, a “dependant” in relation to a person includes the spouse of the person, any child of the person, and any person with whom the person has an interdependency relationship (SISA s 10(1)). Also, subject to a contrary intention, the terms “spouse” and “child” have the inclusive meanings given in s 10(1). The inclusive definitions of dependant (and of spouse and child — see below) mean that the common law concepts of these terms are relevant for the purposes of the SIS legislation. The terms “spouse”, “child”, “dependant” and “relative” are used throughout the SIS legislation and are relevant to many of the prudential rules, eg in the sole purpose test (¶3-200), the benefit payment operating standards (¶3-286), the restriction on loans to members and relatives (¶3-420) and the in-house asset rules (¶3-450). Subject to a contrary intention, the term “relative” has the exclusive meaning in s 10(1) (see below). The term “relative” is also relevant to certain SISA prudential rules such as the restriction on loans by superannuation funds (¶3-420) and the meaning of “related party” for the purposes of the in-house asset rules (¶3-470) and other related party transactions. There is a more extensive and specific definition of “relative” for the purposes of the definition of SMSF in s 17A (¶5-220). Previously, a member of a same-sex couple did not come within the meaning of “spouse”, and children in a same-sex relationship might be excluded from the definition of “child”. Therefore, members and children in a same-sex relationship might not qualify as a “dependant” of a person unless they were common law dependants or they came within the interdependency relationship concept (see below). The current SISA definitions of “spouse” and “child” (see below) mean that members of same-sex or opposite sex couples and their children are given the same treatment under the SIS regulatory

framework. The expanded SISA definitions of “spouse” and “child” also apply from the 2008/09 year of income to ensure that same-sex partners and children of same-sex couples are treated as “death benefits dependants” for the purposes of the taxation of superannuation death benefits (¶8-300) and death benefit termination payments (¶8-840) and for claiming deductions for potential detriment death benefits (¶7-150) (see ITTPA s 295-485A and 302-195A and summary of effects of post-1 July 2008 definitions of “spouse” and “child” below). Meaning of “spouse” A “spouse” of a person includes: (a) another person (whether of the same sex or a different sex) with whom the person is in a relationship that is registered under a law of a state or territory prescribed for the purposes of s 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section, and (b) another person who, although not legally married to the person, lives with the person on a genuine domestic basis in a relationship as a couple (SISA s 10(1)). The following laws and relationships are prescribed for the purposes of s 10(1)(a): • Relationships Act 2008 (Vic) — a registered domestic relationship as defined in s 3 of that Act • Relationships Act 2003 (Tas) — a significant relationship as defined in s 4 of that Act • Civil Unions Act 2012 (ACT) — a civil union as defined in s 6(1) of that Act • Domestic Relationships Act 1994 (ACT) — a relationship as a couple between two adult persons who meet the eligibility criteria for entering into a civil partnership mentioned in s 37C of that Act • Relationships Register Act 2010 (NSW) — a registered relationship as defined in s 4 of that Act • Relationships Act 2011 (Qld) — a relationship as a couple between two adults who meet the eligibility criteria mentioned in s 5 of that Act for entry into a registered relationship • Relationships Register Act 2016 (SA) — a relationship as a couple between two adults who meet the eligibility criteria mentioned in s 5 of that Act for entry into a registered relationship (Acts Interpretation (Registered Relationships) Regulations 2008, reg 3). The phrase “in a relationship as a couple” in s 10(1)(b) covers relationships between persons of the same sex in specified circumstances as well as “marital relationships”. The inclusion of same-sex relationships within this definition is not intended to change the treatment of married or opposite-sex de facto couples, but is simply to remove same-sex discrimination. The definition does not change or redefine any other indicia of a relationship. A former de facto spouse of a deceased superannuation fund member was held not to be a dependant for payment of death benefits purposes as she was not a “spouse” as defined in the trust deed of the fund (Gray v Uniting Super Pty Limited as trustee for the Construction and Building Unions Superannuation Fund 11 ESL 06). Meaning of “child” A “child”, in relation to a person, includes: • an adopted child, a stepchild or an ex-nuptial child of the person • a child of the person’s spouse, and • someone who is a child of the person within the meaning of the Family Law Act 1975 (SISA s 10(1)). An “adopted child”, in relation to a person, means a person adopted by the first-mentioned person:

• under the law of a state or territory relating to the adoption of children, or • under the law of any other place relating to the adoption of children, if the validity of the adoption would be recognised under the law of any state or territory (s 10(1)). The term “stepchild” is not defined in the SIS legislation. Under its ordinary meaning, a stepchild is a “child of a husband or wife by a former union” (Macquarie Dictionary, 2001 edn). A stepchild means a son or daughter by a former marriage of the husband or the wife, even though the natural parents are still living (IR Commrs v AB Russell (1955) 36 TC 83). The traditional common law position is that a stepchild of a marriage ceases to be a stepchild of the step-parent at the time that the natural parent dies (Re Burt [1988] 1 Qd R 23; Basterfield v Gray (1994) Tas R 293; Connors v Tasmanian Trustees Limited (1996) Tas R 267). This common law position is reflected in a variety of legislation covering issues relating to stepchildren, such as legislation dealing with administration and probate of deceased estates, family law and immigration laws (with two notable exceptions in Victoria and Queensland). The SCT has stated that it is bound by the common law that a stepchild relationship ends on the death of a natural parent (SCT Determination D04-05\186, SCT Determination D99-2000\082). A person ceases to be a “stepchild” for the purposes of being a “dependant” of the member under SISR reg 6.22, when the legal marriage of their natural parent to the member ends (Interpretative Decision ID 2011/77). Child under the Family Law Act 1975 A “child” is defined inclusively in s 4(1) of the Family Law Act 1975 (FLA). That definition states that Subdiv D of Div 1 of Pt VII (s 60HA; 60HB) affects the situations in which a child is a child of a person or is a child of a marriage or other relationship. A note to the definition states that in determining if a child is the child of a person within the meaning of the FLA, it is to be assumed that Pt VII extends to all states and territories. The intention of parliament is that all children who come within the meaning of “child” in s 4(1) will be covered by any other provisions which relate to that subsection. In particular, this ensures that West Australian children who are not covered by Pt VII pursuant to s 69ZE(s) as they are not children of a marriage will be treated as though they are, for the purpose of any legislation, referring to a child “within the meaning of the Family Law Act 1975”, howsoever expressed. Interdependency relationship Two persons (whether or not related by family) have an “interdependency relationship” if: • they have a close personal relationship • they live together • one or each of them provides the other with financial support, and • one or each of them provides the other with domestic support and personal care (SISA s 10A(1)). If two persons (whether or not related by family) have a close relationship, but do not satisfy the other requirements outlined above because either, or both, of them suffer from a physical, intellectual or psychiatric disability, they are considered to have an interdependency relationship (s 10A(2)). Regulation 1.04AAAA of SISR specifies: • the matters that are, or are not, to be taken into account in determining under s 10A(1) or (2) whether two persons have an interdependency relationship (s 10A(3)(a)), and • the circumstances in which two persons have, or do not have, an interdependency relationship (s 10A(3)(b)). The concept of “interdependency relationship” in s 10A and reg 1.04AAAA is also used in the RSA Act, and in the ITAA97 (as discussed in ¶8-310 and for the purposes of death benefit payments, see above) (Friar v Brown [2015] FCA 135: upholding the Superannuation Complaints Tribunal’s finding in D1415\074 ([2014] SCTA 222) and D14-15\075 ([2014] SCTA 223) that there was no clear evidence of an

interdependent relationship or financial dependency). Summary of effects of post-1 July 2008 definitions of “spouse” and “child” The expanded definitions of “spouse” and “child” in the SISA mean that: • a same-sex partner of a superannuation fund member will automatically qualify as a dependant under the SISA (ie a SIS dependant) and, therefore, be eligible to receive a deceased member’s death benefits, without the need to prove financial dependency (the common law test of a dependant) or an interdependency relationship (see above) • a child of a person’s relationship with another person (whether a same- or different-sex relationship) will automatically qualify as a dependant of both partners in the relationship • the range of beneficiaries who may be eligible to receive a death benefit of a deceased fund member as a pension under SISR reg 6.21(2A) and (2B) is expanded. A same-sex partner of a deceased member, being a spouse and dependant, automatically qualifies to receive a death benefit pension. Similarly, a child who is the product of a same-sex relationship will qualify to receive a death benefit pension when the benefits of either partner in the relationship are paid by a superannuation fund as death benefits if the child is under 18 years of age, or is under 25 years of age and is a financial dependant, or is permanently disabled (¶3-286). In practice, it is important to note that eligibility to receive a death benefit in a private sector superannuation fund or scheme depends not only on the SISA, but on the governing rules (trust deed) of the fund. Therefore, while same-sex partners and children of same-sex relationships will automatically qualify as dependants under the SISA definitions, their ability to receive a death benefit remains subject to the fund’s governing rules unless these rules contain similar definitions. Taxation effects The concessional tax treatment of death benefit payments to a “death benefits dependant” under ITAA97 is discussed in ¶8-300 and following (superannuation death benefits under ITAA97 Div 302) and ¶8-840 (employment termination payment death benefits under ITAA97 Subdiv 82-B). Meaning of “relative” A “relative” of an individual means the following: (a) a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his/her spouse (b) a spouse of the individual or of any other individual referred to in item (a) (SISA s 10(1)). For the purposes of item (a), if one individual is the child of another individual because of the definition of “child” in s 10(1) (see above), relationships traced to, from or through the individual are to be determined in the same way as if the individual were the natural child of the other individual.

Governing Rules and Trustee Rules ¶3-100 Governing rules and trustee covenants In SISA, the “governing rules”, in relation to a fund, scheme or trust, means any rules contained in a trust instrument, other document or legislation, or combination of them, or any unwritten rules, governing the establishment or operation of the fund, scheme or trust (SISA s 10(1)). The term “trust deed” is commonly used in the industry to refer to the governing rules. For a superannuation entity, its governing rules are therefore the primary documents which set out the structure of the fund and the rules for its operations, as well as the powers and duties of the trustees of the entity. The governing rules operate in addition to any obligation or duty that may apply to or be imposed upon the trustees or directors of the corporate trustee of the entity, for example, under the general trust law, the SIS legislation or regulatory legislation. In many cases, a superannuation entity

imposes more onerous duties and obligations than those under the statutory requirements. Generally, a provision in the governing rules that is inconsistent with a requirement of the SIS law is void to the extent of the inconsistency or is void in certain specified circumstances (¶3-140, ¶3-150). For practical purposes, the governing rules of many superannuation entities are drafted so as to be consistent with the requirements of SIS legislation (or related applicable regulatory legislation), whether by incorporation or reference to those requirements in the rules. This avoids the need for frequent changes to the governing rules, for example, each time that the SIS law is changed. The interaction of a fund’s governing rules with specific SIS requirements is discussed in ¶3-140 – ¶3150. The SIS covenants form part of the “enhanced trustee obligations” and “enhanced director obligations” for an RSA licensee in relation to MySuper products. Deemed covenants under SISA Certain trust law duties and obligations of trustees are codified in the SISA as covenants in SISA Pt 6. This paragraph discusses the covenants that apply to a registrable superannuation entity (RSE). For the covenants for SMSFs, see ¶5-400. If the governing rules of an RSE do not contain covenants to the effect of the covenants set out in s 52, those governing rules are taken to contain covenants to that effect (s 52(1)). The covenants in s 52 are grouped under four categories — general covenants, investment covenants, insurance covenants and covenants relating to risk, annual outcomes assessments, promoting financial interests of beneficiaries and MySuper products, as noted below. General covenants These are covenants by each trustee of the entity: (a) to act honestly in all matters concerning the entity (b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation trustee (see below) would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments (c) to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries (d) where there is a conflict between the duties of the trustee to the beneficiaries, or the interests of the beneficiaries, and the duties of the trustee to any other person or the interests of the trustee or an associate of the trustee: (i) to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons (ii) to ensure that the duties to the beneficiaries are met despite the conflict (iii) to ensure that the interests of the beneficiaries are not adversely affected by the conflict, and (iv) to comply with the prudential standards in relation to conflicts (for APRA prudential standards, see ¶9-700) (e) to act fairly in dealing with classes of beneficiaries within the entity (f) to act fairly in dealing with beneficiaries within a class (g) to keep the money and other assets of the entity separate from any money and assets, respectively: (i) that are held by the trustee personally, or (ii) that are money or assets, as the case may be, of a standard employer-sponsor, or an associate

of a standard employer-sponsor, of the entity (h) not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee’s functions and powers (i) if there are any reserves of the entity — to formulate, review regularly and give effect to a strategy for their prudential management, consistent with the entity’s investment strategies and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due, and (j) to allow a beneficiary of the entity access to any prescribed information or any prescribed documents (s 52(2)). The following points should be noted in relation to the general covenants: • In s 52(2)(b), a “superannuation trustee” is a person whose profession, business or employment is or includes acting as a trustee of a superannuation entity and investing money on behalf of beneficiaries of the superannuation entity (s 52(3)). This requirement is in line with the existing state and territory trustee legislation applying to professional trustees. • The general law requires trustees to avoid conflicts of duties and interest, subject to certain exceptions that allow the trustee to act despite the conflict, for example by authorisation under the fund’s governing rules. Where a conflict exists, and general law allows the trustee to proceed despite the conflict, the additional requirements in s 52(2)(d)(i) to (iv) as noted above must be met. The trustee’s obligations under s 52(2)(d) override any conflicting obligations an executive officer or employee of the trustee has under Pt 2D.1 of the Corporations Act 2001 or Div 4 of Pt 3 of the Commonwealth Authorities and Companies Act 1997 (s 52(4)). • The covenant in s 52(2)(h) does not prevent the trustee from engaging or authorising persons to do acts or things on behalf of the trustee (s 52(5)). Investment covenants These are covenants by each trustee of the entity: (a) to formulate, review regularly and give effect to an investment strategy for the whole of the entity, and for each investment option offered by the trustee in the entity, having regard to: (i) the risk involved in making, holding and realising, and the likely return from, the investments covered by the strategy, having regard to the trustee’s objectives in relation to the strategy and to the expected cash flow requirements in relation to the entity (ii) the composition of the investments covered by the strategy, including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification (iii) the liquidity of the investments covered by the strategy, having regard to the expected cash flow requirements in relation to the entity (iv) whether reliable valuation information is available in relation to the investments covered by the strategy (ie the trustees must consider and make arrangements for the regular valuation of all assets, in particular direct or unlisted investments that may be difficult to value) (v) the ability of the entity to discharge its existing and prospective liabilities (vi) the expected tax consequences for the entity in relation to the investments covered by the strategy (vii) the costs that might be incurred by the entity in relation to the investments covered by the

strategy (ie the trustees will need to consider whether the costs are justifiable in delivering the best deal for members), and (viii) any other relevant matters (b) to exercise due diligence in developing, offering and reviewing regularly each investment option (c) to ensure the investment options offered to each beneficiary allow adequate diversification (s 52(6)). APRA’s prudential standard and associated guidance material provide guidance on its expectations in relation to due diligence in s 52(6)(b) (¶9-720). Diversification While a trustee is required to consider diversification in developing an investment strategy under s 52(6) (a)(ii), this does not prevent a trustee from offering investment options that are not diversified if the trustee has formed the view that it would be appropriate for their members to be able to choose that investment option. In formulating the fund level investment strategy, trustees decide the type and number of options they offer to members. Under s 52(6)(c), trustees will have to offer investment options which will allow a member to obtain a diversified asset mix if they choose. If a member chooses to be undiversified, the trustee has no obligation to assess the appropriateness for that member of the investment strategy chosen by the member beyond the requirement to formulate and give effect to an investment strategy in respect of each investment choice option in item (a). Trustees that offer a MySuper product will meet this requirement without considering the composition of any other investment options as members will be able to choose the single, diversified investment strategy of the MySuper product. A beneficiary may direct a trustee to take up, dispose of, or alter the amount invested in an investment option (s 58(2)(d)). This will allow trustees to provide investment options in a responsible and appropriate manner, and allow members to choose investments appropriate to their individual needs. For some members, maximising their retirement income will involve consideration of investments across their entire asset portfolio, rather than just across their superannuation assets. Insurance covenants These are covenants by each trustee of the entity: (a) to formulate, review regularly and give effect to an insurance strategy for the benefit of beneficiaries of the entity that includes provisions addressing each of the following matters: (i) the kinds of insurance that are to be offered to, or acquired for the benefit of, beneficiaries (ii) the level, or levels, of insurance cover to be offered to, or acquired for the benefit of, beneficiaries (iii) the basis for the decision to offer or acquire insurance of those kinds, with cover at that level or levels, having regard to the demographic composition of the beneficiaries of the entity (iv) the method by which the insurer is, or the insurers are, to be determined (b) to consider the cost to all beneficiaries of offering or acquiring insurance of a particular kind, or at a particular level (c) to only offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries (d) to do everything that is reasonable to pursue an insurance claim for the benefit of a beneficiary, if the claim has a reasonable prospect of success (s 52(7)).

Covenants relating to risk management These are covenants by each trustee of the entity: (a) to formulate, review regularly and give effect to a risk management strategy that relates to: (i) the activities, or proposed activities, of the trustee, to the extent that they are relevant to the exercise of the trustee’s powers, or the performance of the trustee’s duties and functions, as trustee of the entity, and (ii) the risks that arise in operating the entity (b) to maintain and manage in accordance with the prudential standards financial resources (whether capital of the trustee, a reserve of the entity or both) to cover the operational risk that relates to the entity (s 52(8)). Covenants relating to annual outcomes assessments From 6 April 2019, if the entity is a regulated superannuation fund (other than a fund with fewer than five members), each trustee of the entity covenants: (a) to determine, in writing, on an annual basis, for each MySuper product and choice product offered by the entity, whether the financial interests of the beneficiaries of the entity who hold the product are being promoted by the trustee, having regard to: (i) if the product is a MySuper product — a comparison of the MySuper product with other MySuper products offered by other regulated superannuation funds, based on the factors mentioned in s 52(10), and a comparison of the MySuper product with any other benchmarks specified in regulations made for the purposes of this subparagraph, and (ii) if the product is a choice product — a comparison of the choice product with the comparable choice products in relation to the choice product, based on factors mentioned in s 52(10A), and a comparison of the choice product with any other benchmarks specified in regulations made for the purposes of this subparagraph, and (iii) the factors mentioned in s 52(11) (aa) to determine, in writing, on an annual basis, whether each trustee of the entity is promoting the financial interests of the beneficiaries of the fund, as assessed against benchmarks specified in regulations made for the purposes of this paragraph (b) to make the determination referred to in paragraph (a), and a summary of the assessments and comparisons on which the determination is based, publicly available on the website of the entity (c) to do so within 28 days after the determination is made (d) to keep the determination, and the summary of the assessments and comparisons on which the determination is based, on the website until a new determination is made as referred to in paragraph (a) (s 52(9)). Section 52(10) (MySuper products) and s 52(10A) (choice products) provide that in comparing a MySuper product with other MySuper products, or a choice product with the comparable choice products in relation to the choice product (as the case may be), the trustees must compare each of the following: (a) the fees and costs that affect the return to the beneficiaries holding the MySuper products or choice product (b) the return for the MySuper products or choice products (after the deduction of fees, costs and taxes) (c) the level of investment risk for the MySuper products or choice products (d) any other matter set out in the prudential standards.

In determining whether the financial interests of the beneficiaries of the entity who hold a MySuper product or choice product are being promoted by the trustee, the trustee must assess each of the following: (a) whether the options, benefits and facilities offered under the product are appropriate to those beneficiaries (b) whether the investment strategy for the product, including the level of investment risk and the return target, is appropriate to those beneficiaries (c) whether the insurance strategy for the product is appropriate to those beneficiaries (d) whether any insurance fees charged in relation to the product inappropriately erode the retirement income of those beneficiaries (e) any other relevant matters, including any matters set out in the prudential standards (s 52A(11)) (see “Annual outcomes assessment and promoting financial interests covenants” below). Covenants relating to promoting financial interests of beneficiaries From 6 April 2019, if the entity is a regulated superannuation fund (other than a fund with fewer than five members), each trustee of the entity covenants to promote the financial interests of the beneficiaries of the entity who hold a MySuper product or a choice product, in particular returns to those beneficiaries (after the deduction of fees, costs and taxes) (s 52(12)) (see “Annual outcomes assessment and promoting financial interests covenants” below). Covenants relating to regulated superannuation funds — MySuper products From 6 April 2019, if the entity is a regulated superannuation fund that offers a MySuper product, each trustee of the entity covenants: (a) to include in the investment strategy for the MySuper product the details of the trustee’s determination of the matters mentioned in s 52(9)(a) (see above) (b) to include in the investment strategy for the MySuper product, and update each year: (i) the investment return target over a period of 10 years for the assets of the entity that are attributed to the MySuper product, and (ii) the level of risk appropriate to the investment of those assets (s 52(13)). Annual outcomes assessment and promoting financial interests covenants The governing rules of each trustee of a regulated superannuation fund (other than an SMSF or small APRA fund) are taken to contain covenants that require trustees to: • promote the financial interests of their beneficiaries across all products (other than beneficiaries holding defined benefit interests), and • carry out annual outcomes assessments of all their MySuper and choice product offerings, including how each product continues to promote the financial interests of members. Choice products are all superannuation products that are not MySuper products or defined benefit products. The outcomes test covenant requires trustees to determine whether the financial interests of their beneficiaries are being promoted by the trustee having regard to a comparison with other similar products and specified benchmarks and factors. The obligation that the trustees “promote the financial interests” of beneficiaries reinforces and builds upon the existing trustee obligation to act in the best interests of beneficiaries by recognising that trustees must take actions to annually assess whether their MySuper or choice products are optimising outcomes for, and in the best interests of, members.

Trustees are required to assess their MySuper or choice product in respect to a range of product features including their insurance and investment strategies, and compare how their product is performing against other products and benchmarks, using certain performance metrics. In this regard, the outcomes test provides trustees with a framework for assessing their product offering to determine whether it is achieving its intended outcomes and how it may be improved. The framework for the outcomes test endeavours to support the trustee’s primary obligation to promote the financial interests of their members, in particular the net returns to those members. The covenants in s 52(9) and 52(12) effectively replaced the enhanced trustee obligations in SISA Pt 2C former Div 6 (containing former s 29VN to 29Q), as those obligations apply to trustees only in respect of their beneficiaries holding MySuper products. However, the specific obligation in former s 29VN(d) to include certain matters in the investment strategy of a MySuper product is preserved by the additional covenant for MySuper products in s 52(13) (see above). The covenants recognise that although the features of MySuper products and choice products differ, the obligation to undertake an annual outcomes assessment in respect of beneficiaries holding either MySuper products or choice products should be done in as similar a way as is possible, ie trustee obligations to members should apply irrespective of product type. Basically, for both MySuper products and choice products, the determination retains its two-step process approach: • compare products against required benchmarks (including other products) (step one), and • assess whether the product promotes the financial interests of member, including against a specified range of factors (step two). As the differentiation amongst choice products and between choice products and MySuper products can be significant, and it would be difficult to apply a single methodology for comparing both MySuper and choice products when carrying out the annual outcomes assessment, the details of the benchmarks for which a comparison of a choice product will be set out in APRA prudential standards. Covenants for directors of corporate trustees of registrable superannuation entities Section 52A of SISA clarifies the duties that apply to individuals who are directors of corporate trustees of RSEs, by reflecting many of the covenants in s 52(2) (see above), focusing on the individuals who are directors of the corporate trustee of the RSE. Where the governing rules of an RSE do not contain covenants to the effect of those set out in s 52A(2), the governing rules are taken to contain covenants to that effect (s 52A(1)). A covenant referred to in s 52A(2) operates as if the director were a party to the governing rules. These are covenants by each director of a corporate trustee of the entity: (a) to act honestly in all matters concerning the entity (b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation entity director would exercise in relation to an entity where he/she is a director of the trustee of the entity and that trustee makes investments on behalf of the entity’s beneficiaries (c) to perform the director’s duties and exercise the director’s powers as director of the corporate trustee in the best interests of the beneficiaries (d) where there is a conflict between the duties of the director to the beneficiaries, or the interests of the beneficiaries, and the duties of the director to any other person or the interests of the director, the corporate trustee or an associate of the director or corporate trustee: (i) to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons, and

(ii) to ensure that the duties to the beneficiaries are met despite the conflict, and (iii) to ensure that the interests of the beneficiaries are not adversely affected by the conflict, and (iv) to comply with the prudential standards in relation to conflicts (e) not to enter into any contract, or do anything else, that would: (i) prevent the director from, or hinder the director in, properly performing or exercising the director’s functions and powers as director of the corporate trustee, or (ii) prevent the corporate trustee from, or hinder the corporate trustee in, properly performing or exercising the corporate trustee’s functions and powers as trustee of the entity, and (f) to exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the covenants referred to in s 52 (s 52A(2)). Like the general covenants in s 52(2) for RSEs (see above): • the director’s obligations under s 52A(2)(d) override any conflicting obligations the director has under Pt 2D.1 of the Corporations Act 2001 or Div 4 of Pt 3 of the Commonwealth Authorities and Companies Act 1997, and • the covenant in s 52A(2)(e) does not prevent the director from engaging or authorising persons to do acts or things on behalf of the trustee (s 52A(3)). Superannuation entity director A “superannuation entity director” is a person whose profession, business or employment is or includes acting as director of a corporate trustee of a superannuation entity and investing money on behalf of beneficiaries of the superannuation entity (s 52A(7)). The reference in SISA s 52A(2)(f) to a “reasonable degree of care and diligence” is a reference to the degree of care and diligence that a superannuation entity director would exercise in the circumstances of the corporate trustee. Each director of a corporate trustee is required to exercise the same degree of care, skill and diligence that a prudent superannuation entity director would exercise in relation to the entity where he/she is a director of the trustee and that trustee makes investments on behalf of the beneficiaries of the entity. The required standard of care, skill and diligence is an objective standard. Care and diligence go to the way in which the director applies himself/herself to their functions. The level of skill required does not necessarily require particular qualifications, and new directors will not be expected to have the level of skill and knowledge of an experienced director immediately. It is not intended that each director will have the same skills but rather that each understand the business of the trustee and its regulatory framework and be in a position to contribute to meetings of the trustee (52A(2)(b)). Covenants may be prescribed by regulations The SISR may prescribe a covenant to be included in the governing rules of a superannuation entity. These prescribed covenants may elaborate, supplement or otherwise deal with any aspect of a matter in a covenant or other provision in SISA, but must be capable of operating concurrently with the covenants and SISA (SISA s 54A). Covenants are cumulative To avoid doubt, SISA s 51A provides that the covenants are cumulative in effect. That is, each covenant that is referred to in s 52 (for RSEs), 52A (for directors), 52B (for SMSFs), 52C (for SMSF directors) and 53 (for ADFs), or prescribed under s 54A (see above) applies in addition to every other covenant or obligation referred to in the sections that applies to the trustee or director of a corporate trustee of the superannuation entity. For example, the obligations that apply to trustees that offer a MySuper product are in addition to each

covenant that applies to a trustee of an RSE. Additional covenants for ADFs The governing rules of an ADF (other than an excluded ADF) are deemed to include two additional covenants. The first requires the fund to pay beneficiaries (including the legal personal representative of a beneficiary) within 12 months of a request for payment, and the second imposes an obligation on each director of the fund’s corporate trustee to ensure that the first covenant is given effect (SISA s 53). Civil and criminal consequences for contravening covenants A person must not contravene a covenant that is to the effect of a covenant set out in s 52 or 52A and is contained, or taken to be contained, in the governing rules of a superannuation entity (SISA s 54B(1)). Sections 54B(1) and (2) are “civil penalty provisions” in the SISA and there are civil and criminal consequences under SISA Pt 21 for contravening, or being involved in a contravention of, those subsections (s 54B(3)). A contravention does not result in the invalidity of a transaction (s 54B(4)). Section 54B does not limit the operation of s 55 about recovering loss or damage as a result of a contravention (s 54B(5)) (see below). Other covenants must not be contravened A person must not contravene any other covenant contained, or taken to be contained, in the governing rules of a superannuation entity (s 54C(1)). A contravention of s 54C(1) is not an offence, but may result in an action to recover loss or damage under s 55. A contravention of s 54C(1) does not result in the invalidity of a transaction. Recovering loss or damage for contravention of a covenant A person who suffers loss or damage as a result of conduct of another person (eg the fund trustee) that was engaged in contravention of s 54B(1), 54B(2) or 54C(1) (see above) may sue that other person or any person involved in the contravention to recover any loss or damage suffered (s 55(3)). An action under s 55(3) may be brought only with the leave of the court where directors’ covenants are contravened (s 55(4A)). A person may, within six years after the day on which the cause of action arose, seek the leave of the court to bring such an action (s 55(4A), (4B)). In deciding whether to grant an application for leave to bring such an action, the court must take into account whether the applicant is acting in good faith; and there is a serious question to be tried (s 55(4C)). The court may, in granting leave to bring such an action, specify a period within which the action may be brought (s 55(4D)). Statutory defences are provided to trustees in proceedings in respect of certain contraventions of the covenants (s 55(5), (6); 323). In an action for loss or damage suffered by a person as a result of the making of an investment by or on behalf of a trustee of a superannuation entity or as a result of the management of any reserves by a trustee of a superannuation entity, a statutory defence is available if the defendant establishes that the defendant has complied with all of the covenants referred to in s 52 to 53 and prescribed under s 54A that apply to the defendant in relation to each act, or failure to act, that resulted in the loss or damage (s 55(5), (6)). For the statutory defence in s 55(5) to be available, the trustees of RSEs must satisfy all of the covenants in s 52A, 52B, 52C, 53 and 54A where they are relevant to the investment (rather than just s 52(2)(f)) before relying on s 55(5) as a defence to an action for loss or damage in relation to the making of an investment. The above requirement recognises the interdependency between the covenants. For example, where a trustee has acted dishonestly and in a conflicted manner, it would be unreasonable to have a defence for investment loss where it had otherwise complied with the investment covenant. The rule, however, is not intended to prevent trustees from accessing the defence in cases where a covenant or duty is not

relevant to the particular loss as a result of making an investment. The defences in s 55(5) and (6) apply to an action for loss or damage, whether brought under s 55(3) or otherwise (s 55(7)). Proposed changes — Retirement Income Covenant Position Paper The government states that the retirement phase of the superannuation system is currently underdeveloped and needs to be better aligned with the overall objective of the superannuation system of providing income in retirement to substitute or supplement the Age Pension. The government is addressing this through the development of a retirement income framework. The first stage in this framework is the introduction of a retirement income covenant in the SIS Act which will require trustees to develop a retirement income strategy for their members. The covenant will codify the requirements and obligations for superannuation trustees to consider the retirement income needs of their members, expanding individuals’ choice of retirement income products and improving standards of living in retirement (see further ¶17-600). [SLP ¶2-815]

¶3-120 Trustee representation rules Standard employer-sponsored superannuation funds (with some exceptions) are required to comply with prescribed trustee representation rules in their trustee structure (SISA Pt 9). These rules are aimed at ensuring that fund members are able to have significant input in the management and operation of the fund. The trustee representation rules do not apply to SMSFs or small APRA funds (¶3-010), or to funds where an acting trustee has been appointed under the SISA. Special trustee rules apply to SMSFs and small APRA funds (¶5-200, ¶5-650). A fund that is not a standard employer-sponsored fund, and that has been declared not to be a public offer superannuation fund under the SISA (¶3-500), is required to have an arrangement for member representation that is approved by a majority of members and APRA (SISR reg 4.08A). It is not an offence if a fund contravenes the trustee representation rules. However, the fund may be directed not to accept any contributions made to it by an employer-sponsor, eg SG contributions (s 63; 87). Members can also bring a civil liability action for any loss or damage suffered as a consequence of the breach (¶3-820). The relevant trustee structure applicable to a fund, which depends on the number of members that the fund has and whether it is a public offer superannuation fund (as discussed at ¶3-500), is outlined below. The trustee of a public offer entity (¶3-500) or a small APRA fund (¶5-650) must be a registrable superannuation entity (RSE) licensee that is a constitutional corporation (¶3-485). Standard employer-sponsored fund A “standard employer-sponsored fund” is a regulated superannuation fund which has at least one standard employer-sponsor, ie an employer who contributes, or has ceased only temporarily to contribute, to the fund wholly or partly pursuant to an arrangement with the trustee. Examples of such funds are employer funds for employees and industry funds. If employees are able to select the fund to which the employer will contribute, and the employer has no relationship with the fund apart from making the contributions, the fund is not a standard employer-sponsored fund (SISA s 16). Non-public offer fund with more than 49 members A standard employer-sponsored fund with more than 49 members that is not a public offer superannuation fund must comply with the basic equal representation rules in its trustee structure (SISA s 93(4)). The basic equal representation rules are that if a superannuation fund has a group of two or more individual trustees, the group must consist of an equal number of employer and member representatives and, if the fund has a corporate trustee, the board of the corporate trustee must be constituted by an

equal number of employer and member representatives. The group or board may include an additional independent trustee or independent director, if this is requested by either the member or employer representatives and the fund’s governing rules provide for such an appointment. The additional independent trustee or director must not have a casting vote in any proceedings of the group or board of trustees (s 89). Non-public offer fund with five to 49 members A standard employer-sponsored fund with more than four but fewer than 50 members that is not a public offer superannuation fund must comply with one of the following: the basic equal representation rules (as discussed above); an alternative agreed representation rule; or an APRA-approved management arrangement (SISA s 92(4)). A fund complies with the alternative agreed representation rule if: • there is a single trustee of the fund that is a constitutional corporation • the trustee is appointed by agreement between a majority of the members and the employer(s) of those members • the trustee was an approved trustee under former s 26 (applicable until 30 June 2006) or is an RSE licensee (¶3-480) • the trustee is not an associate of a standard employer-sponsor of the fund (s 92(5)). An APRA-approved management arrangement in a superannuation fund is an arrangement in relation to the management and control of the fund which is agreed to by a majority of members and the employersponsors of those members, and is approved by APRA (s 92(4)(c)). APRA direction not to accept employer contributions APRA may direct a regulated superannuation fund not to accept superannuation contributions made to the fund by an employer-sponsor if the fund has breached a regulatory provision and APRA is satisfied that the seriousness or frequency, or both, of the contravention warrants such a direction (SISA s 63). The RSE licensee of a superannuation fund that is not a public offer fund must not accept contributions made to the fund by an employer-sponsor while the fund fails to comply with the basic equal representation rules in s 92(4) (for funds with more than four but fewer than 50 members) or 93(4) (for funds with more than 49 members), as discussed above (s 63(7B)). The trustee of a superannuation fund must notify each employer-sponsor of the fund if a s 63 direction is given to the fund. Non-compliance with any of the requirements in s 63 is a strict liability offence. Public offer superannuation fund The trustee of a standard employer-sponsored fund with five or more members that is a public offer superannuation fund (¶3-500) must be an independent trustee or the fund must comply with the basic equal representation rules. In addition, the fund must have such policy committees as are prescribed by the SISR and each committee must consist of an equal number of employer and member representatives (SISA s 92(3); 93(3)). An “independent trustee” means a trustee who is not a member, an employer-sponsor or associate of an employer-sponsor, an employee of an employer-sponsor or an associate, or a representative of an organisation which represents the interests of members or employer-sponsors (s 10(1)). A director of a corporate trustee of a fund that is also an employer-sponsor of the fund is not taken to be an associate of that employer-sponsor by reason of being such a director (s 10(2)). Where certain conditions are met, a trustee of a public offer superannuation fund who is an employersponsor of the fund or an associate of an employer-sponsor may be deemed to be an independent trustee (s 93A). Effectively, this will enable employees of a professional trustee company to become members of a public offer fund of which their employer is the trustee without the company losing its otherwise independent trustee status. APRA has substituted s 93A(1) to set out the circumstances in

which an employer-sponsor of a public offer superannuation fund will be treated as an independent trustee of the fund (Modification Declaration No 25, Commonwealth Gazette No GN 49, 8 December 2004). The trustee of a public offer superannuation fund (being a public offer entity) must be an RSE licensee that is a constitutional corporation (¶3-485, ¶3-500). Increase in membership If the membership of a fund increases from less than five to five or more but less than 50, or from less than 50 to 50 or more, the fund must comply with the trustee representation rules relevant to its membership number within 90 days of the increase in the membership (s 92(13); 93(5)). Voting rule If a fund is required (or elects) to comply with the basic equal representation rules, a decision of the group of trustees or board of the corporate trustee is taken not to have been made, or taken to be of no effect, if fewer than two-thirds of the total number of trustees or directors voted in favour of the decision (SISR reg 4.08). The two-thirds rule is based on the total number of trustees or directors, not those present at a meeting. However, the two-thirds rule does not apply to decisions made by a delegate of the trustees who has been properly delegated to make such decisions. Governing rules and voting Subject to exceptions, a provision in the governing rules of the fund is void to the extent that it purports to preclude a director of the trustee from voting on a matter relating to the fund (¶3-140). Proposed reforms to governance arrangements in superannuation funds Amendments have been proposed to replace the trustee representation rules in Pt 9. Under the proposals, RSE licensees that have a board of trustees will be required to have a minimum of one-third independent directors, including an independent Chair, and RSE licensees that are a group of individual trustees will be required to have at least one-third of the trustees that are independent (Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017 (Lapsed): ¶17-520). [SLP ¶2-600]

¶3-130 Trustee appointment and removal — disqualified persons A regulated superannuation fund must have a corporate trustee or the fund’s governing rules must provide that its sole or primary purpose is the provision of old-age pensions (SISA s 19: ¶2-130). In the latter case, subject to the requirement to have a specific trustee structure (eg for public offer funds, standard employer-sponsored funds: ¶3-120), the trustee may be an individual trustee, a group of individual trustees or a corporate trustee. The trustee of a public offer entity (¶3-500) or a small APRA fund (¶5-650) must be a registrable superannuation entity (RSE) licensee that is a constitutional corporation (¶3-485). By definition, an ADF or a PST will always have a corporate trustee that is an RSE licensee. In the case of an SMSF, the trustee may be individuals or a corporate trustee, but special rules apply as to who may be the trustees or the directors of the corporate trustee (¶5-220). Trustee appointment, removal or suspension A person must consent in writing to be appointed as a trustee or director of a corporate trustee of a superannuation entity (SISA s 118). In addition, an individual who becomes a trustee or a director of the corporate trustee of an SMSF after 30 June 2007 must sign a declaration in the approved form stating that they understand their duties as SMSF trustees within 21 days of becoming a trustee or director (s 104A: ¶5-300). A standard employer-sponsored superannuation fund that is required under the trustee representation rules (¶3-120) to have member representatives (or an additional independent trustee or independent director of a corporate trustee) in its trustee structure must establish procedures for their appointment and removal, and have these procedures notified to all members (s 107; 108).

The Regulator is empowered to suspend or remove a trustee of a superannuation entity in the following circumstances (Pt 17 s 133): • the trustee is a disqualified person • the conduct of the trustee may result in the financial position of the entity or of any other superannuation entity becoming unsatisfactory • the Regulator has revoked the approval of the trustee or cancels the registrable superannuation entity (RSE) licence of the trustee • if the entity has fewer than five members (and is not an SMSF), the trustee is not an RSE licensee that is a constitutional corporation • the trustee is an RSE licensee that has breached any of the conditions of its RSE licence, • the Regulator has reason to believe that: (i) either a person holds a controlling stake in the RSE licensee or a person has practical control of the RSE licensee, and (ii) because of the person’s control of the RSE licensee, or the way in which that control has been, is or is likely to be exercised, the RSE licensee has been, is or is likely to be unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A, or • the Regulator has reason to believe that: (i) a person holds a controlling stake in an RSE licensee, and (ii) the person does not have approval under s 29HD to hold a controlling stake in the RSE licensee. If a trustee has been suspended or removed, the Regulator may appoint an individual or a corporation as an “acting trustee” on such terms and conditions as may be determined (s 134). An acting trustee must hold the class of RSE licence relevant to it (¶3-480). Disqualified persons A “disqualified person” must not intentionally be or act as a trustee or a responsible officer of the corporate trustee of a superannuation entity (SISA s 126K). A “responsible officer”, in relation to a body corporate, means a director, secretary or an executive officer of the body (s 10(1)). The disqualified person restriction also applies to a person who is or acts as an investment manager or custodian of a superannuation entity, or is or acts as a responsible officer of a body corporate that is an investment manager or custodian of a superannuation entity (see “Offences relating to disqualified persons” below). An individual is a disqualified person if: • at any time, the person has been “convicted of an offence” (see below) in any country, being an offence in respect of dishonest conduct (Case 60/9696 ATC 560: conviction in the UK on two counts of submitting fraudulent insurance claims totalling £134) • a civil penalty order (¶3-820) has been made against the person • the person is an insolvent under administration (eg an undischarged bankrupt: see below) • to the extent that the Regulator is the Commissioner, the Commissioner has disqualified the individual under s 126A, or • to the extent that the Regulator is APRA, the Federal Court of Australia has disqualified the individual

under s 126H (s 120(1)). A body corporate is a disqualified person if: • the body corporate knows, or has reasonable grounds to suspect, that a person who is, or is acting as, a responsible officer of the body corporate is: – for a person who is a disqualified person only because he/she was disqualified under s 126H — disqualified from being or acting as a responsible officer of the body corporate, or – otherwise — a disqualified person • a receiver, or a receiver and manager, has been appointed in respect of property beneficially owned by the body • an administrator has been appointed in respect of the body • a provisional liquidator has been appointed in respect of the body, or • the body has begun to be wound up (s 120(2)). Convicted of an offence and spent convictions A reference to a person convicted of an offence includes a reference to a person for whom an order has been made under s 19B of the Crimes Act 1914, or under a corresponding provision of a law of a state, territory or a foreign country, in relation to the offence (SISA s 120(3)). For example, if the offence has been proved in a court but the court has not recorded a conviction (eg the person was a first time offender), that person is still a “disqualified person”. Spent convictions are available under certain state, federal and overseas legislation that generally prohibit the disclosure of offences in some circumstances. In some cases, a conviction that is more than 10 years old may no longer require disclosure. However, SISA expressly excludes the law on spent convictions and, accordingly, spent convictions are still relevant for determining whether a person is disqualified. A person is a disqualified person if he/she has been convicted of an offence of dishonesty, whether or not a penalty was imposed and irrespective of whether the “spent convictions” provisions of the Commonwealth or a state law apply in relation to the conviction, or whether the conviction was for an offence of dishonesty under Australian law or the law of any other country (s 120(4)). This means that extremely high standards of honesty are to be applied to persons and corporations under s 120. In Case 60/96 (see above), the AAT noted that “… It is clearly desirable that, in the context of a person or corporation acting as trustee, such high standards should not only be expected but strictly enforced. It is for this reason that the operation of spent conviction and like provisions of the Crimes Act 1914 (Cth) (‘the Crimes Act’), which would otherwise result in prior convictions in Australia, or prior convictions for relevantly minor offences, being disregarded, are expressly waived under the SISA (s 120(3) and 120(4))”. In that case, the AAT confirmed offences involving dishonest conduct committed overseas before the operation of SISA were covered for the purpose of the disqualified person test. This was the case even though the offence was a spent conviction under UK legislation, and despite the person being only 21 years old at that time and had received minor punishment, and since that time have had an exemplary record as a successful investment manager and chairman of managed funds. A person may apply for a waiver of the disqualified person status if the dishonest conduct conviction was not “serious dishonest conduct” as described in s 126B (see below). Insolvent under administration An “insolvent under administration” is defined in SISA s 10(1) to mean a person who: • under the Bankruptcy Act 1966 or the law of an external territory, is a bankrupt in respect of a bankruptcy from which the person has not been discharged

• under the law of a country other than Australia or the law of an external territory, has the status of an undischarged bankrupt, and includes • a person any of whose property is subject to control under s 50 or 188 of the Bankruptcy Act 1966, or a corresponding provision of an external territory or foreign country law, or • a person who has executed a personal insolvency agreement under Pt X of the Bankruptcy Act 1966, or the corresponding provisions of the external territory or foreign country law, if a certificate has not been given under s 232 of that Act or the corresponding provision of the external territory or foreign country law, in respect of the agreement. Section 232 of the Bankruptcy Act empowers a trustee to issue a certificate to a debtor that all the obligations created by the agreement have been discharged. This is akin to a certificate of completion. Among others, a “trustee” means the trustee of the estate of the bankrupt in relation to a bankruptcy and the trustee of the agreement in relation to a personal insolvency agreement. For the above purpose, the trustee must be satisfied that the relevant obligations have been discharged. A certificate signed by the trustee is prima facie evidence on the facts stated in it (s 232(2)). The Bankruptcy Regulations require the trustee to be satisfied that the divisible property of the debtor has, so far as practicable, been realised and that no dividend is payable to the creditors (reg 10.14). The trustee must provide the certificate on written request by the debtor within seven days of receiving the request. Where applicable, the trustee must, within seven days of giving the certificate, give a copy of it to the Official Receiver. It should be noted that a personal insolvency agreement might contain a specific term governing the circumstances when it is deemed to be completed, eg it ceases to operate on a certain date. Disqualification of individuals by Commissioner under s 126A The Commissioner may disqualify an individual under SISA s 126A in the three circumstances below: (1) if the Commissioner is satisfied that: (a) the person has contravened the SISA or the FSCDA on one or more occasions, and (b) the nature or seriousness of the contravention(s), or the number of contraventions, provides grounds for disqualifying the individual (s 126A(1)) (2) if the individual is or was a responsible officer of a trustee, investment manager or custodian (the body corporate) — if the Commissioner is satisfied that: (a) the body corporate has contravened the SISA or the FSCDA on one or more occasions (b) at the time of one or more of the contraventions, the individual was a responsible officer of the body corporate, and (c) in respect of the contravention(s) that occurred while the individual was a responsible officer, the nature or seriousness of the contravention(s), or the number of them, provides grounds for the disqualification of the individual (s 126A(2)) (3) if the Commissioner is satisfied that the individual is otherwise not a “fit and proper person” (see below) to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian (s 126A(3); former s 120A); The Commissioner may revoke a disqualification on application by the disqualified individual or on its own initiative. A disqualification or revocation made by the Commissioner takes effect on the day on which it is made. The Commissioner must give the individual written notice of a disqualification, revocation of a disqualification or a refusal to revoke a disqualification. The particulars of a notice (or a notice given under s 344(6) as result of internal review) must be published in the Gazette as soon as practicable (s 126A(5)

to (7)). A disqualified person because of a conviction for an offence under s 120(1)(a)(i) (see above) that does not involve “serious dishonest conduct” (as described in s 126B(2), see below) may apply to the Regulator for a declaration under s 126D to waive the disqualified person status (see s 126B to 126F). The AAT has refused to waive the status of an applicant as a disqualified person under s 120 as there were no exceptional circumstances to allow the application for waiver to be brought out of time, as permitted under s 126B(4) ([2014] AATA 223). Meaning of “serious dishonest conduct” An offence involves “serious dishonest conduct” if the penalty actually imposed for the offence is “a term of imprisonment of at least 2 years … or a fine of at least 120 penalty units…” (s 126B(2)). In ID 2011/24, the judge sentenced a superannuation fund member under s 20(1)(b) of the Crimes Act 1914 to imprisonment for a period that was more than two years, but ordered that he be released after he had served a specified period of his sentence upon giving security. The period of time that he spent in prison was less than two years. An order under s 20(1)(b) of the Crimes Act is called a “recognisance release order” (see s 16 of the Crimes Act). A recognisance release order enables a sentencing court to impose a term of imprisonment on the offender but to direct, by order, that the offender be released after a specified period upon the person giving security. The order for release is part of a composite sentence and operates as a qualification or condition upon the sentence of imprisonment imposed (Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409 at 416). The ATO view is that, in ID 2011/24, the sentencing court considered a term of imprisonment of more than two years to be the appropriate penalty to be imposed for the offence irrespective of the court’s direction that the member be released upon recognisance. Thus, the penalty actually imposed for the offence was a term of imprisonment of more than two years and the offence committed by the fund member was an offence involving “serious dishonest conduct” for the purposes of s 126B. The Regulator must, by written notice to the applicant, make a declaration waiving the applicant’s status as a disqualified person if, having regard to any of the matters below, the Regulator is satisfied that the applicant is highly unlikely to contravene the SISA and do anything that would result in an SMSF not complying with the SISA: • the offence to which the application relates • the time that has passed since the applicant committed the offence • the applicant’s age when the applicant committed the offence • the orders made by the court in relation to the offence, and • any other relevant matter (s 126D(1A)). The Commissioner also has the power to disqualify a person from being or acting as an auditor or actuary of an SMSF (s 131: ¶3-600). Disqualification of individuals by Federal Court under s 126H Under SISA s 126H, the Federal Court may, on application by APRA, disqualify a person from being or acting as: • an individual trustee of a superannuation entity (other than an SMSF) or a responsible officer (ie a director, secretary or executive officer) of a body corporate that is a trustee, or • an investment manager or custodian of a superannuation entity (other than an SMSF). The grounds upon which the court would make a disqualification order are set out in s 126H(3) to (5). These grounds are similar to those in s 126A(1) to (3) in relation to disqualifications made by the Commissioner, ie the person has contravened the SISA or FSCDA and the contraventions provide grounds for disqualification or disqualification of a person on the “fit and proper” grounds (see above). Also, in deciding whether the grounds in s 126H(3) to (5) are satisfied, the court may take into account

whether the individual has contravened a provision of the First Home Saver Accounts Act 2008 (FHSA Act), whether the individual is or has been a responsible officer of a body corporate that is or has been a disqualified person under SISA Pt 15 as applied by Div 2 of Pt 7 of the FHSA Act, and whether the individual’s conduct in relation to FHSAs makes the individual otherwise not “fit and proper” (SISR former reg 13.19A; repealed following the repeal of the FHSA Act). A disqualified person or APRA may apply to the Federal Court for a variation or revocation of a disqualification order under s 126H or an order that the person is not a disqualified person (s 126J). The court also has the power to disqualify a person from being or acting as an auditor or actuary of a superannuation entity (other than an SMSF) (s 130D: ¶3-600). A disqualification order by the court is subject to the normal court-based appeals process, and is not subject to internal review by APRA or merits review by the AAT. In addition, the offence provisions for contravening a disqualification order by the court are harmonised for all superannuation entities and service providers (see below). Fit and proper person test The Commissioner may disqualify an individual if satisfied that the individual is otherwise not a “fit and proper person” to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian (s 126A(3)). A similar provision empowers a court to disqualify a person under s 126H of the SISA if satisfied that the person is otherwise not a fit and person to be a trustee of a superannuation entity or a responsible officer of any body corporate that is the trustee, investment manager or custodian of a superannuation entity (s 126H(5)) (see above). The expression “fit and proper person” is not a defined term in the SIS legislation. Guidance on its meaning may be found from the cases below. In Hughes and Vale Pty Ltd v State of NSW (No 2) (1955) 93 CLR 127, the High Court said (at 156) that the words “fit and proper” were traditionally used in relation to persons holding offices or vocations: “But their very purpose is to give the widest scope for judgment and indeed for rejection. ‘Fit’ (or ‘idoneus’) with respect to an office is said to involve three things, honesty, knowledge and ability: ‘honesty to execute it truly without malice, affection or partiality; knowledge to know what he ought duly to do; and ability as well in estate as in body, that he may intend and execute his office, when need is, diligently, and not for impotency or poverty neglect it’ ….” In Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321, Toohey and Gaudron JJ said as below about the expression “fit and proper”: “The expression ‘fit and proper person’, standing alone, carries no precise meaning. It takes its meaning from its context, from the activities in which the person is or will be engaged and the ends to be served by those activities. The concept of ‘fit and proper’ cannot be entirely divorced from the conduct of the person who is or will be engaging in those activities However, depending on the nature of the activities, the question may be whether improper conduct has occurred, whether it is likely to occur, whether it can be assumed that it will not occur, or whether the general community will have confidence that it will not occur. The list is not exhaustive but it does indicate that in certain contexts, character (because it provides indication of likely future conduct) or reputation (because it provides indication of likely future conduct) may be sufficient to ground a finding that a person is not fit and proper to undertake the activities in question.” The AAT cited the above passages in its decision in Glyman v Tax Practitioners Board 2015 ATC ¶10414, which affirmed the decision of the Tax Practitioners Board to refuse to renew the applicant’s registration as a tax agent as she was not a fit and proper person. The applicant was registered as a tax agent on 1 March 2010. In October 2012, the Commissioner of Taxation determined that the applicant was a disqualified person for the purposes of Pt 15 of the SISA. As a trustee of an SMSF, she had contravened the SISA and was not a fit and proper person to be a “trustee, investment manager or custodian”. In February 2015, the applicant lodged an application with the Tax Practitioners Board to renew her tax agent registration. The Board refused the application. It considered the facts on which the Commissioner’s 2012 decision was based. It found that the applicant had breached her fiduciary duties as a trustee by transferring nearly $1m of trust funds into her personal bank account. The Board found that

having regard to her SISA disqualification and the underlying circumstances, the applicant was not a fit and proper person for registration as a tax agent. The applicant sought review of the Board’s decision by the AAT. In Hart (18 ESL 05; [2018] AATA 1267), the AAT held that the Commissioner had properly exercised his discretion under s 126A to disqualify Mr Hart from acting as a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian of a superannuation entity. Mr Hart (as trustee of the SMSF) had breached various provisions of the SIS Act, including: • failure to keep assets of the fund separate from personal or business assets • acquiring property from a related party of the fund in contravention of the law • allowing a charge to be placed over a fund asset • failure to comply with payment standards and allowing early access to member benefits, and • consistent failure to comply with lodgment of the fund’s tax returns. The AAT said “. . . his behaviour can only be described as falling significantly below the standard one would expect from a competent trustee acting for a SMSF”, and that he was “. . . unquestionably, not a fit and proper person to act in that role. His disqualification by the Commissioner was plainly warranted”. For further discussion of the expression “fit and proper”, see PS LA 2006/17 which discusses the factors the Commissioner will take into account with respect to disqualifying an individual for not being a “fit and proper person” under s 120A(3) (¶3-850). Offences relating to disqualified persons A disqualified person within the meaning in SISA s 120 cannot be a trustee, investment manager or custodian of a superannuation entity, or be a responsible officer of a body corporate that is a trustee, investment manager or custodian of a superannuation entity (s 126K). Section 126K is a two-tier fault liability and strict liability provision (¶3-820). An offence is punishable by the penalty specified in the relevant provisions (a term of imprisonment or fine). A person commits an offence if: • the person is a disqualified person, and the person knows he/she is a disqualified person • the person is or acts as a trustee, investment manager or custodian of a superannuation entity, or is or acts as a responsible officer of a body corporate that is a trustee, investment manager or custodian of a superannuation entity, and • for a person who is an individual and who is a disqualified person only because he/she was disqualified under s 126H — the person is disqualified from being or acting as a trustee of that superannuation entity or from being or acting as that responsible officer (s 126K(1), (2), (4), (5)). An offence also arises if a trustee of a fund is or becomes a disqualified person and does not immediately tell the Regulator (s 126K(8)) (a strict liability offence). A person is not entitled to fail to comply with a requirement under the SISA to answer a question or give information; to produce books, accounts or other documents; or to do any other act whatever on the grounds that this may make the person liable to a penalty by way of a disqualification under s 126A, 126H or 130D (SISA s 126L(3); RSA Act s 67AA). Also, in any proceeding under, or arising out of the SISA, a person is not entitled to refuse or fail to comply with such a requirement on similar grounds. This applies whether or not the person is a defendant in, or a party to, the proceeding or any other proceeding, and despite anything in any provision of the SISA or the Administrative Appeals Tribunal Act 1975 (s 126L). These provisions respond to the High Court’s decision in Rich v ASIC (2004) 22 ACLC 1,198, which overturned the view that disqualification proceedings were protective and not penal in nature.

[SLP ¶2-410, ¶2-550]

¶3-140 Governing rules and SISA requirements The SISA requirements interact with governing rules of a superannuation entity and certain provisions in the fund’s governing rules are void to the extent specified in SISA or to the extent of an inconsistency with the SIS requirements (see also ¶3-145 for provisions dealing with service providers and conflict of interests). Note that the SISA provisions discussed below do not apply to all superannuation entities, ie some apply only to a regulated superannuation fund or a registrable superannuation entity (RSE). The governing rules may also be void to the extent of an inconsistency with a SISA provision that provides protection for trustees in the management of the superannuation entities, such as being subject to direction or victimisation, or when exercising a discretion (¶3-150). Rules about cashing benefits after member’s death The governing rules of a regulated superannuation fund must not permit a fund member’s benefits to be cashed after the member’s death otherwise than in accordance with prescribed operating standards (SISA s 55A(1)). If the governing rules of a fund are inconsistent with s 55A(1), they are invalid to the extent of the inconsistency. The SISR standards in reg 6.21(2A) and (2B) dealing with the cashing of a deceased member’s benefits are discussed at ¶3-286. Rules do not prevent giving effect to certain elections A provision in the governing rules of a regulated superannuation fund is void to the extent that it would prevent a trustee or trustees of the fund from giving effect to: (a) an election made in accordance with s 29SAA (election to transfer accrued default amounts to a MySuper product) (¶9-120) (b) an election made in accordance with s 29SAB (election to transfer assets attributed to a MySuper product if authorisation cancelled) (¶9-120) (c) a requirement in regulations made for the purposes of s 29SAA(3) (d) an election made in accordance with s 29SAC (election not to pass costs of paying conflicted remuneration onto MySuper members) (¶9-120) (e) an election made in accordance with s 242B (election to transfer amounts held in an eligible rollover fund if authorisation cancelled) (¶3-520) (f) an election made in accordance with s 242C (election not to pass costs of paying conflicted remuneration to members of eligible rollover fund) (¶3-520) (s 55B). Rules preventing attributing an amount to a MySuper product A provision of the governing rules of a regulated superannuation fund is void to the extent that it would prevent a trustee or trustees of the fund from attributing an amount to a MySuper product for a member, instead of attributing the amount to a pre-MySuper default option (SISA s 55C(1)). A “pre-MySuper default option”, in relation to an amount attributed to a member of a regulated superannuation fund, is an investment option under which an asset (or assets) of the fund attributed to the member in relation to the amount that would be invested, under the governing rules of the fund, if the member gave no direction in relation to the amount (s 55C(2)). Inconsistent rules with outcomes assessments and MySuper products obligations A provision of the governing rules of a regulated superannuation fund is void to the extent that it is inconsistent with: (a) a covenant referred to in s 52(9), (12) or (13) that is contained, or taken to be contained, in the

governing rules of the fund, or (b) if the trustee of the fund is a body corporate — a covenant referred to in s 52A(2)(f) that is contained, or taken to be contained, in the governing rules of the fund, to the extent that the covenant relates to a covenant referred to in s 52(9), (12) or (13) (s 55D). Rules about trustee indemnification from fund assets Subject to two cases (see below), a provision in the governing rules of a superannuation entity is void if: • it purports to preclude a trustee of the entity from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee of the entity, or • it limits the amount of such an indemnity (SISA s 56(1)). Breaches of trust and penalties A provision in the governing rules of a superannuation entity is void in so far as it would have the effect of exempting a trustee of the entity from, or indemnifying a trustee of the entity against: • liability for breach of trust if the trustee: – fails to act honestly in a matter concerning the entity, or – intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the trustee was required to exercise (¶3-100) • liability for a monetary penalty under a civil penalty order (¶3-820), or • the payment of any amount payable under an infringement notice (¶3-860) (s 56(2)). Section 57 provides a similar rule to the above for the directors of the corporate trustee of a superannuation entity (see below). Operational risks A provision in the governing rules of an RSE is void in so far as it would have the effect of allowing a trustee of the entity: • to indemnify itself out of the assets of the entity for any amount expended out of capital of the trustee managed and maintained by the trustee to cover the operational risk of the entity, or • to indemnify itself out of any assets of the entity that do not form part of a reserve maintained for the purpose of covering the operational risk relating to the entity, any amount that relates to that risk, without first exhausting the reserve and any other financial resources managed and maintained by the trustee to cover the risk (s 56(2A)). Rules preventing seeking advice and indemnity Nothing in the governing rules of a superannuation entity prohibits a trustee of the entity from seeking advice from any person in respect of any matter relating to performance of the duties or the exercise of the powers of a trustee (SISA s 56(3)). A provision in the governing rules that purports to preclude a trustee of the entity from being indemnified out of assets of the entity in respect of the cost of obtaining such advice, or to limit the amount of such an indemnity, is void. Rules providing for indemnity for directors of corporate trustees Subject to SISA s 57(2), the governing rules of a superannuation entity may provide for a director of the trustee to be indemnified out of the assets of the entity in respect of a liability incurred while acting as a director of the trustee (s 57(1)). A provision of the governing rules of a superannuation entity is void in so far as it would have the effect of indemnifying a director of the trustee against:

• a liability that arises because the director: – fails to act honestly in a matter concerning the entity, or – intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the director is required to exercise (¶3-100), or • liability for a monetary penalty under a civil penalty order (¶3-820), or • the payment of any amount payable under an infringement notice (¶3-860) (s 57(2)). Section 56(2) provides a similar rule to the above for individual trustees of a superannuation entity (see above). A director of the trustee of a superannuation entity may be indemnified out of the assets of the entity in accordance with provisions of the entity’s governing rules that comply with s 57. Section 57 has effect despite s 241 of the Corporations Act 2001. Generally, s 241 prohibits a company from indemnifying or exempting a director (and the company’s officers) in respect of liabilities incurred in that capacity except where the indemnity is for liability to third parties where the director acted in good faith or for costs and expenses incurred in a successful defence of civil or criminal proceedings. Rules about voting A provision in the governing rules of a regulated superannuation fund (other than an SMSF) is void to the extent that it purports to preclude a director of the trustee from voting on a matter relating to the fund (SISA s 68C(1)). The above does not apply to a provision in the governing rules to the extent that the provision: (a) precludes a director from voting on a matter in which the director has a material personal interest (b) otherwise relates to voting by a director on a matter in which the director has a material personal interest (c) precludes a director from voting where there is a conflict of a kind described in s 52(2)(d) or 52A(2) (d) (¶3-100) (d) otherwise relates to voting by a director where there is a conflict of a kind described in s 52(2)(d) or 52A(2)(d) (e) precludes a director from exercising a casting vote, or (f) ensures compliance by the trustee of the fund, or a director, with a prudential standard that deals with conflicts of interest or duty (s 68C(2)). A corresponding rule to the above applies where the trustees of the fund are individuals (s 68D). Additional requirements in governing rules The governing rules of a regulated superannuation fund must expressly either require the trustee to be a “constitutional corporation” or provide that the sole or primary purpose of the fund is the provision of oldage pensions. The importance of this requirement is discussed at ¶2-130. Certain superannuation entities, such as a non-SMSF with fewer than five members (¶5-650) or a public offer entity (¶3-010), do not have a choice in this regard as the trustee of the entity must be a body corporate, rather than individuals.

¶3-145 Service providers and conflicts of interest There are rules in SISA on the use of particular service providers by superannuation entities, financial products, investments and entities in which funds may or must be invested in, and conflict of interests.

Service providers and investments in entities A provision in the governing rules of a regulated superannuation fund (other than an SMSF) is void to the extent that: • it specifies a person or persons (whether by name or in any other way, directly or indirectly) from whom the trustee, or one or more of the trustees, of the fund may or must acquire a service • it specifies an entity or entities (whether by name or in any other way, directly or indirectly) in or through which one or more of the assets of the fund may or must be invested • it specifies (whether by name or by reference to an entity) a financial product or financial products: – in or through which one or more of the assets of the fund may or must be invested – that may or must be purchased using assets of the fund, or – in relation to which one or more assets of the fund may or must be used to make payments (SISA s 58A(2), (3), (4)). The entities include, but are not limited to, managed investment schemes, life insurers, PSTs and other unit trusts and authorised deposit-taking institutions (ADIs). Financial products include, but are not limited to, insurance, including tied group life insurance policies. Sections 58A(2), (3) and (4) do not apply if the relevant person, entity or financial product is specified in a law of the Commonwealth or of a state or territory, or is required to be specified under such a law (s 58A(5)). The rules in s 58A are to restore a trustee’s discretion to act in the best interests of members when entering into relevant arrangements. The explanatory memorandum to Act No 61 of 2013 which inserted s 58A provides the following guidelines: • Section 58A does not require termination of contracts giving effect to arrangements required under a fund’s governing rules. Trustees will be required to determine whether the continuation of the arrangements is consistent with the obligation to act in the best interests of members. Those arrangements that can be demonstrated to be in the best interests of members can continue; others must be terminated when the current period of the relevant contract comes to an end. • If the costs of changing from the current service provider outweigh potential benefits to members then it is possible for trustees to conclude that the arrangement is in the best interests of members and no change would be required. • Section 58A does not limit a trustee’s ability to identify generic categories of investment, for example ethical investment. • Section 58A overrides provisions that state that the RSE licensee “may” use a particular entity as well provisions that state the RSE licensee “must” do so. This is to ensure that the requirements of the provision cannot be avoided through a clause that confers power to use particular named entities which might have the effect of encouraging or sanctioning the use of those entities instead of considering other options in the market. • The requirements for selecting service providers in members’ best interests are supported by APRA prudential standards covering a range of topics including conflicts of interest and outsourcing (see Chapter 9). Conflict of interest Section 58B of SISA applies if a trustee of a regulated superannuation fund does one or more of the following: (a) acquires a service from an entity

(b) invests assets of the fund in or through an entity (c) invests assets of the fund in or through a financial product (d) purchases a financial product using assets of the fund (e) uses assets of the fund to make payments in relation to a financial product. In doing one or more of the above things, the general law relating to conflict of interest does not apply to the extent that it would prohibit the trustee from doing the thing, provided the trustee would not breach SISA or any other Act (or a legislative instrument under the Acts), APRA prudential standards, the operating standards, the fund’s governing rules or a SIS covenant. This means that the trustee may enter into service provider and investment arrangements (and undertake the preliminary dealings necessary to do so) even though this may otherwise breach general law conflict of interest prohibitions. It will not be necessary, therefore, for the trust deed to expressly authorise the trustee to engage in dealings with the related party. The words “general law relating to conflict of interest” are intended to be construed broadly so as to cover general law relating to both trustees and directors and to cover conflicts between duties to beneficiaries and the interests of beneficiaries, on the one hand, and duties to other persons and the interests of other persons, on the other. APRA prudential standards and practice guides APRA has issued prudential standards and practice guides on outsourcing, conflicts of interest and other operational risks, see ¶9-720.

¶3-150 Protection for trustees in governing rules The SISA requires the governing rules of a superannuation entity to provide certain safeguards for the protection of trustees in the operation and administration of the entity. Trustee not to be subject to direction The governing rules of a superannuation entity (other than a superannuation fund with fewer than five members or an excluded ADF) must not permit the trustee to be subject to direction by any other person in the exercise of its powers under those rules (eg a member directing the trustee to invest in a particular investment: ¶3-400), except by the persons and in the circumstances specified in the SISA (SISA s 58). The exceptions specified in s 58(2) include a direction given by the court, a Regulator or the Superannuation Complaints Tribunal, a direction given by an employer-sponsor, or an associate of an employer-sponsor, as permitted by the SISR, and: • a direction given by a beneficiary to take up, dispose of or alter the amount invested in an investment option, where the entity is an RSE and the direction is given in prescribed circumstances • a direction given by a member of a regulated superannuation fund to attribute (or continue to attribute) an amount that is an accrued default amount for the member to a MySuper product or an investment option within a choice product in the fund. Any governing rule that is inconsistent is invalid to the extent of the inconsistency. Exercise of trustee discretion The governing rules of a superannuation entity (other than an SMSF or excluded ADF) must not permit a discretion under those rules that is exercisable by a person other than a trustee of the entity to be exercised unless: (a) those rules require the consent of the trustee, or the trustees, of the entity to the exercise of that discretion, or (b) if the entity is an employer-sponsored fund: (i) the exercise of the discretion relates to the contributions that an employer-sponsor will, after the

discretion is exercised, be required or permitted to pay to the fund (ii) the exercise of the discretion relates solely to a decision to terminate the fund, or (iii) the circumstances in which the discretion was exercised are covered by specific SISR (SISA s 59(1)). Any governing rule that is inconsistent with s 59(1) is invalid to the extent of the inconsistency. A qualification provided by s 59(1A) has the effect that the governing rules may, subject to the trustee complying with the prescribed SISR conditions, permit a member to give the trustee a written notice requiring the trustee to pay the member’s benefit entitlements after his/her death to the legal personal representative or a dependant or dependants of the member. Such a notice is commonly referred to as a “death benefit nomination”, and a trustee’s discretionary power to pay death benefits of the member is subject to the nomination (¶3-288). Amendment of governing rules The governing rules of a superannuation entity (other than an SMSF) must not permit the rules to be amended except with the consent of the trustee or where the amendments are in relation to the matters specified in the SISA (SISA s 60). Importantly, the governing rules of a regulated superannuation fund must not permit those rules to be amended in such a way that a person other than a constitutional corporation would be eligible to be appointed as trustee unless the rules provide, and will continue to provide after the amendment is made, that the fund has, as its sole or primary purpose, the provision of old-age pensions (s 60(2)). The governing rules of a superannuation entity are invalid to the extent that they are inconsistent with s 60. For prudential reasons, trustees should generally have qualified professionals undertake the trust deed amendments and related changes to ensure that the amendments or changes are effective and have the desired results. For a practitioner insight into the pitfalls and the inherent risks of not using legal practitioners when effecting trust deed changes, see “SMSF deeds varied via the web. The risks!” by Daniel Butler of DBA Butler Pty Ltd (Lawyers) (published in the Wolters Kluwer Australian Super News, Issue 7, August 2005). Removal of trustee In the case of a public offer entity, the governing rules must not permit the trustee to be removed, except by APRA or in the circumstances permitted by the SISR (SISA s 60A; SISR reg 3.04A). SISA Pt 17 provides for the removal of trustees by APRA. A governing rule that is inconsistent with s 60 or 60A is invalid to the extent of the inconsistency. Trustee victimisation The trustee of an employer-sponsored superannuation fund (including the responsible officer of a corporate trustee) has statutory protection against any act of victimisation in the performance of his/her obligations or powers under the SISA or the governing rules (SISA s 68). A person is taken to commit an act of victimisation against a trustee of an employer-sponsored fund if the person subjects, or threatens to subject, the trustee to a detriment on the grounds that the trustee has fulfilled, is fulfilling, or is proposing to fulfil, an obligation imposed on the trustee, or the trustee has exercised, is exercising, or is proposing to exercise, the trustee’s powers in a particular way. An employer is taken to subject an employee to a detriment if the employer dismisses the employee, or injures the employee in his/her employment, or alters the position of the employee to the employee’s prejudice (s 68(4)). For example, APRA took action for alleged victimisation against two trustee directors of a superannuation fund. The two directors were allegedly victimised in their capacity as an employee and as an auditor and suffered financial detriment when their employment and audit engagement were terminated for simply carrying out their legal obligations as trustee directors to act in the best interests of fund members (APRA media release No 10.14, June 2010).

[SLP ¶2-860 – ¶2-890]

¶3-160 Defined benefit and pension funds must have 50 members A defined benefit fund must have at least 50 defined benefit members, and a regulated superannuation fund which has fewer than 50 members must not provide a defined benefit pension. The 50-member rule also applies to sub-funds within a scheme or fund, but not to certain public sector schemes (see below). For the SISA financial management standards and actuarial requirements applicable to defined benefit and other superannuation funds, see ¶3-330. Meaning of “defined benefit pension” A “defined benefit pension” means a “pension” within the meaning of the SISA (ie an income stream that complies with the minimum standards prescribed for a pension: ¶3-390) other than: • a pension wholly determined by reference to policies of life assurance purchased or obtained by the trustee of a regulated superannuation fund solely for the purposes of providing benefits to members of that fund • an allocated pension or a market-linked pension, or • an account-based pension (¶3-390) (SISR reg 9.04E). The 50-member rule does not apply to funds paying the above excepted pensions as, with those pensions, the investment and mortality risks of the pension are not assumed by the fund but by the life insurance company or pensioner. The explanatory statement to SR 84/2004 states that the 50-member rule is: (i) to restrict the provision of defined benefit pensions to funds that are of a sufficient size to satisfactorily manage the investment and mortality risks of providing those pensions; and (ii) to prevent the payment of non-arm’s length defined pensions by small funds, in order to avoid RBL and social security means testing and to access taxation concessions for estate planning rather than retirement income purposes. Sub-funds to be treated as funds To prevent circumvention of the 50-member rule in SISR reg 9.04D or 9.04I through the use of master and hybrid fund arrangements, a sub-fund within a defined benefit scheme is taken to be a defined benefit fund, or a sub-fund within a regulated superannuation fund is taken to be a regulated superannuation fund, if: • the sub-fund has separately identifiable assets and separately identifiable beneficiaries • the interest of each beneficiary of the sub-fund is determined by reference only to the conditions governing that sub-fund (reg 9.04B; 9.04G). Exceptions — where 50-member rule does not apply Divisions 9.2A and 9.2B of SISR do not apply to a fund that is part of: • the scheme established by or under the Superannuation Act 1976 or the Superannuation Act 1990 • the Military Superannuation and Benefits Scheme, or • an exempt public sector superannuation scheme (reg 9.04A(2); 9.04F(2)).

Fund Operation ¶3-200 Sole purpose test

The trustee of a regulated superannuation fund must comply with the sole purpose test set out in SISA s 62. Essentially, the test requires the trustee to ensure the fund is maintained solely for one or more of the “core purposes”, or for one or more of the core purposes and for one or more of the “ancillary purposes”. The test does not imply that the trustee is required to maintain the fund so that the same kind of benefits will be provided to each member of the fund (s 62(1A)). The sole purpose test is a civil penalty provision, and trustees may be liable to civil and criminal proceedings if the provision is breached (¶3-820). Core purposes The core purposes specified in SISA s 62(1)(a) for a regulated superannuation fund are: • the provision of benefits for each member of the fund on or after the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member’s retirement occurred before or after the member joined the fund) • the provision of benefits for each member of the fund on or after the member attaining age 65 • the provision of benefits for each member of the fund on or after whichever is the earlier of: (a) the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; or (b) the member attaining age 65 • the provision of benefits in respect of each member of the fund on or after the member’s death if: (a) the death occurred before the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; and (b) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both, or • the provision of benefits in respect of each member of the fund on or after the member’s death if: (a) the death occurred before the member attained age 65; and (b) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both (SISR reg 13.18). For the meaning of “dependant” for the purposes of the SISA, see ¶3-020 and ¶3-288. Ancillary purposes The ancillary purposes specified in SISA s 62(1)(b) for a regulated superannuation fund are: • the provision of benefits for each member of the fund on or after the termination of the member’s employment with an employer who had, or any of whose associates had, at any time contributed to the fund in relation to the member • the provision of benefits for each member of the fund on or after the member’s cessation of work, if the work was for gain or reward in any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged and the cessation is on account of ill-health • the provision of benefits in respect of each member of the fund on or after the member’s death if: (a) the death occurred after the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member’s retirement occurred before or after the member joined the fund); and (b) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both • the provision of benefits in respect of each member of the fund on or after the member’s death if: (a) the death occurred after the member attained age 65; and (b) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both • the provision of such other benefits as are approved by the Regulator (see below). The ancillary purposes approved pursuant to s 62(1)(b)(v) are the provision of benefits for or in respect of

each member which SISR Pt 6 permits to be paid (by being cashed, rolled over or transferred), or requires to be paid, and the extent and the persons to whom the fund is permitted or required under SISR Pt 6 to pay (Superannuation Industry (Supervision) approval of provision of benefits No 1 of 2007). The provision of benefits in accordance with SISR Pt 6 is discussed in ¶3-286. The ancillary purposes approval (by reference to the provision of benefits under SISR Pt 6) addresses inconsistencies that might otherwise arise between the sole purpose test and the SISR Pt 6 payment standards. For example: • the sole purpose test allows payment of benefits only to members, dependants or the legal personal representative of the member, whereas reg 6.22 authorises payment of benefits in certain limited circumstances to any individual • the sole purpose test may prohibit payment of benefits that had become unrestricted non-preserved benefits because of termination of employment, but that had been rolled over to a second fund. The benefits would not then be payable from the second fund because of s 62(1)(b)(i), which applies only to benefits to which the relevant employer had contributed (¶3-280), and • the sole purpose test may prohibit payment of a benefit under $200 to a lost member who is found, whereas the benefit may be paid under item 111 of the conditions of release in SISR Sch 1 (¶3-280). In all of the above cases, the ancillary purposes approval ensures these benefits remain payable at any time. Regulator’s guidelines SMSFR 2008/2 contains guidelines on the application of the sole purpose test to SMSFs. In particular, the ruling states that while the sole purpose test requires trustees to ensure that the fund is maintained solely for the purposes specified in SISA s 62 (see above), there are some circumstances where a fund may be maintained solely for these purposes while providing benefits (particularly to members or other related parties) other than those specified without breaching s 62. Although SMSFR 2008/2 is stated to apply to SMSFs, the ATO’s guidelines are, in principle, generally relevant to other regulated superannuation funds. The ATO has provided examples of funds investing in shares which provide collateral shareholder discount entitlements that may breach the sole purpose test (see SMSFR 2008/2: ¶5-410). For the ATO’s views on the potential contravention of the sole purpose test if an SMSF is presently entitled to a distribution from a related or non-arm’s length trust and payment of this amount is not sought, see SMSFR 2009/3 in ¶5-410. Trauma insurance policy Where member contributions are applied to purchase trauma insurance policies, APRA considered that, an unreasonable diversion of contributions as premiums for the contingent trauma cover would be difficult to reconcile with the sole purpose test and the fundamental retirement objective of superannuation. Former SMSFD 2010/1 (withdrawn from 1 July 2014: see below) stated that the trustee of an SMSF could purchase a trauma insurance policy in respect of a member and still satisfy the sole purpose test provided any benefits payable under the policy: • were required to be paid to the trustee • were benefits that will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release, and • the acquisition of the policy was not made to secure some other benefit for another person such as a member or member’s relative. If a trustee purchased a trauma policy that provides for benefits payable under the policy to be paid directly to someone other than the trustee (eg the insured member or member’s relative is the beneficiary of the policy), this would breach the sole purpose test.

A payout under a trauma insurance policy is normally made to a superannuation fund (as owner of the policy) regardless of the insured member’s age, working status, or whether the trauma causes permanent disability. If the receipt of the benefit by the fund under the policy does not coincide with the member satisfying a condition of release under the SISR (¶3-280), the proceeds cannot be paid immediately to the member by the SMSF. Instead, they will be retained in the fund until the member subsequently satisfies a condition of release (eg retirement). The key issues are the entity deriving a benefit from the policy and the timing of that benefit. The sole purpose test must be maintained to ensure that benefits are provided to or for a member on or after the member’s retirement, employment termination or death (see above). Any benefits provided at an earlier time for the member or a related party are sometimes referred to as “current day” benefits and would breach the sole purpose test. Example An SMSF (with two members, H and J) decides to purchase trauma insurance policies for its members so as to alleviate any financial stress for them. The policies are purchased in names of H and J and each policy stipulates that proceeds from the policies are to be paid directly to them. The purchase of the policies provides a “current day” benefit, ie H and J do not have to pay the costs of premiums. This is inconsistent with the sole purpose test and the overall objective of providing retirement benefits for members, and will breach s 62.

The withdrawal of SMSFD 2010/1 is the consequence of the commencement of SISR reg 4.07D(2) from 1 July 2014, which states that a trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member of the fund unless the insured event is consistent with a condition of release specified in items 102 (Death), 102A (Terminal medical condition), 103 (Permanent incapacity) or 109 (Temporary incapacity) of SISR Sch 1. Regulation 4.07D(2) does not apply to the continued provision of an insured benefit to members who joined a fund before 1 July 2014 and were covered in respect of that insured benefit before 1 July 2014 (¶3-240). The Commissioner explains that the insured event under a trauma insurance policy, as described in SMSFD 2010/1, is not consistent with any of the conditions of release set out in reg 4.07D(2). Therefore, a trustee of an SMSF is prohibited from providing such an insured benefit in relation to a member unless the member joined the fund before 1 July 2014, and was covered in respect of that insured benefit before 1 July 2014. An SMSF trustee that continues to provide a trauma insurance benefit to a member who joined the fund before 1 July 2014, and was covered in respect of that insured benefit before 1 July 2014, can purchase a trauma insurance policy to support the provision of that benefit and still satisfy the sole purpose test in s 62 of the SISA provided the conditions set out in SMSFD 2010/1 are met. Cases and examples The Swiss Chalet case is the most often cited example of a fund which was found to have failed the sole purpose test (Case 43/9595 ATC 374). In that case, the fund had purchased shares which enabled access to a golf club for Mr A, the managing director of the employer-sponsor of the fund; invested in a Swiss chalet which also provided a source of funding for Mr A for his family trust; and operated in a manner that denied fund members information about their entitlements and the fund. Although the sole purpose test considered in the case was contained in the Occupational Superannuation Standards Act 1987 (OSS Act), the same result would be expected under s 62. Another often cited case is Case 23/96 96 ATC 278, where the trustees of two superannuation funds (“B1 Fund” and “B2 Fund”) were a husband and wife (“H” and “W”). H and W were members of the B1 Fund with 12 others and were the only members of the B2 Fund. H and W withdrew approximately $53,000 from B2 Fund and paid it into B1 Fund, which then used the money to pay its tax liability ($21,000) and pay the trustee of the B Family Trust ($32,000). The AAT held that using the money held on trust for the beneficiaries of B2 to pay B1 Fund’s tax liability was contrary to the sole purpose test under the OSS Act. Superannuation funds which contravene one or more regulatory provisions in the SISA (¶2-140), particularly those governing investments of the fund, are very likely to also fail the sole purpose test. Examples of these cases are:

• The Trustee for the R Ali Superannuation fund 12 ESL 01 — in this case, the fund also contravened the in-house asset rules in s 84(1) or 85(1) (¶3-450), the arm’s length rule in s 109 (¶3-440), and the prohibition on giving loans to members in s 65 (¶3-420) • Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund 12 ESL 02 — in this case, the fund also contravened the in-house asset rules and arm’s length rule • Dolevski v Hodpik Pty Ltd 11 ESL 07 — in this case, the fund also contravened the in-house asset rules and arm’s length rule. This case also examined whether: (i) the contraventions were due to reasonable reliance on information supplied by another person or due to reasonable mistake such that defences under s 323(2) of the SISA may be relied upon; and (ii) the trustees acted honestly in all the circumstances of the case such that s 221(2) of the SISA may be relied upon for the court to grant relief from liability (¶3-820) • Raelene Vivian, suing in her capacity as the DC of T (Superannuation) v Fitzgeralds 07 ESL 23 — in this case, the fund also contravened the in-house asset rules. This case also examined the principles and factors relevant to the assessment of an appropriate penalty • ZDDD 11 ESL 01 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members and arm’s length rule • Olesen v Eddy 11 ESL 02 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members • Olesen v MacLeod 11 ESL 11 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members. The case also examined whether the conduct amounted to a “serious contravention”, whether a monetary penalty should be ordered and consideration of other principles and factors relevant to the assessment of an appropriate penalty • Triway Super 11 ESL 12 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members and s 126K of the SISA (disqualified person not to be a trustee: ¶3-130) • Olesen v Parker & Parker 11 ESL 21 — in this case, the fund also contravened the prohibition on lending money or giving financial assistance to members and arm’s length rule. This case also examined whether: (i) the contraventions were due to reasonable reliance on information supplied by another person or due to reasonable mistake such that defences under s 323(2) of the SISA may be relied upon; and (ii) the trustees acted honestly in all the circumstances of the case such that s 221(2) of the Act may be relied upon for the court to grant relief from liability • Aussiegolfa Pty Ltd (Trustee) 2018 ATC ¶20-664 — in this case, the full Federal Court held that fund would be maintained solely for the core purposes, or the core purposes and the ancillary purposes set out in s 62 in an arrangement when property was leased by a sub-fund in which an SMSF had invested in to the daughter of the fund members on arm’s length terms (¶3-450) (see also the ATO's decision impact statement (DIS) below). In the Aussiegolfa DIS (www.ato.gov.au/law/view/document?docid=LIT/ICD/VID54of2018/00001), the ATO stated it did not consider that the case is authority for the proposition that a superannuation fund trustee can never contravene the sole purpose test when leasing an asset to a related party simply because market-value rent is received. “It is the purpose of making and maintaining a fund's investments that is central to identifying if there is a contravention of the sole purpose test.” The DIS also noted the observations of the court that a collateral purpose, and a contravention of s 62 of the SISA, could well be present if the circumstances indicated that leasing to a related party had influenced the fund's investment policy. For example, a superannuation fund trustee will contravene the sole purpose test if it acquires residential premises for the collateral purpose of leasing the premises to an

associate of the fund, even where the associate pays rent at market value. [SLP ¶3-610]

¶3-220 Acceptance of contributions and accruals A regulated superannuation fund can only accept contributions and grant benefit accruals in accordance with SISR Pt 7 (contributions standard). The contributions standard applies to “contributions” (eg employer contributions for employees, personal contributions, spouse contributions and contributions made by any other person, payments of the SG shortfall component and payments from the SHASA), but contributions do not include benefits “rolled over” or “transferred” (¶3-284) to the fund (reg 1.03(1)). Rolled over or transfer payments are generally payment on behalf of an individual (eg a fund member) made between superannuation funds and certain other entities within the superannuation system. The “superannuation system” comprises regulated superannuation funds, ADFs, RSAs, exempt public sector superannuation schemes (EPSSSs) (eg some schemes established under Commonwealth, state or territory government legislation), deferred annuities (an annuity offered by a life office which commences payment when the payment standards permit but no later than when the annuitant reaches age 65) and, from 18 December 2008, the Commissioner as the maker of payments to a superannuation provider under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SISR reg 5.01(1)). For example, the contribution standard would apply to a roll-over or transfer from outside the superannuation system (eg a transfer from a foreign fund). The transfer of amounts from a New Zealand KiwiSaver scheme that complies with the Trans-Tasman retirement savings portability requirements is to be treated as a contribution when received by an RSE; however, special provisions apply to the transfer of these amounts (¶8-380). Examples of other payments to a fund that are not subject to the contribution standard include insurance proceeds and payments under a family law superannuation split (see “What are contributions?” below). Contributions received by regulated superannuation funds must be allocated to members within 28 days after the end of the month in which they were received (see below). The Regulator may direct the trustee of a regulated superannuation fund which has contravened a regulatory provision (including the trustee representation rules: ¶3-120) or the FSCDA (¶9-740) not to accept employer contributions (SISA s 63). The trustee must notify employer-sponsors of the issue of the direction and refund contributions accepted in contravention of the direction within 28 days, or such further period allowed by the Regulator. A trustee which fails to comply with the above requirements is guilty of a strict liability offence (¶3-820). The governing rules of a regulated superannuation fund may prescribe more restrictive acceptance of contribution and benefit accrual rules than the SIS standards and trustees may, at their discretion, impose more restrictive arrangements in accordance with their powers under the governing rules. Contributions may be made “in specie” (in assets other than cash). In these cases, the trustees must also ensure that the relevant investment provisions of the SIS legislation dealing with acquisition of assets are not breached (¶3-430). A registrable superannuation entity (RSE) that is a regulated superannuation fund must not accept contributions unless the RSE is registered under SISA Pt 2B (reg 7.03A) (¶3-490). Superannuation contributions, including fund reserves allocated to a member, are subject to contribution caps for taxation purposes (see below). Superannuation providers are required to provide the ATO with information about contributions received and roll-over superannuation benefits (¶12-530). The ATO uses the information received for various purposes such as administration of the SG, co-contributions and contributions caps regimes. RSA providers are subject to similar contribution rules and the terms “fund” and “member” in this paragraph may be read as a reference to “RSA provider” and “RSA member” (¶10-110). The data and payment standards dealing with contributions are discussed at ¶9-790.

Topics covered The acceptance of contribution rules are discussed under the following topics. • What are contributions? • SISR rules on accepting contributions • Exception: contributions related to earnout rights • Additional rule — public offer superannuation fund • Bring forward rule and work test after age 65 • Eligible spouse contributions and child contributions • Accepting spouse contributions-splitting • Accepting downsizer contributions • Work test exemption for members with low balances • Accrual of benefits — defined benefit funds • Accepting contributions outside age and work tests • Caps on contributions and tax treatment • Contributions must be allocated to members • Repaying contributions under cooling-off provisions • Refund of contributions, including excess contributions, made in error • Employers remitting contributions to superannuation funds • Employer reporting of contributions on pay slips • Employers using a clearing house for superannuation payments • MySuper products — limitation imposed by governing rules. What are contributions? In the SISR, the term “contributions”, in relation to a fund, includes: • payments of superannuation guarantee shortfall components to the fund • payments to the fund from the Superannuation Holding Accounts Special Account, but • does not include benefits that have been rolled over or transferred to the fund (SISR reg 1.03(1)). For SIS purposes, roll-overs and transfers are payments made within the superannuation system. The contribution standard therefore does not apply to a roll-over or transfer originating from within the superannuation system including under SISR Pt 6 Div 6.4, 6.5 or 6.7, or under SISR Pt 7A, or as provided for under Pt VIIIB of the Family Law Act 1975. The standard also does not apply to proceeds from an insurance policy, eg for a claim paid in respect of a member’s life or disability insurance policy, as these are not regarded as contributions. A transfer from an overseas superannuation fund (¶7-120, ¶8-370) and a payment of a CGT exempt amount by an entity to a superannuation fund (¶6-550) are examples of transfers or roll-overs from outside the superannuation system. These payments are contributions which are subject to the

contribution standard in reg 7.04. Ordinary meaning of “contributions” TR 2010/1 explains the ordinary meaning of the word “contribution” in relation to a superannuation fund, ADF or RSA in the ITAA97, how a contribution can be made, and when a contribution is made. Aspects of the ruling are also relevant to the meaning of “contribution” in the SIS legislation, as the SISR definition of contribution is inclusive (see above). The ruling states that, in the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general. For example, the capital of a superannuation fund may be increased directly by transferring money or funds to it, transferring an existing asset to it (an in specie contribution), creating rights in the fund (also an in specie contribution), or increasing the value of an existing asset held by it. The fund’s capital can also be increased indirectly by paying an amount to a third party for the benefit of the fund, forgiving a debt owed by the fund, or shifting value to an asset owned by the fund (see further ¶6-120, ¶6-123). A person’s purpose is the object which the person has in view or in mind. Generally, a person will be said to intend the natural and probable consequences of the person’s acts and, likewise, this may be inferred from the acts. This is a determination of a person’s objective purpose, not the person’s subjective intention. A person will not normally have a purpose of benefiting a fund member if a transaction carried out is in no way dependent upon the identity of the other party as a superannuation fund, or the person is simply fulfilling the terms of a contract or arrangement entered into on a commercial or arm’s length basis. By contrast, an objective determination of a person’s purpose may in some cases lead to the conclusion that the person’s purpose is to benefit one or more particular fund members or all of the members in general. This may occur when a transaction or arrangement is entered into because of a connection or relationship between the person and the fund, or cannot be explained by reference to commercial or arm’s length dealings. A contribution of property is received when either legal or beneficial ownership of the property passes to the fund. If there is no formal ownership registration process as evidence, ownership passes when the fund acquires possession of the property or on execution of a deed of transfer of the property. Otherwise (eg with shares in a publicly listed company or Torrens title land), ownership passes when the fund is registered as the property’s owner or when the fund acquires beneficial ownership of the property (eg possession of the requisite transfer forms, or a properly completed off-market share transfer form). A contribution by way of debt forgiveness is taken to occur when the lender executes a deed of release that relieves a superannuation fund from its obligation to repay the loan. The ATO considers that shares acquired by a superannuation fund under an employee share scheme (ESS) are contributions as the fund’s capital increases when a person transfers an asset (such as a share or option to acquire shares) to the fund, but the fund pays less than the market value of the asset. Whether the contribution of the shares (which is an in-specie contribution) is an employer contribution or a personal contribution will depend on the facts of each case. The general prohibition on the intentional acquisition of assets (including in-specie contributions) from related parties of the fund (¶3-430) may also need to be considered (Factsheet Employee share scheme options and acquisition of shares by selfmanaged super funds: www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsftechnical/employee-share-scheme-options-and-acquisition-of-shares-by-self-managed-super-funds). TA 2009/10 warns about arrangements involving non-commercial use of negotiable instruments (eg promissory notes) to pay a benefit from or make a contribution to a superannuation fund (see ¶3-280). TA 2008/12 “Non-cash contributions to superannuation funds” warns about in specie contribution arrangements designed to allow a fund member to circumvent the contribution caps under ITAA97 (¶16250). SISR rules on accepting contributions A regulated superannuation fund may accept contributions only in accordance with the rules in SISR reg 7.04 as summarised below. An additional rule in reg 7.04A applies if the fund is a public offer superannuation fund.

An amount paid to a superannuation fund which cannot be accepted under the contribution rules must be returned to the entity or person that paid the amount, rather than the member for whom the contribution is made. This is to avoid potential unintended consequences that may arise if the amount was returned to the member, such as an increased tax liability. Rule 1: Age of member and work test A regulated superannuation fund may accept contributions in accordance with the rules set out in the table below (reg 7.04(1)). Age of member

Contributions and conditions

– under 65

contributions made in respect of the member

– not under 65, but is under 70

contributions made in respect of the member that are: (a) mandated employer contributions (b) if the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made (see “Work test” below): (i) employer contributions (except mandated employer contributions: see below), or (ii) member contributions (see below) (c) downsizer contributions (see below) d) if the member has not satisfied the work test during the financial year in which the contributions are made, but satisfies the requirements in reg 7.04(1A): (i) employer contributions (except mandated employer contributions), or (ii) member contributions (see “Work test exemption for members with low balances”: below)

– not under 70, but is under 75

contributions made in respect of the member that are: (a) mandated employer contributions, or (b) if the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made and the contributions are received on or before the 28th day after the end of the month that the member turns 75: (i) employer contributions (except mandated employer contributions), or (ii) member contributions made by the member (c) downsizer contributions d) if the member has not satisfied the work test during the financial year in which the contributions are made, but satisfies the requirements in reg 7.04(1A) — contributions received on or before the 28th day after the end of the month on which the member turns 75 that are: (i) employer contributions (except mandated employer contributions), or (ii) member contributions made by the member (see “Work test exemption for members with low balances”: below).

– not under 75

mandated employer contributions

In any of the above circumstances, a fund may accept contributions in respect of a member if it is reasonably satisfied that the contribution is in respect of a period during which the fund may accept the contribution, even though the contribution is actually made after that period (reg 7.04(6)). For example, this will allow a fund to accept a delayed contribution for an employee after an employee’s death (Interpretative Decision ID 2014/31). Where a fund is unwilling or unable to accept contributions after the death of an employee in a case where the fund has already closed the member’s account, the employer may make a payment, equal to the contribution amount, directly to the deceased employee’s personal legal representative. For superannuation guarantee purposes, such a payment is treated as a contribution to a complying superannuation fund for the benefit of the employee (see SGAA 23(9A)). An exception to the acceptance of contribution rules is available for contributions of the proceeds of the sale of a business to which certain small business concessions apply where the sale involved an earnout right (see “Exception: contributions related to earnout rights” below). A person who has triggered the “bring forward rule” for non-concessional contributions in a financial year and has since attained age 65 will be required to satisfy the “work test” (see below) in later financial years even if the person is making contributions under the remainder of the bring forward cap in those later years (see “Bring forward rule and work test after age 65” below). Employer and member contributions “Employer contributions” are contributions by or on behalf of an employer-sponsor of the fund. “Member contributions” are contributions by or on behalf of a member other than employer contributions for the member, eg personal contributions, spouse contributions and government co-contributions (see below) (reg 1.03(1); 5.01(1)). “Mandated employer contributions” are: • SG contributions, ie contributions made by or on behalf of an employer to reduce the employer’s potential liability to the SG charge (¶12-000) • SG shortfall components, ie payments of the shortfall component of the SG charge by the ATO (¶12400) • award contributions made by or on behalf of an employer in satisfaction of the employer’s obligations under an industrial agreement or award • payments from the SHASA (reg 5.01(1), (2)) (¶12-600). With regard to SG or award contributions by employers, mandated employer contributions only cover those contributions to the required SG level (eg 9.5% in 2015/16: see ¶12-200), or to the industrial award or agreement level (if higher than the SG level). Any excess employer contributions are not mandated employer contributions and these may be accepted only if the relevant rule for employer contributions as noted in the table above is met. Where members have an effective arrangement with their employer to salary sacrifice to superannuation, the superannuation contributions under the arrangement are considered to be made by the employer. Salary sacrifice arrangements, including the tax consequences of the arrangements and whether they are “effective”, are discussed in ¶12-250. Work test As noted in the table, non-mandated employer contributions and member contributions for members aged 65 or more can only be accepted if “the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made” (commonly called the “work test”). A person is “gainfully employed on a part-time basis during a financial year” if the person was gainfully employed at least 40 hours in a period of not more than 30 consecutive days in that financial year (reg 7.01(3)). For people who are engaged in some form of gainful employment in a financial year, the work test is not difficult to satisfy. For example, a person who was gainfully employed for 40 hours within a four-

week period in a financial year would have met the work test. Such a person is therefore able to make superannuation contributions for the rest of the year without having to meet the work test again in that year. “Gainfully employed” means being employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. “Gain or reward” is the receipt of remuneration such as wages, business income, bonuses and commissions, in return for personal exertion in these activities. It does not include the passive receipt of income, eg receipt of rent or dividends (reg 1.03(1)). An exception applies for recent retirees with small superannuation balances who do not meet the work test (see “Work test exemption for members with low balances”). Residency and identity of person making contribution Member contributions (see above) can be accepted in respect of a member between the age of 65 and 75 provided the member satisfies the work test. Additionally, for a member who is 70 or more but below 75, the contributions must be made by the member himself/herself. The validity of a contribution is not affected by the overseas residence or nationality of the member in respect of whom the contribution is made (SPG 270, para 22). The validity of a contribution made in respect of a member under age 70 is not affected by the identity of the person or entity that made the contribution or by the relationship or lack of relationship between the contributor and the member. Therefore, a contribution may be made by any person or entity in respect of a member under age 70 (subject to the work if aged 65 or above). However, where the member is aged 70 or above but under age 75, the contributing person or entity must be either the member or the member’s employer or an associate of the employer (SPG 270, para 23). Exception: contributions related to earnout rights An exception to the restrictions on the acceptance of superannuation contribution in reg 7.04(1) (see the table above) allows superannuation funds to accept a contribution of an amount of the proceeds of the sale of a business to which the small business 15-year asset exemption or retirement exemption applies, provided the sale involved an earnout right and the contribution would not have been affected by the contribution restrictions had it been made during the financial year in which the business was sold. Specifically, despite reg 7.04(1), a regulated superannuation fund may accept, as a contribution, an amount to the extent that the amount does not exceed the member’s capital gains tax (CGT) cap amount if: (a) the amount to be accepted as a contribution could be covered under s 292-100 (certain CGT-related payments) of the ITAA97 in relation to a CGT event referred to in that section (b) the capital proceeds from the CGT event were or could have been affected by one or more financial benefits received under a look-through earnout right, and (c) reg 7.04(1) would not have prevented the fund from accepting the amount as a contribution had it been made to the fund in the financial year in which the CGT event happened (reg 7.04(6A)). The CGT event is the one referred to in whichever of s 292-100(2), (4), (7) and (8) that could cause the amount to be covered under that subsection (reg 7.04(6A), Note). In reg 7.04(6A), the terms “capital proceeds”, “CGT cap amount”, “CGT event”, “financial benefit” and “look-through earnout right” have the same meaning as in the ITAA97 (reg 7.04(7)). Rule 2: Member contributions where no TFN is provided In addition to Rule 1, a regulated superannuation fund must not accept any member contributions if the member’s TFN has not been quoted (for superannuation purposes) to the trustee of the fund (reg 7.04(2)). For example, co-contributions payments made by the ATO for a member cannot be accepted unless the member’s TFN has been quoted. The expression “quoted (for superannuation purposes)” is discussed at ¶6-680. Breach of rules — action to be taken

A regulated superannuation fund that has received an amount in a manner that is inconsistent with Rules 1 or 2 must return the amount to the entity or person that paid the amount within 30 days of becoming aware that the amount was received in a manner that is inconsistent with the Rules unless, in the case of Rule 2, the member’s TFN is quoted (for superannuation purposes) within 30 days of the amount being received by the fund (reg 7.04(4)). In addition to the above, special rules provide for the returned contribution amounts to be increased or reduced in the circumstances specified in reg 7.04(4)(b), for example to take account of unit price movements, reasonable administration and transaction costs incurred by the fund and risk insurance interests. Additional rule — public offer superannuation fund A public offer superannuation fund (¶3-010) cannot require a new employer of an existing fund member to become a standard employer-sponsor of the fund before the fund will accept employer contributions on behalf of the member. A “standard employer-sponsor” of a superannuation fund means an employer who contributes, or has ceased only temporarily to contribute, to the fund wholly or partly pursuant to an arrangement with the trustee of the fund (¶3-120). This rule effectively applies to new employment arrangements entered. It means that employees can choose to remain in the same fund when they change employment, and the employer contributions made for them do not have to be returned or paid to another fund if their new employer is not a standard employer-sponsor of the fund to which the contributions are paid. The above rule is particularly relevant for the operation of the superannuation guarantee choice of fund regime (¶12-040). It should also be noted that if an industrial award requires contributions to be paid into a particular superannuation fund, the above rule does not change the award obligations of the employer. Bring forward rule and work test after age 65 Under the bring forward arrangement for non-concessional contributions (generally non-deductible member contributions: ¶6-540), a person who is under 65 years of age in an income year can “bring forward” two years’ cap amount as his/her non-concessional contributions cap over a three-year period. In that case, the person’s non-concessional cap in the first year is three times the annual cap amount and this cap applies to all contributions made in the first year and the next two years. For example, this will enable a person in 2009/10 to make non-concessional contributions totalling $450,000 for the 2009/10 year and the next two financial years. Regulation 7.04(1) of SISR provides that a member aged 65 to 74 can make personal (non-concessional) contributions to a superannuation fund provided the member satisfies the work test in each year that the contribution is made (see table under the heading “SISR rules on accepting contributions” above). The work test requires the member to be “gainfully employed on at least a part-time basis in the financial year”, ie the member must work for at least 40 hours during a consecutive 30-day period in each financial year (see above). The effect of reg 7.04(1) is that a member will have to meet the work test to make contributions once the member turns 65, even if the member is using up the remainder of a bring forward cap. The ATO applies the bring forward rule and the acceptance of contributions rule as discussed above (see examples below from the ATO fact sheet Super contributions — too much super can mean extra tax, available at www.ato.gov.au). In both examples, assume that the bring forward cap amount is $450,000. Example 1 Trevor has retired and he makes a contribution of $400,000 in the financial year he turns 65 years old. He was not required to meet the work test to make the contribution as he was under 65 years of age at the time he made the contributions. As Trevor has retired and does not meet the work test, he cannot make further contributions in future financial years after he turns 65 years of age to use up the remainder of his brought-forward cap ($450,000 − $400,000 = $50,000).

Example 2 On 2 July 2008, Dimitri turns 65. Because he is 64 at some time in the 2008/09 financial year, he can use the bring forward option in

that financial year. However, before accepting any contribution, the fund must also be satisfied that Dimitri satisfies the work test, if the contribution is made after 2 July 2008. On 30 June 2009, Dimitri tries to contribute $450,000. If Dimitri’s fund is not satisfied that he meets the work test, the fund must return the full amount of the contribution within 30 days.

Eligible spouse contributions and child contributions A regulated superannuation fund may accept contributions for a spouse or a child if permitted by the trust deed of the fund, subject to the contribution rules in SISR reg 7.04 as discussed above. This means that spouse contributions may be accepted if the spouse for whom the contributions are made is under the age of 65, without restrictions. If the spouse is aged 65 but under 70, spouse contributions may only be accepted if the spouse is at least “gainfully employed on a part-time basis” (see above). If the spouse is aged 70 or over, the fund cannot accept spouse contributions for the spouse as only personal contributions can be accepted for a person in this age group. There are no age limits or work tests for the spouse making the contributions. Accepting spouse contributions-splitting Eligible members of superannuation funds (and RSA holders) can split personal and employer contributions with their spouse. The mechanism for splitting contributions (effectively, a roll-over, transfer or allotment of an amount of the contributions made for or by the member for the benefit of the member’s spouse within the same fund or to another fund), and the circumstances in which a trustee or RSA provider may accept an application for contributions-splitting, are set out in SISR Div 6.7 and RSAR Div 4.5 (SISR reg 6.40 to 6.46; RSAR reg 4.37 to 4.43). Contributions-splitting is available to members who have an accumulation interest or a defined benefit interest that is not a defined benefit component, and the interest is not subject to a payment split or a “payment flag” within the meaning of Pt VIIIB of Family Law Act 1975 (¶6-680). Providing contributions-splitting is optional for superannuation funds or RSA providers. Where this is made available, the trustees or RSA providers must make the roll-over, transfer or allotment to the receiving spouse as soon as practicable and, in any case within 90 days, after receiving a contributionssplitting application. Where contributions-splitting is provided by a regulated superannuation fund, a member may, in a financial year, apply to the trustee of the fund to split (ie roll over, transfer or allot) for the benefit of the member’s spouse an amount of the splittable contributions made by or for the member in: • the previous financial year, or • the financial year in which the application is made — where the entire benefits of the member (ie including the splittable contributions) are to be rolled over or transferred in that financial year (reg 6.44(1)). An application to split contributions made for or by a member in a current financial year for the benefit of the member spouse may occur, for example, where the member exits an employer-sponsored fund on termination of employment or changes a fund in that year and rolls over or transfers his/her entire benefits from the fund. A member is limited to one valid contributions-splitting application in a financial year. The splitting of non-concessional contributions (generally undeducted contributions) contributed after 5 April 2006 is prohibited as an integrity measure. The contributions-splitting process and tax aspects are discussed further at ¶6-800. Accepting downsizer contributions A regulated superannuation fund may accept downsizer contributions from 1 July 2018 (reg 7.04). The downsizer contributions scheme is discussed in Chapter 6. The term “downsizer contribution” takes its meaning from ITAA97 s 292-102.

A contribution is a downsizer contribution to the extent that it is from an individual’s share of the proceeds of the sale of a dwelling under a contract entered into on or after 1 July 2018. The maximum amount that an individual can contribute from the proceeds of such a sale is $300,000. This can be done as a single contribution or as multiple contributions. If a superannuation fund becomes aware that a contribution it has received is an ineligible downsizer contribution, in whole or in part, (eg the fund is notified of that fact by the Commissioner, or it exceeds the $300,000 limit), the fund must then assess whether it can otherwise accept the contribution under a different rule based on the member’s age or work test status. Where a fund determines that the contribution can be accepted for some other reason under the contribution acceptance rules, the contribution will count towards the individual’s applicable contributions caps like other contributions. Downsizer contributions are treated in the same way as other contributions that a superannuation fund is permitted to accept. As such, fund trustees that generally have discretion regarding contributions made to the fund are not obligated to accept an allowable downsizer contribution. However, for individuals wishing to make a downsizer contribution into a MySuper product, superannuation providers must accept the contribution in accordance with SISA s 29TC(1)(f) (exception to limitations on accepting contributions into MySuper accounts:

¶9-150). Work test exemption for members with low balances A work test exemption enables individuals aged 65 to 74 years with a total superannuation balance of below $300,000 to make voluntary superannuation contributions (see table above) for 12 months from the end of the financial year in which they last met the work test, applicable to contributions in the 2019/20 and later financial years (reg 7.04(1A)). A regulated superannuation fund may accept voluntary contributions made in respect of a member aged 65 to 74 years (see table above) if the following requirements are met: • the member has not been gainfully employed on either a full-time or part-time basis during the financial year in which the contributions are made (ie the member does not satisfy the work test conditions in the contribution year) • the member satisfied the work test conditions in the previous financial year • the member has a total superannuation balance (¶6-490) below $300,000 on 30 June of the previous financial year, and • the member has not previously relied on the work test exemption in relation to a previous financial year. The work test exemption does not apply to defined benefit funds. This does not prevent a member of a defined benefit fund from opening an accumulation superannuation account in order to make voluntary contributions utilising the work test exemption. The government has stated that: • total superannuation balances will be assessed for eligibility at the beginning of the financial year following the year that the individuals last met the work test. Once eligible, there is no requirement for the individuals to remain under the $300,000 balance cap for the duration of the 12-month period • existing annual concessional and non-concessional caps ($25,000 and $100,000 respectively in 2018/19) will continue to apply to contributions made under the work test exemption • individuals will be able to access unused concessional cap space to contribute more than $25,000 under existing concessional cap carry forward rules during the 12 months, and

• individuals who use the work test exemption in the year they turn 65 will be allowed to access the bring forward arrangements for non-concessional contributions (Assistant Treasurer’s media release, 7 December 2018: www.srr.ministers.treasury.gov.au/media-release/048-2018/? utm_source=wysija&utm_medium=email&utm_campaign=Media+Release+%E2%80%93+Work+test+exemption+for+ (see ¶17-600 for further proposed changes announced in the 2019/20 Federal Budget). Accrual of benefits — defined benefit funds In addition to the contribution standards, a defined benefit fund may grant an accrual of benefits in respect of a member under identical conditions relating to mandated employer contributions and non-mandated employer contributions as discussed above (SISR reg 7.05). An “accrual” of benefits in a fund does not include allocation of investment earnings or charging of costs, or benefits rolled over or transferred into the fund (reg 7.01(1)). Accepting contributions outside age and work tests The trustee of a superannuation fund (or its duly delegated agent) may determine that a particular contribution in respect of a member is made in respect of an earlier eligible contribution period and can be accepted (reg 7.04(6); 7.05(5)). APRA expects that a trustee would only apply this in circumstances such as the following: (a) it is an employer contribution paid after the end of a period of gainful employment but clearly related to an earlier

employment period that was a valid contribution period for the member; or (b) it is a contribution that was erroneously allocated to another member during a valid contribution period for the correct member and the late contribution is merely a corrective transaction to reverse the original error. A government co-contribution may be accepted by a fund at any time because it is made in respect of a period during which the member’s contribution that gave rise to the co-contribution was validly made (SPG 270 para 41). Caps on contributions and tax treatment The tax concessions that are available to contributors (eg employers, members, spouse or other persons) in the form of a tax deduction, tax rebate or government co-contribution are discussed in Chapter 6. Subject to the SISR rules and its trust deed, a regulated superannuation fund is not limited in the amount of contributions it may accept. However, there are caps on the amount of concessional contributions (generally deductible contributions) and non-concessional contributions (generally undeducted contributions) that receive concessional tax treatment in the hands of the recipient fund (namely, being taxed in the fund at 15% in the case of concessional contributions or being untaxed in the case of nonconcessional contributions). The operation of the caps on concessional and non-concessional contributions and the tax consequences of making contributions in excess of the caps for a year are discussed in ¶6-400, ¶6-500 and ¶6-540. For the tax treatment of contributions in the hands of the fund, see ¶7-120 and ¶7-310. Contributions must be allocated to members The trustees of all regulated superannuation funds (including a defined benefit fund) are required to allocate a contribution in relation to an accumulation interest to a member of the fund within 28 days after the end of the month the contribution is received or, if it is not reasonably practicable to do so, within such longer period as is reasonable in the circumstances (reg 7.08). For exceptions to the 28-day rule, see reg 7.07H and 7.07G(4). The allocation rule for defined benefit interests is reg 7.11, which applies to funds that are required to allocate contributions in accordance with ITAR reg 292-170.03. That regulation sets out how certain defined benefit funds must calculate notional taxed contributions and requires the trustee to allocate contributions made to the fund having regard to the present and prospective liabilities of the fund to its members (¶6-520). The allocation of contribution provisions are operating standards and they prevent the practice of funds allocating contributions directly to reserve accounts or deferring the allocation of contributions to a member account to avoid the superannuation contributions surcharge. For further information on reserves, see ¶3-400. The operation of reg 7.08 together with reg 7.11 means that a member with an accumulation interest in a defined benefit fund is treated in the same way as a member with an accumulation interest in an accumulation fund. This is an integrity measure for the purposes of the concessional contributions cap to ensure that amounts allocated from reserves are included as concessional contributions. It should be noted that reg 7.08 does not preclude the transfer of administration costs that are charged against a contribution to an administration reserve account, provided the contribution is first allocated to a member of the fund. Repaying contributions under cooling-off provisions Contributions which are repaid under the cooling-off provisions in the Corporations Regulations 2001 must be transferred or rolled over to another superannuation entity and retained in the superannuation system until a condition of release is met (¶3-280, ¶4-400). Refund of contributions, including excess contributions, made in error A prima facie case for restitution occurs where the trustee of a superannuation fund is the recipient of an amount greater than was intended, for example, because of a clerical, transcription or arithmetic error. The Commissioner accepts that the principles of unjust enrichment and the equitable remedy of restitution apply to the trustees of superannuation funds just as they apply to any other entity. The decisions in

Personalised Transport Services Pty Ltd v AMP Superannuation Ltd & Anor 06 ESL 12 and SCT Determination D06-07\129 make that clear. However, determining when restitution is appropriate is complicated and it may be a matter for the courts or tribunals. In ID 2010/104 involving a fund returning contributions purportedly in restitution of a payment made in mistake, the Commissioner stated that the grounds for restitution for mistake concentrate on the principle of unjust enrichment which concerns whether it would be unjust for the recipient to retain the enrichment. The law is that it is prima facie unjust for a recipient to retain an enrichment conferred because of mistake, regardless of whether the mistake is a mistake of law or fact (David Securities Pty Ltd v Commonwealth Bank of Australia 92 ATC 4658). However, the payer’s prima facie right of recovery may be rebutted to the extent that circumstances have removed any unjust enrichment (Mason & Carter, Restitution Law in Australia, 2nd edn, Lexis Nexis Butterworths, Australia, 2008 at p 401). A court will find that the recipient may justly retain a mistaken payment if any one of several defences applies in a particular case (David Securities at 4,684). In ID 2010/104, the Commissioner found that the individual formed an intention to make a superannuation contribution of a certain amount and gave effect to that intention by contributing that amount. The fund was the intended recipient and the individual obtained the expected superannuation benefits. The individual was not mistaken in the sense that he thought he was required to make a contribution. In the circumstances of this case, there was a contribution (as discussed in TR 2010/1), and it would not have been unjust for the trustee of the fund to retain the contribution. Is interest payable by the fund trustee on the refunded payment? The Commissioner considers that it would be unusual for interest to be payable. The measure of restitution is generally the value of the enrichment. Its purpose is to restore the parties to the position they were in prior to the mistake, as opposed to the remedies commonly available under torts or contract law, where the purpose is to place the parties in the position they would have been in had the wrong not occurred. The Commissioner states that the reasonable adjustments included in reg 7.04(4) (for fund administration costs, transaction costs, etc, see above) reflect the ordinary principles of restitution where a party has a defence to the action restitution to the extent to which they have altered their circumstances based on the receipt. The Commissioner also noted that in SCT Determination D06-07\129, the Tribunal awarded interest to the complainant but gave no legislative authority. The Commissioner’s view is that interest payable (if any) is to be calculated from the day from which it was unreasonable for the trustee to have withheld payment, until the day the payment would be sent to the complainant. He inferred that interest was awarded because of the length of time that the complainant did not have the benefit of the money, due to the trustee’s refusal to refund the amount. The complainant had advised the trustee of the mistake and requested a refund on 29 May 2006, and it was not until 28 March 2007 that the Tribunal ordered the amount plus interest to be paid to the complainant. Employers remitting contributions to superannuation funds An employer who has deducted an amount from the salary or wages of its employees for the purpose of paying that amount as a superannuation contribution of the employee(s) is required to remit the amount deducted to the superannuation fund concerned within 28 days of the end of the month in which the deduction was made. Employers who fail to comply may be liable to a fine (this is a strict liability offence) (SISA s 64(2)). An employee whose employer has breached the provision can also sue the employer under common law. As an alternative to remitting the amount deducted to the fund, employers may pay that amount within the 28-day period to the Small Business Superannuation Clearing House (SBSCH) (the SGAA-approved clearing house: ¶12-010), provided the SBSCH accepts the payment (s 64(2A)). Contributions deducted from employees’ salary or wages to which s 64 applies are generally members’ voluntary contributions, rather than employer contributions. APRA considers that a trustee’s duties and powers may give rise to obligations to act in respect of non-receipt of the contributions that fall within the ambit of s 64. APRA states that a trustee who knows, or should reasonably know, of such outstanding contributions arguably has the duty to act in the interests of members in following up outstanding amounts. The trustee should identify the failure of remittance and take follow-up action by implementing

an effective control process to monitor employer obligations under s 64. The trustee must inform members of any outstanding contributions at the end of the reporting period within their knowledge and of the actions taken to have the contributions paid. Employer reporting of contributions on pay slips Employers are not required under SISA to report to employees, on pay slips, information about superannuation contributions, such as the amount of the contributions they have made or will make and the date on which the employer expects to pay them (SISA former Pt 29B). However, obligations on disclosures about contributions may arise under the Fair Work legislation (¶12-520) or under the data and payment standards made under the SISA (¶9-790). Employers using a clearing house for superannuation payments A “clearing house” refers to a service or facility that is set up to receive employer payments and to redistribute the payments to various superannuation funds as superannuation contributions made by the employer for the nominated employees. Clearing houses are commonly used by employers that have a large number of employees to make payment of the employer’s contributions for various purposes, such as the SGA Act choice of fund regime (¶12-040). Using a clearing house means that the employer is only required to make a single payment to the clearing house (usually through a direct debit authority) which, in turn, distributes the contributions and the employees’ data to the employees’ chosen superannuation fund on the employer’s behalf. A “clearing house account” is a bank account used to receive and disburse superannuation contributions to a number of different superannuation funds. The account may also include non-superannuation deductions and contributions (eg health insurance premiums). For tax and SG purposes, contributions made through clearing houses, other than the Small Business Superannuation Clearing House (SBSCH) which is the approved clearing for SGA Act purposes, enter the superannuation system only when they are received by the employee’s chosen fund or, where relevant, the default fund. By contrast, contributions made though SBSCH are taken to be received by the funds at that time (¶12-010). For SISR purposes, contributions enter the superannuation system when they are received by the superannuation fund, RSA or exempt public sector superannuation scheme. On the risks associated with using clearing houses, APRA states as below: 46. Where an RSE licensee uses a clearing house service, APRA expects the risks arising from the use of this service to be considered within the RSE licensee’s risk management framework. The risks associated with this service may include, but are not limited to, risks related to timing of contributions received and the transfer of monies from the clearing house to the RSE, including the need to ensure that all such monies are RSE monies. 47. Where an RSE licensee operates its own clearing house service, APRA considers that there may be additional risks, particularly regarding the separation of RSE monies from clearing house monies. To avoid mixing non-superannuation monies received as part of the clearing house function with monies of the RSE, an RSE licensee is expected to ensure that the clearing house account is separate to any bank accounts of the RSE (SPG 270 para 46, 47). The ATO’s guidelines on the ordinary meaning of contribution, how a contribution can be made and when a contribution is made for tax purposes, which may also be relevant for SIS purposes, are discussed in TR 2010/1 (¶6-120, ¶6-123). MySuper products — limitation imposed by governing rules Sections 29TC(1)(f) and 29TC(3)(a) of SISA (about the characteristics of a MySuper product: ¶9-150) effectively permit the governing rules of a superannuation fund to place limitations on the source or kind of contributions to a MySuper product, if those limitations are of a prescribed kind. Under SISR reg 9.48: • funds may limit contributions where the contribution is a transfer from a “foreign superannuation fund” (as defined in ITAA97), or a similar foreign fund (this is consistent with other legislative arrangements under which funds can choose not to accept transfers from certain foreign superannuation funds)

• funds may limit in specie contributions and contributions by non-associated employers to “corporate MySuper products” (as defined by the Fair Work Act 2009) or to MySuper products to which s 29TB applies (ie large employers-tailored MySuper products: ¶9-180). [SLP ¶2-980]

¶3-230 Minimum benefits of members As a prescribed operation standard, the trustee of a regulated superannuation fund (or ADF) must maintain minimum benefits for the benefit of members and ensure that members’ minimum benefits are kept in the fund until they are cashed, rolled over or transferred in accordance with the SISR (see “Restriction on the use of a member’s minimum benefits in the fund” below). In an accumulation fund, a member’s “minimum benefits” comprise benefits arising from: • the contributions made in relation to the member plus net investment earnings (member-financed benefits) • the member’s mandated employer contributions (¶3-220) plus net investment earnings (mandated employer-financed benefits) • government co-contribution benefits (ie co-contributions, less costs and repayments of overpayments of co-contributions), and investment earnings on them • amounts rolled over or transferred into the fund which are taken by the trustee of the receiving fund to be minimum benefits and all benefits rolled over or transferred from an RSA (reg 5.01(1); 5.04 to 5.06A). The definition of minimum benefits and restrictions on the use of minimum benefits in SISR reg 5.08(1) (see below) prevents the use of forfeiture arrangements for tax avoidance purposes by accumulation funds. These arrangements typically involve a fund forfeiting a member’s excess superannuation benefits to the fund and, subsequently, paying forfeited benefits to another member of the fund (usually a spouse or other associate of the member). For a defined benefit fund, if a member belongs to a class of employees for which a benefit certificate for SG purposes applies, the member’s minimum benefits are the amount specified in the certificate as the member’s minimum requisite benefit. For other members in the defined benefit fund, the member’s minimum benefits are the sum of the member’s member-financed benefits, the member’s mandated employer-financed benefits and government co-contribution benefits and investment earnings on them (reg 5.04(3)) and any amount allocated to the member under ITAR reg 292-170.03. These are allocations of reserves which are taken to be the concessional contributions of a member. Their inclusion as minimum benefits ensures that trustees of such defined benefit funds cannot put in place arrangements to circumvent the concessional contribution cap (¶6-520). All the benefits of a member in an eligible rollover fund (¶3-520) or in an ADF (¶3-660) are minimum benefits. Restriction on the use of a member’s minimum benefits in the fund Subject to certain exceptions (see below), the trustee of a regulated superannuation fund must ensure that the member’s minimum benefits are maintained in the fund until the benefits are: • cashed as benefits of the member (other than for the purpose of the member’s temporary incapacity) • rolled over or transferred as benefits of the member, or • transferred, rolled over or allotted in accordance with SISR Div 6.7 as spouse contributions-splitting amounts (SISR reg 5.08(1)).

A member’s benefits are “cashed” if they are paid to the member or another person in accordance with the SISR rules on preservation and payment of benefits (¶3-280 – ¶3-286). In contrast, a member’s benefits are “rolled over” if they are not paid to the member, or another person, but are paid to one or more superannuation entities within the superannuation system, and benefits are “transferred” if they are paid from one regulated superannuation fund to either another fund or an RSA where the member has not yet satisfied a condition of release under the SISR or RSAR preservation rules (reg 5.01(1)). The three exceptions where the use of a member’s minimum benefits does not apply are noted below. (1) If a court forfeiture order (¶3-286) applies to all or a part of the member’s benefits (reg 5.08(1A)). This exception is consistent with reg 6.17(2C) which allows payment to be made from a member’s benefits in compliance with a court forfeiture order, for example, to allow the proceeds of crime to be recovered from a person’s superannuation. (2) The amount of a member’s minimum benefits in an accumulation fund where the amount is attributable only to employer contributions other than mandated employer contribution (reg 5.08(2)). This exception allows for members’ benefits derived from non-mandated employer contributions to be forfeited or divested if the member concerned does not stay in the employer’s employment for a specified period. In effect, the exception grandfathers “employee retention arrangements” of the kind which have been in force in relation to the member concerned since before 12 May 2004 (ie before the change to the definition of minimum benefits from that date (see “Benefits in employee retention schemes” below for discussion of the scope of this exception). (3) An amount of a member’s minimum benefits cashed as temporary incapacity benefits where the amount is not attributable to the member’s member-financed benefits and not attributable to the member’s mandated employer-financed contribution (reg 5.08(3)). The exception means that temporary incapacity benefits can be paid from an accumulation fund from voluntary employerfunded or insured benefits, as was permitted before the definition of minimum benefits was extended from 12 May 2004. Benefits in employee retention schemes The exception in reg 5.08(2) (second exception) applies to minimum benefits in an accumulation fund (including an SMSF) which are derived from non-mandated employer contributions that are forfeited in whole or part from the member pursuant to a written agreement entered into before 12 May 2004 between the member and the member’s employer. This written agreement makes the member’s entitlement to such minimum benefits conditional on the member remaining in the employer’s employment for a “specified minimum period”. For the forfeiture to occur, the member’s employment must have ended before the minimum employment period specified in the written agreement. The second exception effectively provides “grandfathering” rules for existing employee retention schemes which have been in force since 12 May 2004, where voluntary employer-funded benefits only fully vest in an employee after a certain period of employment. In summary, reg 5.08(2A) to (2D) expands the scope of the second exception: – by extending grandfathering to minimum service provisions contained in governing rules, an award or a certified agreement – by extending grandfathering to minimum service provisions where the terms have been changed during the period after 12 May 2004 or where the terms have been set out in different documents at different times during that period, and – by extending grandfathering to minimum service provisions which allow the member to be an employee of their current employer’s predecessor or related company for the minimum service period, or to be a member of another fund to which their current employer or its predecessor or related company contributed for the minimum service period. The expansion of the second exception under reg 5.08(2A) to (2D) therefore provides similar relief for employee retention arrangements and allows for some practical situations that are not covered by reg

5.08(2). There is a considerable degree of overlap between reg 5.08(2) and 5.08(2A), and some employee retention schemes may find that they are covered by both exceptions. Investment returns and member protection The trustee of a regulated superannuation fund (or ADF) must determine the costs and investment returns to be credited/debited from time to time against members’ benefits in the fund (SISR reg 5.02(1)). The terms “cost” and “investment return” are defined terms (reg 5.01(1)). In determining the costs to be charged, the trustee may include the following: (a) the direct costs of establishing, operating and terminating the fund (b) any administrative, insurance and taxation costs relating to the establishment, operation and termination of the fund, and (c) if the member’s benefits are subject to a payment split, the costs incurred in administering the payment split (not including the costs offset by any fees payable under reg 59 of the Family Law (Superannuation) Regulations 2001 in respect of the payment split) (reg 5.02(2)). If costs charged against members’ benefits are refunded, the refunded amount must be distributed in a fair and reasonable manner to the members affected (reg 5.02C). The trustee must determine the investment return to be credited or debited to a member’s benefits (or benefits of a particular kind) in a way that is fair and reasonable as between all the members and the various kinds of benefits of each member (reg 5.03(2)). If the fund maintains reserves, it must also have regard to certain specified matters (reg 5.03(1)). [SLP ¶3-000]

¶3-240 Insurance cover and standards The SISA imposes obligations on superannuation fund trustee regarding the provision of insurance for permanent incapacity benefit and death benefit to MySuper members under s 68AA(1) and 68AA(5) as discussed below. A member of a regulated superannuation fund is a MySuper member if the member holds a beneficial interest in the fund of a class that the RSE licensee of the fund is authorised to offer as a MySuper product (¶9-030). A “death benefit” means a benefit provided in the event of the death of the member (s 68AA(10)). A “permanent incapacity benefit” means a benefit provided if the member is suffering permanent incapacity (s 68AA(10)). A member is taken to be suffering permanent incapacity if a trustee of the fund is reasonably satisfied that the member’s ill-health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience (SISA s 10(1); SISR reg 1.03C). A failure to comply with s 68AA(1) or (5) is a breach of a condition of the RSE licence (see s 29E(1)(a)). Providing permanent incapacity and death benefit insurance cover for MySuper members Each trustee of a regulated superannuation fund must ensure that: (a) the fund provides permanent incapacity benefit to each MySuper member of the fund (b) the fund provides death benefit in respect of each MySuper member of the fund, and (c) the benefits referred to in (a) and (b) are provided by taking out insurance (SISA s 68AA(1)). The trustee may determine “reasonable conditions” to which the provision of permanent incapacity benefit or death benefit is subject. The determined conditions in relation to a benefit are reasonable if they are

the same as the terms and conditions of the policy of insurance taken out to provide the benefit (s 68AA(2) to (4)). Section 68AA(1) does not apply if a MySuper member makes an election not to receive permanent incapacity benefit or death benefit in accordance with s 68AA(5) (see below) in relation to a benefit (reg 68AA(8)). From 1 July 2019, the obligation in s 68AA for a trustee to provide death or permanent disability insurance under a MySuper product also does not apply if a MySuper member meets one of the criteria noted in s 68AAA(1) (see “Opt-out insurance rules for superannuation members from 1 July 2019” below). However, once a MySuper member no longer meets the listed criteria in s 68AAA(1), the requirement under s 68AA for the trustee to provide death and permanent disability insurance re-applies (s 68AA(8A) and (8B)). MySuper members electing not to receive permanent incapacity or death benefit A regulated superannuation fund must ensure that each MySuper member of the fund may elect either or both of the following: • that permanent incapacity benefit will not be provided to the member by the fund • that death benefit will not be provided in respect of the member by the fund (s 68AA(5)). The trustee may require MySuper members who wish to make the opt-out election under s 68AA(5) to make the election in relation to both the permanent incapacity benefit and death benefit, or to make the election to death benefit if they make the election to permanent incapacity benefit (reg 68AA(6)). The obligation to give MySuper members the choice under s 68AA(5) does not apply to a MySuper member if the trustee certifies, in writing, that the trustee is reasonably satisfied that the risk that is to be insured cannot be placed with an insurer at a reasonable cost, or be provided on an opt-out basis (SISA s 68AA(7); SISR reg 9.49). Therefore, a trustee does not have to provide members holding a MySuper product with the ability to opt out the life and TPD insurance (that must be offered on a compulsory basis for MySuper members under s 68AA(1)) if the trustee is reasonably satisfied that the insurance cannot be provided on an opt-out basis at reasonable cost or cannot be obtained from an insurer on opt-out basis at all. If a MySuper member makes an election not to receive permanent incapacity benefit or death benefit in accordance with s 68AA(5) in relation to a benefit, s 68AA(1) does not apply in relation to the member and the benefit (reg 68AA(8)). Section 68AA does not apply to certain fund members Section 68AA does not apply to a defined benefit member, an ADF Super member (within the meaning of the Australian Defence Force Superannuation Act 2015), or a person who would be an ADF Super member apart from the fact that the superannuation fund is or was, for the purposes of SGAA Pt 3A, a chosen fund for superannuation contributions made for the person by the Commonwealth (s 68AA(9)). Section 68AA also does not require the provision of death benefit or permanent incapacity benefit in respect of a MySuper member if death benefit or permanent incapacity benefit is not to be provided because of s 68AAA about inactive accounts (see “Opt-out insurance rules for choice and MySuper members from 1 July 2019” below). Opt-out insurance rules for choice and MySuper members from 1 July 2019 Fund trustees are required under s 68AA to provide MySuper members with the option to opt out of death and total and permanent disability insurance cover, except in certain circumstances (see above). There are no similar requirements for members who hold a choice product but some trustees of choice products may choose to provide insurance on an opt out basis. From 1 July 2019, the trustee of a regulated superannuation fund must ensure that the fund does not provide a benefit to, or in respect of, a member under a choice product or MySuper product by taking out or maintaining insurance if:

(a) the member’s account is inactive in relation to that product for a continuous period of 16 months, and (b) the member has not elected that the benefit will be provided under the product by taking out or maintaining insurance, even if the member’s account is inactive in relation to that product for a continuous period of 16 months (s 68AAA(1)). Section 68AAA(1) does not apply to certain funds and members (see “Exceptions” below). With regard to s 68AAA(1)(b), the trustee must ensure that each member of the fund who holds a choice product or MySuper product offered by the fund may elect, in writing, that a benefit specified in the election is to be provided to the member under the product by taking out or maintaining insurance, even if the member’s account is inactive in relation to that product for a continuous period of 16 months. Section 68AAA was inserted by the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (Act No 16 of 2019) (PYSP) as part of a package of measures to limit certain fees and ban exit fees, ensure that insurance arrangements in superannuation are appropriate and members are not paying for insurance cover that they do not know about or premiums that inappropriately erode their retirement savings, and to strengthen the ATO’s role in reuniting small, inactive balances (see ¶17-330). Inactive account and test period For the purposes of s 68AAA(1), a choice or MySuper account is considered inactive if no contributions or rollovers have been received in the account in the previous continuous period of 16 months (s 68AAA(3)). A reset rule for the period of activity applies when a contribution or rollover is received. That is, the contribution or rollover will reset the clock on inactivity for another 16 months (s 68AAA(4) and 68AAA(5)). The timing and frequency of assessing whether a member holds a product that meets one of the listed criteria is at the trustee’s discretion. However, the requirements imposed on trustees to not offer opt-out insurance to these members, as well as the notification requirements for inactive members, necessitate that trustees make these assessments at a reasonable frequency. Disclosure and notification obligations of trustees From 1 July 2019, the Corporation Regulations 2001 (CR) (dealing with the disclosure and notification obligations of trustees of superannuation funds to their members) set out: • when a trustee must notify a member that a member’s account has been inactive and that insurance may no longer be offered or maintained without a direction from the member, and • how a trustee must inform a member that the member can cancel their insurance where the member has previously directed the trustee to take out or maintain insurance coverage under the provisions below. CR reg 7.9.44B requires a trustee to notify a member once their account has been inactive, when after a further prescribed period of continued inactivity, insurance will cease to be provided either because of amendments to the SIS Act or the fund’s governing rules. This is intended to give a member an opportunity to take steps to maintain their insurance cover if they wish (see “Insurance inactivity notices” below). CR reg 7.9.44C requires the trustee to acknowledge a member’s direction to maintain insurance cover even though the member’s account may be considered inactive, and provide annual reminders to the member (see “Notice about the right to cease insurance cover” below). When considering a period of inactivity, the trustee must include the period before 6 April 2019 (the date the CR provisions commenced) (CR Ch 10 Pt 1.29). Insurance inactivity notices Regulation 7.44B sets out the periods of inactivity which trigger the requirement to issue an inactivity notice, as below: • when a member’s account has been inactive for a continuous period of time and insurance would cease to be provided if the account continued to be inactive for another seven months

• when a member’s account has been inactive for a continuous period of time and insurance would cease to be provided if the account continued to be inactive for another four months, and • when a member’s account has been inactive for a continuous period of time and insurance would cease to be provided if the account continued to be inactive for another month. For example, when insurance cover will cease after 16 months of inactivity consistent with the SIS Act, a notice will be required to be sent after nine months of inactivity, then after 12 months of inactivity and then after 15 months of inactivity. An inactivity notice is not required if the person has elected to maintain insurance or insurance has already ceased to be provided. Regulation 7.9.44B also sets out the contents of the insurance inactivity notice, and provides that notices need to be given to the member within two weeks of the end of the prescribed periods of inactivity. Notice about the right to cease insurance cover Where a member’s account is considered inactive and the member has elected to take out or maintain insurance, the member must be made aware of how to cancel the insurance cover in the future. Regulation 7.9.44C requires a trustee of the fund to provide a notice about rights to cease insurance within two weeks of the member making the election, and at certain intervals after that, to remind the member that insurance premiums are still being charged to the member’s account. The trustee is able to decide the date the reminder is sent to the member, as long as it is within 15 months of the last notice sent to the member. This will give trustees the flexibility to align the distribution of reminder notices with their ordinary distribution schedule. The notice about rights to cease insurance cover will: • explain that the member has elected to take out or maintain insurance cover even though their product has been inactive • state the date the election was made, and • explain how the member can cancel their insurance cover. Exceptions The insurance opt-out rules in s 68AAA do not apply: • to a defined benefit member, an ADF Super member (within the meaning of the Australian Defence Force Superannuation Act 2015) or a person who would be an ADF Super member if they had not chosen a fund (s 68AAA(6)) • to SMSFs or small APRA funds (s 68AAD) • where an employer makes contributions to a fund, in addition to its superannuation guarantee obligations, which cover the full cost of the member’s insurance premiums, on behalf of the member (s 68AAE). For the SG exception to apply, the employer must: • notify the trustee that it is paying the employee’s insurance premiums • the amount the employer is contributing exceeds the employer’s superannuation guarantee obligations for the member; and • the excess is equal to or greater than the insurance premiums, payable in relation to the insurance cover for the quarter (s 68AAE). Breach of s 68AAA A failure to comply with s 68AAA is a breach of the RSE licensee law with which the trustee must comply. This failure to comply with the RSE licensee law may result in certain consequences, eg a direction from

APRA to comply (SISA s 131D), cancellation of the trustee’s authority to offer a MySuper product (SISA s 29U) or cancellation of the RSE license (SISA s 29G). RSE licence conditions and cancellation of RSE licences are discussed in Chapter 9. Proposed changes — low balance accounts and members under 25 Amendments have been proposed which ensure that trustees can only provide insurance to a member of a choice or MySuper product if directed by the member where the member: • is under 25 years old and begins to hold a product on or after 1 October 2019 (proposed new s 68AAB), or • holds a product with a balance less than $6,000 (proposed new s 68AAC). These amendments were previously part of the measures introduced by the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (PYSP), but were omitted from the Act when passed by parliament. The government has delayed the start date of these elements by three months from the announced commencement of the package to provide additional time for funds to take action and notify members prior to the changes taking effect from 1 October 2019 (Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019 (Lapsed): ¶17-520). APRA and ATO guidelines The Regulators’ guidelines are available in Protect Your Super (www.letstalk.ato.gov.au/SuperCommunity/news_feed/protect-your-super) which contains the ATO’s advice and implementation documents on the PYSP changes, and in APRA’s letter of 8 May 2019 and FAQs to all RSE trustees (www.apra.gov.au/sites/default/files/letter_protecting_your_super_legislative_amendments_implementation.pdf www.apra.gov.au/protecting-your-super-package-frequently-asked-questions).

¶3-243 Insurance operating standards A regulated superannuation fund must comply with prescribed operating standards which: • prohibit the trustee from providing insured benefits other than those that are consistent with the conditions of release in the SISR for death, terminal medical condition, permanent incapacity and temporary incapacity to beneficiaries who join a fund from 1 July 2014 (reg 4.07D) (see “Permitted types of insurance” below), and • prohibit the trustee from providing insured benefits for members unless they are supported by an insurance policy from an insurer, ie a fund will not be able to self-insure (see “Self-insurance” below) (reg 4.07E). “Insured benefit”, for a member, means a right, other than an anti-detriment payment, for the member’s benefits to be increased on the realisation of a risk (reg 4.07C). An “anti-detriment payment” means a “tax saving amount” for ITAA97 s 295-485(1)(b) (¶7-148). Permitted types of insurance The trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member unless the insured event is consistent with a condition of release specified in SISR Sch 1, items 102, 102A, 103 or 109 (these cover the release of benefits in the event of a member’s death, terminal medical condition, permanent incapacity and temporary incapacity) (reg 4.07D(2)). Where a trustee is unable to amend the fund’s governing rules to comply with the restrictions on providing insured benefits, those terms of the governing rules are deemed to be omitted from the rules and replaced by terms that allow the provision of benefits that are permitted (reg 4.07D(4)). Exemptions The restriction in reg 4.07D(2) does not apply to: (a) the continued provision of benefits to members who joined a fund before 1 July 2014, or

(b) the provision of benefits under an approval granted before 1 July 2014 under SISA s 62(1)(b)(v) (ie which allows for determination of benefits under the sole purpose test: see ¶3-200) (reg 4.07D(3)). The exemption only extends to circumstances where a member was actually covered in respect of an insured benefit before 1 July 2014 and cannot be used to provide members with a type of cover they did not have before 1 July 2014. A member can, however, vary his/her level of insurance cover from 1 July 2014, with adjustments to the associated premiums after 1 July 2014. The exemption in item (a) can apply if a member is transferred to another fund under the successor fund transfer rules in reg 6.29, so as to ensure the continuance of a member’s pre-1 July 2014 insurance arrangements in the successor fund. The exemption in item (b) addresses inconsistencies in fund operations and the SIS requirements on provision of benefits. Currently, funds offer a range of benefits to members as permitted by the core and ancillary purposes of the sole purpose test in s 62. The wording of s 62 allows funds to offer insured benefits that are not consistent with the conditions of release in SISR Sch 1. Consequently, these benefits cannot be released to members at the time of their disability, but must remain in the member’s superannuation account until a condition of release (eg the member reaching preservation age) is met. Where an approval has been granted under s 62(1)(b)(v), before 1 July 2014, for the provision of and release to beneficiaries of particular insured benefits, those benefits are exempted from the restriction on providing types of insured benefits. This exemption includes the provision of such benefits to beneficiaries who join the fund from 1 July 2014. The exemption only applies while the approval under s 62(1)(b)(v) remains in force. Former determination SMSFD 2010/1, which previously stated that a trustee of an SMSF could purchase a trauma insurance policy in respect of a fund member and still satisfy the sole purpose test in s 62 in certain circumstances, was withdrawn from 1 July 2014 in light of the commencement of reg 4.07D from that date (see further ¶3-200). Self-insurance If a regulated superannuation fund does not self-insure in relation to a particular risk, the fund may provide an insured benefit, in relation to that risk, to members of the fund only if the benefit is fully supported by an insurance policy provided by an insurer (SISR reg 4.07E(2)). This includes insurance from a Lloyds underwriter. If a regulated superannuation fund self-insures in relation to a particular risk, the fund may, on and after 1 July 2016, provide an insured benefit, in relation to that risk, to members of the fund only if the provision of the benefit is fully supported by an insurance policy provided by an insurer (reg 4.07E(4)). This effectively prohibits such a fund from providing an insured benefit to its members on or after 1 July 2016 unless the insured benefit is fully supported by an insurance policy provided by an insurer (see “Exceptions to prohibition under reg 4.07E” below). Where the fund’s governing rules do not permit a trustee to obtain an external insurance policy in respect of benefits previously self-insured, the trustee must, before 1 July 2016, amend the rules of the fund to allow the trustee to do so (reg 4.07E(5)). Where the trustee cannot amend the governing rules, they are deemed to be amended to allow the trustee to obtain such a policy (reg 4.07E(6)). Exceptions to prohibition under reg 4.07E The prohibition on self-insurance does not apply to: • the trustees of any fund where the insured benefits are provided by or their provision is guaranteed by the Commonwealth Government or the government of a state or territory (reg 4.07E(7)) • the provision of insured benefits to defined benefit members of funds (or sub-funds) that, as at 1 July 2013, are self-insuring in respect of their defined benefit members and are not prohibited from doing so under a condition on their RSE trustee’s licence (reg 4.07E(8)). In addition, where a beneficiary is receiving benefit payments, has made a claim for benefit payments, or has experienced an insured event, during the period when self-insurance is permitted in respect of their

fund, that beneficiary’s ability to continue to receive benefit payments, to lodge a claim, to have a claim determined or to have further benefits paid is not affected (reg 4.07E(9)). Modifications to exceptions Under reg 4.07E(8), the prohibition in reg 4.07E(4) does not apply in relation to defined benefit members if, on 1 July 2013, the defined benefit fund self-insures in relation to defined benefit members and, on or before 1 July 2013, the fund was not prohibited from self-insuring by a condition imposed on the trustee’s RSE licence (the relevant condition being condition B.1 of an RSE licence). APRA has become aware that reg 4.07E may have limited the ability of RSEs to accept successor fund transfers from self-insuring defined benefit funds, as the successor fund could only continue the selfinsurance after 1 July 2016 if it had been permitted to self-insure on 1 July 2013 (in relation to defined benefit members and the risk) and actually did so at that time. For example, assume Fund A self-insured in relation to defined benefit members up to and including 1 July 2013, and there was no condition on its RSE licence prohibiting self-insurance. Under reg 4.07E(8), Fund A may continue to self-insure defined benefit members in relation to the risk after 1 July 2016. However, if Fund A transfers self-insured defined benefit members to Fund B under successor fund arrangements, and Fund B did not itself satisfy reg 4.07E(8) as at 1 July 2013, Fund B would only be able to continue the self-insurance of the transferred members until 1 July 2016 (under reg 4.07E(3)), and would not be able to extend the self-insurance arrangements to new members of the relevant defined benefit division or sub-fund. To address the above concerns, an additional exception to reg 4.07E(2) and (4) has been added to facilitate successor fund transfers of self-insured defined benefit members, so that the restrictions in those subregulations will no longer apply to RSEs to the extent that they have received a successor fund transfer of defined benefit members where the transferring defined benefit members were self-insured in their original fund (reg 4.07E(8A); Superannuation Industry (Supervision) modification declaration No 1 of 2014). This exception applies subject to any condition imposed by APRA under SISA s 29EA(1) on the licence of the RSE licensee of the fund. The modification declaration (MD) is intended to allow new defined benefit members to join the selfinsurance arrangement only where those defined benefit members have a connection (for example, through a common employment relationship, or membership of the same division or sub-fund) with the transferred defined benefit members and would otherwise have been permitted to join the self-insurance arrangement within the original fund. The explanation statement to the MD states that the successor fund may permit defined benefit members of the self-insurance arrangement to change insurance categories within the self-insurance arrangement. For example, where the self-insurance arrangement covers temporary incapacity and death, a defined benefit member who has only had death cover may add temporary incapacity cover to their existing arrangement (subject to the fund’s own requirements). However, the successor fund may not itself make changes to its insurance offerings within the selfinsurance arrangement so as to extend those self-insured offerings to different risks. That is the MD is not designed to allow a successor fund to self-insure in relation to an entirely new risk, eg to allow selfinsurance in relation to permanent incapacity where the original fund only self-insured in relation to death; but this does not mean that the successor fund’s terms of self-insurance of that risk have to be precisely the same as the terms of self-insurance in the original fund. The successor fund may undertake a subsequent successor fund transfer of the members in which case reg 4.07E(8A) will apply to the subsequent successor fund transfer and allow relevant defined benefit members to be self-insured in the third (or subsequent) fund. APRA prudential standards and practice guides APRA’s interpretation of the meaning of “the risk” is that it refers to a type of insured benefit, eg death, permanent incapacity, temporary incapacity. Self-insurance is discussed in Prudential Standard SPS 160 “Defined Benefit Matters” and Prudential Standard SPS 250 “Insurance in Superannuation” (¶9-720). Voluntary Code of Practice for superannuation funds

The Insurance in Superannuation Working Group (ISWG, see below) has released a Insurance in Superannuation Voluntary Code of Practice (www.fsc.org.au/policy/life-insurance/insurance-insuperannuation-working-groupiswg/Insurance_in_Superannuation_Voluntary_Code%20of%20%20Practice.pdf). The parties bound by the Code are superannuation fund trustees which have adopted the Code (see “Legal status of Code” below). The overarching objective of the Code is to improve the insurance in superannuation offered to fund members, and the processes by which superannuation trustees which have adopted the Code provide insurance benefits to their members. Among others, an objective is that “insurance offered on an automatic basis in superannuation must be appropriate and affordable, and must not inappropriately erode retirement income”, and that the Code is intended to introduce greater transparency around life insurance premiums that are automatically packaged into superannuation. The insurance products held by superannuation funds covered by the Code include: • death cover, which pays on the death of an insured member, or if they are diagnosed as terminally ill with a life expectancy less than a specified period (generally 12 or 24 months) • total and permanent disability (TPD) cover, which pays if an insured member becomes disabled and is unable or unlikely to ever work again, or unable or unlikely to look after themselves ever again • income protection cover, which is designed to provide a replacement income of a specified amount for members who are unable to work due to illness or injury. Depending on the policy, payments may continue up to a specified age if the disability is ongoing or permanent, or may be payable for a specified maximum period. Legal status of Code The Code contains industry standards that superannuation trustees which have adopted the Code will uphold on an “if not, why not basis” when providing insurance benefits to their members. For these superannuation trustees, the Code operates alongside, and is subject to, existing laws and regulations which will prevail where there is any conflict or inconsistency between the Code and any law or regulation. Among other things, superannuation trustees are required under the SIS Act covenants (¶3-100) to perform their duties and exercise their powers in the best interests of our beneficiaries and, accordingly, are expected to comply with their commitments in the Code to the extent that they are in the best interests of beneficiaries and consistent with their other legal obligations. ISWG The ISWG comprises the Association of Superannuation Funds of Australia (ASFA), the Australian Institute of Superannuation Trustees (AIST), the Financial Services Council (FSC), Industry Funds Forum (IFF), and Industry Super Australia (ISA). It was formed in November 2016 to review automatic insurance premiums within superannuation. ASIC report on consumer experience of insurance through superannuation ASIC has released Report REP 591 Insurance in Superannuation which sets out the findings following a review of 47 superannuation trustees on the consumer experience of insurance provided through superannuation. The review focused on insurance claims and complaints handling, disclosures about insurance and cover ceasing, insurer rebates paid to trustees, and whether members were defaulted into demographic categories that resulted in higher premiums (www.asic.gov.au/regulatory-resources/find-adocument/reports/rep-591-insurance-in-superannuation/). [SLP ¶3-030]

¶3-245 General fees rules Part 11A of SISA contains the general fees rules for regulated superannuation funds and ADFs (s 99A to

99F). The rules do not apply to SMSFs or PSTs. Entry fees The trustee of a regulated superannuation fund or an ADF must not charge entry fees (SISA s 99B(1)). An entry fee is a fee, other than a buy-sell spread, that relates, directly or indirectly, to the issuing of a beneficial interest in a superannuation entity to a person who is not already a member of the entity. Buy-sell spread, switching fee or exit fee If the trustee, or the trustees, of a regulated superannuation fund or an approved deposit fund charge a buy-sell spread, a switching fee or an exit fee, the fee must be no more than it would be if it were charged on a cost recovery basis (SISA s 99C(1)). The regulations may prescribe the way in which a buy-sell spread, a switching fee or an exit fee charged on a cost recovery basis is to be worked out. Cost of advice to employers The trustee, or the trustees, of a regulated superannuation fund or an approved deposit fund must not include in any fee charged to any member of the fund an amount that relates to costs incurred by any person, directly or indirectly, in relation to personal advice provided by any person to an employer of one or more members of the fund (SISA s 99D). Fair and reasonable attribution of costs among members If there is more than one class of beneficial interest in a regulated superannuation fund, the trustee, or the trustees, of the fund must attribute the costs of the fund between the classes fairly and reasonably (SISA s 99E). Cost of financial product advice Section 99F(1) of SISA provides that the trustee or the trustees of a regulated superannuation fund must not directly or indirectly pass the cost of providing financial product advice in relation to a member of the fund (the subject member) on to any other member of the fund, to the extent that: (a) the advice is provided by a trustee of the fund or another person acting as an employee of, or under an arrangement with, a trustee or trustees of the fund (b) the advice is “personal advice” (c) the advice is provided in any of the following circumstances: (i) the subject member has not yet acquired a beneficial interest in the fund when the advice is given, and the advice relates to whether the subject member should acquire such an interest (ii) the advice relates to a financial product that is not a beneficial interest in the fund, a “related pension fund” for the member and the fund, a “related insurance product” for the member and the fund or a “cash management facility” within the fund (iii) the advice relates to whether the subject member should consolidate that member’s beneficial interests in two or more superannuation entities into a beneficial interest in a single superannuation entity (iv) at the time the advice is provided, the subject member reasonably expects that a person mentioned in item (a) will periodically review the advice, provide further personal advice or monitor whether recommendations in the original or any later advice are implemented and the results of that implementation (v) other prescribed circumstances. The terms “financial product” (¶4-060) and “personal advice” (¶4-630) have the same meanings as in Ch 7 of the Corporations Act 2001.

The terms “related pension fund”, “related insurance product”, “cash management facility” and “life policy” are defined in s 99F(3) and (4). While RSE licensees will have to comply with the general fees rules for all products they offer, APRA can specifically ensure that the general fees rules are complied with in relation to a MySuper product at the time they consider an application from an RSE licensee for authorisation to issue MySuper products: • as the RSE licensee will be in breach of a standard condition on their RSE licence if it does not comply with the general fees rules, and • APRA may cancel the RSE licensee’s authorisation of a MySuper product if the RSE licensee does not comply with the general fees rules in relation to the MySuper product (s 29U(2)(d)). For the interaction of the Pt 11A fee rules with the fee rules in SISA Pt 2C Div 5 for MySuper products, see Chapter 9.

¶3-250 Fee cap and prohibition of exit fees The general fee rules in SISA Pt 11A from 1 July 2019: • impose a “fee cap” which restricts the total amount of administration fees, investment fees and associated costs as prescribed in regulations that can be charged where the balance of an account is less than $6,000, and • prohibit exit fees charged as a result of the disposal of all or part of a member’s interests in a superannuation entity, regardless of the balance. The above measures were implemented by the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (PYSP) (Act 16 of 2019) and PYSP Regulations (F2019L00539) to protect individuals’ retirement savings from erosion from disproportionately high fees and to ban exit fees to remove a barrier to account consolidation. The Act also implemented other measures which ensure that insurance arrangements in superannuation are appropriate so that members are not paying for insurance cover they do not know about or premiums that inappropriately erode their retirement savings (¶3-243), and which strengthen the ATO’s role in reuniting small, inactive balances to reduce the costs to members and consolidate the accounts of members with multiple superannuation accounts. Cap on fees and costs From 1 July 2019, the total amount of administration fees, investment fees and prescribed costs that can be charged annually are 3% of the balance of the account held by the member, if the balance is less than $6,000 at the end of the fund’s income year or at the time of account closure (SISA s 99G, SISR reg 9.51). An apportionment applies if the member begins to hold the account during an income year. The amount of administration fees, investment fees and prescribed costs that can be charged is calculated using the member’s account balance at the end of the fund’s income year apportioned based on the number of days the member held the account during the income year (s 99G(2), (5)). If the member ceases to hold the account during the income year, the amount of fees and prescribed costs that can be charged is calculated using the member’s balance on the day the member ceases to hold the account and is apportioned based on the number of days the member held the account in the fund. If the trustee has charged more than the permitted administration fees, investment fees or prescribed costs (or calculated amount under the cap), the trustee has up to three months after the end of the fund’s income year to refund the excess to the member, or up to three months from the day the member ceased to hold the account to refund the excess to the member (s 99G(6)). “Prescribed costs” refer to an amount prescribed in regulations (if any) incurred by the trustee for the administration of the fund or investment of the fund’s assets which are not charged to the member as a

fee (s 99G(3)(c)). The amount prescribed (as part of the capped fees and costs charged to a member of a regulated superannuation fund in relation to a MySuper product or choice product for a year of income of the fund) is so much of the indirect cost of the MySuper product or the choice product for the year that is required to be reported to the member under s 1017D of the Corporations Act 2001 as: (a) is not charged to the member as a fee, and (b) is incurred by the trustee of the fund in relation to the year, and (c) relates to the administration of the fund or investment of the assets of the fund (SISR reg 9.50). The EM (to Act No 16 of 2019) explains the amount prescribed as below: • 2.15 It is expected that the regulations will capture amounts which directly or indirectly reduce the return on a member’s investment. It would include the situation where the charging of these amounts may be deducted from a member’s return before the investment earnings are attributed to the member. • 2.16 It is expected that the regulations will prescribe these amounts with reference to the amount of indirect cost disclosed by the trustee. • 2.17 It is the balance of an account that determines whether administration fees, investment fees and prescribed costs are capped and, if so, the maximum amount of these fees and costs that is charged. That is, a member who has more than one account in a fund may have total combined superannuation savings in that fund greater than $6,000. However, if the balance of a particular account is less than $6,000, the administration fees, investment fees and prescribed costs that can be charged for that account will be capped and will be calculated based on the amount in that account. An administration fee or investment fee that is charged at a reduced rate for a member of a MySuper account to align with the fee cap is not a contravention of a trustee’s obligation to only charge fees in accordance with the charging rules or the requirement to follow the same process for a class of member of the same beneficial interest (SISA s 29TC(i)(d), s 29VA(11), s 29VB(1)(d), s 29VB(4) and s 29VE(c)). For the avoidance of doubt, a trustee that is meeting the fee cap is meeting its obligations under s 99E of the SIS Act to attribute the costs of the fund fairly and reasonably between classes. Prohibition of exit fees From 1 July 2019, a trustee of a superannuation fund or an ADF cannot charge a member an exit fee (other than a buy-sell spread) when the member withdraws all or part of their interest from the fund or when the member’s interest is transferred out of the fund, eg a transfer to the ATO under the SUMLM Act (SISA s 99BA). Exit fees cannot be applied to the balance or interest that is fully or partly withdrawn or transferred out of the fund. An “exit fee” is a fee, other than a buy-sell spread, that relates to the disposal of all or part of a member’s interests in a superannuation entity (s 99BA(2)). This can include a deferred entry fee or a percentage based fee. The exit fee effectively is a fee triggered by the disposal of the member’s interest. Regulations may prescribe circumstances when the ban on exit fees does not apply. APRA and ATO guidelines The Regulators’ guidelines are available in Protect Your Super (www.letstalk.ato.gov.au/SuperCommunity/news_feed/protect-your-super) which contains the ATO’s advice and implementation documents on the PYSP changes, and in APRA’s letter of 8 May 2019 and FAQs to all RSE trustees about the PYSP reforms (www.apra.gov.au/sites/default/files/letter_protecting_your_super_legislative_amendments_implementation.pdf www.apra.gov.au/protecting-your-super-package-frequently-asked-questions).

¶3-260 Assignment of members’ interest and charge on fund assets

The trustee of a regulated superannuation fund (or ADF) must not recognise, encourage or sanction an assignment of a member’s superannuation interests or a charge over a member’s benefits (SISR reg 13.12; 13.13). Also, the trustee must not give a charge over the assets of the fund (reg 13.14). The above restrictions do not apply if the assignment or charge is permitted expressly or implicitly by the SIS legislation (reg 13.15; 13.15A; see “Approved charges on fund assets” below). A “charge” includes a mortgage, lien or other encumbrance (reg 13.11). In reg 13.12, a “charge” does not include a specific charge given in respect of particular benefits of a member before the fund became regulated or where the trustee was permitted under the Occupational Superannuation Standards Regulations or Superannuation Industry (Supervision) (Transitional Provisions) Regulations 1993 to recognise the charge. The ordinary meaning of the word “give” and the difference in wording between reg 13.12, 13.13 and 13.14 indicate that the phrase “give a charge” in reg 13.14 requires a trustee, by some positive action, to create a charge and not merely recognise (including act on or give effect to) a previously established charge (see ID 2011/81). The trustee of a fund does not “give a charge” for the purposes of reg 13.14 if the trustee purchases an asset subject to a charge that was established before the trustee purchased the asset (ID 2011/81). In that case, the SMSF acquired real property from an unrelated party and, at the time of purchase, was aware that the property was subject to a charge in favour of another unrelated party. The property remained subject to the charge after it was acquired. The ATO states that the explanatory statement to the regulations gives no explanation in relation to reg 13.14. However, differences in the language used in reg 13.12, 13.13 and 13.14 (see above) support the view that reg 13.14 is intended to apply to the creation of a charge by the fund trustee, as distinct from the trustee recognising an existing charge on acquiring an asset. The above provisions would prohibit a member from assigning his/her interest in the fund to another member or prevent a fund from participating as a borrower in margin lending arrangements if the fund is required to grant a charge over its assets as part of the arrangements (ID 2007/58). A fund participating in margin lending would also contravene the borrowing restriction in SISA s 67 as discussed at ¶3-410 (ID 2007/58). Approved charges on fund assets Trustees are permitted, in certain circumstances, to give a charge over fund assets in relation to derivatives transactions on approved Australian and foreign stock and futures exchanges under reg 13.15A. This exception was expanded from 10 May 2016 to cover fund trustees giving a charge over the fund’s assets over-the-counter (OTC) derivative transactions, whether cleared or uncleared so as to address certain inadequacies of the exception before that date, as summarised below. The rules of certain exchanges and clearing houses and certain existing, or expected, laws and prudential standards of certain jurisdictions either expressly require that security be granted or have the consequence that security needs to be granted. Trustees may not be able to rely on the former “derivatives contract” exception in reg 13.15A (as it then applied) to grant the charges required by the rules of exchanges and clearing houses or law for a number of reasons. These include the following: (a) the term “derivatives contract” may not be broad enough to capture other OTC derivatives such as foreign exchange forwards and swaps and interest rate swaps utilised by trustees (b) the former exception did not contemplate security being granted by the trustee to third parties who assist the trustee to access the approved body (ie a trustee’s clearing member), including in circumstances where the trustee was not a direct participant of the approved body if the charge was not contemplated in the rules of the approved body (c) the list of “approved bodies” in SISR Sch 4 did not include some important OTC derivatives clearing houses which clear high volumes of OTC derivatives (eg LCH Clearnet). Similarly, the broad exception in reg 13.15 which provides that the restriction on granting security does

not apply to an assignment or charge that is permitted, “expressly or by necessary implication”, by the SISA or SISR may not cover the granting of security in the context of cleared or uncleared OTC derivatives. Amended reg 13.15A (effective from 10 May 2016) therefore allows trustees of superannuation funds and ADFs to provide margin by way of security in relation to derivatives in the manner required to access international capital markets and liquidity so as to allow those entities to access liquid global markets such as the United States cleared OTC derivatives market through Futures Commission Merchants (FCMs). Schedule 4 contains the list of approved bodies (being domestic and foreign exchanges and clearing houses) to whom trustees may grant security for the purposes of reg 13.15A. In addition, a broader definition of “derivative” applies (see reg 13.15A(2) and note). The note to the “derivative” definition is a reminder that, while the term “derivative” covers a variety of arrangements, not all are “eligible obligations” (ie what financial markets would typically consider to be a derivative). CFDs and margin accounts (ID 2007/57) In this ID, the trustee of an SMSF deposited fund assets with the CFD provider as security in relation to the fund’s obligations to pay margins under a separate written agreement with the provider. As the terms of the agreement stated the circumstances in which the fund assets would be realised, this showed an intention to create a charge over the assets. Accordingly, by entering into the agreement with the CFD provider, the trustee has contravened reg 13.14. Regulation 13.15A is not applicable in this case as a CFD is not an options contract or a futures contract, and the charge was not given in relation to the rules of an approved body.

Margin account for investment in shares (ID 2007/58) In this ID, the trustee of an SMSF maintained a margin account with a broker’s clearing house which continued over a period of time at different monetary levels depending on the value of shares on hand. In relation to shares, a margin account with a broker is an account through which shares can be purchased for a combination of cash and a loan (margin lending). The portfolio of shares is used as security for the margin lending facility. The trustee has contravened SISA s 67(1), which prohibits the trustee from borrowing money or maintaining an existing borrowing of money. The limited exceptions to the general prohibition under s 67(2), 67(2A) and 67(3) are not available as operating the margin account does not fall within the exceptions (¶3-410). The trustee has also contravened reg 13.14. The exception in reg 13.15A is not applicable as the shares held as fund assets were provided as security for the loan taken out to purchase the shares, thus representing a charge over fund assets.

[SLP ¶3-212]

¶3-270 Members’ rights to accrued benefits The trustee of a regulated superannuation fund must not allow a member’s right or claim to accrued benefits, or the amount of those accrued benefits, to be altered adversely to the member by amendment of the fund’s governing rules or by any other act carried out, or consented to, by the trustee (SISR reg 13.16). The restriction does not apply to an alteration if: • the alteration does not relate to a member’s minimum benefits (¶3-230) and written consent to the alteration has been given by the member (and, by the non-member spouse if the benefits are subject to a payment split) • the alteration does not relate to a member’s minimum benefits and the Regulator has consented in writing to the alteration after either: – the alteration has been approved by at least two-thirds of all of the fund members who are affected by it, in accordance with the procedures specified in reg 13.16(4), or – for a fund covered by the basic equal representation rules in SISA s 89 (¶3-120), the alteration has been approved by at least two-thirds of the total number of trustees or, if the fund has a

single corporate trustee, by two-thirds of the directors of the corporate trustee, subject to the procedures specified in reg 13.16(5), or • the alteration is necessary for compliance with the SISA, the Income Tax Act 1986, the Superannuation (Unclaimed Money and Lost Members) Act 1999, the ITAA36 or ITAA97, or their regulations • the alteration is solely for the purpose of rectifying a mistake which has resulted in a member’s right or claim to accrued benefits, or the amount of the accrued benefits, being advantageously altered and the Regulator has approved the alteration • the alteration affects only the benefits of members in respect of whom assessments under s 15 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 have been made, and the alteration serves to enable the trustee: – to be reimbursed for an amount paid, or to be paid, under that Act and the Superannuation Contributions Tax (Imposition) Act 1997, or – in relation to an amount paid before reimbursement occurs, to charge interest on the amount paid • the alteration is made: – to give effect to a payment split – as a consequence of the trustee taking action that, because of Div 2.2 of the Family Law (Superannuation) Regulations 2001, has the effect that a future payment in respect of the superannuation interest of the member spouse would not be a splittable payment, or – as a consequence of the operation of a fund’s governing rules that, because of Div 2.2 of the Family Law (Superannuation) Regulations 2001, has the effect that a future payment in respect of the superannuation interest of the member spouse would not be a splittable payment, or • the alteration enables the trustee to be reimbursed for an amount paid, or to be paid, under s 24 of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 because of an overpayment of government co-contributions (reg 13.16(2)). [SLP ¶3-214]

¶3-280 Preservation of benefits The trustee of a regulated superannuation fund (or ADF) must comply with rules for the preservation of member benefits (discussed in this paragraph) and for the portability and payment of members’ benefits (discussed in ¶3-284 and ¶3-286) (SISR Pt 6 reg 6.01 to 6.46). Under the SISR, a member’s benefits in a regulated superannuation fund may comprise one or more of the following categories of benefits: • preserved benefits (PBs) • restricted non-preserved benefits (RNPBs) • unrestricted non-preserved benefits (UNPBs). A member’s benefits in an ADF may comprise only of PBs and/or UNPBs, ie there are no RNPBs in ADFs (¶3-662). Generally, PBs and RNPBs must be preserved until the member satisfies a condition of release as specified in SISR Sch 1 (see below). For example, PBs and RNPBs must be retained in the fund until a member’s “retirement” on or after attaining his/her preservation age (or until the member satisfies another

condition of release with no cashing restriction). On the other hand, UNPBs do not need to be preserved because they are classified as UNPBs under the preservation rules or the member has previously satisfied a condition of release in respect of these benefits and no cashing restrictions apply, ie these benefits are payable on demand by the member, subject only to any restriction in the trust deed of the fund in which the benefits are kept. A member’s preservation age varies between 55 and 60 years, based on his/her birth date (see “Preservation age” below). The governing rules or the trustee of a superannuation fund may alter the category of a member’s benefits in the fund, provided this does not decrease the member’s PBs or increase the member’s UNPBs in the fund (reg 6.16). Where a relevant condition of release is satisfied and no cashing restriction applies, a member’s benefits may be paid in a lump sum or pension form, or both (¶3-286). It has been held that the Official Trustee in Bankruptcy could not access a bankrupt member’s superannuation benefits (which were held in an employer-sponsored superannuation fund) even though the benefits had unconditionally vested in the member, as the Trustee could not be in a better position than the bankrupt member (Kirkland). The Commissioner has issued alerts on arrangements which promote the early access to preserved superannuation benefits for private use (see “Taxpayer alert on early access to superannuation” at the end of this paragraph). Payments of superannuation benefits to members that do not comply with the conditions of release are not treated as superannuation benefits, and are taxed as ordinary income at the marginal tax rates of members (¶8-500). APRA guidelines APRA’s Superannuation Prudential Practice Guide SPG 280 “Payment standards” provides guidelines on the following: • General matters — payment standards, governing rules, risk management and administration • Classification of benefits • Conditions of release — retirement, transition to retirement income streams, early release of benefits • Pension issues • Roll-overs and transfers — successor funds, illegal early release and identity theft/fraud, and portability rules • Death benefit payments • Miscellaneous (www.apra.gov.au/superannuation-standards-and-guidance) (¶9-720). The preservation rules are discussed under the following topics • Preservation system overview • Earnings in the fund • Negative investment returns • Preservation rules • SISR Sch 1 — Conditions of release/cashing restrictions • Conditions of release for temporary residents

• Condition of release — retirement • Preservation age • Condition of release — terminal medical condition • Condition of release — post-preservation age non-commutable income stream • Condition of release — permanent incapacity and temporary incapacity • Condition of release — termination of employment • Condition of release — temporary resident permanently departing Australia • Condition of release — severe financial hardship • Condition of release — compassionate grounds • Condition of release — former lost members with small benefits • Condition of release — release of benefits under ATO release authority • Condition of release — release of benefits to a provider of a KiwiSaver Scheme • Condition of release — release of benefits to acquire deferred superannuation income streams • Eligible spouse contributions • Preservation and cooling-off rules • Taxpayer alert on early access to superannuation. Preservation system overview The preservation regime (1 July 1999 system) requires all contributions made by or on behalf of a member of a regulated superannuation fund, and all earnings of the fund in respect of the period from 1 July 1999 to be preserved. In contrast, under the pre-1 July 1999 system, undeducted contributions and the earnings on benefits which were RNPBs and UNPBs were not required to be preserved. Because the post- and pre-July 1999 systems are different, grandfathering rules require trustees of regulated superannuation funds to calculate each member’s non-preserved benefits as at 30 June 1999 so as to retain the non-preserved status of these benefits under the 1 July 1999 system. The dollar amount of each member’s non-preserved benefits, calculated as at 30 June 1999, is not indexed for future years. The method of calculating a superannuation fund member’s PBs, RNPBs and UNPBs under the 1 July 1999 system is outlined below (see “Preservation rules”). Discussion of the pre-1 July 1999 system may be found in earlier editions of the Guide. Earnings in the fund — accumulation account and pension account Under the 1 July 1999 preservation rules, the investment earnings of a superannuation fund in an accumulation phase are preserved benefits (with certain exceptions, see below). The preservation rules do not affect the earnings in superannuation funds which have commenced to be paid in the form of an income stream. In such cases (with one exception), the investment earnings are taken to be UNPBs if they relate to a benefit being paid as a non-commutable life pension or annuity or to an UNPB being paid as a pension or annuity (SISR reg 6.15A). An exception applies in respect of the investment earnings on benefits in a “transition to retirement” income stream (see “Condition of release — post-preservation age non-commutable income stream” below). These earnings remain as PBs until the pensioner or annuitant satisfies a condition of release

with a “nil” cashing restriction such as retirement or after reaching preservation age or attaining age 65 (SISR reg 6.15A(2) to (5); RSAR reg 4.17B). Once a condition of release with a “nil” cashing restriction is met, investment earnings on transition to retirement income streams become UNPBs. This treatment places investment earnings on benefits in the “transition to retirement” phase on the same footing as investment earnings on benefits in the accumulation phase. Negative investment returns An exception to the general rule that all investment returns accruing from 1 July 1999 must be preserved is provided by SISR reg 6.16A. This covers the situation where a member’s benefits in a fund are largely or wholly made up of PBs, RNPBs and/or UNPBs and the negative investment returns debited to the member’s benefits exceed the amount of the member’s PBs. In such a case, the negative return for a period must be debited in the following order: (a) against the member’s PBs; (b) against the member’s RNPBs; and (c) against the member’s UNPBs. As investment returns from 1 July 1999 are preserved by virtue of reg 6.03, a member’s RNPBs or UNPBs which have been reduced because of earlier negative returns cannot be restored to their prereduction levels by subsequent positive investment returns. Preservation rules The rules for determining the PBs, RNPBs and UNPBs for a member of a regulated superannuation fund for the periods before and after 1 July 1999 allow for the implementation of the 1 July 1999 preservation rules (under which all contributions and earnings of the fund from 1 July 1999 are preserved), and the retention of the status of pre-1 July 1999 non-preserved benefits of the member, if any. PBs — on or after 1 July 1999 The amount of a member’s PBs at any time on or after 1 July 1999 is the total benefits of the member in the fund reduced by the member’s RNPBs and UNPBs (see below) (SISR reg 6.03). The PBs of a member include: • benefits transferred from another superannuation fund, ADF or RSA that are PBs in the transferor fund (reg 6.06; 6.12) • contributions made, or benefits rolled over or transferred, to the fund which are taken by the trustee to be PBs (reg 6.15) • benefits in the fund recategorised by the trustee as PBs in accordance with the fund’s governing rules (reg 6.16). As PBs are a residual amount (ie total benefits less RNPBs and UNPBs), contributions and earnings of the fund automatically become subject to preservation under the 1 July 1999 system as they are part of the member’s total benefits and are not included in the member’s RNPBs or UNPBs. Employment termination payments rolled over to the fund from 1 July 2004 are PBs (previously they were UNPBs). RNPBs — on or after 1 July 1999 A member’s RNPBs in a regulated superannuation fund at any time on or after 1 July 1999 are specified in reg 6.08. For all type B members and type A members who are not defined benefit members, RNPBs are the sum of: • the amount of the member’s RNPBs in the fund as at 30 June 1999 as calculated under reg 6.07 • the amount of the member’s RNPBs received from another regulated superannuation fund, exempt public sector superannuation scheme or RSA on or after 1 July 1999. For type A members who are defined benefit members, RNPBs are the sum of:

• either: – where the trustee elects in respect of the member, the greater of the member’s RNPBs in the fund as at 30 June 1999 as calculated under reg 6.07 that would be payable to the member on 1 July 1999 if the member resigned or were retrenched from employment on that day, or – the amount of the member’s RNPBs in the fund as at 30 June 1999 as calculated under reg 6.07 • the amount of the member’s RNPBs received from another regulated superannuation fund, exempt public sector superannuation scheme or RSA on or after 1 July 1999. RNPBs also include benefits that were RNPBs in the source from which they were received (reg 6.09; 6.12) and benefits in the fund recategorised by the trustee as RNPBs in accordance with the fund’s governing rules (reg 6.16). A member’s RNPBs thus cannot be increased by contributions made to the fund on behalf of the member, or by investment earnings on the member’s benefits in respect of the period on or after 1 July 1999, as these are PBs by virtue of reg 6.03. Where a tax deduction is allowed for personal superannuation contributions under ITAA36 former s 82AAT on or after 1 July 1999 for contributions made before that date, the benefits arising from those contributions that were previously allocated to RNPBs are taken to be PBs (reg 6.08(2)). UNPBs — on or after 1 July 1999 A member’s UNPBs in a regulated superannuation fund are the sum of (reg 6.10): (1) PBs or RNPBs of the member which have become UNPBs because the member has satisfied a condition of release and no cashing restrictions apply for that condition of release (reg 6.12) (2) amounts (other than a CGT exempt component) received as roll-overs of former ETPs made by employers on or after the “commencement day” (see below) (3) UNPBs received by the fund in respect of the member on or after the commencement day (and before 1 July 2004) (4) investment earnings on the amounts in items (1) to (3) for the period before 1 July 1999. Where a tax deduction is allowed to a fund member for personal superannuation contributions under ITAA36 former s 82AAT on or after 1 July 1999 for contributions made before that date, the benefits arising from those contributions that were previously allocated to RNPBs, and which become UNPBs because a condition of release had been satisfied, are taken to be PBs (reg 6.10(3)). That is, a reclassification from UNPBs to PBs will be made so that the deductible contributions are subject to preservation. Member contributions made at any time on or after 1 July 1999 are PBs by virtue of reg 6.03. Roll-overs or transfers of a member’s benefits that are UNPBs in the transferor fund remain as UNPBs in the transferee fund (reg 6.13). SISR Sch 1 — Conditions of release/cashing restrictions A member’s PBs and RNPBs in a superannuation fund (or ADF) can only be accessed (“cashed”) if a condition of release is satisfied. The conditions of release are specified in SISR Sch 1 (reproduced in the table below). The conditions of release have specific meanings or tests which must also be met, eg “retirement”, attaining “preservation age” and taking benefits as a non-commutable income stream, “permanent or temporary incapacity”, “severe financial hardship” or “compassionate grounds”, as discussed below. As noted in Sch 1, a cashing restriction applies as to the form or amount of the benefit payment with certain conditions of release. For example, a benefit paid because of a member’s temporary incapacity must be paid as a non-commutable income stream for a period not exceeding the period of incapacity from employment of the kind engaged in immediately before the temporary incapacity. Also, while no

cashing restriction applies to the amount constituting RNPBs paid on termination of employment from an employer-sponsored fund, any PBs can only be paid as a non-commutable life pension or annuity. A member of a fund is taken to have satisfied a condition of release if the event specified in that condition has occurred in relation to the member (but see “Limitation on conditions of release for temporary residents” below). SISR Schedule 1 — conditions of release of benefits

PART 1 — REGULATED SUPERANNUATION FUNDS Column 1

Column 2

Column 3

Item No.

Conditions of release

Cashing restrictions

101

Retirement

Nil

102

Death

Nil

102A

Terminal medical condition

Nil

103

Permanent incapacity

Nil

103A

Former temporary resident to Amount that is at least the amount of the whom reg 6.20A or 6.20B applies, temporary resident’s withdrawal benefit in the requesting in writing the release of fund, paid: his/her benefits (a) as a single lump sum, or (b) if the fund receives any combination of contributions, transfers and roll-overs after cashing the benefits — in a way that ensures that the amount is cashed

103B

The trustee is required to pay an amount to the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s superannuation interest in the fund

Amount that the trustee is required to pay to the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s superannuation interest in the fund, paid as a lump sum to the Commissioner

104

Termination of gainful employment Nil with a standard employer-sponsor of the regulated superannuation fund on or after 1 July 1997 (where the member’s preserved benefits in the fund at the time of the termination are less than $200)

105

Severe financial hardship

For a person taken to be in severe financial hardship under reg 6.01(5)(a) — in each 12month period (beginning on the date of first payment), a single lump sum not less than $1,000 (except if the amount of the person’s preserved benefits and restricted non-preserved benefits is less than that amount) and not more than $10,000 For a person taken to be in severe financial hardship under reg 6.01(5)(b) — Nil

106

Attaining age 65

Nil

107

The Regulator has determined A single lump sum, not exceeding an amount under reg 6.19A(2) that a specified determined, in writing, by the Regulator, being amount of benefits in the regulated an amount that: superannuation fund may be released on a compassionate ground (a) taking account of the ground and of the person’s financial capacity, is reasonably required, and (b) in the case of the ground mentioned in reg 6.19A(1)(b) — in each 12-month period (beginning on the date of first payment), does not exceed an amount equal to the sum of: (i) three months’ repayments, and (ii) 12 months’ interest on the outstanding balance of the loan

108

Termination of gainful employment 1. Preserved benefits: Non-commutable life with an employer who had, or any pension or non-commutable life annuity of whose associates had, at any 2. Restricted non-preserved benefits: Nil time, contributed to the regulated superannuation fund in relation to the member

109

Temporary incapacity

A non-commutable income stream cashed from the regulated superannuation fund for: (a) the purpose of continuing (in whole or part) the gain or reward which the member was receiving before the temporary incapacity, and (b) a period not exceeding the period of incapacity from employment of the kind engaged in immediately before the temporary incapacity

109A

For acquiring a superannuation interest (within the meaning of the ITAA97) that supports a deferred superannuation income stream to be provided under a contract or rules that meet the standards of reg 1.06A(2)

The restrictions contained in reg 1.06A(3)(e)

110

Attaining preservation age

Any of the following: (a) a transition to retirement income stream (b) a non-commutable allocated annuity (c) a non-commutable allocated pension (d) a non-commutable annuity (e) a non-commutable pension

111

Being a lost member who is found, Nil

and the value of whose benefit in the fund, when released, is less than $200 111A

The Commissioner of Taxation gives a superannuation provider a release authority under Div 131 in Sch 1 to the TAA

The restrictions contained in s 131-35 and 13140 in that Schedule

111B

A person gives a superannuation provider a release authority under s 135-40 in Sch 1 to the TAA

The restrictions contained in s 135-75 and 13585 in that Schedule

113

A person gives a transitional release authority to a superannuation provider under ITTPA s 292-80B

Restrictions contained in ITTPA s 292-80C(1) and (2)

113A

A former resident of Australia has: (a) moved permanently to New Zealand, and (b) nominated a provider of a KiwiSaver Scheme for the purposes of this item

Amount that is at least the amount of the former resident’s withdrawal benefit in the fund, paid:

Any other condition, if expressed to be a condition of release, in an approval under SISA s 62(1)(b)(v)

Restrictions expressed in the approval to be cashing restrictions applying to the condition of release

114

(a) as a single lump sum, or (b) if the fund receives any combination of contributions, transfers and roll-overs after cashing the benefits — in a way that ensures that the amount is cashed

PART 2 — APPROVED DEPOSIT FUNDS Column 1

Column 2

Column 3

Item No.

Conditions of release

Cashing restrictions

201

Retirement

Nil

202

Death

Nil

202A

Terminal medical condition

Nil

203

Permanent incapacity

Nil

204

Former temporary resident to Amount that is at least the amount of the whom reg 6.24A applies, temporary resident’s withdrawal benefit in the requesting in writing the release of fund, paid: his/her benefits (a) as a single lump sum, or (b) if the fund receives any combination of transfers and roll-overs after cashing the benefits — in a way that ensures that the amount is cashed

204A

The trustee is required to pay an amount to the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s superannuation interest

Amount that the trustee is required to pay to the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for the person’s superannuation interest in the fund, paid as a lump sum to the Commissioner

in the fund 205

Severe financial hardship

For a person taken to be in severe financial hardship under reg 6.01(5)(a) — in each 12month period (beginning on the date of first payment), a single lump sum not less than $1,000 (except if the amount of the person’s preserved benefits and restricted non-preserved benefits is less than that amount) and not more than $10,000 For a person taken to be in severe financial hardship under reg 6.01(5)(b) — Nil

206

Attaining age 65

Nil

207

The Regulator has determined A single lump sum, not exceeding an amount under reg 6.19A(2) that a specified determined, in writing, by the Regulator, being amount of benefits in the approved an amount that: deposit fund may be released on a compassionate ground (a) taking account of the ground and of the person’s financial capacity, is reasonably required, and (b) in the case of the ground mentioned in reg 6.19A(1)(b) — in each 12-month period (beginning on the date of first payment), does not exceed an amount equal to the sum of: (i) three months’ repayments, and (ii) 12 months’ interest on the outstanding balance of the loan

207A

For acquiring a superannuation interest (within the meaning of the ITAA97) that supports a deferred superannuation income stream to be provided under a contract or rules that meet the standards of reg 1.06A(2)

The restrictions contained in reg 1.06A(3)(e)

208

Attaining preservation age

Any of the following: (a) a transition to retirement income stream (b) a non-commutable allocated annuity (c) a non-commutable allocated pension (d) a non-commutable annuity (e) a non-commutable pension

208A

The Commissioner of Taxation gives a superannuation provider a release authority under Div 131 in Sch 1 to the TAA

The restrictions contained in s 131-35 and 13140 in that Schedule

208B

A person gives a superannuation provider a release authority under

The restrictions contained in s 135-75 and 13585 in that Schedule

s 135-40 in Sch 1 to the TAA 210

A person gives a transitional release authority to a superannuation provider under ITTPA s 292-80B

Restrictions contained in ITTPA s 292-80C(1) and (2)

211

Being a lost member who is found, Nil and the value of whose benefit in the fund, when released, is less than $200

Note Unless a contrary intention is specified, the definitions set out in reg 6.01(2) apply to Sch 1. Conditions of release for temporary residents Regulation 6.01B sets out the conditions of release that an individual who, at any stage, has been a temporary resident can satisfy. The regulation applies to a member who is or was a temporary resident but not a member who: (a) is an Australian citizen, a New Zealand citizen or a permanent resident, or (b) is, at any time, the holder of a Subclass 405 (Investor Retirement) visa or a Subclass 410 (Retirement) visa described in Sch 2 to the Migration Regulations 1994. For a temporary resident member to whom reg 6.01B applies, the only conditions of release that can apply to the member are: • a condition of release that was satisfied by the member before 1 April 2009, and • the conditions of release in items 102, 102A, 103, 103A, 103B, 109, 111A, 111B, 113A, 202, 202A, 203, 204, 204A, 208A and 208B of Sch 1 (see the table below). SISR Sch 1 — conditions of release and cashing restrictions Condition of release — retirement For the purposes of the preservation rules, a member’s “retirement” is taken to occur: • for a member who has attained a preservation age less than 60 — if an arrangement under which the member was “gainfully employed” (see ¶3-220 and below) has ended and the fund trustee is reasonably satisfied that the member intends never to again become gainfully employed, either fulltime (ie at least 30 hours per week) or part-time (ie at least 10 hours per week), or • for a member who has attained the age of 60 — an arrangement under which the member was gainfully employed has ended, and either of the following circumstances apply: – the member attained that age on or before the ending of the employment, or – the trustee is reasonably satisfied that the member intends never to again become gainfully employed, either on a full-time or a part-time basis (SISR reg 6.01(7)). This means that the “retirement” of a person cannot happen before age 55 but, after age 60, retirement may be taken to have occurred upon cessation of gainful employment even if the person subsequently reenters gainful employment. Also, a person who leaves employment before age 60, but chooses to access his/her benefits only after age 60, will be covered by the “retirement” condition of release. While two definitions of “retirement” have slightly different tests applicable to them, proof of age is required in either case. Where the trustee must be reasonably satisfied that the member intends never again to become gainfully employed, additional evidence will be required to support this. Proof of retirement may be satisfied by obtaining evidence that the member’s gainful employment has ceased (eg

a statement from the employer) and of the member’s intention, at the time of the claim, to never again be gainfully employed either on a full-time or a part-time basis (eg a statutory declaration from the member). Where a member has reached the age of 60, is in two or more employment arrangements at the same time, and ceases one of these employment arrangements, this is a valid condition of release in respect of all preserved and restricted non-preserved benefits accumulated up until that time. However, it is APRA’s view that this will not change the character of any preserved or restricted non-preserved benefits that accrue after the condition of release has occurred. That is, a member will not be able to cash any further benefits or investment earnings accrued from another existing employment arrangement, or any benefits or investment earnings from a new employment arrangement, until a further condition of release occurs (Superannuation Prudential Guide SPG 280 para 22). Whether a person is “gainfully employed” is a question of fact, and not all jobs or undertakings will meet the “gainful employment” test. For example, a director of a small private company is unlikely to be gainfully employed by virtue of holding that office as being a director of a company alone is not necessarily employment, and is not necessarily under a contract of service (see Beljan v Energo Form Act Pty Ltd [2013] ACTMC 21 [22]). By contrast, a person who is self-employed as an Uber driver may qualify as being in gainful employment and could possibly satisfy the retirement definition on ceasing such self-employment. Preservation age A person’s preservation age depends on the birth date of the person as set out in the table below (SISR reg 6.01(2)). Date of birth

Preservation age

Before 1 July 1960

55

1 July 1960 – 30 June 1961

56

1 July 1961 – 30 June 1962

57

1 July 1962 – 30 June 1963

58

1 July 1963 – 30 June 1964

59

After 30 June 1964

60

Condition of release — terminal medical condition The expression “terminal medical condition” has the meaning given by SISR reg 6.01A (reg 6.01(2)). A terminal medical condition exists in relation to a person at a particular time if the following circumstances exist: (a) two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period (the certification period) that ends not more than 24 months after the date of the certification, and (b) at least one of the registered medical practitioners is a specialist practising in an area related to the illness or injury suffered by the person (c) for each of the certificates, the certification period has not ended (reg 6.01A). If a member satisfies this condition of release, the member’s benefits in the fund which have accrued up to that point in time become unrestricted non-preserved benefits and can be accessed at any time and in any form. Any additional benefits accrued by the member while the certification period is current also become unrestricted non-preserved benefits. The certification period is the period referred to in reg 6.01A(a) (see above) within which a registered medical practitioner has certified that the member is likely to die. Benefits covered by the condition of release retain their unrestricted non-preserved status even where they are not accessed by the member.

Any benefits which are accrued after the certification period ends are not covered by the condition of release, and another condition of release would need to be satisfied in order for these benefits to be accessed. Condition of release — post-preservation age non-commutable income stream This condition of release allows a member of a superannuation fund (or RSA holder) who has reached preservation age to access his/her PBs and/or RNPBs in the fund (or RSA) without having to “retire” from gainful employment in the form of: • a non-commutable allocated annuity or allocated pension • a non-commutable annuity or pension, or • a transition to retirement income stream. Non-commutable allocated income streams and transition to retirement income streams A “non-commutable allocated annuity” and “non-commutable allocated pension” means a pension or annuity which meet the relevant standards (eg SISR reg 1.06(4) for allocated pensions, reg 1.05(2), (9) or (10) for an annuity). A “transition to retirement income stream” (TRIS) means an account-based income stream that meets the standards of reg 1.05(11A) or reg 1.06(9A) and, from 1 July 2017, that meets the standards in reg 1.06A (see ¶3-390). In addition, the total amount of pension payments in any year is limited to a maximum amount of no greater than 10% of the account balance at the start of each year (reg 6.01(2)). The standards are discussed in ¶3-390. A restriction applies to both types of income streams so that where the income stream is commuted, the resulting benefit cannot be taken in cash. The following exceptions permit the benefit resulting from a commutation to be cashed where: • the annuitant/pensioner has satisfied a condition of release with a “nil” cashing restriction (see “SISR Sch 1 — conditions of release and cashing restrictions” above) • the commutation is to cash an UNPB • the commutation is to pay a superannuation contributions surcharge • the commutation is to give effect to a payment split under the family law • the commutation is to make a payment for the purpose of giving effect to an ATO release authority under the ITAA97 in connection with excess contributions tax (reg 6.01(2), definition of “noncommutable allocated annuity”, para (b)) (¶6-600). In addition, the commutation restriction above does not prevent commutations for the purpose of returning a benefit to the accumulation phase or to purchase another non-commutable income stream. Where a commuted annuity or pension originally contained more than one category of benefits (eg PB, RNPB and UNPB), the trustee (or annuity provider) must determine the preservation components of the resulting superannuation benefit (or ETP before 1 July 2007) from the commutation in accordance with reg 6.22A, ie in the following order — UNPBs, RNPBs and PBs (see example below). UNPBs and RNPBs are fixed dollar amounts which are known at the commencement of the income stream, and the payment amounts made out of the income stream up to the time of commutation will also be known. Therefore, by following the cashing order in reg 6.22A, the trustee (or annuity provider) will be able to determine the preservation components of a commutation superannuation benefit (or resulting superannuation lump sum). Example: commutation of a non-commutable allocated pension Alison commences a non-commutable allocated pension from a superannuation fund. The pension has an opening account balance of $100,000, made up of $10,000 UNPBs, $20,000 RNPBs and $70,000 PBs.

After three years, Alison decides to return to full-time work and commutes the pension by rolling back the account balance to the accumulation phase. At the time of the commutation, the account balance of the pension is $85,000, with $25,000 having been paid out as pension income payments. The $85,000 represents a superannuation benefit. To ascertain the preservation status of the commutation benefit, the trustee (allocated pension provider) should apply the order for cashing of benefits set out in reg 6.22A. Accordingly, the $25,000 of income payments from the pension will consist of $10,000 of UNPBs and $15,000 of RNPBS, and the superannuation benefit of $85,000 will consist of the remaining $5,000 of RNPBs and $80,000 of PBs.

The ATO’s view is that reg 6.22A applies on a whole of fund level only where a member has a single interest in the fund. If a member has two or more interests, reg 6.22A applies separately to each interest. Where an income stream contains benefits in more than one category, the trustee (or annuity provider) may alter the benefit category provided this does not result in an increase in the amount of UNPBs or a decrease in the amount of PBs (reg 6.16). This enables the trustee (annuity provider) to reclassify UNPBs and RNPBs as PBs, thus avoiding the need to determine the preservation components of a superannuation benefit resulting from a commutation. Non-commutable annuity and non-commutable pension A “non-commutable annuity” and “non-commutable pension” are defined to mean benefits which meet the minimum standards in reg 1.05(2), (9) or (10) and 1.06(2), (7) or (8), respectively (ie the standards relating to lifetime, life expectancy and market linked annuities and pensions), except that where the annuity or pension is commuted within the six-month cooling-off period which applies to these types of products, the resulting superannuation benefit cannot be cashed. The exceptions to this restriction allow a resulting superannuation benefit to be cashed where the annuitant/pensioner has satisfied a condition of release of benefits with a “nil” cashing restriction, or where the purpose of the commutation is to cash an UNPB. The restriction on commutation above does not prevent commutations within the six-month period for purposes other than to cash the resulting superannuation benefit. For example, commutation is permitted where the resulting benefit is rolled over or transferred within the superannuation system (ie to return a benefit to the accumulation phase or to purchase another income stream). Where the benefit is rolled over or transferred, it will retain its preservation status so that the annuitant/pensioner can only access the PBs or RNPBs when a condition of release with a “nil” cashing restriction is satisfied, or a condition of release is met which allows the benefit to be cashed in a form permitted under Sch 1 (reg 6.18; 6.19). Alternatively, where the non-commutable annuity or pension is commuted within the six-month period, the resulting benefit may be used to purchase another non-commutable pension or non-commutable annuity or a non-commutable allocated annuity or pension. In addition, under the minimum standards as noted above for these types of income stream products, commutation is also allowed outside the six-month period for certain specified purposes (eg to pay a superannuation contributions surcharge, to give effect to a superannuation benefit payment split under the family law). Where a commuted annuity or pension originally contained more than one category of benefits (eg PB, UNPB and RNPB), the trustee (or annuity provider) must determine the preservation components of the resulting benefit from the commutation in accordance with the SISR as discussed above in relation to a non-commutable allocated annuity or pension. Annuity providers subject to the SISR payment standards Because annuity providers are not subject to the SISR payment standards, the definitions of “noncommutable allocated annuity” and “non-commutable annuity” specifically provide that the payment standards for regulated superannuation funds under reg 6.16; 6.18; 6.19 and 6.22A apply to these noncommutable annuities. This ensures that the outcomes described above, in relation to the form and the order in which benefits can be cashed and the ability of annuity providers to alter the preservation category of benefits, apply equally to both regulated superannuation funds and annuity providers. Condition of release — permanent incapacity and temporary incapacity A member is taken to be suffering “permanent incapacity” if a trustee of the fund is reasonably satisfied that the member’s ill-health (whether physical or mental) makes it unlikely that the member will engage in

gainful employment for which the member is reasonably qualified by education, training or experience (SISR reg 1.03C). A trustee is not required to assess the extent of the incapacity at the time the member ceased gainful employment. That is, the full extent of the incapacity may have developed at some later time and the trustee’s decision should take account of these developments. Where a member settles a total and permanent disability (TPD) claim, including a settlement conciliated through the Superannuation Complaints Tribunal, the member’s PBs will include the settlement amount and can be cashed under the permanent incapacity condition of release only where the trustee is reasonably satisfied that the member is unlikely because of ill-health ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience. “Temporary incapacity”, in relation to a member who has ceased to be gainfully employed (including a member who has ceased temporarily to receive any gain or reward under a continuing arrangement for the member to be gainfully employed), means ill-health (whether physical or mental) that caused the member to cease to be gainfully employed but does not constitute permanent incapacity. As noted in SISR Sch 1 above, cashing restrictions apply in relation to this condition of release. It is not necessary for the member’s employment to fully cease. Benefits may be paid where a member makes a partial return to gainful employment while incapacitated, provided that the member’s remuneration plus the temporary incapacity benefits do not exceed the member’s remuneration at the time the member became ill. Condition of release — termination of employment A member may cash his/her PBs and RNPBs from a regulated superannuation fund upon terminating employment (eg upon resignation, retrenchment or dismissal prior to retirement) with a standard employer-sponsor if the benefits are less than $200 at the time of the termination and cashing is permitted by the trust deed of the fund. A standard employer-sponsor is an employer that contributes to the fund (or has ceased only temporarily to contribute) wholly or partly pursuant to an arrangement between the employer and the trustee of the fund (see SISR Sch 1, item 104 above). In other cases (eg the benefits are more than $200), the member may access his/her PBs and RNPBs upon termination of employment with an employer who had, or any of whose associates had, at any time contributed to that fund in relation to the member. The member’s RNPB relating to the employer will become an UNPB, which are accessible at any time. The member’s PB can only be paid in the form of a non-commutable life pension or non-commutable life annuity (see SISR Sch 1, item 108 above). Condition of release — temporary resident permanently departing Australia A temporary resident departing Australia in the circumstances prescribed in SISR reg 6.20A or 6.20B can request to withdraw his/her benefits. A compulsory cashing rule applies if the temporary resident is a member of a regulated superannuation fund that is not an unfunded public sector superannuation scheme and a voluntary cashing rule applies if the fund is an unfunded scheme. A payment to the ATO by the trustee of a regulated superannuation fund under the Superannuation (Unclaimed Money and Lost Members) Act 1999 in relation to the superannuation interest of a former temporary resident is also a condition of release (¶3-286). Condition of release — severe financial hardship A person is taken to be in “severe financial hardship”, if the trustee is satisfied (based on written evidence from the relevant government department or authority responsible for administering income support payments) that: • the person had been receiving “Commonwealth income support payments” (as defined in reg 6.01(1), eg an income support supplement, a service pension, or a social security benefit or pension, or a drought relief payment) for a continuous period of at least 26 weeks and was in receipt of payments of that kind on the date of the written evidence, and is unable to meet reasonable and immediate family living expenses (reg 6.01(5)(a)), or • for a person who has attained his/her “preservation age” (see above) plus 39 weeks — the person has

received Commonwealth income support payments for a cumulative period of 39 weeks after attaining the relevant preservation age and was not gainfully employed on a full-time or part-time basis on the date of application for early release of the preserved or restricted non-preserved benefits (reg 6.01(5)(b)). The written evidence provided for under reg 6.01(5)(a) is ineffective if it is dated more than 21 days before the date of the person’s application to the trustee for release of benefits (reg 6.01(5A)). If a person meets the condition of release in reg 6.01(5)(a), the cashing restriction, in each 12-month period (beginning on the date of first payment), is a single lump sum not less than $1,000 (except if the amount of the person’s preserved benefits and restricted non-preserved benefits is less than that amount) and not more than $10,000. There is no cashing restriction if reg 6.01(5)(b) is met. Condition of release — compassionate grounds A person must apply to the ATO (or, before 30 June 2018, the Chief Executive Medicare) for a determination that an amount of the person’s preserved benefits or restricted non-preserved benefits in a specified superannuation entity be released on “compassionate grounds” because the person does not have the financial capacity: (a) to pay for “medical treatment” (defined in the SISR as treatment covering life-threatening illnesses or to alleviate acute or chronic pain or mental disturbance: reg 6.19A(3), (4)) or medical transport for the person or a dependant (b) to enable payments to prevent foreclosure by a mortgagee or the exercise of an express or statutory power of sale over the family home (c) to pay for home and vehicle modifications to accommodate the special needs of a severely disabled person or dependant (d) to pay for expenses associated with the person’s palliative care, in the case of impending death (e) to pay for expenses associated with a dependant’s palliative care, death, funeral or burial, or (f) to meet expenses in other cases where the release is consistent with a ground mentioned in items (a) to (e), as the Regulator determines (reg 6.19A(1)). Where the condition of release is met, the benefit must be released as a single lump sum not exceeding an amount that is determined in writing by the Regulator to be reasonably required, based on the nature of the hardship and the person’s financial capacity. Other cashing restrictions apply for ground (b) (see the table under “SISR Sch 1 — conditions of release of benefits” above). The ATO must give a copy of its written determination to both the member who applied for the early release of benefit and the trustee of the superannuation entity or RSA provider. In Flanagan v APRA 04 ESL 17, the Federal Court upheld APRA’s decision to reject a member’s application for early release of preserved benefits on compassionate grounds as the purpose of the application was to extinguish a child support debt which had threatened the seizure of his principal residence. In Collier & Collier v First State Super Trustee Corporation 98 ESL 14, a consent order by the Family Court to release benefits on the grounds of severe financial hardship did not enable the Federal Court to order the release of benefits as this did not come within the prescribed SISR conditions. The ATO’s guidelines on the process and administration of the release of benefits on compassionate grounds from 1 July 2018 may be found in CRT Alert 058/2018. Condition of release — former lost members with small benefits A superannuation fund member who was previously “lost” (¶3-380), and whose benefit in the fund is less than $200, may cash his/her benefit with no restriction (SISR Sch 1, item 111). Condition of release — release of benefits under ATO release authority In specific circumstances, the ATO may issue a release authority to a superannuation provider (fund) for

a specified amount of an individual’s benefits to be released by the fund to the ATO in conjunction with an excess concessional or non-concessional contributions determination (¶6-520, ¶6-565), or an FHSS determination (¶6-385), or a Division 293 tax assessment (¶6-400). A separate scheme also enables an individual to give a release authority issued by the ATO in connection with the payment of a Division 293 tax debt account discharge liability to a superannuation provider (¶6400). The release conditions and the circumstances in which such release authorities arise are set out in items 111A and 111B for superannuation funds and items 208A and 208B for ADFs (see “SISR Schedule 1 — conditions of release of benefits” above), and are discussed in ¶6-400 and ¶6-640. Condition of release — release of benefits to a provider of a KiwiSaver Scheme A condition of release allows a superannuation fund to release money to a former resident of Australia who has: (a) moved permanently to New Zealand, and (b) nominated a provider of a KiwiSaver Scheme for the purposes of the release (SISR Sch 1 item 113A). A cashing restriction ensures that the amount of the former resident’s withdrawal benefit in the fund is paid as a single lump sum. If the fund subsequently receives any combination of contributions, transfers and roll-overs after cashing the benefits, the fund must ensure that the released amount is cashed. Condition of release — release of benefits to acquire deferred superannuation income streams SISR Sch 1 item 109A sets out a condition of release that permits a superannuation fund member to acquire an interest in a deferred superannuation income stream that meets pension and annuity standards in SISR reg 1.06A(2) using the member’s preserved and restricted non-preserved superannuation benefits. This enables deferred superannuation income streams (also referred to as “innovative income streams”) to be purchased while a member is still in the accumulation phase on potentially more attractive terms than those available when a member reaches retirement age. The meaning of deferred superannuation income stream is discussed in ¶3-390. The reg 1.06A standards are intended to cover a range of lifetime products that do not meet the existing annuity and pension standards in SISR reg 1.06(9A) (for pensions) and 1.05(11A) (for annuities). Under the reg 1.06A standards, the income streams are required to be payable for a beneficiary’s remaining lifetime, and income stream payments can be guaranteed in whole or part by the income stream provider, or determined in whole or part through returns on a collective pool of assets or the mortality experience of the beneficiaries of the asset pool. These income streams may also have a deferral period for annual payments and are permitted to be commuted subject to a declining capital access schedule and preservation rules. The SISR minimum standards for pensions and annuities (see ¶3-390) are important for tax purposes as explained below. Under the ITAA97, superannuation funds and life insurance companies which provide innovative stream products that comply with the pension standards in reg 1.06A and 1.06B (about the maximum commutation amount) are entitled to the income tax exemption (earnings tax exemption) on income from assets they hold to support these income streams where the member’s superannuation interest is in the retirement phase (¶7-153). Also, income streams which comply with the standards are superannuation pensions and annuities for tax purposes and income stream payments are treated as superannuation income stream benefits under the ITAA97 in the hands of the recipients and enjoy concessionally tax treatment (¶8-210, ¶8-240, ¶8-320). Eligible spouse contributions Eligible spouse contributions are PBs in a regulated superannuation fund. A spouse who has never been gainfully employed can only satisfy certain conditions of release (eg reaching age 65, death, financial hardship or compassionate grounds). However, for a spouse who has at any time been gainfully employed, whether before or during the membership of the fund, all of the other conditions of release in Sch 1 may apply.

Preservation and cooling-off rules The “cooling-off” provisions in the CR, which allow the return of a superannuation product, do not constitute a condition of release for SISR purposes. Contributions which are repaid under the cooling-off provisions must be transferred or rolled over to another superannuation entity and retained in the superannuation system until a condition of release is met. PB and RNPB roll-overs which are repaid under the cooling-off provisions must be transferred or rolled over to another superannuation entity and retained in the superannuation system until a condition of release is met. UNPB roll-overs may be paid to the member under the cooling-off provisions (¶4-400). Taxpayer alert on early access to superannuation TA 2009/1 warns about arrangements incorrectly offering people early release of their preserved superannuation benefits before retirement for a fee without meeting the SISR conditions of release. This alert reiterates previous ATO concerns about substantially similar arrangements as described in TA 2002/3. TA 2009/1 applies to arrangements having the following features. (1) A group of Australian residents have existing superannuation benefits held in funds. (2) A person or group of persons (the organiser) approaches such Australian residents, either directly or indirectly, to enter into an early release arrangement. The group may be composed of members of an ethnic community or share a common employer. (3) The organiser incorrectly informs such Australian residents that they can use the early release arrangement to gain immediate access to their superannuation contributions for use for personal or investment purposes. (4) The organiser purports to establish and operate an SMSF. (5) The organiser arranges the roll-over of superannuation benefits of the individual into the SMSF. (6) The superannuation benefits of the Australian residents are subsequently released from the SMSF by the organisers of the arrangement without a condition of release being satisfied. (7) A significant fee is normally charged upon the release of benefits, as much as 30% of the benefits improperly released. The ATO considers that these types of arrangements give rise to income tax and superannuation regulatory issues, including whether: (a) the organiser of the arrangement, the trustee of the SMSF or any other person may have committed a criminal offence, such as those under the SISA (b) the arrangement, or certain steps within it, may constitute a sham at general law (¶16-080) (c) the purported SMSF used in the arrangement was properly established for the provision of superannuation benefits upon retirement, as prescribed under the SISA (d) the release of the superannuation benefits under the arrangement was properly authorised by meeting a relevant condition of the release (e) any amounts received by the Australian resident that breach the preservation requirements have been properly included in their assessable income for the relevant income year (f) any penalties or interest charges should be applied to any understatement of such assessable income for the Australian resident (g) any fee or commission received by the organiser/s of an illegal early release arrangement should be included as assessable income for the relevant income year

(h) any fee or commission should not be allowable as a deduction by the Australian resident taxpayer for that income year (i) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of TAA Sch 1 Div 290 (¶16-070). [SLP ¶3-050]

¶3-284 Portability of benefits The SISR rules on the roll-over or transfer of a member’s benefits in a superannuation fund or ADF are set out in: Div 6.4 (reg 6.27B to 6.29) — see “General rules — roll-overs and transfers of benefits from a fund with consent”, and Div 6.5 (reg 6.30 to 6.38) — see “Compulsory roll-over and transfer of superannuation benefits”. The terms “roll-over” and “transfer” have often been used interchangeably for payments made within the superannuation system. The “superannuation system” comprises regulated superannuation funds, ADFs, RSAs, exempt public sector superannuation schemes (EPSSSs) (eg some schemes established under Commonwealth, state or territory government legislation), deferred annuities (an annuity offered by a life office which commences payment when the payment standards permit but no later than when the annuitant reaches age 65) and the Commissioner of Taxation (for payments made to a superannuation provider under the Superannuation (Unclaimed Money and Lost Members) Act 1999) (reg 5.01(1)). A benefit is “rolled over” if it is paid as a superannuation lump sum (other than by way of being transferred) within the superannuation system. The term “transferred”, in relation to a member’s benefits paid out of, or received by, a regulated superannuation fund or ADF, means paid to, or received from, another regulated superannuation fund or ADF or an RSA or an EPSSS otherwise than upon the member satisfying a condition of release under the SISR (¶3-280) (reg 5.01(1)). An employment termination payment from an employer, a transfer from an overseas superannuation fund and a capital gains tax exempt amount are examples of transfers or roll-overs outside the superannuation system. These payments are contributions and are subject to the SISR acceptance of contribution standards, while a roll-over and transfer of a benefit is not a “contribution” for the purposes of the standards (reg 1.03(1)) (¶3-220). General rules — roll-overs and transfers of benefits from a fund with consent Two general rules govern the roll-over or transfer of a member’s benefits from a fund to another superannuation entity (SISR reg 6.28, 6.29). First, except as otherwise provided by SISA or SISR or the Corporations Act 2001 and Corporations Regulations 2001, a member’s benefits in a regulated superannuation fund (or ADF) must not be rolled over from the fund unless: • the member has given consent to the roll-over to the trustee of the fund, or • the trustee believes, on reasonable grounds that the receiving regulated superannuation fund (or ADF, EPSSS, RSA provider) has received the member’s consent to the roll-over (reg 6.28(1)). “Consent” means written consent or any form of consent determined by the Regulator as sufficient in the circumstances (reg 6.27B). Second, except as otherwise provided by SISA or SISR or the Corporations Act 2001 and Corporations Regulations 2001, a member’s benefits in a regulated superannuation fund (or ADF) must not be transferred from the fund unless: • the member has given consent to the transfer to the trustee of the fund

• the trustee of the fund believes, on reasonable grounds, that the receiving regulated superannuation fund (or ADF, EPSSS, RSA provider) has received the member’s consent to the transfer • in the case of an eligible rollover fund (ERF: see (¶3-520), the trustee of the fund believes, on reasonable grounds, that the member has an interest in the receiving fund and that fund has received at least one contribution or roll-over in respect of the member within the 12-month period ending when the transfer is to be made • the transfer is to a “successor fund” (ie a fund that confers on transferee members equivalent rights in respect of the benefits transferred that the member had in the transferor fund: ¶3-360), or • for SISA s 29SAA, 29SAB, 387, 388 or 394, the trustee is required by an APRA prudential standard to transfer the benefits (see “Benefit transfers to MySuper accounts” below) (reg 6.29(1)). Benefit transfers to MySuper accounts As noted in the last dot point, a member’s benefits in a regulated superannuation fund may be transferred without consent where the fund trustee is required by an APRA prudential standard (see “APRA prudential standards and guidelines” below) to transfer the benefits for s 29SAA, 29SAB, 387, 388, or 394 purposes (¶9-120 and ¶9-130). These are transfers of accrued default member accounts as noted below. • Paragraphs 29SAA(1)(b) and 387(1)(b) require the trustee to take the action required under the prudential standards in relation to accrued default amounts where the trustee has sought MySuper authorisation but the member is not eligible to be in the fund’s MySuper product. • Section 29SAB requires action to be taken under the prudential standards if the authorisation to offer a MySuper product is cancelled under s 29U(1). • Section 388 requires the trustee to take the action required by the prudential standards if the trustee holds accrued default amounts and has not applied for MySuper authorisation before 1 July 2017. • Section 394 requires trustees that are not authorised to operate an eligible rollover fund to transfer the amounts held in existing eligible rollover funds to an authorised eligible rollover fund or a fund that offers a MySuper product in accordance with the prudential standards. The exception provided in reg 6.29(1)(d) is necessary as prudential standards are otherwise of no effect to the extent that they conflict with the SISR. Operating standards for transferee fund The trustee of a superannuation fund receiving the roll-over or transfer of a person’s benefits (receiving fund) must be an entity that is registered under SISA Pt 2B (¶3-490) (reg 6.28(2), 6.29(2)). In addition, the trustee of the receiving fund must not accept the roll-over or transfer of a person’s benefits if the trustee reasonably believes that the benefits being rolled over or transferred are made on the basis of a belief held by the trustee of the transferor fund that the receiving trustee has received the person’s consent to the roll-over or transfer, and the receiving trustee has not in fact received that consent (SISR reg 4.12). Compulsory roll-over and transfer of superannuation benefits Members of certain regulated superannuation funds may request the trustee of the fund to roll over or transfer his/her withdrawal benefits to another fund of the member’s choice in accordance with compulsory roll-over or transfer of benefit rules in SISR Div 6.5. A “withdrawal benefit” means, if the member voluntarily ceased to be a member, the total amount of the benefits that would be payable to the member, or to another superannuation entity or an EPSSS or an RSA in respect of the member, or to another person or entity because of a payment split of the member’s interest in the superannuation fund (SISR reg 1.03(1)). Division 6.5 does not apply: • to unfunded public sector superannuation schemes

• to member benefits paid as a pension (other than an account-based pension or an allocated pension or market-linked pension), or • in respect of a defined benefit component of a superannuation interest in a defined benefit fund, if the member holds the interest as an employee of an employer-sponsor of the fund (reg 6.30(2)). SuperStream — information and reporting Under SuperStream: • the Commissioner is required to keep a central register containing SuperStream information, including the bank details and an Internet protocol address (or other approved electronic service address) for prescribed eligible superannuation entities (SISA s 34Y, 34Z). • the Commissioner may make this information available to entities that must comply with the data and payment regulations and standards to ensure that payments and transmissions of data are sent to the correct destination. The information that is required to be provided to the Commissioner and the manner and timing for its provision are prescribed in SISR Pt 3B (reg 3B.02). • SISR Pt 6 Div 6.5 prescribes which superannuation transactions are subject to the superannuation electronic data and payment regulations and standards (SuperStream), and what information is required to accompany a request for a roll-over or transfer, a member registration and a contribution, and when that information must be validated (reg 6.33 to 6.38). SuperStream data and payment standards which have been made under SISA Pt 3B are discussed in ¶9780. Extension of SISR Pt 3B and Pt 6 Div 6.5 to SMSFs The operation of SuperStream has been extended to cover SMSFs (Treasury Laws Amendment (2018 Measures No 2) Regulations 2018: F2018L01373). In summary, SMSFs are included as prescribed eligible superannuation entities in reg 3B.01 and are subject to requirements in SISA s 34Z to provide information to the Commissioner for SuperStream purposes (Sch 1 amendments) and also subject to SISR Pt 3B regulations. SMSFs may be required to provide the Commissioner with their unique superannuation identifier, bank details for electronic payments, and an Internet protocol address or other digital address that can facilitate SuperStream communication. In practice, an SMSF is only required to obtain a digital address and provide it to the Commissioner if it receives a contribution (other than a contribution from a member or a related party employer), or a roll-over, or transfer of a member’s withdrawal benefit. If an SMSF never receives a contribution, roll-over, or transfer of a member’s withdrawal benefit, it is not required to provide the listed information to the Commissioner and consequently is not required to obtain a digital address. The extension of SuperStream to SMSFs commence on or after 30 November 2019 (ie SMSFs will not be required to do anything in relation to SuperStream before that date) and will apply to transfers and rollovers that are requested on or after 30 November 2019. Roll-over or transfer process — forms in SISR Sch 2A and 2B A member of a regulated superannuation fund or an ADF (transferring fund) may request the trustee of the fund, in writing, to roll over or transfer an amount that is the whole or a part of the member’s withdrawal benefit to another regulated superannuation fund or ADF, an RSA provider or an EPSSS (the receiving fund) (reg 6.33(1)). If the receiving fund is not an SMSF, the member may make the request to the transferring fund or the receiving fund. If the request is to roll over or transfer an amount that is the whole of the member’s withdrawal benefit, the member may use the form specified in SISR Sch 2A to make the request (see reg 6.33(2)). If the receiving fund is an SMSF, the member must make the request to the transferring fund, and the member may use the form specified in SISR Sch 2B if the request is to roll over or transfer the whole of the member’s withdrawal benefit (see reg 6.33(3)).

An ATO approved form will replace these forms in light of the extension of SuperStream to SMSFs. The roll-over or transfer process is summarised below: • the trustee of the receiving fund must tell the transferring fund about the request and give the information to the transferring fund (reg 6.33A) • the transferring fund must be able to electronically receive information in relation to the roll-over or transfer sent to it by the receiving fund in accordance with reg 6.33A and with any applicable standards made under SISA s 34K(3) or RSA Act s 45B(3); by the member, in accordance with any standards under s 34K(3) or s 45B(3); or by the Commissioner under reg 6A.03 (reg 6.33B) • the trustee of the transferring fund may request further information in order to process the request (reg 6.33C) • the trustee of the transferring fund must ask the ATO, using an electronic interface provided by the ATO, for validation of the member’s details (reg 6.33D) • for transfers of withdrawal benefits to an SMSF, the trustee of the transferring fund must, using an electronic interface provided by government, verify the SMSF and member’s details (reg 6.33E), and • subject to reg 6.35 and 6.38, the trustee must roll over or transfer the amount in accordance with the request (reg 6.34). The trustee may refuse to roll over or transfer an amount under reg 6.34 in the circumstances specified in reg 6.35. There will be a suspension or variation of the obligation to roll over or transfer a member’s benefit if: • APRA believes, on reasonable grounds, that the roll-over or transfer would have an adverse effect on the financial position of the fund or the interests of other members of the fund, or • the trustee of the fund has applied to APRA to suspend or vary the roll-over or transfer obligation by providing APRA with information about the fund’s financial position and the effect of roll-overs or transfers on the position, or on the interests of, other fund members (reg 6.36; 6.37; 6.38). Electronic portability request scheme Regulation 6A.01 of SISR prescribes the electronic portability request scheme under which a member of a regulated superannuation fund or ADF may give the Commissioner a request to roll over or transfer the member’s withdrawal benefits held in the fund (SISA s 34A). The electronic portability request scheme does not apply to withdrawal benefits held in an unfunded public sector superannuation scheme, an SMSF, or in respect of a defined benefit component of an interest in a superannuation fund if the member who holds the interest is an employee of an employersponsor of the fund. If the member’s request is in respect of a benefit being paid as a pension, the pension must be an allocated pension, an account-based pension or a market linked pension for it to be rolled over or transferred under the scheme. This is consistent with the paper portability arrangements (see “Compulsory roll-over and transfer of superannuation benefits” above). The key differences between the electronic scheme and the paper portability arrangements include the following: • the member applies electronically to the Commissioner, rather than in writing to the trustee of their fund • the Commissioner verifies the member’s identity, instead of the member providing certified copies of identity documents to the fund trustee, and confirms the ownership of the benefits and fund membership details • the Commissioner gives the request electronically to the fund trustee.

It is not compulsory for members to electronically request the roll-over or transfer of their benefits under the scheme. Members may continue to apply in writing to their fund under reg 6.33(1) to (3) if they do not wish to use the scheme or their request cannot be completed electronically. A member may not be able to complete an electronic portability request if: • the member’s withdrawal benefit is held in a fund exempted from the scheme • the member’s withdrawal benefit is an interest exempted from the scheme • the member’s withdrawal benefit details in a fund are not displayed on the ATO’s online service • the request is for the roll-over or transfer of part of the member’s benefit • the information required on the electronic request is not provided, or • the request is in respect of a benefit that the member is receiving as a pension other than an allocated pension, an account-based pension or a market linked pension. The Commissioner must: • confirm the member’s identity and the member’s ownership of the withdrawal benefit • confirm the member’s membership in the complying superannuation fund to which the roll-over or transfer is to be made, and • identify the account in the complying superannuation fund to which the roll-over or transfer is to be made (reg 6A.03). Portability form — Sch 2A of SISR Schedule 2A of the SISR sets out the prescribed portability form that members must use to request a transfer of the whole balance of their superannuation benefits from one fund to another, including an SMSF. The form Rollover initiation request to transfer whole balance of superannuation benefits between funds (NAT 71223), and ATO guidelines (eg proof of identity, compliance checklist) are available at www.ato.gov.au/Forms/Rollover-initiation-request-to-transfer-whole-balance-of-superannuation-benefitsbetween-funds. A separate portability form must be completed for each transfer, together with certified copies of proof of identity documents, and sent to either fund. The fund to which the balance is transferred must be: • able to accept the transfer • a complying and regulated fund (visit “Super Fund Lookup” to confirm this — this is an online tool available at superfundlookup.gov.au/LookupTool.aspx). The portability form cannot be used to: • transfer part of the balance of a superannuation account • transfer benefits without knowing where they are located • transfer benefits from multiple funds — a separate form must be completed for each transfer • transfer benefits where certain conditions or circumstances do not allow it, eg if there is a superannuation agreement under the Family Law Act 1975 in place • open a superannuation account, or • change the fund to which employers pay contributions (this must be done by completing a standard

choice form: ¶12-046). Consolidation of accounts — ATO electronic portability form The Commissioner has general administration of the electronic portability scheme (SISA Pt 3 Div 3) and related SIS TFN provisions (SISA s 6(1)(g); RSA Act s 3(1)(e)). APRA’s general administration of the portability arrangements under the SISA is unaffected by the scheme. Interaction of SIS portability rules and TFN rules The TFN rules in the SISA and RSA Act are discussed in ¶11-700 to ¶11-750. Certain superannuation fund members and RSA members may request the ATO to consolidate their accounts using the ATO “electronic portability form” (SISA s 34A; 299NA; 299U(2A); RSA Act s 39A; 138A; 144(2A)). For the purposes of the portability scheme, the Commissioner may request a member’s TFN (ie quotation of the member’s TFN on the form and disclose the member’s TFN to the transferring fund or RSA provider for the purposes of the scheme). The Commissioner’s disclosure of the member’s TFN to the transferring fund’s trustee would occur when the Commissioner electronically transmits the transfer request to the trustee. If the Commissioner discloses the member’s TFN to the transferring fund’s trustee, the member is taken to have quoted their TFN to the trustee for the purposes of the superannuation legislation and at the time the Commissioner discloses the TFN to the trustee. Members are not required to quote their TFN on the transfer request, but failure to quote the TFN may affect whether the Commissioner can pass on the member’s request to the transferring fund’s trustee. Members who do not wish to disclose their TFN on the transfer request may apply directly to their fund in writing to roll-over or transfer their benefits to another fund under the SISR Div 6.5 portability requirements. The quotation of TFN is not mandatory on the standard portability form in SISR Sch 2A or on the fund’s transfer form. Electronic portability scheme and TFN rules are taxation laws The SISA and RSA Act provisions relating to the electronic portability form and TFNs are “taxation laws” (as defined in ITAA97 s 995-1(1)) and, consequently, are subject to the administrative and offence provisions relating to taxation laws, including: • confidentiality of taxpayer information (TAA Sch 1 Div 355) • penalties relating to false or misleading statements (TAA Sch 1 Subdiv 284-B), and • offences relating to TFNs (TAA Pt III Div 2 Subdiv BA). APRA prudential standards and guidelines APRA’s Prudential Practice Guide SPG 280 sets out guidelines on the SISR payment standards, including the SISR requirements for the roll-over and/or transfers of a member’s benefits (www.apra.gov.au/superannuation-standards-and-guidance). Briefly, SPG 280 states that a member’s benefit must not be rolled over or transferred (in whole or in part) from an RSE, unless any of the following apply: (a) the member has given consent (b) the transfer is to a successor fund (c) the transfer is of an accrued default amount to a MySuper product pursuant to Prudential Standard SPS 410 MySuper Transition (d) the transfer is to an ERF pursuant to Prudential Standard SPS 450 Eligible Rollover Fund (e) the transfer is to the Commonwealth pursuant to the provisions of the Superannuation (Unclaimed Money and Lost Members) Act 1999, or

(f) the transfer is to a superannuation interest of the member’s spouse pursuant to the Family Law Act 1975 (SPG 280 para 29). For a list of all SPSs and SPGs issued by APRA, see ¶9-720. [SLP ¶3-050]

¶3-286 Payment of benefits The rules on payment of a member’s benefits from a regulated superannuation fund are set out in SISR Div 6.2 (reg 6.17 to 6.17C). The rules govern the manner, time and extent to which the benefit must be paid and, when making benefit payments, require the trustee to have regard to death benefit nominations (¶3-288) and any other duty that may arise in a particular case, such as giving or seeking information or restrictions under the family law (reg 6.17A; 6.17AA; 6.17B; 6.17C). Generally, a member’s benefits may be paid by being: • “cashed” under the compulsory and voluntary cashing rules in Div 6.3 (see below) • rolled over or transferred under Div 6.4 or 6.5 (dealing with the portability of member benefits: ¶3-284) • rolled over, transferred or allotted under Div 6.7 (dealing with spouse contributions-splitting amounts: ¶6-850) • cashed, rolled over or transferred in accordance with Pt 7A (dealing with superannuation interests subject to a payment split under the family law: ¶3-355), or • paid in accordance with the Family Law (Superannuation) Regulations 2001 (where the trustee pays, creates, transfers or rolls over a superannuation interest in satisfaction of a non-member spouse interest on marriage breakdown) (reg 6.17(2), (2A), (2B)). The restriction on the payment of a member’s benefits in reg 6.17(2) does not apply if, under a law of the Commonwealth, a state or a territory, a court makes a forfeiture order (however called) under a prescribed proceeds of crime law forfeiting part or all of the member’s benefits in the fund to the Commonwealth, a state or a territory (reg 6.17(2C)). In such a case, the member’s benefits must be paid in accordance with the forfeiture order (see “Forfeiture orders and confiscation orders” below). If a member of a regulated superannuation fund (or ADF) becomes a bankrupt (within the meaning of s 5(1) of the Bankruptcy Act 1966), the trustee of the fund is not prevented from paying to the trustee in bankruptcy an amount out of the fund that is property divisible among the member’s creditors within the meaning of s 116 of the Bankruptcy Act 1966 (SISA s 349A). Bankruptcy issues affecting superannuation fund members and their contributions are discussed in ¶15-300. The provisions dealing with the payment and release of benefits under the conditions of release in SISR (¶3-280) are prescribed operating standards which must be complied with at all times (¶3-820). Additionally, it must be noted that the payment of benefits which is not made in accordance with SISR can have serious taxation consequences (¶8-500). The taxpayer in Xiu Xu 2013 ATC ¶10-342 had withdrawn $62,500 from her SMSF to complete the purchase of a home after she had been made redundant from her job. The AAT found that the taxpayer did not satisfy the conditions of release claimed to be applicable for the withdrawal (viz, retirement, severe financial hardship, compassionate grounds and attaining preservation age) (¶3-280). The taxpayer had also failed to include the $62,500 as assessable income in her tax return under ITAA97 s 6-10 and 304-10 (payment in breach of legislative requirements). As the taxpayer also did not exercise reasonable care in relation to her income tax return, the AAT affirmed the administrative penalty of 25% of the shortfall amount imposed by the Commissioner under TAA Sch 1 s 284-75(1). Further, the AAT said that there were no compassionate, special or particularly unusual features of her case that justified exercising the discretion to remit any part of the penalty pursuant to TAA Sch 1 s 298-20.

APRA guidelines APRA’s Prudential Practice Guide SPG 280 — Payment Standards (June 2017) sets out guidelines on the SISR payment standards, including the SISR requirements for the roll-over and/or transfers of a member’s benefits (www.apra.gov.au/superannuation-standards-and-guidance) (¶3-280). For a list of other SPGs issued by APRA, see ¶9-720. Division 6.3 — compulsory and voluntary cashing rules Under SISR Div 6.3 the payment of a member’s benefits from a superannuation fund may be compulsory or voluntary, with special procedures and rules to deal with the superannuation entitlements of temporary residents who are departing or have left Australia permanently (see below). In addition, special rules govern the payment of a deceased member’s benefits as an income stream after the member’s death (see “Form of cashing of benefits after member’s death” below). The trustee of a regulated superannuation fund providing a pension under reg 1.06(2), (7) or (8) (ie lifetime pensions or market linked pensions (¶3-390)) must not pay the pension, or allow the pension to be commuted, except in accordance with those regulations. The ATO has issued alerts warning taxpayers of arrangements offering early access to superannuation benefits and arrangements involving non-commercial use of negotiable instruments to pay fund benefits (see “Taxpayer alerts” below). Compulsory cashing of benefits A member’s benefits in a regulated superannuation fund must be cashed, or rolled over for immediate cashing, as soon as practicable after the member dies (reg 6.21(1), (3)). This rule means that a member may voluntarily leave his/her superannuation entitlements in the fund until his/her death. The meaning of “cashed” is not defined (see “‘Cashing’ a benefit and making a payment in specie” below). Under reg 6.21, the member’s benefits may be cashed in one or more of the following forms: • in respect of each person to whom the benefits are cashed: – a lump sum, or an interim lump sum and a final lump sum (see example below) • subject to reg 6.21(2A) and (2B) (dealing with death benefit paid as income streams, see below): – one or more pensions, each of which is in the retirement phase – the purchase of one or more annuities, each of which is in the retirement phase (reg 6.21(2)). The requirement that a death benefit that is cashed as one or more pensions or annuities must also be a superannuation income stream in the retirement phase applies from 1 July 2017 (see “Pension or annuity must be in the retirement phase” below). Benefits may be cashed as an interim and final lump sum to facilitate an interim payment of the benefits, for example, if, at the relevant time, the member’s entitlement has not yet been finally determined. Example Paul and Robin are married and are the trustees and members of their SMSF. Robin passed away, and Paul is the beneficiary of Robin’s superannuation benefits and, as Robin’s husband, was also the dependant at the time of her death. Under reg 6.21(2)(a)(ii), the death benefits may be cashed in no more than two instalments, as an interim lump sum and a final lump sum.

It is the trustee’s responsibility to arrange for the timely cessation of any pension payments that were being paid to the deceased member and, where applicable, commence payment of any reversionary pensions or lump-sum payments to any persons nominated in binding death benefit nominations. As part of the trustee’s obligations to act in the best interest of members, there must be death benefit payment procedures and systems, including specifically covering the payment of augmented or antidetriment lump-sum death benefits to dependants and claiming a tax deduction under ITAA97 s 295-485

as discussed in ¶7-148 (Prudential Practice Guide SPG 280, para 58). For instance, if the fund’s policy is not to pay augmented death benefits and claim such a deduction, the reason for such a policy should be explicitly stated and disclosed to members. Under the compulsory cashing rule, the benefits may be rolled over as soon as practicable for immediate cashing (reg 6.21(3)). This allows the benefits to be cashed from a source other than the original fund (eg because the original fund does not offer pensions and the beneficiary wants to be paid a pension). A compulsory cashing rule also applies to a temporary resident member’s benefits in a regulated superannuation fund that is not an unfunded public sector superannuation scheme under reg 6.20A, while a voluntary cashing rule applies to the cashing of a temporary resident member’s benefits in a fund that is an unfunded public sector superannuation scheme under reg 6.20B (see “Temporary residents leaving Australia permanently” below). The payment of the member’s benefit is made as a single lump sum. If the trustee of a regulated superannuation fund is required to pay an amount to the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 for a person’s superannuation interest in the fund (¶8-400), the amount must be cashed in favour of the Commissioner as a lump sum (reg 6.20C). Form of cashing of benefits after member’s death The compulsory cashing of a deceased member’s benefits under SISR reg 6.21 is also restricted by reg 6.21(2A) and (2B), as summarised below. First, on the death of a member, the deceased member’s benefits can be cashed as a pension or to purchase an annuity for an entitled recipient only if, at the time of the member’s death, the entitled recipient: • is a dependant of the member, and • in the case of a child of the member: – is less than 18 years of age, or – being 18 or more years of age, is either financially dependent on the member and less than 25 years of age, or has a disability of the kind described in s 8(1) of the Disability Services Act 1986 (reg 6.21(2A)). Second, if benefits in relation to a deceased member are being paid to a child of the deceased member in the form of a pension under reg 6.21(2A), the benefits must be cashed as a lump sum on the earlier of: (a) the day on which the pension is commuted, or the term of the pension expires (unless the benefit is rolled over to commence a new annuity or pension), and (b) the day on which the child attains 25 years of age, unless the child has a disability of the kind described in s 8(1) of the Disability Services Act 1986 on the day that would otherwise be applicable under item (a) or (b) (reg 6.21(2B)). Pension or annuity must be in the retirement phase The requirement in reg 6.21(2)(b)(i) and (ii) (applicable from 1 July 2017, see above) that a death benefit which is cashed as one or more pensions or annuities must also be a superannuation income stream in the “retirement phase” operates in conjunction with the special treatment of a superannuation income stream being in the “retirement phase” for tax and SIS purposes and the application of the transfer balance cap regime from that date (¶6-430, ¶16-230, ¶16-530). Broadly, from 1 July 2017, a pension or annuity provider (eg a superannuation fund, RSA provider or insurance company) can only claim an earnings tax exemption in respect of a superannuation income stream that is in the retirement phase (¶7153). In most cases, a pension or annuity will be in the retirement phase when a superannuation income stream benefit is payable from it, or it is a deferred superannuation income stream or a transition to retirement income stream in certain circumstances (ITAA97 s 307-80(1): ¶16-230). This requirement from 1 July 2017 also means that the only income streams that can be paid to a

dependant beneficiary of a deceased member are those for which an entity can claim an earnings tax exemption. If a pension or annuity that is paid to a dependant ceases to be in the retirement phase, the interests supporting the income stream must be cashed out as a lump sum, or rolled-over and paid as a new pension or annuity that is in the retirement phase. An example is where a death benefits pension is paid to a dependant spouse who has already reached the limit of his/her transfer balance cap because of the person’s own superannuation interests. If the pension provider refuses to comply with a commutation authority that is issued under TAA Sch 1 Subdiv 136-B in respect of the superannuation income stream, the income stream would cease to be in the retirement phase (s 307-80(4)). In such a situation: • the provider would no longer be entitled to an earnings tax exemption in respect of a superannuation income stream, and • the pension or annuity would also cease to satisfy the compulsory cashing rules in reg 6.21(2)(b)(i) and (ii) (or RSAR reg 4.24(3)(b)(i) and (ii)) and the provider would have to cash the relevant benefits in another form. Voluntary cashing of benefits The general rules for the voluntary cashing of benefits are: • PBs and RNPBs may only be cashed if the member satisfies a condition of release (¶3-280) (reg 6.18; 6.19) • UNPBs may be cashed at any time (reg 6.20). The amounts of PBs or RNPBs that may be cashed cannot exceed the amount of PBs or RNPBs that the member had accrued and the amount of any investment earnings accruing on those benefits before 1 July 1999 at the time the condition of release was satisfied. The voluntary cashing of superannuation benefit rules do not apply to cashing of benefits in the event of the death of a member. In that case, the cashing rules are governed by reg 6.21 (see above). Form of benefit payment A member’s benefits may be voluntarily cashed: • where there is a “nil” cashing restriction attached to a condition of release (¶3-280), in one or more of the following forms: – one or more lump sums – one or more pensions – the purchase of one or more annuities • where there is a cashing restriction attached, in the form specified in the condition of release (reg 6.18(3); 6.19(3); 6.20(3)). Benefits may be cashed as two or more lump sum payments to facilitate an interim payment of the member’s benefits when the entitlement arises and a final payment of the remainder of the benefits when ascertained. This may be relevant if, at the time of a member’s entitlement, the fund’s actual earnings rate is not yet known since the fund’s last balance date and an estimated earnings rate was used for the calculation of benefits. Priority order where there is a cashing restriction If a member has satisfied a condition of release and there is a cashing restriction in respect of that condition, the trustee must give priority to cashing the benefits in the following order: • first — to unrestricted non-preserved benefits • second — to restricted non-preserved benefits

• third — to preserved benefits (SISR reg 6.22A). For an example, see “Condition of release — post-preservation age non-commutable income stream” at ¶3-280. Persons in favour of whom benefits may be cashed The governing rules of a superannuation fund must not permit a member’s benefits to be cashed after the member’s death other than in accordance with the payment standards prescribed in the SISR (SISA s 55A). Any rule inconsistent with the above is invalid to the extent of the inconsistency. Subject to certain exceptions, a member’s benefits in a fund may not be paid to a person other than the member or the member’s legal personal representative: • unless the member has died and the benefits are paid to either or both of the following: – one or more dependants of the deceased – the member’s legal personal representative, or • the benefits are paid to an individual, after the trustee has made reasonable enquiries and has not found a dependant or legal personal representative of the member (SISR reg 6.22(1) to (3)). The term “dependant” is defined inclusively in the SISA. A person ceases to be a “stepchild” for the purposes of being a “dependant” of the member under reg 6.22 when the legal marriage of their natural parent to the member ends (Interpretative Decision ID 2011/77). The inclusive definition means that that person may still qualify as a dependant if he/she has an “interdependency relationship” with the deceased, or was a dependant of the deceased within the ordinary meaning (ie financially dependent on the deceased), at the date of the member’s death (¶3-020). A general exception allows a member’s benefits to be cashed in favour of a person other than the member if the cashing is expressly permitted by the Regulator as an approved ancillary purpose under the sole purpose test (¶3-200) and the benefits are cashed to the extent of that approval (reg 6.22B). Other specific exemptions apply as below. • Where a superannuation fund receives an ATO release authority in respect of a member under TAA Sch 1 s 131-15 or s 135-40 (¶6-640), or equivalent ITAA97 provisions before 1 July 2018. In that case, the fund can cash the member’s benefits in favour of the Commissioner in accordance with the authority in satisfaction of the member’s tax liability (reg 6.22(4)). • To allow a superannuation fund to cash a member’s benefits in favour of the Commissioner if the member’s benefits are to pay an amount to the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶8-400) (reg 6.22(5)). • To allow superannuation funds to pay a member’s benefits in accordance with a court forfeiture order (see “Forfeiture orders and confiscation orders” below). For the meaning of “dependant” in the SISA, see ¶3-288. For other restrictions on the payment of a deceased member’s death benefits, see above. Trustees may need to take into account any relevant state or territory laws concerning provision of benefits for minors, including the trust law provisions. Temporary residents leaving Australia permanently A “temporary resident” means a holder of a temporary visa under the Migration Act 1958 (SISR reg 6.01(2)). Temporary residents may access their superannuation upon when they leave or have left Australia if they satisfy the rules prescribed in the SISR. Compulsory cashing — not an unfunded public sector superannuation scheme A compulsory cashing rule applies to a member’s benefit in a regulated superannuation fund that is not an

unfunded public sector superannuation scheme if: • the member: – was a temporary resident – is not an Australian citizen, New Zealand citizen or permanent resident – has left Australia • the member’s visa has ceased to be in effect, and • the trustee of the fund receives a request for cashing from the member and the conditions in reg 6.20A(2) or (3) as noted below are met (reg 6.20A(1), (1A)). A payment made under reg 6.20A is a departing Australia superannuation payment within the meaning of ITAA97 s 301-170 (¶8-400). The conditions under reg 6.20A(2) and (3) are: • the member’s withdrawal benefit in the fund is less than $5,000 and the trustee has received: – a copy of a visa, or evidence of a visa, showing that the member was a temporary resident but the member’s temporary visa has ceased to be in effect – a copy of the member’s passport showing that he/she has left Australia (reg 6.20A(2)) • the trustee of the fund is satisfied, based on a written statement from the Department of Immigration and Citizenship, that the member was a temporary resident but the member’s temporary visa has ceased to be in effect, and the member has left Australia (reg 6.20A(3)). Where the above conditions are met, the benefits must be cashed within 28 days after the request is lodged: • as a single lump sum that is at least the amount of the member’s withdrawal benefit in the fund, or • if the fund receives any combination of contributions, transfers and roll-overs after cashing the benefits, in a way that ensures that an amount that is at least the amount of the member’s withdrawal benefit is cashed without requiring an additional application from the member. For the ways of giving evidence of a visa, see the Migration Regulations reg 2.17. The above process similarly applies to the compulsory cashing of a member’s superannuation benefits held in an ADF (reg 6.24A). Voluntary cashing — unfunded public sector superannuation scheme A temporary resident member’s benefit in a regulated superannuation fund that is an unfunded public sector superannuation scheme may be cashed if the trustee of the fund receives a request from the member and documentation evidencing the member’s visa and departure from Australia similar to those for compulsory cashing of benefits under reg 6.20A as described above (reg 6.20B). The benefits must be cashed: • as a single lump sum that is at least the amount of the member’s withdrawal benefit in the fund, or • if the fund receives any combination of contributions, transfers and roll-overs after cashing the benefits, in a way that ensures that an amount that is at least the amount of the member’s withdrawal benefit is cashed without requiring an additional application from the member (reg 6.20B(4)). A payment made under reg 6.20B is a departing Australia superannuation payment under ITAA97 (¶8400). “Cashing” a benefit and making a payment in specie

For the purposes of the benefit payment provisions in the SISR, the term “cashed” is not defined and it therefore has its ordinary meaning. “Cashing” necessarily involves the actual payment of cash, assets or other consideration for the benefit of the beneficiary. The term “cashed” suggests that the benefits need to be paid out of the superannuation system. It generally refers to the receipt of one or more lump sums, one or more pensions, or the purchase of one or more annuities. Consequently, transferring shares and cash to a taxpayer’s account from a deceased member’s account via a journal entry would not amount to “cashing” the benefits (Interpretative Decision ID 2002/141). The ATO’s view is that the above general rule reflects the ordinary meaning of the word “cashed” which, in the Macquarie Dictionary, means “… to give or obtain cash for (a cheque, etc)”. Therefore, there is a presumption arising from the use of that word “cashed” that a benefit, whether given in the form of a pension or lump sum will be paid in money (or money equivalent such as a cheque or electronic funds transfer). The ATO states that the definition of “lump sum” in SISR reg 6.01 (defined as including an asset) modifies the ordinary meaning of “cashed” where a benefit is paid as a lump sum. In that case, the “cashing” of a benefit may be paid in specie (subject to cashing restrictions, if any, attached to a condition of release in SISR Sch 1 in relation to the payment of that lump sum benefit). For example, if the condition of release that is satisfied relates to severe financial hardship or compassionate grounds (¶3-280), the benefit payment must be in cash. In summary, a payment of benefits in specie is permitted in the case of lump sum benefits because reg 6.01(1) expressly provides that a “lump sum” includes an asset. By contrast, as there is no equivalent modification relevant to the payment of pensions, a pension (or other income stream payment) cannot be made in specie (NTLG Superannuation Subcommittee, 8 May 2006). There may be tax consequences for the payer’s superannuation fund when benefits are paid in specie (¶7-130). SMSFD 2011/1 states that a benefit payable with a cheque or promissory note is “cashed” for the SISR purposes at the time the cheque or note is received by the member or beneficiary if: • at the time of receipt, money is payable immediately and available for payment • the trustee takes all reasonable steps to ensure that the money is paid promptly • the money is paid, and • the SISR requirements are otherwise satisfied. Forfeiture orders and confiscation orders From 9 August 2011, the restrictions on how a member’s benefits in the fund may be paid as prescribed under SISR reg 6.17 do not apply if a court makes a forfeiture order (however called) forfeiting part or all of the member’s benefits in the fund to the Commonwealth, a state or a territory under a law of the Commonwealth, a state or a territory mentioned in the table below (reg 6.17(2C)): Item

Law

Provision(s)

Commonwealth 1.1

Proceeds of Crime Act 2002

Section 47, 48, 49, 92

New South Wales 2.1

Confiscation of Proceeds of Crime Act 1989

Subsection 18(1)

2.2

Criminal Assets Recovery Act 1990

Section 22

Victoria 3.1

Confiscation Act 1997

Division 1 of Part 3 Section 35 Part 4 Subsection 157 (6)

Queensland 4.1

Criminal Proceeds Confiscation Act 2002

Section 58, 58A, 151 Part 5 of Chapter 3

Western Australia 5.1

Criminal Property Confiscation Act 2000 Section 30, to the extent that it applies to confiscation under section 6 in satisfaction of a person’s liability under section 20 Section 30, to the extent that it applies to confiscation under section 7

South Australia 6.1

7.1

Criminal Assets Confiscation Act 2005

Section 47

Tasmania Crime (Confiscation of Profits) Act 1993

Section 16

Australian Capital Territory 8.1

Confiscation of Criminal Assets Act 2003

Section 54, 58, 62, 67

Northern Territory 9.1

Criminal Property Forfeiture Act 2002

Section 75, 76, 80, 96, 97, 99

A forfeiture order includes a confiscation order. The exception in reg 6.17(2C) is to allow the trustees of regulated superannuation funds to recognise a forfeiture order issued under Commonwealth, state or territory proceeds of crime legislation and enable the proceeds of crime to be recovered from a member’s superannuation (ie the member’s entitlements represented by the minimum benefits), as reg 6.22 would otherwise prevent the member’s benefits in the fund from being cashed in favour of a person other than the member or the member’s legal personal representative (¶3-286). The exception is limited to forfeiture orders because these recover profits from a crime for which a person has been convicted and require the court to make a finding that the person’s superannuation is the proceeds of crime. It does not allow other court orders to be imposed on superannuation that may impose a fine or recover amounts not directly linked to a crime because this would result in the loss of superannuation savings genuinely contributed for retirement income purposes.

Taxpayer alerts Unauthorised benefit releases TA 2009/1 warns about arrangements for unlawful access to superannuation benefits for which a significant fee is normally charged upon the release of benefits to an SMSF (¶3-280). Payments of benefits via non-commercial use of negotiable instruments TA 2009/10 “Non-commercial use of negotiable instruments involving SMSFs” warns about arrangements involving non-commercial use of negotiable instruments to pay a benefit from or make a contribution to an SMSF. The ATO is concerned that some SMSF trustees and members are attempting to use negotiable instruments in a non-commercial and contrived manner to artificially avoid liquidity problems, change the timing of transactions or to obtain taxation advantages. The ATO considers that arrangements of this type give rise to regulatory and taxation issues, being whether: SIS regulatory issues • the arrangement, or some step within it, may be a sham at general law • the benefit payment standards may not be met • the contributions standards (¶3-220) may not be met • the restriction on funds acquiring assets from related parties (¶3-480) may apply • the restriction on funds providing financial assistance to a member or relative of a member (¶3-430) may apply • the in-house asset provisions (¶3-450) may not be met. Taxation issues • the arrangement, or some step within it, may be a sham at general law (¶16-080) • the arrangement attempts to change the timing of a contribution in order to reduce or eliminate liability for excess contributions tax under ITAA97 Div 292 (¶6-500) • any assessable income may arise to one of the parties and, if so, at what time such income may arise • income tax deductions may be available to one of the parties and, if so, at what time such deductions may be allowable • the general anti-avoidance provisions in ITAA36 Pt IVA may apply to the arrangement or some part of it (¶16-080), and • any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of TAA Sch 1 Div 290 (¶16-070). [SLP ¶3-050]

¶3-287 Illegal early release of superannuation benefits The illegal early release (IER) of superannuation benefits may take various forms and it generally refers to the situations where a member of a regulated superannuation fund accesses or attempts to access his/her preserved benefits in the fund without satisfying a condition of release set out in SISR Sch 1 (¶3280). Typically, IER occurs where a member’s superannuation benefits held in APRA-regulated funds are illegally accessed under the guise of transfers or roll-overs to SMSFs. This passes control of the money

from an APRA-licensed trustee into the hands of a scheme promoter or participant so that the money can illegally leave the superannuation system via an SMSF. The two main types of IER schemes involve: • the fraudulent use of a member’s identification by an unrelated party to steal superannuation benefits without the member’s knowledge or consent, and • a member participating with a promoter to access the member’s benefits. In many cases, the participant ends up with a considerably reduced benefit after fees, tax and penalties are deducted. APRA and the ATO, as Regulators of the superannuation industry, have provided guidance on process that may be implemented to manage the risks of IER of superannuation benefits (see “Process to manage the risk of early release of superannuation benefits” below). Taxpayer Alert TA 2009/1 has also warned about arrangements offering early access to superannuation benefits using SMSFs (¶3-280). Generally, as a promoter is often not a trustee of a purported superannuation fund that is used in a scheme, this limits the Commissioner’s ability to pursue SISA penalties against those involved. This means that promoters of IER schemes are principally dealt with by the ASIC relying on its powers in the Corporations Act regarding the provision of unlicensed financial advice. Additionally, in the absence of specific SISA provisions on the promotion of IER schemes, the Commissioner’s compliance and enforcement methods under the SISA focus on disrupting or closing down schemes from operating, such as freezing the SMSF’s assets under SISA s 264.

To address the above inadequate enforcement powers, s 68B now expressly prohibits the promotion of IER schemes and imposes civil and criminal penalties on promoters of a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund contrary to the SISR payment standards (see below). Note that s 68B applies to complement the other powers that are conferred on the Regulators by SISA for compliance regulation which remain unchanged (¶3-850). Penalties for promotion of IER schemes 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 SISA s 31(1) (s 68B(1)). The payment standards are the preservation and payment of benefit rules, as discussed in ¶3-280 to ¶3-286. Section 68B(1) is a civil penalty provision (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 for contravening or being involved in a contravention of the provision (¶3820). The term “person” is not defined in SISA; therefore, it takes its meaning from s 2C of the Acts Interpretation Act 1901 to include a body corporate and an individual. Promote and scheme The terms “promote” and “scheme” have the meanings in s 68B(3). Whether a person has promoted a scheme will be determined on a case-by-case basis having regard to the whole of the circumstances. The explanatory memorandum (to Act No 11 of 2014 which inserted s 68B) states that is determined on an objective basis, considering the whole of the circumstances, and the factors which may indicate that a person has promoted a scheme include, but are not limited to the following: • the person markets or encourages interest in the scheme (this may be marketing directly in the conventional sense, or otherwise. It includes 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 devises or designs the scheme or part of the scheme (this includes setting up the legal or financial arrangements of the scheme, constructing or commissioning the production of documents 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 (eg providing some or all of the necessary paperwork for participants to sign or directing them to complete the necessary documents) • the person has provided information to the participants as to how to undertake activities which ultimately result in the individual accessing his/her superannuation benefits without meeting a condition of release, and • the person undertakes the relevant activities with the intention that he/she will result or are likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards. Whether or not a person has received consideration in respect of the scheme is not determinative of whether a person has promoted the scheme. The fact that a person has received consideration in respect of a scheme is an indication that they may have promoted a scheme, although 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 an amount for tax will be remitted to the ATO on behalf of the participant in the scheme where the amount so deducted for tax are never remitted to the ATO. In some cases, a promoter may take all of the superannuation benefits and not pass on any amount to a participant.

In identifying whether a “scheme” exists, consideration should be given to a continuum, a sequence of events, a course of action or a course of conduct, rather than focusing on particular transactions at particular points in time (para 1.13–1.16). Likely to result Section 68B(1) is breached 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. 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 (see the example below). According to the explanatory memorandum (EM), 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 (para 1.19). Example — from the EM ABC Superannuation Fund receives a roll-over request from John, a member of Smith Superannuation Fund, an SMSF. ABC Superannuation Fund, as part of the roll-over 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 roll-over request. The Commissioner obtains information under his formal powers from ABC Superannuation Fund that identifies that Mr X is behind the roll-over 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 s 68B may still be sought by the Commissioner.

Process to manage the risk of early release of superannuation benefits With respect to IER involving transfers and roll-overs into SMSFs, APRA and the ATO have written to all trustees to provide guidance on additional processes that trustees should consider implementing to assist in verifying the validity of these transfer or roll-over requests (APRA letter Ref No IER, 5 February 2010). The attachment to the APRA letter sets out suggestions that trustees should consider integrating into their benefit payment processes to assist in verifying the validity of transfer/roll-over requests to SMSFs so as to minimise the risk of illegal early release and identification (ID) fraud (see below). APRA has cautioned that: • the suggestions are generic and do not take into account a trustee’s discretion in the carrying out of transfer/roll-over requests • the suggestions do not prevent trustees from carrying out additional checks or alternative processes that provide an equivalent or greater level of assurance, and • most importantly, these checks do not diminish the responsibility of a trustee to safeguard members’ superannuation benefits. Extracts from the attachment, including a flowchart of the suggested process, are noted below. Flowchart of suggested process

Note: • Trustees (and/or administrators) should consider starting this process as soon as possible after receiving a transfer/roll-over request to allow time to resolve issues and/or report concerns if appropriate. • Complete the checks for transfer/roll-over request for all SMSFs, paying particular attention to transfer/roll-over requests for new SMSFs. New SMSFs are displayed in Super Fund Lookup (SFLU) with a status of “Registered — status not determined” (see below). • Any issues identified while undertaking the checks should be recorded. • Trustees (or fund representatives) should attempt to resolve issues by contacting the member concerned where appropriate. • If after this contact, the trustees suspect that there is illegal activity being conducted, the trustees should: – contact the ATO and AUSTRAC (Australian Transactions Reports and Analysis Centre: see below) to report illegal early release of superannuation, and – contact state police, APRA, AUSTRAC, ASIC and ATO in the case of ID fraud. • If the trustees do not encounter any issues, the transfer/roll-over request can be completed in accordance with the fund’s normal procedure for transfers and roll-overs. Proof of identity (POI) checks on a member The purpose of POI checks is to reduce the risk of ID fraud. Check

What to look for

What this may mean

Check the member Match the member’s information with information information stored on file: • name • member number • date of birth • signature • passwords.

Failure to match the information could identify someone trying to impersonate their member. That person may not have all the details or the most recent details provided by the member.

Check for forged documents

If the documents do not meet the standards or they contain indicators of

Check if the identification documents meet the standards.

Check the contact details

Refer to the issuing authority (eg state transport departments) for guidance on standards and what to look for in identifying fraudulent copies.

forgeries, the documents may be fraudulent.

Check for repeated use of numbers where the numbers should be different (eg document ID, account number, client ID) in documents.

Someone may be forging documents. These may be copied, resulting in key ID numbers being the same in each copy.

Check for unusual repeated use of a Justice of the Peace (JP) for transfers/roll-over requests from different members.

Someone may be forging documents using a copy of a JP certification.

Check if the only contact details provided is a PO Box and/or a mobile phone number.

Someone may be trying to hide their identity by providing details which make them harder to trace.

Prevention measures • Consider limiting the amount of personal information that the fund provides in communications to members (eg on the member statement). Distribution of personal information in this way exposes that information to the risk of being stolen. • Stolen information can be used by someone to impersonate the member thereby compromising the integrity of member POI checks. • Refer to federal and state authorities. Super Fund Lookup — confirm the SMSF is a regulated SMSF The Super Fund Lookup (SFLU) which is maintained by the ATO contains publicly available information about all superannuation funds that have an ABN, including funds regulated by the ATO and APRA. The SFLU address is superfundlookup.gov.au (¶18-730). The purpose of SMSF checks is to verify that the transfer/roll-over is to a regulated superannuation fund. APRA-regulated funds are permitted to transfer/roll-over benefits to an SMSF only if it is a regulated SMSF. Check the payment details The purpose of checking the transfer/roll-over payment is to verify that the payment is valid and is being made to an SMSF. IER promoters often seek to ensure payments are made directly to them so that they can take their “cut” before passing the remainder to the member. Trustees must always ensure that the payment is made to an SMSF. To reduce the risk of a transfer/roll-over being paid to an entity that is not a regulated superannuation fund, trustees may request a copy of the fund’s bank account statement or account establishment confirmation documents as part of the standard documents for the transfer/roll-over request. Check

What to look for

What this may mean

Check the bank account details

Check that the name of the SMSF on SFLU matches the name on bank documents.

Failure to match the bank account details may mean that an SMSF does not exist or there is a possible passingoff attempt on the SMSF.

Cheque payments

Check the name on the cheque is the name of the SMSF as it appears on SFLU.

An IER promoter may seek to have the cheque paid directly so they can take their “fees” before giving the rest to the

Cross cheques issued by the fund and member. add “account payee only” to the cheque. This means that the cheque can only be paid to a financial institution account and should only be paid into the account of the payee on the cheque.

Electronic fund transfer (EFT) payments

Check the address to send cheque is the same as the contact address on SFLU.

An IER promoter may seek to have the cheque paid directly so they can take their “fees” before giving the remainder to the member.

Check the EFT details are the bank account details of the SMSF provided on the bank documents.

Failure to match the bank account details may mean that an SMSF does not exist or there is a possible passingoff attempt on the SMSF.

Check the Bank/State/Branch (BSB) Someone may be trying to make a number on EFT is for an Australian bank payment overseas which is very difficult account. to recover. Previous release enquiries

Check to see if the member has previously made enquiries for release on: • financial hardship grounds, and/or • compassionate grounds.

Someone may be seeking to transfer the money into an SMSF where they can access it, having failed to access the money legitimately.

Other APRA-regulated fund checks Trustees should identify, determine and undertake any additional checks which they consider appropriate to verify the validity of a transfer/roll-over request, including to other APRA-regulated funds. Trustees may decide to discuss the transfer/roll-over request with the member concerned to verify that the request is valid and that the member understands his/her responsibilities as a trustee of an SMSF. Trustees may obtain further details to verify the validity of the request such as: • a copy of the SMSF’s trust deed • a copy of the ATO’s “New Trustee Letter” (which is also sent to new directors of corporate trustees and new trustees of SMSFs) • a copy of the SMSF trustee declaration under the SISA (for new trustees after 1 July 2007) • a printout from the ATO’s Australian Business Register (ABR) of the SMSF containing its membership information, and • where the member has a legal personal representative, a copy of the appointment instrument/authority to act for the member. Reporting issues and IER activities Report any unresolved issues to the relevant authority and/or Regulator, as below. Report to the ATO Fund trustees must report to the ATO and/or APRA if they detect an IER attempt, or they have any suspicions about a transfer/roll-over request to an SMSF, or they have any previous dealings with IER funds. Report to AUSTRAC, the police and members Superannuation funds (except SMSFs) are “reporting entities” under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and, among other requirements, fund trustees are required to

report “suspicious matters” to AUSTRAC. All identity theft and IER cases should be reported to AUSTRAC in accordance with the Act (¶15-140). A fund that becomes aware of an ID fraud attempt should report this to the relevant authorities — relevant state police, APRA, AUSTRAC and ASIC. The fund should also contact members who have been the victims of an ID fraud and these members should be encouraged to contact the relevant state police, ATO, financial institutions and any other superannuation funds they hold an account with.

¶3-288 Death benefit nominations — meaning of “dependant” The governing rules of a superannuation entity (other than an SMSF or excluded ADF) must not permit discretions which are exercisable under the governing rules of the entity to be exercised by a person other than the trustee, except in certain circumstances (SISA s 59: ¶3-150). The payment of death benefits to the beneficiaries or the estate of a deceased fund member is one of the more important exercise of trustee discretionary powers. Most superannuation funds permit members to make death benefit nominations in a non-binding manner. Generally, this would involve the members informing the trustee regarding their preferred death benefit recipients, and leaving the trustee to make the eventual decision on death benefit payments in light of all the relevant circumstances. Alternatively, the trustee may provide for greater certainty to members in making death benefit nominations in two mutually exclusive ways, pursuant to either s 59(1)(a) or 59(1A). The payment of death benefits from a superannuation fund is determined in accordance with the governing rules of the fund and not in accordance with the terms of the deceased’s will (McFadden v Public Trustee for Victoria [1981] 1 NSWLR 15 at 22). Therefore, this is ultimately a matter for the discretion of the trustee of the fund unless legislation or the governing rules provide otherwise. The trustees of superannuation funds cannot abrogate their responsibility in making decisions in the exercise of their fiduciary functions except as authorised under the governing rules of the trust or legislation. When undertaking their duties, trustees must act in good faith, responsibly and reasonably (Scott v National Trust [1998] 2 All ER 705 at 717). “Binding” death benefit nomination Under SISA s 59(1A), the governing rules of a superannuation entity may permit a member to give a notice to the trustee requiring the member’s benefits to be paid on his/her death to the legal personal representative or dependants. The acceptance of a member’s “binding” death benefit notice is permitted only if the trustee has given the member information that the trustee reasonably believes the member needs to enable him/her to make an informed decision on the making of a death benefit notice (SISA s 59(1A); SISR reg 6.17A(2)). A member’s death benefit notice is binding on the trustee if the following conditions are met. (1) Each death benefit nominee is a legal personal representative or dependant of the member. (2) The allocation of the death benefit among the nominees is clear. (3) The notice is in writing and is signed and dated by the member in the presence of two witnesses aged over 18, neither of whom is a nominee. (4) The notice contains a declaration, signed and dated by the witnesses, stating that it was signed by the member in their presence. (5) The notice is “in effect”. A death benefit notice ceases to have effect three years from the day it was first signed, last confirmed or amended by the member, or at the end of any shorter period provided in the fund’s governing rules (reg 6.17A(7)). A member who has given a trustee a death benefit notice as above may confirm, amend or revoke the notice. The notice amending or revoking a death benefit notice must comply with the procedural

requirements in points (3) and (4) above. A confirmation notice must be in writing, signed and dated by the member (reg 6.17A(5), (6)). A trustee is not required to comply with a death benefit nomination if the trustee is aware that a payment under the nomination, or the lodgment or failure to revoke the nomination, would breach a court order (reg 6.17A(4A)). If the information provided by a member in a death benefit notice is not sufficiently clear to allow the trustee to pay the benefit, the trustee must seek written clarification from the member as soon as practicable after receiving the notice. The Supreme Court of Queensland has held that a letter sent by a member of a superannuation fund to the fund’s trustee pursuant to the trust deed was a non-binding death benefit nomination (Donovan v Donovan [2009] QSC 26 (Fryberg J)). The court said it was quite plain that the deed’s intent was to require the nomination to be in the form described in reg 6.17A(6), as otherwise the requirements of trust deed (in cl 11.4(b)) as to form would be meaningless. In addition, such an interpretation made sense in the context of a superannuation fund and it was understandable that a deed should specify a requirement in effect to comply with the form described in reg 6.17A(6) out of an abundance of caution. Alternative exception — s 59(1)(a) As another exception to the general restriction in SISA s 59, the governing rules of a fund may permit a discretion to be exercisable by a person other than the trustee if the governing rules require the trustee’s consent to the exercise of the discretion (s 59(1)(a)). This effectively will also permit members to determine, with greater certainty, the persons to whom death benefits would be paid. The governing rules must provide that the trustee consent to the death beneficiary nomination. To implement this, the trustee must actively consent to such nominations through a process of appropriate consideration. The difference between requiring trustee consent to member discretion under s 59(1)(a) and non-binding guidance as noted at the outset is that the use of s 59(1)(a) provides greater certainty for member nomination within a more systematic framework, without being binding on the trustee. Where the governing rules allow a s 59(1)(a) procedure to be adopted, the trustee must have formally documented processes in consenting to member nominations. A passive process where nominations are consented to without adequate consideration would not suffice. Also, as members’ circumstances change over time, the consent process should include a periodical review mechanism that takes into consideration such changes. Such a process would also be consistent with the duty of the trustee to act in the best interests of members. Monitoring changes in member circumstances Trustees should decide in advance how to deal with members’ benefit entitlements if the circumstances of a nominated beneficiary have changed. For example, if the member previously nominated a spouse but has since divorced and remarried, the former spouse may no longer be a dependant. Another example is where a nominee may have predeceased the member and the member has not changed or revoked the notice, or a nominated beneficiary is under a legal disability when the benefit is payable. SMSFs and the SISR binding nomination rules Section 59 of SISA does not apply to SMSFs. This means that the governing rules (trust deed) of an SMSF may permit members to make death benefit nominations that are binding on the trustee, whether or not in circumstances that accord with the binding death benefit nomination rules in SISR reg 6.17A (see below). However, a death benefit nomination is not binding on the trustee to the extent that it nominates a person who cannot receive a benefit in accordance with the SIS operating standards discussed in ¶3-286 (eg the nominated beneficiary is not a “dependant” within the meaning in the SISA, see Munro’s case below). As s 59 does not apply to SMSFs, it is possible, consistent with the SISA and SISR, for the governing rules of an SMSF to permit a member to make a binding death benefit nomination in a different manner and form to that set down in reg 6.17A (SMSFD 2008/3). On the basis of SMSFD 2008/3, a death benefit nomination in the SMSF context may remain valid indefinitely as the SMSF is not subject to reg 6.17A (and the three-year renewal rule: see “‘Binding’ death benefit nomination” above) provided this is not inconsistent with the express provisions of the trust deed of the fund. For example, if the SMSF trust deed were to be drafted to totally reflect the requirements in s

59(1A) and reg 6.17A, any nomination must then conform to the SISR requirements, including the renewal requirement, despite SMSFD 2008/3. With death benefit nominations, SMSF trustees must therefore ensure that the provisions of the fund’s trust deed are met when exercising their discretion in relation to death benefit payments when a member dies. In Munro v Munro [2015] QSC 61, the Queensland Supreme Court held that a death benefit nomination form completed by an SMSF member was not a binding nomination as the nominated beneficiary was the “Trustee of Deceased Estate”. Clause 31.2 in the fund’s trust deed requires the trustee to pay a benefit payable on the death of the member in accordance with a binding nomination where the nomination is signed by the nominator, specifies that a benefit is to be paid to one or more nominated dependants or the legal personal representative of the member, states the nomination is binding on the trustee and complies with the relevant requirements. The court found that the nomination must mean what it said — that is, it was the “Trustee of Deceased Estate” that was nominated. The nomination did not comply with either clause 31.2 of the trust deed or reg 6.22 of the SISR (which only allows a death benefit payment to be made in favour of a dependant or a member’s legal personal representative) as the nomination was of neither the deceased member’s executors under his will not a dependant under reg 6.22. It is typical for the spouse or children of a deceased superannuation fund member to also be an executor or administrator of the deceased member’s estate, or to be appointed as attorneys under a power of attorney for the member. In these cases, care should be taken to ensure that conflict transactions or conflict of duty situations are avoided (see below). Practical issues The following practical implications were canvassed in the practitioner article “How long can a binding death benefit nomination (BDBN) last for?” (by B Figot and D Butler, DBA Butler Lawyers: published in the Wolters Kluwer Australian Super News, Issue 5, 11 June 2009). • The specific provisions of the SMSF’s governing rules are absolutely vital. If the governing rules include reg 6.17A (or if there is any ambiguity as to whether they include reg 6.17A), a court will probably deem reg 6.17A to apply “out of an abundance of caution”. Therefore, for those SMSFs that want BDBNs that last for more than three years, the governing rules should be very clear that reg 6.17A (or at least the three-year rule contained in reg 6.17A(7)) is not to apply. • The best practice is for the SMSF governing rules to expressly allow for indefinite BDBNs, yet for members to make a new BDBN every three years anyway. That way, if when the three-year period expires, the member is unable to make a new BDBN because they are, say, in a coma (cf SCT Determination D07-08\030), at least their BDBN still has a “leg to stand on”. By contrast, if the SMSF governing rules were ambiguous as to how long a BDBN could last for, or they referred to the threeyear period, this could place the member’s estate planning at risk. • Drafting a BDBN must be done correctly. Like a will, specific wording should be used in order to ensure that — unlike Donovan’s case (see above) — the requisite intention is manifested. However, many people overlook the importance of the actual wording of a BDBN, which is as important as that in a will. Enduring power of attorney (EPoA) A “conflict transaction” entered into by an attorney under an EPoA or POA can invalidate a transaction. Whether an attorney’s action in a particular case will be valid or invalid in a particular case will depend on the governing rules of the superannuation fund, the EPoA document, the relevant powers of attorney legislation in the applicable state/territory and the SIS legislation. In Re Narumon [2018] QSC 185, the attorneys under an EPoA executed by Mr Giles, an incapacitated superannuation fund member, were his wife and sister. The attorneys purported to extend a lapsed BDBN and also execute a new BDBN in which they were both nominated beneficiaries for death benefits payable by the fund. The EPOA document did not expressly authorise the attorneys to enter into conflict transactions. In the circumstances of the case, the Court found as follows: • the fund’s governing rules allowed for any power or right of a member to be exercised by an attorney;

this would have allowed the attorneys to confirm and the then existing BDBN which had lapsed • the EPoA document did not expressly deal with superannuation matters. However, the meaning of “financial matters” in the relevant (Queensland) legislation was wide enough to cover superannuation • the extension/confirmation by the attorneys of the prior BDBN was not a conflict transaction and was valid. The BDBN benefited the attorneys, but this was not a conflict transaction as it simply ensured the continuity of Mr Giles’ prior wishes; and • the new BDBN executed by the attorneys, which provided a different proportion for payment of the member’s death benefits and would have benefited Mrs Giles more than the prior BDBN was a conflict transaction, and was invalid. SMSFD 2008/3 and managing risks The following extracts from the practitioner article “Can a BDBN specify how a death benefit is paid?” (by B Figot and D Butler, DBA Butler Lawyers: published in the Wolters Kluwer Australian Super News, Issue 11, 17 December 2009) discusses whether there is anything to stop an SMSF’s governing rules from allowing a BDBN to specify how benefits are to be paid and the risks that must be considered. “Firstly, despite the Commissioner’s determination [SMSFD 2008/3], the view that the requirements in the regulations do not apply to SMSFs is not universally accepted. The recent case of Donovan v Donovan [2009] QSC 26 considered the validity of a BDBN made by the member of a SMSF. The judge was aware of the Commissioner’s determination but left the door open to the possibility that even SMSF BDBNs must conform to the superannuation regulations. Secondly, the most popular type of SMSF pension (including death benefit pensions) is an accountbased pension. Account-based pensions can generally be commuted (ie exchanged for a lump sum) at any time. Further, there is generally no limit on the size of account-based pensions annual payments. These characteristics can be sought to be addressed by having the BDBNs also add extra rules as to how pensions are paid (eg with a cap of maximum pension payments, without the ability to be commuted, etc). In order to achieve this, the SMSF’s governing rules would need to specify limitations and in so doing ensure that there is no conflict with the superannuation regulations. Moreover, in order for these limitations to be irrevocable, the SMSF’s governing rules would need to contain special provisions to preclude the surviving spouse from opting out. This type of strategy has yet to be tested in court. Thirdly, remember that the members of the SMSF must also be trustees (or directors of the trustee company). This means that members also can write the SMSF’s cheques! Consider an example where dad fears that mum is a spendthrift and will quickly dissipate any superannuation death benefits. Accordingly, dad makes a BDBN that specifies that upon his death, mum (as the surviving director of the SMSF’s corporate trustee) must pay herself a pension. If mum truly is a spendthrift, she may well take the money out of the SMSF and waste it. Although an action could then be brought against the trustee in the Supreme Court, this would not help in achieving the goal of ensuring that mum is financially supported. Practical methods to deal with these risks To overcome the first risk, some advocate inserting provisions directly in the SMSF’s governing rules. However, this does little to address the second or third concern. Another technique is for the client to accept these risks. The client can merely accept that by using the superannuation environment, tax efficiency is being achieved but this comes at the cost of being able to fully control superannuation benefits from the grave. The final technique can be split into two ‘sub-techniques’. The first sub-technique is to make a BDBN specifying that upon death, superannuation death benefits be paid not to the spouse, but rather to the deceased’s estate. The terms of the deceased’s estate (ie the will) can then specify that the surviving spouse receive an annuity of $X per annum as increased for inflation each year. Naturally, an independent third party would be the executor of the

estate and the trustee of any trust that arises under it. However, the first sub-technique opens the door to the new risk of the estate being challenged. Therefore, the second sub-technique should be considered. This is to withdraw benefits from the SMSF during the member’s lifetime and then put the benefits in an inter vivos trust (eg a family discretionary trust). The governing rules of the inter vivos trust could specify that the surviving spouse receive $X as increased for inflation each year and an independent third party would be the trustee. For completeness, note that in New South Wales the ‘notional estate’ provisions can mean that this technique could also be subject to a subsequent challenge against the estate. Both these sub-techniques involve a loss of tax efficiency.” More BDBN cases The article “The most important case ever in SMSF succession planning … and what it really means” by Bryce Figot, Director, DBA Lawyers, on the recent case of Wooster v Morris [2013] VSC 594 (Wooster) provides many insights and lessons on BDBNs for trustees of SMSFs. Extracts from the article are reproduced below. “Lesson 1 — LPR does not automatically become a trustee Wooster clearly dispels the myth that when a person dies, their executor (legal personal representative) automatically becomes a trustee in the deceased’s place. Here, the plaintiffs were the deceased’s executors but they did not become trustees. Rather, the identity of trustee upon death is determined by the trust deed of the SMSF. In DBA Lawyers’ opinion, there are very few deeds that appropriately distribute the power to appoint a trustee upon death or loss of capacity. Lesson 2 — BDBNs are only a partial solution at best There is a misconception that SMSF succession planning is completely handled by making a BDBN. Wooster clearly dispels this myth as well. In Wooster, the deceased had made a valid BDBN but the plaintiffs still had to spend over three and a half years in legal battles to obtain their money. Accordingly, an adviser cannot simply tell a client to make a BDBN and expect that succession planning is handled. This leads into the most important lesson from the case. Lesson 3 — what really matters is the identity of who is holding the ‘purse strings’ Wooster clearly demonstrates that far more important than any BDBN is the identity of who is holding the ‘purse strings’ upon a member’s death or loss of capacity. As stated above, this depends to a very large degree on what the trust deed of the SMSF provides. There is huge variation in this regard. Although DBA Lawyers carefully draft their deeds to ensure sensible outcomes, many practitioners find that other SMSF trust deeds have poorly drafted provisions that invariably result in the ‘minority’ surviving member(s) wielding an unfair amount of power upon death.” In Ioppolo & Hesford (as Executors of the Estate of the late Francesca Conti) v Conti [2013] WASC 389, there was no BDBN in place but the deceased, by her will, had expressed the desire that her entitlements in the SMSF be applied to her children (beneficiaries under the will) and had specifically stated she did not want any entitlement paid to her husband (the defendant). Apart from the distribution of the deceased member’s benefits issue, the case also provides some guidelines on the application of SISA s 17A on the appointment of trustees when an SMSF member dies. The executors of deceased member of the SMSF had applied to court to be appointed a trustee of the fund and sought directions on whether the defendant (as the surviving member and trustee of the SMSF) was obliged to appoint the executors as trustee, and whether the trustee was entitled to distribute the deceased member’s interest in the fund contrary to the direction in the deceased’s will. Finding for the defendant, the court said that there was no obligation to appoint the executor as an additional trustee and that the surviving trustee was entitled to distribute the deceased member’s benefits at his discretion. The executors had argued for their appointment as a trustee of the SMSF in accordance with s 17A, with particular reference to s 17A(1)(d)(i), to ensure the fund remained compliant. The court disagreed, stating that s 17A(3) allows for the appointment of an executor as a trustee of the fund but does not in its terms require such an appointment. Effectively, on the death of one of the members of a two-member SMSF, the fund can remain an SMSF for six months as provided by s 17A(4). In this case,

“Mr Conti appointed a corporate trustee and the fund remained an SMSF because it migrated from the type of fund covered in s 17A(1) to a fund covered by s 17A(2).” The parties agreed that the trustees of the fund are entitled but not bound to take into account the desires of a deceased member expressed in a will as to the distribution or application of that member’s superannuation account. Essentially it was the plaintiffs’ argument because the defendant did not comply with the direction in the deceased’s will, he was not acting bona fide. The court held that the trustee was entitled to ignore the direction in the will and the mere fact he did so could not in and of itself be evidence of a lack of bona fides. As there was nothing else in the evidence which suggests the trustee did not act in good faith, and the plaintiffs’ arguments failed. The plaintiffs also sought to have one of them appointed as a trustee under s 77 of the Trustees Act 1962 (WA). To take that step, it would be necessary to establish there was good reason for doing so, but the court was not satisfied the trustee acted with a lack of bone fides or in any way improperly. Accordingly, there were no grounds for appointing an additional trustee adding that “… to do so would sow the seeds of disaster. It would result in there being one corporate trustee aligned with the first defendant and one individual trustee aligned with the beneficiaries under the will. There is no mechanism for resolving the inevitable disputes that would arise in this situation. In such circumstances there would have to be a compelling reason to appoint an additional trustee. No such reason exists in this case and the discretion found in s 77 should not be exercised.” On appeal by the executors, the WA Court of Appeal has confirmed the decision in the Ioppolo case that on the death of a member of SMSF, the SISA permitted but did not require the executor of the deceased member’s estate to be appointed as a trustee of the SMSF (Ioppolo & Anor v Conti & Anor [2015] WASCA 45). Section s 17A(3) of SISA did not require Mr Conti to appoint one or other of the executors as a trustee of the fund, and that there was no evidence capable of sustaining the assertion that Mr Conti had acted in bad faith in making the determination that the late Mrs Conti’s interest in the fund should be conferred on him. Conflict of duty/interest issues An executor/administrator of a deceased estate, as a fiduciary, must not allow their personal interests to conflict with their obligations owed to the estate, without proper authorisation. Care should be taken to ensure that a conflict of duty/interest situation does not arise where a person acts as executor/administrator while also receiving superannuation death benefits in their personal capacity. These conflict situations can arise where no BDBN is in place or the deceased has died intestate, because of the executor/administrator’s duty to collect assets of the deceased on behalf of an estate and their interests as beneficiaries of superannuation death benefits. In McIntosh v McIntosh [2014] QSC 99, the mother of the deceased (her son who died intestate) was the administrator of the deceased estate. While in that capacity, the mother also applied for, and received, death benefits from her son’s industry and retail superannuation funds in her personal capacity. Under Queensland’s intestacy laws, the death benefits, had they been paid to the estate, would have been distributed equally between the mother and her former husband as the deceased’s parents. The Queensland Supreme Court held there was a conflict of duty contrary to her fiduciary duties as administrator: “… When the mother made application to each of the superannuation funds for the moneys to be paid to her personally rather than to the estate, she was preferring her own interests to her duty as legal personal representative to make an application for the funds to be paid to her as legal personal representative. She was in a situation of conflict which she resolved in favour of her own interests. As such she acted … in breach of her fiduciary duty as administrator of the estate …” The mother was required to account to the estate for the death benefits she had personally received. The McIntosh principles were applied in Burgess v Burgess [2018] WASC 279. In that case, Mr Burgess had died without leaving a will and was survived by his wife and two minor children. A year later, Mrs Burgess applied to become administrator of the deceased’s estate. Mr Burgess’ estate (including superannuation paid to the estate) would be split among Mrs Burgess and their two young children. Mr Burgess had superannuation benefits in four public offer funds, where no BDBNs was in place.

She had applied for and received death benefits from one fund before her appointment as administrator, and had applied for and received death benefits from a second fund after her appointment. The third superannuation fund had also paid benefits to the estate, while the fourth fund had not yet made any payment at that time and neither had Mrs Burgess made any application to the fund for payment. The court found as follows: • Benefits from first fund — Mrs Burgess could retain the benefits as she was not an administrator at the time of application and no conflict had arisen in relation to the first fund • Benefits applied for and received after appointment as administrator — Mrs Burgess was required to account to the estate for the benefits There was a conflict of interest and as administrator she was bound to claim the benefits on behalf of the estate after her appointment as administrator; • Benefits still unpaid — Mrs Burgess was bound, as administrator, to claim any remaining superannuation benefits which are still unpaid on behalf of the estate. The court (Martin J) also stated that the undesirable outcome in the case might have been avoided if there had been a will which contained a conflict authorisation or there had been BDBNs in relation to the superannuation benefits. The importance of having a will and a BDBN for superannuation benefits, and conflict issues, were also discussed in Gonciarz v Bienias [2019] WASC 104. In that case, the deceased (a member of Retail Employees Superannuation Trust (REST)) died intestate and those entitled to distribution of the estate under the intestacy rules were his spouse (the plaintiff) and two others (the defendants). The deceased had made a non-binding beneficiary nomination for one of the defendants before marrying the plaintiff. The plaintiff had made a death benefit claim in her capacity as the spouse of the deceased to the trustee of REST. She had also applied for a grant of letters of administration of the estate. The defendants claimed that the plaintiff had acted in conflict to her duties as administrator by making an application to REST for the payment of the superannuation benefits to herself (following the Burgess v Burgess principle, see above). The issue which the plaintiff faced were twofold — the estate required an administrator to administer the estate, and the plaintiff as the deceased’s widow had a strong claim to payment of the death benefit. By accepting the grant of administration, the plaintiff would be obliged to subordinate her personal claim to the death benefit to that of the estate. In the circumstances of the case, the court decided to grant the plaintiff’s request to be removed as administrator and for a new administrator to be appointed to achieve “…an outcome that is in the interests of all beneficiaries”. By contrast, in Brine v Carter [2015] SASC 205, an executor was found not to have a conflict as the other executors had effectively consented to that executor claiming superannuation benefits in her personal capacity despite the conflict situation. Who is a dependant? In the SISA, a “dependant” in relation to a person includes the spouse and any child of the person and any person with whom the person has an interdependency relationship (SISA s 10(1); 10A). The inclusive definition means that a “dependant” under the common law principles (generally a person who is financially dependent on the deceased) is also covered. The SISA definition is discussed in ¶3-020. The ITAA97 contains two definitions which includes the term “dependant” — “SIS dependant” which has the same meaning as dependant in the SISA, and “death benefits dependant” which has the meaning given in ITAA97 s 302-195. The definition of “death benefits dependant” (which has a narrower meaning and which is used for the purposes of the taxation of superannuation death benefits) (¶8-300) and the taxation of death benefit termination payments (¶8-840) is discussed in ¶8-310. The meaning of spouse, child, SIS dependant and death benefits dependant is discussed in ¶3-020. Death benefit payments to other persons and unclaimed money

When a member dies, and the trustee after making reasonable enquiries is unable to find either a legal personal representative or a dependant of the member, the trustee may cash the member’s benefits in favour of another individual, subject to the fund’s governing rules (SISR reg 6.22: ¶3-286). The trustee must make a decision in relation to the benefit payment that is fair and reasonable to the circumstances of all parties who have, or are likely to have, an interest in the death benefit. Interested parties who consider that the trustee’s decision is “unfair or unreasonable” may complain to the Superannuation Complaints Tribunal (¶13-140). If the trustee is unable to find an appropriate beneficiary, the benefit must be dealt with in accordance with the Superannuation (Unclaimed Money and Lost Members) Act 1999 (¶3-380). For other restrictions on the form of death benefit payments, see “Form of cashing of benefits after member’s death” in ¶3-286. Death benefits and estate planning The taxation of superannuation death benefits is discussed in ¶8-300 to ¶8-340. A superannuation death benefit may be paid to an individual who is a SIS “dependant” of a deceased member (as noted above), but this payment may be subject to tax if that person is not also a “death benefit dependant” under s 302-195 of ITAA97 (¶8-310). If there is no binding death benefit nomination in place when a member of an SMSF dies, the fund trustee has the following options for payment of superannuation death benefit: (1) Pay a lump sum death benefit to each child (a SIS dependant, as well as a death benefit dependant for tax purposes) of the deceased member. (2) Pay a lump sums death benefit to the deceased member’s estate (ie legal personal representative), which will subsequently be distributed to the beneficiaries in accordance with the deceased member’s will. Note superannuation is not an estate asset and will not be distributed in accordance with the terms of a deceased’s will unless the death benefit is paid to the estate. That is, if the deceased’s intention is for a will to apply to superannuation proceeds, this will only occur if the fund trustee pays the death benefit to the deceased’s legal personal representative who will then distribute the proceeds to anyone (whether or not a SIS dependant or death benefits dependant), in accordance with the will. (3) Pay the death benefit to the deceased member’s legal personal representative to hold in a trust created under the member’s will (eg a general testamentary trust). (4) Pay the superannuation death benefit as a pension. On the member’s death, a “reversionary” pension previously paid to the member will automatically revert to another person (the reversionary). Where the pension previously paid to the member is not a reversionary pension, a new pension can be created subject to the rules for pension death benefits in SISR reg 6.21(2A) and (2B) (see “Form of cashing of benefits after member’s death” in ¶3-286). In summary, SMSF members should bear in mind the following for estate planning and taxation purposes: (1) Who do they want to provide for after their death? (2) Is this person a death benefit dependants? (3) What is the most tax effective way to distribute to this person/persons? (4) Is it better for death benefits to be paid directly to intended beneficiaries or to the member’s estate? (5) Can pensions be paid to intended beneficiaries? (6) If the intended beneficiaries are children (eg an adult child), whether or not they are financially dependent, and if so how much longer would they be financially dependent?

(7) What is the best way to support financially dependent children for the period of time they will remain financially dependent? (8) What (if any) are appropriate restrictions to place on dependants’ access to a death benefit that will ensure that the dependant is adequately provided for until such time as the dependant would ordinarily be financially independent? For a case study and practitioner which examines the SIS and taxation implications for superannuation death benefits, see “Planning for minor dependants and your SMSF death benefit” by Philip de Haan, Partner, and Aimee Riley, Lawyer, Thomson Geer Lawyers in the Wolters Kluwer Australian Super News, Issue 7, 21 August 2015 (¶103).

¶3-290 Providing information to members and others The trustee of a regulated superannuation fund must provide information to members, former members and other persons, such as prospective members and employer-sponsors, in accordance with the product disclosure rules in Pt 7.9 of the Corporations Act 2001 (CA) and Regulations (CR) from 11 March 2002 (¶4-050). Previously, these information requirements were prescribed by SISR Pt 2 former reg 2.05 to 2.48C and SISA Pt 19 former s 150 to 193 (the public offer fund rules: ¶3-520). The SISR continues to prescribe certain residual disclosure obligations (see below). The product disclosure rules under the CA and CR are discussed in Chapter 4. In summary, the rules for superannuation products or interests cover: • point of sale disclosure requirements, as provided in CA s 1013D, the content requirements for Product Disclosure Statements, and general information requirements relating to superannuation products in CR Pt 7.9 Div 4 • periodic statements for retail clients (CA s 1017D; CR Pt 7.9 Subdiv 5.2 to 5.3) • periodic disclosure of fund information (CA s 1017DA; CR Pt 7.9 Subdiv 5.4 to 5.7) • ongoing disclosure of material changes and significant events (CA s 1020G; CR Pt 7.9 Subdiv 5.8) • information and documents to be given to existing holders of superannuation products on request (CA s 1017C; CR Pt 7.9 Subdiv 5.9 to 5.10) • information about complaints (CA s 1017DA(1)(a)(iii); CR Pt 7.9 Subdiv 5.11) • periodic reporting requirements when product holders cease to hold the product (exiting members or deceased members) (CA s 1017D(5)(g); CR Pt 7.9 Subdiv 5.12). Residual SISR disclosure provisions The following disclosure of information provisions are still prescribed by the SISR. • reg 2.01 to 2.05 — which cover the scope and application of SISR information provisions, the manner of, and charges for, providing information • reg 2.29 — which requires funds (other than SMSFs) to provide information to APRA about the fund’s derivatives charge ratio (in conjunction with the requirements in CR reg 7.9.37(1)(i) dealing with the provision of fund information: ¶4-180) • reg 2.30 to 2.33 — which deal with the time and manner of providing information on request (to other than a “concerned person” as defined in s 1017C of the Corporations Act 2001) • reg 2.36B to 2.36E — which deal with providing information about superannuation interests subject to a payment split (¶3-355).

[SLP ¶2-920]

¶3-300 Dealing with members’ inquiries and complaints Part 7.10A of the Corporations Act 2001 and the Superannuation (Resolution of Complaints) Act 1993 (as amended by the Treasury Laws Amendment (Putting Consumers First — Establishment of the Australian Financial Complaints Authority) Act 2018 (AFCA Act)) provide the external dispute resolution (EDR) scheme to deal with superannuation complaints which are not resolved by the superannuation trustees under the fund’s internal dispute resolution (IDR) procedures. The operation of the EDR process under AFCA (which replaced the Superannuation Complaints Tribunal for complaints lodged from 1 November 2018) is discussed in Chapter 13. From 6 March 2018, each trustee of a regulated superannuation fund other than an SMSF, or of an ADF: (a) must be a member of the AFCA scheme (b) must have an IDR procedure that complies with the standards, and requirements, mentioned in subparagraph 912A(2)(a)(i) of the Corporations Act 2001 in relation to financial services licensees (see below) (c) must give to ASIC the same information as the trustee would be required to give under subparagraph 912A(1)(g)(ii) of the Corporations Act 2001 if the trustee were a financial services licensee, and (d) must ensure that written reasons are given, in accordance with requirements specified under subsection (1B) of this section, for any decision of the trustee (or failure by the trustee to make a decision) relating to a complaint (s 101(1)). However, paras (1)(a) to (c) do not apply to a trustee if the trustee is required under the Corporations Act 2001 to have a dispute resolution system complying with subsection 912A(2) or 1017G(2) of that Act (s 101(1A)). ASIC may, by legislative instrument, specify for the purposes of paragraph (1)(d) any or all of the following: (a) the persons who must be given written reasons (b) the matters that must be included in those reasons (c) the times by which those reasons must be given, or (d) the circumstances that constitute a failure to make a decision (s 101(1B)). Requirement for superannuation entities to establish IDR procedure Section 912A(2)(a)(i) of the Corporations Act 2001 basically requires entities to have an IDR procedure that complies with standards and requirements made or approved by ASIC in accordance with regulations made for the purposes of the provision. ASIC guidelines on IDR and transitional provision for giving written reasons Transitional provisions in the AFCA Act provide that until the first time an instrument made under SISA s 101(1B) (see above) comes into force, para 101(1)(d) has effect as if: (a) the requirements of para 101(1)(c) to (e) of SISA as in force immediately before 6 March 2018 were the requirements specified under subsection 101(1B), and (b) subsection 101(1A) of SISA as in force immediately before 6 March 2018 still had effect. ASIC Regulatory Guide RG 165 (as reissued in May 2018) provides guidance on the transitional arrangements for trustees of regulated superannuation funds and ADFs and RSA providers as below (RG165.88).

“Prior to the Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Act 2018 (AFCA Act), provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Retirement Savings Account Act 1997 (RSA Act) imposed requirements in relation to the time within which complaints should be dealt with by the trustees of regulated superannuation funds and approved deposit funds, and by retirement savings account (RSA) providers. The SIS Act also imposed requirements in relation to the giving of reasons for decisions on complaints by the trustees of regulated superannuation funds. These requirements sat alongside the IDR arrangements for financial service providers under the Corporations Act. Schedule 2 of the AFCA Act has now: • repealed s 101(1) and (1A) of the SIS Act and s 47(1) and (2) of the RSA Act, which set out the requirements for dealing with inquiries and complaints within 90 days and the requirements for the giving of reasons for decisions on complaints • amended the SIS Act and RSA Act to require trustees of a regulated superannuation fund (other than a self-managed superannuation fund) or of an approved deposit fund, or an RSA provider to have an IDR procedure that complies with the standards and requirements made or approved by ASIC for s 912A(2)(a)(i) of the Corporations Act in relation to AFS licensees, and • amended the SIS Act and RSA Act to empower ASIC to make a legislative instrument setting out requirements for the giving of reasons for decisions on complaints. As a transition measure, the IDR time frame requirements for trustees of regulated superannuation funds and ADFs, and RSA providers in s 101(1) and (1A) of the SIS Act and s 47(1) and (2) of the RSA Act will continue until we consult on and finalise updated IDR standards and requirements that are made or approved under s 912(2)(a)(i) of the Corporations Act. The effect of the requirements in the SIS Act for trustees of regulated superannuation funds in relation to the giving of reasons for decisions on complaints is also retained until ASIC makes a legislative instrument setting out the requirements: Sch 2, item 10 of the AFCA Act.” Regulatory Guide RG 165 also provides guidance on the transitional arrangement on disclosure of AFCA contact details in final response letters and delay letters (RG 165.88). SISA former s 101 — duty to establish arrangements for dealing with inquiries and complaints Before its substitution by the AFCA Act, former s 101(1) provided that each trustee of a regulated superannuation fund (other than an SMSF) or an ADF must take all reasonable steps to ensure that there are arrangements in force at all times under which members and other persons have the right to make inquiries or complaints of the kind specified below in relation to that person. For the above purposes, the persons eligible to make enquires and complaints are: (a) a beneficiary or former beneficiary may make an inquiry or complaint about the operation or management of the fund in relation to that person (b) the executor or administrator of the estate of a former beneficiary may make an inquiry or complaint about the operation or management of the fund in relation to the former beneficiary, and (c) without limiting the generality of (a) or (b), any person may make an inquiry or complaint about a decision of a trustee that relates to the payment of a death benefit if the person has an interest in the death benefit, or claims to be entitled to death benefits through, a person who has an interest in the death benefit (former s 101(1A)). The trustee must ensure that an inquiry or complaint is properly considered and dealt with within 90 days after it was made (former s 101(1)(b)). If an eligible person makes a complaint relating to the payment of a death benefit, the person must be given written reasons for the decision in relation to the complaint when the person is given notice of the decision (former s 101(1)(c)(i)). If no decision is made within 90 days after the complaint is made, the person may, by giving notice in writing to the trustee, request written reasons for the failure to make a

decision in relation to the complaint within that period (former s 101(1)(c)(ii)). If an eligible person makes a complaint of another kind specified in s 101(1A), the person may, by giving notice in writing to a trustee of the fund, request written reasons for a decision made by the trustee in relation to the complaint, or if no decision is made within 90 days after the complaint is made, the failure to make a decision in relation to the complaint within that period (former s 101(1)(d)). In both instances, the written reasons are to be given to the person within 28 days after the request is given to the trustee, or such longer period as ASIC permits (former s 101(1)(e)). A person who intentionally or recklessly contravenes former s 101 is guilty of an offence punishable on conviction by a fine not exceeding 100 penalty units. The above requirements similarly apply to trustees of certain exempt public sector superannuation schemes and of ADFs other than an excluded ADF. [SLP ¶3-620]

¶3-310 Providing information to the Regulators The trustee of a superannuation entity is required to provide annual returns and audit reports to the Regulator as discussed in ¶3-315. Apart from those requirements, various other reporting obligations may arise in particular circumstances as noted below. Newly established entities The trustee of a newly established superannuation entity must, within seven days after its establishment, provide prescribed information to APRA or a specified person as prescribed (SISA s 254(1); SISR reg 11.03). The information to be given by a new superannuation fund is set out in reg 11.04. For new ADFs and PSTs, see reg 11.05 and 11.06 respectively. A new superannuation fund may comply with the information requirements in conjunction with its election to become a regulated superannuation fund (¶2-130). For this purpose the new fund must, within 60 days of its establishment, provide the required information and election to the Commissioner using the approved form “Application for ABN registration for superannuation entities” (¶18-730). A new superannuation fund includes a former resident ADF that has converted to a superannuation fund. When a superannuation entity lodges the approved form above, the ATO will also allocate an ABN and a TFN to the entity. An entity may, if it so wishes, also use the form to register for the GST. Where the entity is not an SMSF and, therefore, is not regulated by the ATO for SIS prudential purposes, the ATO will forward relevant information in the form concerning the entity to APRA. A superannuation fund is considered to come into existence after its trust deed is signed and property is set apart for the benefit of specified members (eg when the fund receives contributions). Significant adverse events The trustee of a superannuation entity must immediately inform the Regulator in writing of the occurrence of an event having a significant adverse effect on the financial position of the entity after becoming aware of such an event (SISA s 106). Before 1 January 2008, funds had three business days to give that notice. An event has a significant adverse effect if, as a result of the event, a trustee of the entity will not, or may not, be able to pay benefits to beneficiaries as and when they fall due at any time before the trustee’s next annual report to beneficiaries. Section 106 is a civil penalty provision (¶3-820). Fund status change If the trustee of a superannuation entity knows that the entity has ceased to be an SMSF or has become an SMSF since becoming a superannuation entity, the trustee must notify the Commissioner in writing as soon as practicable and not later than 21 days after that knowledge (SISA s 106A). A person who fails to comply is guilty of an offence punishable on conviction by a fine of up to 100 penalty

units (¶3-800). Information at request of a Regulator The Regulator may, by written notice, require the trustee of a superannuation entity to provide, within a specified time, information or reports on such matters as are set out in the notice (SISA s 254(2)). In addition the Regulator may, by written notice, require a “relevant person” to produce, at such reasonable time and reasonable place as are specified, any books relating to the affairs of the entity (s 255(1); Robertson 95 ATC 4225). A relevant person in relation to a superannuation entity means an individual trustee or investment manager, a responsible officer of a corporate trustee or corporate investment manager, an auditor or actuary of the entity, or a custodian in relation to the entity. Similar powers to request production of books apply for the purposes of investigation of a superannuation entity by the Regulator (s 269; Glaser 98 ATC 4230). The Regulator may also request information from the trustee of a superannuation entity for the purposes of its statistical data collection program (s 347A). Fund details, winding up, trustee retirement and other information requirements The trustee of a superannuation entity (other than an SMSF) must notify APRA in writing of changes in the entity’s name, RSE licensee and other contact details. The changes must be notified within 28 days or, in the case of an eligible rollover fund, immediately after the change (SISR reg 11.07(1)). The trustee of a superannuation entity (other than an SMSF) must also notify APRA in writing that an incoming trustee has commenced as a trustee of the entity as soon as possible, but no later than five days, after commencement (reg 11.07(2A)). The trustee of a superannuation entity must notify the Regulator of a decision or resolution to wind up the entity or to retire as a trustee. This must be notified as soon as practicable after the making of the decision or resolution and before winding up commences or the trustee has retired. For an SMSF, the notification must be given before, or as soon as practicable after, winding up commences or the trustee has retired (reg 11.07(3), (4)). A regulated superannuation fund which becomes an SMSF, or an SMSF which ceases to be one, must provide prescribed information to the ATO within 28 days of the change in status (reg 11.07A). Notification of changes can be made using the ATO form at www.ato.gov.au/super/self-managed-superfunds/administering-and-reporting/notify-us-of-changes. The trustee of a superannuation fund that has been declared not to be a public offer fund must notify APRA in writing of a breach of any of the conditions to which the fund was subject (¶3-500). Other disclosure or provision of information obligations may be imposed on a superannuation entity in connection with an investigation of the entity under SISA Pt 25 or by the TFN provisions under Pt 25A. Derivatives charge ratio reporting The derivatives charge ratio of a regulated superannuation fund is the percentage of the fund’s assets (other than cash) that are subject to a charge in relation to a derivatives contract (as defined in SISR reg 13.15A(2)) to the fund’s total assets (based on market value) (SISR reg 2.29(1)). For the purposes of s 1017DA(1)(a) of the Corporations Act 2001 (CA), a regulated superannuation fund must provide fund information to members in each reporting period. In all cases, the fund information must include all the items of information specified in reg 7.9.37(1) of the Corporations Regulations 2001 (CR), so far as applicable, including information, as provided in CR reg 7.9.37(1)(i), about the fund’s derivatives charge ratio if the ratio exceeds 5% at any time during the reporting period (¶4-180: “Fund information — content”). If CR reg 7.9.37(1)(i) applies, the trustee of the fund must give the information mentioned in that paragraph to APRA as soon as practicable, and in any event within six months, after the end of the reporting period to which the information relates (SISR reg 2.29(2)). SMSFs are exempted from both of the above reporting requirements (SISR reg 2.18(2); CR reg 7.9.38; ¶4-090).

Transfer balance account report — events-based reporting All superannuation providers, including SMSFs and life insurance companies, with members in retirement phase are required to comply with events-based reporting requirements using a Transfer Balance Account Report (TBAR) in connection with the transfer balance cap and total superannuation balance regime which commenced from 1 July 2017 (ATO factsheet Superannuation Transfer balance account report: www.ato.gov.au/super/apra-regulated-funds/reporting-and-administrative-obligations/reportingand-administrative-obligations-for-the-transfer-balance-cap) (¶6-422). The TBAR reporting requirements for APRA-regulated funds are to be incorporated into the SuperStream data and payment standards reporting requirements in the course of 2018 (see ¶9-790). [SLP ¶3-234]

¶3-315 Accounts, audit and reporting by superannuation entities The trustee of a registrable superannuation entity (RSE) (¶3-490) or an SMSF must comply with the accounts, audit and reporting obligations in SISA Pt 4 as below: • obligations for RSEs — Div 2, comprising s 35A to 35AD • obligations for SMSFs — Div 3, comprising s 35AE, 35B, 35C, 35D. The annual return and periodic reporting requirements for RSEs are set out in the FSCDA and discussed at ¶9-740 and following. Where the SIS legislation imposes accounts and record-keeping obligations, the person responsible must not incorrectly keep accounts and records (a strict liability offence), or incorrectly keep accounts and records with the intention to deceive, mislead or provide false or misleading information (SISA s 303; 307; Criminal Code Act 1995). RSEs — keeping accounting records Each trustee of an RSE must ensure that: • accounting records that correctly record and explain the transactions and financial position of the RSE licensee for the entity and the entity are kept • the accounting records of the RSE licensee and the entity are kept in a way that enables: – the preparation of reporting documents referred to in FSCDA s 13 (these are the returns and reports prescribed under the FSCDA: ¶9-750), and – the preparation of any other documents required to be audited under the RSE licensee law (SISA s 35A(1)) • the accounting records of the RSE licensee and the entity are kept in a way that enables those reporting documents and other documents to be conveniently and properly audited in accordance with the RSE licensee law. “RSE licensee law” means: (a) SISA or SISR; (aa) prudential standards (¶9-700); (b) the FSCDA; (c) the Financial Institutions Supervisory Levies Collection Act 1998; (d) the provisions of the Corporations Act 2001 listed in SISA s 38A(b) of the definition of regulatory provision or specified in regulations made for the purposes of s 38A(b)(xvi) of that definition, as applying in relation to superannuation interests; and (e) any other provisions of any other Commonwealth law as specified in regulations (SISA s 10(1)). Each trustee of the entity must ensure that the accounting records under s 35A(1): • are retained for at least five years after the end of the year of income to which the transactions relate • are kept in Australia, or in another country if APRA gives written approval for the records to be kept in that country, and the conditions (if any) specified in the approval are met, and

• are kept in writing in the English language, or in a form in which they are readily accessible and convertible into writing in the English language (s 35A(2)). The trustee must notify APRA, in the approved form, of the address where the accounting records are kept: • if, before 1 July 2013, APRA has not already been notified of the current address — within 28 days after 28 July 2013 • otherwise — within 28 days after the entity is registered under s 29M (¶3-490) (s 35A(4)). The trustee must notify APRA, in the approved form and within 28 days, if the accounting records are moved to a new address (s 35A(5)). Section 35A is a two-tier liability provision (¶3-820). A trustee who contravenes s 35A(1), (2), (4) or (5) commits an offence punishable by a penalty of 100 penalty units (fault liability) or 50 penalty units (strict liability). RSEs — auditor request for information If the auditor of an RSE requests, in writing, a trustee of an RSE to give the auditor a document, each trustee of the entity must ensure that the document is given to the auditor within 14 days of the request being made. An auditor may only request documents that are relevant to the preparation of a report about the operations of the entity or the RSE licensee of the entity (SISA s 35AB(1)). Section 35AB is a two-tier liability provision. A trustee who contravenes the section commits an offence punishable by a term of imprisonment for two years (fault liability) or 50 penalty units (strict liability). RSEs — appointed auditor’s functions and duties Section 35AC of SISA applies if the RSE licensee law requires an auditor of an RSE to be appointed, or requires or permits a function or duty to be performed, or a power to be exercised, by an auditor. The RSE licensee must not appoint a person as an auditor of the entity unless the RSE licensee is reasonably satisfied that the person: (a) meets the eligibility criteria for auditors of RSEs set out in the prudential standards, and (b) has not been disqualified from being or acting as an auditor of an RSE under s 130D (¶3-600). The RSE licensee must end the appointment of the appointed trustee if the RSE becomes aware that the person no longer meets the conditions above (s 35AC(6)). A person who is appointed as an auditor must perform the functions and duties set out in the RSE licensee law that are relevant to the person’s appointment and must comply with the RSE licensee law in performing the functions and duties (s 35AC(3), (4)). The trustee of the RSE to whom the RSE licensee law applies must make any arrangements that are necessary to enable the appointed auditor to perform the functions and duties (s 35AC(5)). RSEs — appointed actuary’s functions and duties Section 35AD of SISA applies if the RSE licensee law requires an actuary of an RSE to be appointed or requires or permits a function or duty to be performed, or a power to be exercised, by an actuary. The obligations and duties of the RSE licensee and RSE actuary under s 35AD mirror those in s 35AC for auditors. RSEs — approved audit report form The approved audit report form June 2018 (issued under Prudential Standard SPS 310 “Audit and Related Matters”) is available at www.apra.gov.au/forms-superannuation-entities. SMSFs — keeping accounting records

Each trustee of an SMSF must ensure that: (a) accounting records that correctly record and explain the transactions and financial position of the entity are kept (b) the accounting records are kept in a way that enables the following to be prepared: (i) the accounts and statements of the entity referred to in s 35B (ii) the returns of the entity referred to in s 35D, and (c) the accounting records are kept in a way that enables those accounts, statements and returns to be conveniently and properly audited in accordance with SISA (s 35AE(1)). Each trustee of the SMSF must ensure that the accounting records: • are retained for at least five years after the end of the year of income to which the transactions relate, and • are kept in Australia and are kept in writing in the English language (or in a form readily accessible and readily convertible into writing in the English language (s 35AE(2)). Section 35AE is a two-tier liability provision. A trustee who contravenes the section commits an offence punishable by a penalty of 100 penalty units (fault liability) or 50 penalty units (strict liability). SMSFs — keeping financial statements The trustee of an SMSF must, in respect of each year of income of the fund, ensure that the following are prepared: • a statement of financial position and an operating statement (except if specified otherwise by reg 8.01: see below) • a statement of net assets of the entity and a statement of changes in net assets (as specified in reg 8.01(2): see below), or • the accounts and statements specified in reg 8.02(3) (see below) (s 35B(1), (2)). The SISR have prescribed market value reporting for SMSFs (see “SMSF accounts and statements — market value reporting of assets” below). Exceptions under reg 8.01(1) — statement of financial position and operating standard not applicable In the two situations below, the requirement to prepare a statement of financial position and operating statement under s 35B(1)(a) and (b) does not apply: 1. the trustee prepares a statement of net assets of the entity and a statement of changes in net assets of the entity in respect of that year of income — if the fund is a defined benefit fund in respect of a year of income of the fund (or an accumulation fund in respect of the 1994/95 year of income of the fund) (reg 8.01(2)), and 2. the trustee prepares the accounts and statements specified by reg 8.02(3) (see below) — if the fund is a regulated superannuation fund in respect of a year of income where, at the end of the year, the benefits paid to each individual member of the fund: (a) are wholly determined by reference to policies of life assurance, or (b) if item (a) does not apply only because shares in the life insurance company issuing the policies were acquired because the company was demutualised, the benefits paid to each individual member would otherwise be wholly determined by reference to policies of life assurance and the shares have been held for no longer than 18 months from the date of acquisition (reg 8.01(3)). The accounts and statements specified in reg 8.02(3) for a fund covered by reg 8.01(3) (see point 2

above) are: • a statement that policies of the kinds mentioned in reg 8.01(3) are in place at the end of the year of income • a statement as to whether those policies have been fully maintained as directed by the relevant insurers • a statement of the identities of those insurers • the amounts contributed by employers and members in respect of the year of income • where not all of those amounts have been paid as premiums on the policies — the amount of premiums paid on the policies in respect of the year of income, and • the expenses incurred by the fund in respect of the year of income, other than amounts covered by premiums. Signing and retaining accounts The accounts and statements prepared under s 35B(1) must be: • signed by the director of the single corporate trustee or at least two directors of the corporate trustee of the fund, or at least two individual trustees of the fund, and • retained for a period of five years after the end of the year of income to which they relate (s 35B(3), (4)). Section 35B is a two-tier liability provision. A trustee who contravenes the section commits an offence punishable by a penalty of 100 penalty units (fault liability) or 50 penalty units (strict liability). SMSF accounts and statements — market value reporting of assets The assets of an SMSF must be valued at their market value when preparing the fund’s accounts and statements required by SISA s 35B(1) for the 2012/13 year and any later year of income (SISR reg 8.02B). The term “market value” means the amount that a willing buyer of an asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made: • the buyer and seller dealt with each other at arm’s length in relation to the sale • the sale occurred after proper marketing of the asset, and • the buyer and seller acted knowledgeably and prudentially in relation to the sale (s 10(1)). In pre-2012/13 years, SMSFs were generally able to choose either the historical cost or market valuation accounting method to value their assets when preparing their financial statements. By contrast, APRAregulated funds are required by the Australian Accounting Standard AAS 25, as reporting entities, to value their assets at net market value as at the reporting date. The market value basis reporting for SMSFs will ensure that assets held within the superannuation system are valued in the same manner and will enhance the comparability of financial information and fund performance across all sectors of the superannuation system. This will also provide members with current and accurate information about the financial position of their SMSF and their entitlements. Note that market value reporting has been required for other regulatory provisions or fund operations, eg SMSFs paying pensions or ensuring compliance with the in-house asset limit under SISA. For the ATO guidelines on valuation of assets, see ¶18-775. SMSFs — auditor appointment and audit For each year of income, each trustee of an SMSF must ensure that an approved SMSF auditor is appointed to give the trustee a report, in the approved form, of the operations of the entity for that year.

The appointment must be made within whichever of the periods set out in the regulations that applies to the entity (SISA s 35C(1)). For s 35C(1), the prescribed period is no later than 45 days before the day by which s 35D requires a return to be lodged for the fund (SISR reg 8.02A). Regulation 8.03 prescribes the period for which the report mentioned in s 35C(6) must be provided (see “Time for auditor to give audit report to trustees” below). If an auditor requests, in writing, a trustee of an SMSF to give the auditor a document, each trustee must ensure that the document is given to the auditor within 14 days of the request being made. Only documents that are relevant to the preparation of the report may be requested (s 35C(2)). A trustee who contravenes s 35C(1) or (2) commits an offence punishable by a term of imprisonment for two years (fault liability) or a penalty of 50 penalty units (strict liability). SMSFs — approved audit report form An approved form: (a) must either: (i) relate solely to the audit of the accounts and statements referred to in s 35B(1) and prepared in respect of a year of income; or (ii) relate only to the audit of those accounts and statements and of any other accounts and statements, prepared in respect of a year of income, that are identified in the form (b) must include a statement by the auditor as to the extent of the auditor’s compliance with the auditor independence requirements referred to in s 128F(d) (¶5-508), and (c) must include a statement by the auditor as to whether, in the auditor’s opinion, each trustee of the SMSF has, during the year of income, complied with the provisions of SISA or SISR that are identified in the form (s 35C(5)). ATO form The ATO approved form of the audit report to be given by the auditor to the trustee of an SMSF for reporting periods commencing on or after 1 July 2016 is available at www.ato.gov.au/Forms/SMSFindependent-auditor-s-report (Self-managed superannuation fund independent auditor’s report). For the ATO approved form in earlier periods, see ¶18-740. Time for auditor to give audit report to trustees The auditor must give the audit report to each trustee of an SMSF within the prescribed period after the end of the year of income (s 35C(6)). The prescribed period is 28 days after the trustee of the fund has provided all documents relevant to the preparation of the report to the auditor (reg 8.03). An auditor who contravenes s 35C(6) commits an offence punishable by a penalty of 50 penalty units (strict liability). Summary of key dates for SMSFs • The prescribed period within which SMSF trustees must appoint an auditor is the period ending 45 days before the due date for lodgment of the SMSF annual return. The prescribed period for the appointment does not vary when the prescribed period within which the auditor must give their report is extended. • The prescribed period for which an audit report in respect of an SMSF must be given is 28 days after the trustee of the SMSF has provided all documents relevant to the preparation of the report to the auditor. This ensures that SMSF auditors do not contravene the SISR if they cannot provide the audit report within the prescribed period due to circumstances beyond their control. SMSFs — annual return lodgment The trustee of an SMSF is required to lodge an annual return in respect of its operations each year.

The annual return reporting requirements for SMSFs (ie a fund that was an SMSF at any time during the year of income) are set out in SISA s 35D. An SMSF is required to lodge an annual return each year within the reporting period or such longer period allowed by the Commissioner (s 35D(2)). The reporting period is the period prescribed by the SISR or, if not prescribed, specified by legislative instrument made by the Commissioner. The lodgment date for an SMSF annual return is usually the date by which the fund is required to lodge its tax return for the year. The lodgment date is 31 October following the end of the income year for most funds, subject to exceptions (¶11-050, ¶11-070). The SMSF annual return must be in the “approved form” and contain such information as the form requires in respect of the year of income (¶5-510). An annual return that is not in the approved form may be rejected and such a decision is not subject to review (C & M Baldwin 92 ATC 2063). A trustee who contravenes s 35D commits an offence punishable by a penalty of 50 penalty units (fault liability) or 25 penalty units (strict liability). APRA guidance on audit of RSEs only APRA Prudential Standard SPS 310 Audit and Related Matters sets out the requirements in relation to the audit of an RSE licensee’s business operations and the audit-related reporting requirements (¶9-720). Superannuation Prudential Guide SPG 310 provides guidelines to assist RSE licensees and auditors in complying with those requirements and, more generally, to outline prudent practices in relation to audit arrangements. Among other requirements, APRA expects that all parts of the auditor report in the approved audit report form are submitted simultaneously by the RSE licensee, or by a person on behalf of the RSE licensee, in electronic format to APRA. RSE auditors may include additional material into the approved form where the RSE auditor has been engaged by the RSE licensee to express an audit opinion on additional aspects of its business operations. Such insertions would not limit or detract from the audit opinion provided in accordance with SPS 310.

¶3-330 Financial management Regulated superannuation funds are subject to stringent financial management standards (SISR reg 9.01 to 9.45). These standards cover: • the circumstances in which a fund is considered to be in an “unsatisfactory financial position” — in such a case, the auditor or actuary of the fund is obliged to report the situation to the trustee who is then required to take remedial action (¶3-600) • the requirements for maintaining and monitoring the solvency of a fund — different rules apply according to whether the fund is a defined benefit fund or an accumulation fund. From 12 May 2004, defined benefit funds must have at least 50 defined benefit members, and superannuation funds paying defined benefit pensions must have at least 50 members (¶3-160). Defined benefit funds The trustee of a “defined benefit fund” (¶3-010) is required to have an actuarial investigation made in relation to the fund, and must obtain an actuarial report in respect of that investigation (SISR reg 9.29; 9.30). The actuarial investigation and reporting requirements must be satisfied on the establishment of the fund or on conversion from an accumulation fund to a defined benefit fund, and in every three-year period after the last investigation. These requirements do not apply if the fund has a defined benefit member who is being paid a defined benefit pension. Such funds are subject to an annual actuarial certification (see “Funds paying pensions” below). Defined benefit funds must also comply with funding and solvency certification requirements, and take

specific action in case of technical insolvency and winding up of the fund (reg 9.09; 9.23). Exemptions from these requirements apply to funds which: • are part of a scheme established by the Superannuation Act 1976, the Superannuation Act 1990 or the Military Superannuation and Benefits Scheme • are part of an exempt public sector superannuation scheme, or • have never been used for SG purposes (reg 9.05; 9.20). Regulator may request new certificates or investigation The Regulator may direct the trustee of the fund, in writing, to obtain from an actuary a new or replacement funding and solvency certificate, or to require an actuarial investigation, if the Regulator considers on reasonable grounds that to do so would be in the prudential interests of the fund and in the best interests of fund members (SISR reg 9.09(1A); 9.29(2)). Funds paying pensions A fund which has a defined benefit member who is being paid a defined benefit pension from the fund, on or after 12 January 1999, must have actuarial certifications as to whether pensions will continue to be paid under the fund’s governing rules (SISR reg 9.29A). A “defined benefit pension” means a pension (within the meaning of the SISA) other than: • a pension purchased or obtained in the form of an annuity from a life assurance company by the trustee of a fund solely for the purpose of providing benefits to members of that fund, or • an allocated pension or a market linked pension. Funds providing pensions wholly through the purchase of annuities issued by life offices are exempted as the solvency arrangements supporting the annuity payments are subject to regulation under the Life Insurance Act 1995, and funds paying allocated or market linked pensions are exempted as the members bear both the investment and longevity risks in those products. After obtaining its first actuarial certificate under reg 9.29A, a fund must have actuarial investigations made at least once a year. A fund that has five or more members may apply to APRA to have the actuarial investigations made for a period not exceeding three years. Accumulation funds The trustee of an accumulation fund must comply with financial management standards which (SISR reg 9.34 to 9.45): • prescribe the maximum rate of return that the trustee of a solvent fund may allot to members in each year of income • require a fund that is technically insolvent to be wound up or be subject to a special supervision program aimed at restoring solvency within five years. The financial management standards do not apply to funds that are part of an exempt public sector superannuation scheme or that have never been used for SG purposes. [SLP ¶3-120]

¶3-340 Other trustee duties and administration obligations In addition to accounts, audit and record-keeping obligations (¶3-315), the trustee of a superannuation entity must comply with various duties and obligations relating to the entity’s management, administration and operation. These include: • takings steps to identify multiple accounts of members and merging such multiple accounts (see below)

• complying with rules when using a member’s TFN to facilitate account consolidation (see below) • seeking information from an investment manager on the making of, or the returns on, investments and other relevant information so as to be able to assess the manager’s investment management capability (s 102: ¶3-400) • keeping and retaining minutes of trustee meetings, records of trustee changes and consents to act as trustees, for at least 10 years (s 103; 104: these are strict liability offences) • keeping and retaining copies of all “member or beneficiary reports” which are given to members (such as those required under the SISA or the entity’s governing rules) for at least 10 years (not applicable to a PST) (s 105: this is a strict liability offence) • establishing procedures for the appointment of additional independent trustees or member representatives as trustees (not applicable to a superannuation fund with fewer than five members, an ADF or a PST) (s 107; 108: ¶3-130) • ensuring that the appointment of an investment manager is made in writing (s 124: ¶3-400) • ensuring the accounts, records, statements, etc, are properly and correctly maintained so as to protect the integrity of the SIS system (Pt 26 s 303; 306; 307; 308). A person responsible for keeping accounts, accounting and other records must not incorrectly keep accounts and records (a strict liability offence), or incorrectly keep or make accounts and records, or provide false or misleading information, with the intention to deceive or mislead (SISA s 300 to 308; Criminal Code Act 1995). Identifying and consolidating multiple accounts of members Each trustee of a superannuation entity (other than a PST or SMSF) must: • set out a procedure for identifying if multiple “superannuation accounts” (see below) are held by a member • carry out the procedure to identify such members at least once each financial year • for such members, merge the member’s multiple accounts where the trustee reasonably believes it would be in the member’s best interest, regardless of the balances of the accounts, and • ensure no fees are payable (other than a buy-sell spread: ¶9-210) for any merger (SISA s 108A). Section 108A is a strict liability offence provision (penalty: 50 penalty units). There is no requirement to merge a member’s multiple accounts if it is not practicable in the circumstances to merge the accounts, or one or more of the accounts is a defined benefit interest or income stream (s 108A(2)). Impracticable circumstances may include where a member has an interest in a hybrid scheme, which may include a defined benefit and an accumulation benefit. In deciding whether it is in the member’s best interest to merge accounts, the trustee must take into account the possible savings in fees, charges and insurance premiums which will result if they merge two or more separate accounts creating a single account (s 108A(4)). Trustees should not ordinarily regard cases like the following as impracticable: • where there are costs associated with the implementation of the rules or operational requirements that the fund considers are of a higher priority • where contributions have been paid into two or more accounts in the current reporting period, or higher per-account costs may arise as a result of having a smaller number of accounts. A “superannuation account” is a record of the member’s benefits, in relation to a superannuation entity in which the member has an interest, which is recorded separately from other benefits of the member in

relation to the entity (if any) and from other benefits of any other member in relation to the entity. TFN provisions in the SIS Act The rules regarding the use of TFNs by RSA providers, trustees of eligible superannuation entities and of regulated exempt public sector superannuation schemes (superannuation providers) are contained in Pt 11 of the RSA Act (¶10-350) and Pt 25A of the SIS Act. APRA shares administration of these provisions with the Commissioner of Taxation. APRA has made Retirement Savings Accounts Tax File Number approval No 1 of 2017 (F2017L01270) (the RSA TFN approval) and Superannuation Industry (Supervision) Tax File Number approval No 1 of 2017 (F2017L01262) (the SIS TFN approval). Relevantly, the SIS TFN approval made the following approvals for the purposes of the SISA provisions below: (a) s 299E(1) — approved the manner of a trustee of an eligible superannuation entity (other than an SMSF) or of a regulated exempt public sector superannuation scheme requesting that a beneficiary or applicant to become a beneficiary of the entity or scheme quote their TFN in connection with the operation or the possible future operation of the SIS Act and the other Superannuation Acts (b) s 299G(1) — approved the manner of a trustee of an eligible superannuation entity (other than an SMSF) requesting that a beneficiary of the entity or scheme quote their TFN in connection with the operation or the possible future operation of the Acts referred to in that subsection (c) s 299P(a) for the purposes only of s 299D — approved the manner for a beneficiary, or applicant to become a beneficiary, of an eligible superannuation entity (other than an SMSF) or of a regulated exempt public sector superannuation scheme, to quote their TFN to a trustee of the entity or scheme in connection with the operation or possible future operation of the SIS Act and the other Superannuation Acts (d) s 299S(1)(b) — approved the manner of a person setting out their TFN in an application to the trustee of an eligible superannuation entity (including an SMSF) or regulated exempt public sector superannuation scheme for payment of a benefit (e) s 299M(2) — approved the manner of a trustee of an eligible superannuation entity (other than an SMSF) (the first fund) informing another superannuation provider of a TFN of a beneficiary of the first fund, and (f) s 299N(2) — approved the manner of a trustee of a regulated exempt public sector superannuation scheme (the first fund) informing another superannuation provider of a TFN of a beneficiary of the first fund. The SISA TFN provisions and approvals are discussed further in ¶11-750. Privacy rules reflected in 2017 TFN approval The 2017 TFN approval also reflects the current Privacy (Tax File Number) Rule 2015 (2015 TFN Rule) issued by the Privacy Commissioner under s 17 of the Privacy Act 1988 (Privacy Act), which replaced the requirements previously set out in the Tax File Number Guidelines 2011. The 2015 TFN Rule regulates the collection, storage, use, disclosure, security and disposal of individuals’ TFN information and is legally binding on superannuation and RSA providers. APRA guidelines and further information For additional information, including FAQs, explanation of the TFN obligations under the Privacy (Tax File Number) Rule 2015 and TFN penalties, see: • APRA website — www.apra.gov.au/tax-file-number-approvals • APRA’s letter on the TFN approval, 28 September 2017 — www.apra.gov.au/sites/default/files/letterall-rse-licensees_superannuation-legislative-instruments_28-september-2017.pdf Use of TFNs for consolidation or roll-over

From 1 January 2012, the trustee of a superannuation entity must comply with prescribed rules when using a beneficiary’s TFN to locate accounts and where they use TFNs in order to facilitate account consolidation (SISR Div 6.8 reg 6.47 to 6.50). RSA providers are subject to similar rules under the RSAR (¶10-350). For the above purposes, a “beneficiary” means a person who quotes his/her TFN to a trustee in accordance with SISA s 299LA(1) and who is a beneficiary of an eligible superannuation entity or of a regulated exempt public sector superannuation scheme, or an applicant to become such a beneficiary. An RSA provider or superannuation entity means an RSA provider, eligible superannuation entity or regulated exempt public sector superannuation scheme. A trustee means a trustee of an eligible superannuation entity or of a regulated exempt public sector superannuation scheme (reg 6.47). The SISR Div 6.8 rules dealing with the conditions for use of TFNs, obtaining the beneficiary’s consent and procedures are the prescribed conditions for the use of TFNs quoted by a beneficiary to a trustee in accordance with s 299LA(1) (¶11-750). Under s 299LA(2), a trustee will have obtained sufficient consent to use the beneficiary’s TFN to locate multiple amounts within the fund if the beneficiary has quoted his/her TFN for superannuation purposes to the superannuation entity. The prescribed rules for the use of TFNs, obtaining the beneficiary’s consent and procedural requirements are the same under the SISR and RSAR and are discussed in ¶10-350. [SLP ¶3-600, ¶3-660]

¶3-350 Dealing with surpluses The trustee of a standard employer-sponsored fund (other than an SMSF) may make payments to a current or former standard employer-sponsor (including an associate or related body corporate of the employer-sponsor) only if the payment is a reasonable payment for services rendered in connection with the operation or management of the fund or is in the nature of an investment or a loan to the employersponsor under the in-house asset rules (SISA s 117(4), (8)). In other cases, payments to a standard employer-sponsor may be made only if: • the fund’s governing rules require or permit the payment to be made • the trustee had declared its intention to make the payment and, where appropriate, the trustee had equal employer/member representation at the time of the declaration • an actuary has certified that the fund will remain in a satisfactory financial position if the payment were to be made • the trustee is satisfied that the payment and any associated changes to the governing rules are a reasonable resolution of the interests of the employer-sponsor and members • all members have been given notice of the proposed payment together with particulars of any changes to the governing rules • the trustee decided to make the payment or has passed a resolution agreeing to make the payment three months after the relevant notice was given to members • any other requirements prescribed by the SISR have been complied with (s 117(5)). Any or all of the above conditions may be waived at APRA’s discretion. The restrictions on payments to employer-sponsors will not apply in circumstances where their application would result in the acquisition of property otherwise than on just terms and the acquisition would be invalid because of s 51(xxxi) of the Constitution (s 117(3A)). Apart from the SISA restrictions, trustees must also have regard to trust law issues relevant to a proposed return of surplus. For example, the High Court has held that the use of a surplus in an employersponsored superannuation fund could create an industrial dispute over which the industrial tribunal had

jurisdiction (Shell Australia (1992) 174 CLR 345). In UEB (1991) 1 NZSC 40,233, an amendment to the trust deed of a superannuation fund which allowed a surplus to be returned to the employer on termination of the fund was held to be invalid and beyond the trustee’s powers. The amendment adversely affected the members whose consent was not obtained and could not remove the prohibition in the trust deed on payments of surplus to the employer. Also, in Hillsdown (1997) 1 All ER 862 (an appeal from the UK Pensions Ombudsman heard in the UK High Court of Justice, before Knox J), a payment of surplus to an employer under a transfer-out power was held to be both a breach of the employer’s implied obligation of good faith to its employees, a fraud on a power and a breach of trust, even though the trustees had acted honestly and intended to act in the best interests of members. For a case where a return of surplus to the employer in conjunction with an increase in members’ benefits was held to be valid, see Lock (1991) 25 NSWLR 593. [SLP ¶3-640, ¶3-645]

¶3-355 Splitting superannuation interests on marriage breakdown The Family Law (Superannuation) Regulations 2001 (FLSR) provide the administrative framework for the application of the Family Law Act 1975 (FLA), Pt VIIIB. Essentially, that Part allows a member spouse of a superannuation fund or ADF to make an agreement with his/her non-member spouse to split the member spouse’s superannuation interest between them on separation. If the parties are unable to agree, the Family Court will be able to order that the superannuation interest be split between them. From 15 June 2005, married couples are also able to split annuities purchased wholly with roll-over amounts (a “superannuation annuity”) in the same way as other superannuation benefits under FLA Pt VIIIB. A superannuation annuity that is split on marriage breakdown is given the same treatment as that applying to pensions under the SISR and the Income Tax Regulations 1936 (ITR) (SISR reg 1.05). The FLSR provisions commenced when Pt VIIIB came into effect on 28 December 2002. Superannuation splitting under the FLA and FLSR is discussed in detail in Chapter 14. Trustees’ obligations and options for superannuation interests subject to a payment split The regulatory and administrative framework for trustees of regulated superannuation funds and ADFs to deal with the splitting of a member’s superannuation interest pursuant to a financial agreement or court order under Pt VIIIB, and the additional options that may be exercised in relation to the interest that is subject to a payment split, are contained in SISR Pt 7A (reg 7A.01 to 7A.22), as below. • Division 7A.1A sets out the obligations and options for trustees in dealing with an original superannuation interest that is subject to a payment split and an allocated pension or market linked pension is being paid in respect of the interest, and no request has been received as to how the interest is to be dealt with. • Division 7A.2 further clarifies the obligations and options where the original superannuation interest is an accumulation interest in the growth phase or an allocated pension or market linked pension is being paid in respect of the interest. The Division is not applicable to a “partially vested accumulation interest” or the interest is determined by reference to a life insurance policy, or to an original interest if the trustee has created a non-member spouse interest under reg 7A.03B. • Division 7A.3 sets out the payment options and standards for the non-member spouse entitlements in respect of the split superannuation interests (ie the preservation and conditions of release of the benefits). • Division 7A.4 sets out further rules for creating a new interest in the fund for the non-member spouse, or for rolling over or transferring the benefits for, or paying the benefits to, the non-member spouse. Generally, where a member holds a superannuation interest (the “original interest”) which becomes subject to a family law agreement or order, the member’s former spouse may ask the trustee to create a new interest in the fund to hold his/her entitlement under Div 7A.2. If the member’s interest is an allocated pension or market linked pension, the trustee may create a new interest for the former spouse without

waiting for a request. If the original interest is an accumulation interest in the growth phase (ie payments have not begun to be made to the member), the former spouse can also request a new interest, roll-over or lump sum payment of his/her entitlement under Div 7A.2. In summary, the SISR provisions: • require the trustee of the fund or ADF to give notice to the member spouse and non-member spouse that the member spouse’s superannuation interest is subject to a payment split • if the interest is held in an SMSF, allow the member spouse to request the trustee to roll over or transfer the non-member spouse’s entitlement to a regulated superannuation fund, ADF, RSA or exempt public sector superannuation scheme (EPSSS) nominated by the non-member spouse • allow the non-member spouse to request the trustee to create a new interest in the fund or ADF on his/her behalf, transfer the entitlement to another regulated superannuation fund, ADF, RSA or EPSSS nominated by the non-member spouse or, if the non-member spouse has met a condition of release, payment of his/her entitlement • allow the trustee, if no request is received from the member spouse or non-member spouse, to create an interest on behalf of the non-member spouse or roll over or transfer the non-member spouse’s entitlement, if no fund is then nominated, to an eligible rollover fund • ensure that unrestricted non-preserved, restricted non-preserved and preserved benefits are shared between the parties on an equal basis in proportion to their share of overall benefits • ensure that minimum benefits held in the fund or ADF are shared proportionately between the member spouse and non-member spouse, with the trustee having the option of making all of the member spouse’s and non-member spouse’s benefits minimum benefits, provided the minimum benefits of other fund members are not reduced • provide for information to be disclosed or given by the trustee to the non-member spouse before the non-member spouse has an interest created, and for the provision of ongoing information where an interest cannot be created or transferred (eg in the case of defined benefit schemes). If a trustee acts to satisfy a payment split (eg by creating a new interest for a non-member spouse or transferring or rolling over an amount to another fund or RSA for the benefit of a non-member spouse or ensure that a future payment of the superannuation interest would not be a splittable payment under the FLSR), the trustee’s action will comply with the payment standards in the SISR (¶3-286) (reg 6.17(2A), (2B)). Altering a member’s right or claim to accrued benefits to satisfy a superannuation agreement, flag lifting agreement or splitting order is also permitted (reg 13.16(2)(f): ¶3-270). Trustee to provide information about interests subject to a split The information requirements in relation to superannuation interests that are subject to a split are set out in SISR Pt 2 Div 2.5A (reg 2.36B to 2.36E). If an interest in a superannuation fund (or ADF) becomes subject to a payment split, the trustee of the fund must notify the member spouse and non-member spouse in writing that the interest is subject to a payment. This “payment split notice” must be given: • within 28 days of a payment split under a superannuation agreement or flag-lifting agreement, or • in the case of a splitting order, by the later of the end of 28 days after the “operative time” (see below) for the payment split and the end of 28 days after the trustee receives a copy of the order. The payment split notice must contain the information set out in reg 2.36C, such as the fund’s contact details, whether the governing rules will allow the non-member spouse to be a member of the fund, the circumstances under which the entitlement is payable to the non-member spouse, the value of the components of the benefit and, if the non-member spouse is able to become a fund member, all relevant

details to understand the management and financial condition of the fund. Operative time — deeming provision Special rules ensure that certain SISA provisions are not inadvertently breached when the trustee of a superannuation fund receives a court order which specifies an operative time that is in the past. In relation to the payment split of a member spouse’s superannuation interest under a court order, the “operative time” means the time specified in the order (which may be a time in the past), and in relation to a payment split under a superannuation 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 or, in the case of an SMSF, when the agreement is served on the trustee. When the trustee is served with a court order specifying an operative time that is in the past, the nonmember 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 to prevent an inadvertent breach of the following provisions (SISR reg 1.04AAA(2)): • s 17A, except s 17A(5) — conditions for SMSFs (¶5-220) • s 65 — lending to fund members (¶3-420), and • Pt 8 — the in-house assets rules (¶3-450). Also, the non-member spouse is to be treated as a member of the fund from the later of the end of six months after the operative time for the payment split and the end of six months after the trustee receives the agreement or order (reg 1.04AAA(3)). This rule is relevant to s 17A(5), which provides when an SMSF would cease to be an SMSF due to the admission of new members and therefore no longer has fewer than five members. It ensures that SMSFs and SAFs have sufficient time to restructure their affairs if a court order specifies an operative time which is a date in the past so they are not in breach of the above SISA provisions.

¶3-360 Amalgamation of funds — successor funds Part 18 of SISA provides for the amalgamation of funds in circumstances where the trustee of a regulated superannuation fund or ADF has not become a registrable superannuation entity (RSE) licensee (¶3-480). Amalgamations may occur as APRA can suspend or remove such a trustee and put in place an RSE licensee as an acting trustee. Part 18 facilitates the transfer of all members’ benefits in an RSE to another entity. APRA may approve the transfer of all benefits of members and beneficiaries in a regulated superannuation fund or ADF (transferor fund) to another regulated fund or ADF (transferee fund) if all the trustees of the transferor fund are party to the transfer and the trustee of the transferee fund is an approved trustee (s 144; 145). For a transfer of benefits to be approved, APRA must be satisfied that: • all reasonable attempts to bring about the transfer under another SISA or SISR provision (eg under the successor fund arrangements) have failed or the transfer was taking place under a scheme for winding up or dissolving the transferor fund under s 142 (¶3-290) • the transfer is reasonable in all the circumstances, having regard to the factors set out in s 146. When the benefits of members and beneficiaries in a transferor fund are transferred to a transferee fund, members and beneficiaries and other persons cease respectively to have rights or contingent rights against the transferor fund (s 147). This provision ensures there is a clean break between members and beneficiaries and other persons holding contingent rights against a transferor fund after the transfer. The ITAA97 provides separate CGT roll-over and loss transfer relief for merging superannuation funds and transfers of member benefits to another superannuation fund in certain circumstances (¶7-140).

Successor funds The benefits of a member of a regulated superannuation fund may be transferred to a successor fund (SISR reg 6.29(1)) (¶3-284). A “successor fund”, in relation to a transfer of benefits of a member from a fund (called the original fund), means a fund which satisfies the following conditions: • the fund confers on the member equivalent rights to the rights that the member had under the original fund in respect of the benefits • before the transfer, the trustee of the fund has agreed with the trustee of the original fund that the fund will confer on the member equivalent rights to the rights that the member had under the original fund in respect of the benefits (reg 1.03(1)). To meet the “equivalent rights” requirement, the member’s position and rights in the successor fund must effectively be the same as in the original fund. That is, the member’s rights in respect of benefits are equivalent in value, measure, force and effect to those in the original fund. Although special consideration should be given to significant rights, any judgment of whether rights are equivalent should not be assessed solely on an individual change to a specific right but on the equivalency of the bundle of rights (including rights to contingent benefits). Both the transferor and transferee trustees must satisfy themselves whether equivalent rights will be conferred in a particular case based on the individual circumstances of a transfer, a scrutiny of the fund’s governing rules, due diligence examinations and legal advice. Successor fund transfer rules not applicable to MySuper transfers The general rule for the transfer of member benefits in reg 6.29(1)(d) provides that a member’s benefits in a fund must not be transferred from the fund unless the trustee of the fund is required by a prudential standard made under SISA s 34C to transfer the benefits for s 29SAA, 29SAB, 387, 388 or 394 (see ¶3284). These are transfers of accrued default member accounts (discussed in ¶9-120 and ¶9-130). The rule in reg 6.29(1)(d) is necessary as prudential standards are of no effect to the extent that they conflict with the SISR. Therefore, transfers under prudential standards would have to otherwise satisfy one of the existing requirements of reg 6.29 noted in ¶3-284. The successor fund transfer rules do not apply to the transfer of accrued default amounts to a MySuper product in another fund. These transfers are discussed in ¶9-120 and ¶9-130. A prudential standard, made under s 34C for the purpose of s 29SAA, 29SAB, 387, 388 or 394, requires the transfer of the accrued default amounts to another fund in the following circumstances: • Paragraphs 29SAA(1)(b) and 387(1)(b) require the trustee to take the action required under the prudential standards in relation to accrued default amounts where the trustee has sought MySuper authorisation but the member is not eligible to be in the fund’s MySuper product. • Section 29SAB requires action to be taken under the prudential standards if the authorisation to offer a MySuper product is cancelled under s 29U(1). • Section 388 requires the trustee to take the action required by the prudential standards if the trustee holds accrued default amounts and has not applied for MySuper authorisation before 1 July 2017. • Section 394 requires trustees that are not authorised to operate an eligible rollover fund (EDR) to transfer the amounts held in existing EDRs to an authorised EDR fund or a fund that offers a MySuper product in accordance with the prudential standards. APRA prudential standards and guidelines APRA prudential standards and guidelines on successor fund transfers and wind-ups and related issues are noted at ¶3-284 and ¶9-720.

¶3-370 Winding up fund

A superannuation fund may be wound up for one or more of the following reasons: • the principal employer-sponsor is being wound up or liquidated, or has been taken over or amalgamated resulting in a consolidation of superannuation funds • insolvency of the fund • rationalisation of various existing superannuation arrangements covering a number of different groups of employees into a single arrangement, or a decision by the employer-sponsor to replace the existing superannuation arrangements for employees • the Regulator has formulated a scheme for the winding up or dissolution, or both, of the fund under SISA s 142. The prudential requirements to which trustees must have regard during the winding-up process include the following: • lodging of returns for the fund (as required under the SIS legislation or the FSCDA: ¶3-310) • notifying the regulator of a significant adverse event affecting the financial position of the fund (SISA s 106(1): ¶3-310) • clarifying and complying with the conditions for return of surpluses in an employer-sponsored fund to a standard employer-sponsor (SISA s 117: ¶3-350) • complying with the successor fund rules for transfers of members’ benefits (SISR reg 6.29: ¶3-284) • complying with or amending the trust deed to include an enabling clause to wind up the fund (SISR reg 4.05(2)(b)) • complying with the special rules for winding up defined benefit funds (SISR Div 9.4) • complying with other notification requirements, eg giving written notice to the regulator of the decision or resolution to wind up, or of a trustee’s decision to retire, or trustee changes (SISR reg 11.07). Regulators’ guidelines Guidance for successor fund transfers and wind-ups may be found in Superannuation Prudential Practice Guide SPG 227 (¶9-720) (see Superannaution Reporting Standard SRS 602.0 Wind-up at ¶9-750). For the ATO fact sheet on superannuation fund wind-ups and related reporting, see www.ato.gov.au/Super/Self-managed-super-funds/Winding-up.

¶3-380 Lost members and unclaimed superannuation benefits The trustee of a regulated superannuation fund or an ADF or an RSA provider (superannuation provider) is required to deal with unclaimed superannuation monies of members in accordance with the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLM Act) and to pay unclaimed money of members to the Commissioner of Taxation (ATO) or a state or territory government or authority (“state or territory authority”). The Commissioner of Taxation is responsible for the administration of the SUMLM Act. The term “unclaimed superannuation monies” covers these types of unclaimed money: • unclaimed money under the SUMLM Act (see “Unclaimed Money” below) • lost member accounts, ie small accounts of lost members, and inactive accounts of unidentifiable members (see “Lost members” below), and • unclaimed superannuation of former temporary residents, and

• superannuation of inactive low-balance members. In this paragraph, all references are to the SUMLM Act and its regulations unless stated otherwise. A “member” means a member of a superannuation fund, a depositor with an ADF or an RSA holder, and a “fund” means a regulated superannuation fund, an ADF or an RSA. State and territory authorities and public sector superannuation schemes may pay unclaimed superannuation moneys to the Commissioner, and the Commissioner may accept, and subsequently pay out, amounts transferred by state and territory authorities and public sector superannuation schemes. A superannuation provider who has paid unclaimed money to the ATO or a state or territory authority is discharged from liability as trustee in respect of that money. A payment of unclaimed money to the ATO or a state or territory authority is not assessable to the person entitled to the unclaimed money at the time of payment. However, a repayment of the unclaimed money subsequently to a person entitled to it (see below) will be assessable as a superannuation benefit (¶8130). Individuals are able to claim back monies from the Commissioner at any time. Interest on these monies is currently only payable in the case of former temporary residents who become an Australian or New Zealand citizen or hold a permanent resident visa (s 20H(2A)). Interest accrues and is payable on all unclaimed superannuation monies held by the ATO (s 24G(3A), (3B), (3C), (3D); 17(2AB), (2AC), (2AD), (2AE); 20H(2AA)). Outline of SUMLM Act The outline below is provided in s 7 of the SUMLM Act. Readers are advised to refer to the Wolters Kluwer Australian Superannuation Law & Practice service and to the legislation for further coverage and information. Unclaimed money register At the times determined by the Commissioner, superannuation providers must give the Commissioner of Taxation details relating to any unclaimed money they hold in respect of members who have reached the eligibility age or who have died. Unclaimed money is money in an inactive account which the superannuation provider is unable to ensure is received by a person entitled to receive it. Superannuation providers must pay to the Commissioner of Taxation any unclaimed money they hold. Later, the Commissioner must, if satisfied that it is possible to do so, pay the amount he or she has received in respect of a person to: (a) the person (b) to a fund identified by the person (c) if the person has died — to the person's death beneficiaries or legal personal representative. If a State or Territory law regulates unclaimed money in a way consistent with this Act, superannuation providers that are trustees of public sector superannuation schemes may give details relating to the money, and pay the money, to the relevant State or Territory authority instead of paying it to the Commissioner of Taxation. The Commissioner of Taxation may publish, or make available, details relating to unclaimed money in respect of members who have reached the eligibility age or who have died. Superannuation of former temporary residents The Commissioner of Taxation must give the superannuation provider for a fund a notice identifying a member of the fund if satisfied that the member is a former temporary resident. The superannuation provider must give the Commissioner a statement and pay the Commissioner the amount that would be payable to the member if the member had requested payment in connection with

leaving Australia (subject to reductions for amounts paid or payable from the fund in respect of the member). If the Commissioner is satisfied, he or she has received a payment under this Act for such a member, the Commissioner must pay the amount he or she has received (and interest, in some cases) to the member, to a fund identified by the member or, if the member has died, to the member’s death beneficiaries or legal personal representative. The Commissioner of Taxation may publish, or make available, details relating to amounts paid to the Commissioner in respect of such members. Lost members register The Commissioner of Taxation may publish, or make available, details relating to lost members. Superannuation of lost members At the times determined by the Commissioner, superannuation providers must give the Commissioner of Taxation details relating to: (a) small accounts of lost members, and (b) inactive accounts of unidentifiable lost members. Superannuation providers must pay to the Commissioner of Taxation the value of any such accounts. Later, the Commissioner must, if satisfied that it is possible to do so, pay an amount he or she has received in respect of a person: (a) to a fund identified by the person, or (b) if the person has reached eligibility age or the amount is less than $200 — to the person, or (c) if the person has died — to the person's death beneficiaries or legal personal representative. Superannuation of inactive low-balance members At times determined by the Commissioner, superannuation providers must give the Commissioner of Taxation details relating to inactive low-balance accounts. Superannuation providers must pay to the Commissioner of Taxation the value of any such accounts. Later, the Commissioner must, if satisfied that it is possible to do so, pay an amount the Commissioner has received in respect of a person: (a) to a fund identified by the person, or (b) if the person has reached eligibility age or the amount is less than $200 — to the person, or (c) if the person has died — to the person’s death beneficiaries or legal personal representative. Reunification of amounts held by the Commissioner If, having taken the steps required in relation to unclaimed amounts, or amounts held by the Commissioner for lost members or inactive low-balance members, the Commissioner still holds an amount, the Commissioner must pay that amount to a fund in which the member for whom the Commissioner holds the amount is active, or in accordance with the regulations. Prescribed public sector superannuation schemes The trustees of certain public sector superannuation schemes may comply with this Act in the same way as superannuation providers. Unclaimed money An amount payable to a member is “unclaimed money” if: • the member has reached the eligibility age (65 in all cases, or in pre-29 August 2002 cases, 65 for a man and 60 for a woman)

• the superannuation provider has not received an amount in respect of the member (and, in the case of a defined benefits superannuation scheme, no benefit has accrued in respect of the member) within the last two years, and • after the end of five years since the superannuation provider last had contact with the member, the provider has been unable to contact the member again after making reasonable efforts (s 12). An amount payable is taken to be unclaimed money if: • a “payment split” applies to a “splittable payment” (within the meaning of those terms in Pt VIIIB of the Family Law Act 1975) in respect of a superannuation interest of a fund member and, as a result, the non-member spouse (or his/her legal personal representative if he/she has died) is entitled to be paid an amount, and • after making reasonable efforts and after a reasonable period has passed, the superannuation provider concerned is unable to ensure that the non-member spouse or his/her legal personal representative, as the case may be, receives the amount (s 12(2)). The trustee of a superannuation fund must make reasonable efforts to contact a member who has reached eligibility age (age 65 for a man and 60 for a woman) and the member’s account is inactive within the last two years and five years have passed since the trustee last had contact with the member (s 13(1)). If the member has reach eligibility age and there has been a payment split under the family law or the member has died, the trustee must make reasonable efforts to ensure that the non-member spouse or the legal personal representative of the deceased member, as the case may be, receives the amount (s 13(1A)). In the case of a deceased member, an amount payable in respect of a member of a fund is taken to be “unclaimed money” if: (a) the member has died (b) the superannuation provider determines that, under the governing rules of the fund or by operation of law, a benefit (other than a pension or annuity) is immediately payable in respect of the member (c) the superannuation provider has not received an amount in respect of the member (and, in the case of a defined benefits superannuation scheme, no benefit has accrued in respect of the member) within the last two years, and (d) after making reasonable efforts and after a reasonable period has passed, the superannuation provider is unable to ensure that the benefit is received by the person who is entitled to receive the benefit (s 14). A superannuation provider who does not know a member’s date of birth or sex must make reasonable attempts to obtain that information. If that information is known, the provider is required to keep records of it (s 10). Certain assumptions may be used when determining whether a member has reached eligibility age. Penalties may be imposed for failing to comply with the above requirements (s 13(2); 15). States and Territories States and territories which have legislation dealing with unclaimed money are: • New South Wales — Unclaimed Money Act 1995 (NSW) • Victoria — Unclaimed Money Act 2008 (Vic) (replacing former Unclaimed Moneys Act 1962) • Queensland — Public Trustee Act 1978 (Qld) • South Australia — Unclaimed Superannuation Benefits Act 1997 (SA)

• Tasmania — Unclaimed Moneys Act 1918 (Tas) • Northern Territory — Unclaimed Superannuation Benefits Act 1998 (NT) • Australian Capital Territory — Unclaimed Moneys Act 1950 (ACT). Lost members The lost members’ scheme under the SUMLM Act applies to all regulated superannuation funds (except SMSFs), ADFs, ERFs and RSA providers. SMSFs are not covered as they cannot have “lost members”. The term “lost member” in the SUMLM Act is defined by reference its meaning in the SIS Regulations and the RSAR Regulations. Except in certain circumstances (see below), a “lost member” is a member of a superannuation fund, ADF, ERF or an RSA holder who: • is “uncontactable” — ie either the fund or RSA never had an address for the member or two written communications sent to the member’s last-known address have been returned unclaimed, and the fund has not received a contribution or roll-over for the member within the last 12 months of the member’s membership of the fund • is an “inactive member” — ie he/she has been a member for more than two years, joined the fund or RSA under a standard employer-sponsored arrangement, and in the last five years the fund or RSA has not received further contributions or roll-over amounts, or • joined the fund from another fund, exempt public sector superannuation scheme (EPSSS) or RSA as a lost member/RSA holder (RSAR reg 1.06; SISR reg 1.03A). A member is not a lost member if: (a) the member is permanently excluded from being a lost member; or (b) within the last two years of the member’s membership, the superannuation provider has verified that the member’s address is correct and has no reason to believe that the address is now incorrect. A member is permanently excluded from being a lost member if: • the member is an “inactive member” who has indicated by a positive act (eg by deferring a benefit) that he/she wishes to remain a member • the member has contacted the fund or RSA at any time after becoming a member indicating that he/she wishes to remain a member, or • the member is a member of an SMSF (reg 1.03A(2)). Despite the above, a superannuation provider may also decide that a member, class of members or all members cannot be permanently excluded from becoming lost members (reg 1.03A(3)). Consequences of members becoming lost If a fund has lost members, the consequences are: • the superannuation provider must report details of the lost member to the ATO for recording on the lost members register • if the lost member is transferred to another fund or an EPSSS, the transferor fund must provide certain information about the member to the transferee fund as required under reg 7.9.81 of the Corporations Regulations 2001 (note to reg 1.03A(3)). There may also be consequences regarding the information to be supplied to the member (see CR reg 7.9.60A and Pt 14 of Sch 10A). Lost member accounts An account in a superannuation fund (or an RSA) is taken to be a “lost member account” if: • the member on whose behalf the account is held is a “lost member” (see above)

• the balance of the account is less than $6,000, and • the account does not support or relate to a defined benefit interest (within the meaning of ITAA97 s 291-175 and former s 292-175) (s 24B(1)). The balance of an account does not reflect any earnings, fees or charges that have not yet been credited to, or debited from, the account. An account in a fund is also taken to be a “lost member account” if: • the member on whose behalf the account is held is a “lost member” • the superannuation provider has not received an amount in respect of the member within the last 12 months • the superannuation provider is satisfied that it will never be possible for the provider, having regard to the information reasonably available to the provider, to pay an amount to the member, and • the account does not support or relate to a defined benefit interest (s 24B(2)). Unclaimed superannuation of former temporary residents The SUMLM Act also provides a scheme to deal with the superannuation benefits of “former temporary residents” (as defined in s 20AA) (SUMLMA Pt 3A). Briefly, the Commissioner must give superannuation funds a notice identifying a fund member if satisfied that the member used to be the holder of a temporary visa, has left Australia, and is not an Australian or New Zealand citizen or the holder of a visa. The fund is then required to give the Commissioner a statement and pay to the Commissioner the amount that would be payable to the member if the member had requested payment in connection with leaving Australia (subject to reductions for amounts paid or payable from the fund in respect of the member). On application, the Commissioner must pay the unclaimed amount (plus interest, in some cases) to the member, to a fund identified by the member or, if the member has died, to the member’s legal personal representative. The scheme and taxation of unclaimed superannuation of former temporary residents are discussed in ¶8-400. Events-based reporting of lost members and unclaimed money Superannuation providers are required to report information about superannuation member attributes and superannuation transactions, including lost members and unclaimed superannuation money, to the Commissioner under TAA Sch 1 s 390-5 in the approved form under event-based reporting (see ¶9-795). ATO Guidance The ATO’s protocol about unclaimed superannuation money and lost members may be found in www.ato.gov.au/Super/APRA-regulated-funds/Fund-reporting-protocol/Unclaimed-superannuationmoney-protocol/ and www.ato.gov.au/Super/APRA-regulated-funds/Fund-reporting-protocol/Lostmembers-register-protocol/.

¶3-385 Transferring inactive low-balance accounts to ATO From 13 March 2019, superannuation providers are required to transfer superannuation savings accounts with balances below $6,000 to the Commissioner if an account, related to a MySuper or choice product, has been inactive for a continuous period of 16 months. An account need not be transferred if the member has chosen to maintain insurance or if the existing insurance cover has not ceased (SUMLMA Pt 3B). Also, from 13 March 2019, the ATO is also empowered to proactively pay amounts held by it into a member’s active superannuation account, where the reunited account balance would be greater than $6,000 (SUMLMA Pt 4B). Part 4B sets out a procedure for transferring amounts received by the Commissioner under SUMLMA Pts 3 (unclaimed money paid to the ATO), 3B (low balances in inactive

accounts paid to the ATO) and 4A (lost member accounts paid to the ATO) in respect of a person into a single active account held by a superannuation provider in respect of the person. APRA and ATO guidelines The Regulators’ guidelines are available in Protect Your Super (letstalk.ato.gov.au/SuperCommunity/news_feed/protect-your-super) which contains the ATO’s advice and implementation documents on the PYSP changes, and in APRA’s letter of 8 May 2019 and FAQs to all RSE trustees about the PYSP reforms (www.apra.gov.au/sites/default/files/letter_protecting_your_super_legislative_amendments_implementation.pdf www.apra.gov.au/protecting-your-super-package-frequently-asked-questions). [SLP ¶3-036, ¶3-970, ¶30-000]

Pension Standards ¶3-390 Minimum standards for income streams Superannuation income streams must comply with the minimum standards set out in SISR reg 1.05 and 1.06, and related pre-commutation income payment requirements set out in reg 1.07A to 1.07D, in order to be an “annuity” or a “pension” for SISA purposes, and to be taxed as a superannuation income stream benefit (¶8-150). An annuity or pension is a benefit which meets the standards of reg 1.05(11A) and 1.06(9A) respectively (post-June 2007 standards), and which does not permit the capital supporting the income stream to be added to by way of contribution or roll-over once it has commenced. The income stream must also comply with rules requiring a minimum payment to be made for the year if the income stream is commuted during the year (reg 1.05(1); 1.06(1)). Annuities and pensions which commence before 20 September 2007 will satisfy the minimum standards if they meet the standards set out in reg 1.05(1A) and 1.06(1A) respectively (existing standards). Annuities and pensions which commence in the period between 1 July 2007 and 20 September 2007 can meet either the pre-July or post-June 2007 standards. Regulations 1.05(1B) and 1.06(1B) clarify that an annuity or pension includes a complying life expectancy or market linked income stream that commences on or after 20 September 2007 from the commutation of another complying income stream, provided the new income stream also meets the post-June 2007 standards. That is, these market linked annuities and pensions meet the standards in reg 1.05(9) or (10) and the post-June 2007 standards in reg 1.05(11A) in the case of an annuity, and reg 1.06(7) or (8) and the post-June 2007 standards in reg 1.06(9A) in the case of pensions. In practice, where the new market linked income streams meet the relevant standards, the allowable term of the new market linked annuities or pension has to be chosen such that the total value of payments in each year is at least equal to the minimum payment amounts in SISR Sch 7 (see below). Lifetime annuities and pensions which meet the existing standards in reg 1.05(2) or 1.06(2) also meet the post-June 2007 standards (see below). Topics • SISR minimum standards for pension and annuities and classes • Minimum pension payment standards under reg 1.05(11A) and 1.06(9A) • Schedule 7 — minimum payment amounts • Pre-commutation payment rule • Transition to retirement income streams • Restriction on factors for converting lifetime or life expectancy pensions

• Minimum standards under reg 1.06A for innovative income stream products — 1 July 2017 onwards • ATO guidelines — superannuation interests and minimum standards • ATO guidelines — compliance with SISR minimum standards • ATO guidelines — commencement and cessation of income streams • Non-compliance with pension standards — tax consequences. SISR minimum standards for pension and annuities and classes The pre-July 2007 minimum standards cover annuities and pensions of the following classes: • lifetime annuities or pensions — where the annuity or pension is paid at least annually throughout the life of the primary beneficiary (and of the reversionary beneficiary, if any) and the size of the payment in a year is fixed, allowing for variation only as specified in the contract or rules. That is, these income streams meet the standards in reg 1.05(2) or 1.06(2) • life expectancy annuities or pensions — where the annuity or pension is paid at least annually to the primary beneficiary (or a reversionary beneficiary, if any) and the total amount of the payments in the first year and subsequent years is fixed, allowing for variation only as prescribed. For annuities or pensions which commenced before 20 September 2004, the primary beneficiary must purchase the annuity or be entitled to the pension on or after the beneficiary’s age pension age or service pension age, and the annuity or pension must be payable for a term equal to the beneficiary’s life expectancy (where life expectancy is less than 15 years) or a term that is at least 15 years but not greater than life expectancy (where life expectancy exceeds 15 years). Annuities or pensions commencing on or after 20 September 2004 can have the same term options as market linked products (see below). That is, these income streams meet the standards in reg 1.05(9) or 1.06(7) • market linked annuities or pensions (also commonly called “term allocated annuities or pensions”) — where the annuity or pension is paid at least annually. For annuities or pensions which commenced on or after 20 September 2004 and before 1 January 2006, payments of the annuity or pension must be made to the primary beneficiary throughout a period of whole years that is not less than the beneficiary’s life expectancy on the commencement day (rounded up to the next whole number) and not greater than the beneficiary’s life expectancy on the commencement day calculated as if he/she were five years younger (rounded up to the next whole number). An annuity or a pension with a commencement day on or after 1 January 2006 may be paid until the primary beneficiary or reversionary beneficiary reaches age 100. Where the term of the annuity or pension is set using the life expectancy or age of the primary beneficiary, the maximum term is the difference between age 100 and the primary beneficiary’s age in years on the commencement day (or, where greater, the life expectancy of the primary beneficiary calculated as if they were five years younger on the commencement day). The total amount of a market linked annuity or pension to be made in a year (excluding payments by way of commutation but including payments under a payment split) must be determined in accordance with SISR Sch 6 (or RSAR Sch 4) and annual payments may vary between plus or minus 10% of the rounded-up amount as determined under Sch 6 cl 1 and 4. That is, these income streams meet the standards in reg 1.05(10), 1.06(8); or RSAR reg 1.07(3A) and 1.08 • allocated annuities or pensions — where the annuities or pensions do not meet the lifetime annuity or pension standards and the payment amount in a year is not fixed. Payment of the annuity or pension must be made at least once annually, and the payments in a year (excluding payments by way of commutation but including payments under a payment split) are subject to the maximum and minimum limits prescribed (SISR Sch 1AAB or RSAR Sch 1A; SISR Sch 1A or RSAR Sch 1). That is, these income streams meet the standards in reg 1.05(4) or 1.06(4) • defined annuities and pensions — where the annuities or pensions do not meet the lifetime annuity or pension standards, but the payments in a year are fixed in the contract or rules, allowing for variation only as provided by the contract or rules or to make payments under a payment split. That

is, these income streams meet the standards in reg 1.05(6) or 1.06(6), and • hybrid annuities — where the annuities have features of allocated annuities and defined annuities (ie those income streams meeting the standards in reg 1.05(8)). Benefits in this category must comply with the standards applicable to the relevant component of the annuity as described above. Lifetime, life expectancy and market linked income streams (ie annuities and pension complying with their relevant standards) are commonly referred to as “complying pensions” under the social security law. These income streams enjoy an exemption from the social security assets test when determining entitlement to social security benefits (¶16-500). The minimum standards for complying pensions provide, among other things, that commutation can only occur in limited circumstances, including where the commutation amount is applied to commence another “complying” income stream. Summary of income stream classes Income streams effectively fall into two classes: • account-based income streams, where there is an account balance attributable to the beneficiary, and • non-account-based income streams — where there is no attributable account balance. Essentially, a benefit is taken to be a pension for the purposes of the SISA if: • it is provided under fund rules or a contract that meet the standards of reg 1.06(9A) (see “Minimum standards under reg 1.05(11A) and 1.06(9A)” below), and the rules do not permit the capital supporting the pension to be added to by way of contribution or roll-over after it has commenced • in the case of rules to which reg 1.06(9A)(a) applies, the rules also meet the pre-commutation payment standards of reg 1.07D, and • in the case of rules to which reg 1.06(9A)(b) applies, the rules also meet the pre-commutation payment standards of reg 1.07B (see “Pre-commutation payment rule” below). To provide for the income streams which had already commenced earlier, a benefit that commenced to be paid before 20 September 2007 is taken to be a pension if: • it is provided under fund rules that meet the standards of reg 1.06(2), (4), (6), (7) or (8) (see above) • where the primary beneficiary became entitled to the benefit on or after 20 September 1998 under the rules for life expectancy pensions, those rules provide that the commencement day is the day when the primary beneficiary became entitled to the pension, and • the rules also meet the minimum payment requirements if a commutation occurs, as provided in reg 1.07A, 1.07B and 1.07C, based on the type of pension involved (reg 1.06(1A)). Similarly, a benefit that commenced to be paid on or after 20 September 2007 is taken to be a pension if: • the benefit arises under fund rules that meet the standards of reg 1.06(7) or (8) and 1.06(9A) • the benefit was purchased with a roll-over superannuation benefit that resulted from the commutation of: (i) an annuity provided under a contract that meets the standards of reg 1.05(2), (9) or (10); (ii) a pension provided under rules that meet the standards of reg 1.06(2), (7) or (8); or (iii) a pension provided under terms and conditions that meet the standards of RSAR reg 1.07(3A), and • for a benefit that arises under rules that meet the standards of reg 1.06(7) or (8), the rules also meet the standards of reg 1.07B or 1.07C, respectively (reg 1.06(1B)). Similar deeming rules to the above for pensions apply where the primary income stream is an annuity (reg 1.05(1A), (1B)). Minimum standards under reg 1.05(11A) and 1.06(9A)

Under SISR reg 1.06(9A), the rules of the superannuation fund that provides the benefit (the pension) must ensure that payment of the pension is made at least annually, and that: (a) for a pension where there is an account balance attributable to the beneficiary — the total of payments in any year (including under a payment split) is at least the amount calculated under cl 1 of Sch 7 (see “Schedule 7 — minimum payment amounts” below), and (b) for a pension not covered by item (a) (ie non-account-based pensions): (i) both of the following apply: (A) the rules do not provide for a residual capital value, commutation value or withdrawal benefit greater than 100% of the purchase price of the pension (B) the total of payments in any year (including under a payment split) is at least the amount calculated under cl 2 of Sch 7, or (ii) each of the following applies: (A) the pension is payable throughout the life of the beneficiary (primary or reversionary), or for a fixed term of years that is no greater than the difference between the primary beneficiary’s age on the commencement day and age 100 (B) there is no arrangement for an amount (or a percentage of the purchase price) prescribed by the rules to be returned to the recipient when the pension ends (C) the total of payments from the pension in the first year (including under a payment split) is at least the amount calculated under cl 2 of Sch 7 (D) the total of payments from the pension in a subsequent year cannot vary from the total of payments in the previous year unless the variation is as a result of an indexation arrangement (see below) or the transfer of the pension to another person (E) if the pension is commuted, the commutation amount cannot exceed the benefit that was payable immediately before the commutation, or (iii) the standards of reg 1.06(2) are met, or (iv) for rules in existence on 29 June 2007, the standards of reg 1.06(2) would be met, except for the circumstances in which those rules allow for either or both of the following: (A) the pension to be commuted (B) the variation or cessation of pension payments in respect of a child of the deceased, and (c) the pension is transferable to another person only on the death of the beneficiary (primary or reversionary, as the case may be), and (d) the capital value of the pension and the income from it cannot be used as a security for a borrowing. The post-June 2007 minimum standards for an annuity under reg 1.05(11A) are similar to those above for a pension. A pension must satisfy the requirements of either reg 1.06(9A)(a) or 1.06(9A)(b) throughout its life. A single pension cannot satisfy one or the other, or purport to satisfy the requirements of both, at different points in time (see “ATO guidelines — superannuation interests and minimum standards” and “ATO guidelines — compliance with SISR minimum standards” below). A restriction applies to prevent an annuity or pension from being transferred or paid to a person who is ineligible to be paid a benefit in that form by the SISR payment standards (reg 1.05(11B); 1.06(9B)). Briefly, a deceased member’s benefits can only be cashed in annuity or pension form in favour of particular classes of recipients, and death benefits being paid in the form of an annuity or pension to a

child of a deceased member have to be cashed as a lump sum no later than the time at which the child attains the age of 25, unless the child has a permanent disability (reg 6.21(2A), (2B): ¶3-286). In addition, a pension must meet the minimum standards in reg 1.06(9A) if the pension is paid from a successor fund in accordance with rules to which reg 1.06(9A)(b)(iv) (see above) applied in the original fund (reg 1.06(9C)). Where applicable for the purpose of the minimum standards, an “indexation arrangement” is defined as an arrangement that results in the amount of annuity or pension payments increasing by the same percentage each year, or which results in the amount of annuity or pension payments in each year being adjusted in line with the consumer price index or a measure of average weekly earnings published by the Australian Statistician. Unless APRA otherwise approves, the indexation arrangement must result in payments from the annuity or pension being adjusted at least annually (reg 1.05(13); 1.06(11)). Schedule 7 — minimum payment amounts Schedule 7 contains the minimum payment rules for annuities and pensions under the minimum standards in reg 1.05(11A) and 1.06(9A). There is no maximum payment required annually and the maximum payment is effectively the account balance, except in the case of transition to retirement pensions in which case the total amount of payments in any year for the pension is limited to no greater than 10% of the account balance at the start of each year (see “Transition to retirement income streams” below). If an income stream commences on a day other than 1 July, the minimum payment amount for the first year of the income stream is to be applied proportionately to the number of days remaining in the financial year that include and follow the commencement day (cl 3). If the commencement day is on or after 1 June in a financial year, no payment is required to be made for that financial year (cl 4). The minimum payment amounts as determined under Sch 7 are rounded to the nearest 10 whole dollars. For an account-based income stream, the minimum annual payment amount is calculated by multiplying the account balance of the income stream on 1 July of the relevant year (or the commencement day in the case of the first year of the income stream where that is a day other than 1 July) by the percentage factor (see below) that corresponds to the beneficiary’s age on 1 July in the financial year (or on the commencement day in the case of the first year of the income stream) (cl 1(1)). The “account balance” is the amount of the annuity or pension account balance on 1 July in the financial year in which the payment was made, or the day of commencement (if the annuity or pension commenced in that year). This would be the total consideration paid to purchase the annuity or pension, including any returns and less any fees, charges, taxes or payments to the annuitant or pensioner, or payments made under a payment split. If the value of the annuity or pension as noted above is less than the withdrawal benefit to which the beneficiary would be entitled if the annuity or pension were to be fully commuted, the account balance is the value of the withdrawal benefit. The table below sets out the percentage factor for each age group. Age of beneficiary Percentage factor Under 65

4%

65–74

5%

75–79

6%

80–84

7%

85–89

9%

90–94

11%

95 or more

14%

For a non-account based income stream, the minimum annual payment amount is calculated by

multiplying the purchase price of the income stream by the percentage factor that corresponds to the beneficiary’s age on the commencement day (in the case of the first year of the income stream) or on the anniversary of the commencement day. The “purchase price” means the total amount paid as consideration to purchase the income stream (cl 2(2)). Pre-commutation payment rule In the financial year in which a commutation is to take place, an annuity or pension must pay a minimum amount of at least the pro rata of the minimum annual payment that would have been required under the SISR or RSAR as calculated under the following provisions: • reg 1.07A for allocated annuities or pensions • reg 1.07B for other annuities or pension (not allocated or market linked) • reg 1.07C for market linked annuities or pensions • reg 1.07D for account-based income streams. The formula for calculating the pro-rata minimum payment amount is as follows: Minimum annual amount × days in payment period ÷ days in financial year For income streams that commence in the year in which they are commuted, the pro-rata minimum payment amount is calculated using the number of days in the payment period from the commencement day of the income stream to the day on which the commutation takes place. For commutations in subsequent years, the pro-rata minimum payment amount is calculated using the number of days in the payment period from 1 July in the financial year in which the commutation takes place to the day on which the commutation takes place. Example Jaylee commenced an account-based pension from her superannuation fund on 1 July 2008 when she was age 60. She decides to commute the pension on 31 July 2009. The account balance of the pension on 1 July 2009 is $100,000. The minimum required payment from the pension in 2009/10 is $4,000 (4% of $100,000: see Sch 7) (note that this has been halved to $2,000 for the 2009/10 year: see below). The pro-rata minimum payment amount for the pension before commutation will be $2,000 × 31 ÷ 365 = $169.86. If Jaylee has not received any pension payment at the time of the commutation, the fund will need to pay her a minimum pension payment of $169.86 before the commutation.

The pro-rata payment requirement does not apply to a commutation resulting from the death of an annuitant or pensioner or a reversionary annuitant or pensioner, or to a commutation for the purpose of paying a superannuation contributions surcharge, giving effect to an entitlement of a non-member spouse under a payment split, or meeting the rights of a client to return a financial product under the cooling-off period provisions in the Corporations Act 2001. A further exception to this rule applies where the income stream account balance, immediately after the commutation, is equal to or greater than the required minimum payment for the year as reduced by the amount of income payments already made in the year (reg 1.07A(2)(ba); 1.07C(2)(ba)). For this purpose, any payments already made from the income stream (either as income or by way of commutation) to the recipient in the relevant year count for purposes of determining whether the exception to the pro-rata minimum payment rule applies. Commutations cannot satisfy minimum draw-down requirements From 1 July 2017, the minimum draw-down requirements in the annuity and pension standards in the SIS Regulations 1994 (and RSA Regulations 1997) prevent a partial commutation of a pension or annuity from being counted as towards the minimum drawn-down requirement. The table below sets out the legislative references of the relevant annuity and pension standards. Pension or annuity provided under and pre-

Relevant SISR or RSAR provisions

commutation payment rule SISR reg 1.05(11A)(a), 1.05(11A)(b)(i), 1.05(11A) (b)(ii)

reg 1.05(11A)(a), 1.05(11A)(b)(i)(B), 1.05(11A)(b) (ii)(D)

SISR reg 1.06(9A)(a), 1.06(9A)(b)(i), 1.06(9A)(b)(ii) reg 1.06(9A)(a), 1.06(9A)(b)(i)(B), 1.06(9A)(b)(ii) (C) SISR reg 1.07A(1), 1.07C(1), 1.07D(1)

reg 1.07A(2)(ba), 1.07C(2)(ba), 1.07D(1)(c)

RSAR reg 1.07(3D), 1.08(2), 1.08A(1)

reg 1.07(3D)(a), 1.08(2)(ba), 1.08A(1)(c)

The change preventing a partial commutation from counting towards the minimum payment (draw-down) requirement are necessary because of the “debit” rules introduced in respect of the transfer balance cap from 1 July 2017. These rules provide an individual with a debit against their transfer balance account when they receive a superannuation lump sum because of the commutation of a superannuation income stream of which they are a retirement phase recipient (ITAA97 s 294-80(1), table item 1). Debits are available in respect of partial or full commutations. That is, if partial commutations were to continue to count towards the minimum draw-down requirements and give rise to a debit in an individual’s transfer balance account, the individual could ultimately refresh their retirement phase superannuation income streams by the value of their past minimum draw-downs without having additional amounts count towards their transfer balance cap (as new credits would be neutralised by the debits). This outcome is inconsistent with the policy intent of the transfer balance cap which does not take into account earnings or losses on assets that are retirement phase interests, or amounts paid from the interests (including but not limited to minimum draw-down amounts). This does not arise for full commutations of income stream products because of the requirement that all minimum draw-down requirements must first be satisfied before a superannuation income stream can be fully commuted. Payments that are made under a payment split continue to count towards the minimum draw-down requirements in the amended regulations. Although the partial commutation of a superannuation income stream will reduce the value of that income stream, the way in which a trustee calculates the minimum pension payments that must be made from the income stream will not be affected by the partial commutation. That is, the same amount of pension payments that were required to be made before the commutation must still be made after the commutation. Where a commutation authority involving a partial commutation is issued in relation to superannuation income stream, trustees will need to determine whether the minimum pension payments will still be able to be met for the income year after they comply with the commutation authority. Where this is not the case, the trustee would be expected to make the minimum pensions payments before complying with the commutation authority, and then commute the remaining balance of the account to comply with the commutation authority. In such cases, s 136-85(1) of Sch 1 to the TAA 1953 would require that the trustee notify the Commissioner that they have commuted the maximum release amount for the superannuation interest that supported the superannuation income stream identified in the commutation authority (being the amount they are required to commute under s 136-80(1)(b)). As noted above, from 1 July 2017, a payment by way of a commutation of a pension is specifically excluded from being counted towards the minimum annual payment amount that is required to be paid from the pension account (reg 1.06((A)(a)). Former SMSFD 2013/2 (withdrawn effective 1 July 2017) previously stated that certain payments made as a result of a partial commutation of an account based pension could count towards the minimum annual amount but payments made as a result of a full commutation could not. See also former SMSFD 2014/1 (withdrawn effective 1 July 2017) about counting commutation payments of an account based pension that is a transition to retirement income stream (see below) towards the maximum and minimum annual amount). Transition to retirement income streams Under the SISR preservation rules, a condition of release allows a member who has reached preservation age (ie age 55 or more) to access his/her preserved and restricted non-preserved benefits from a superannuation fund by way of a transition to retirement pension while continuing gainful employment, ie

without having to retire (see ¶3-280). A “transition to retirement income stream” means an account-based income stream that meets the standards of reg 1.05(11A) or reg 1.06(9A) and, from 1 July 2017, that meets the standards in reg 1.06A (see below). In addition, the total amount of pension payments in any year is limited to a maximum amount of no greater than 10% of the account balance at the start of each year (ie 1 July) (reg 6.01(2)). The 10% limit is discussed further below. Restrictions apply where these income streams are commuted in that the resulting benefit payment cannot be taken in cash except where: • the annuitant/pensioner has satisfied a condition of release with a “nil” cashing restriction (see “Conditions of release/cashing restrictions” table in ¶3-280) • the commutation is to cash an unrestricted non-preserved benefit • the commutation is to pay a superannuation contributions surcharge • the commutation is to give effect to a payment split under the family law, or • the commutation is to make a payment for the purpose of giving effect to an ATO release authority under the ITAA97 in connection with excess contributions tax. In addition, the restriction on commutation does not prevent commutations for the purpose of returning a benefit to the accumulation phase. This is because where the resulting amount from the commutation is rolled over or transferred, it will retain its preservation status so that the annuitant/pensioner is not able to cash the benefit until a condition of release with no cashing restriction is satisfied. Alternatively, the resulting commutation amount may be used to purchase another non-commutable income stream or transition to retirement income stream. The restrictions described above are the same as those applying to non-commutable allocated annuities and pensions generally (¶3-280). The value of payments from an income stream which is taken into account for purposes of the 10% limit excludes payments by way of commutation of the income stream. This rule ensures, for example, that commutations of a transition to retirement income stream which are permitted for the purpose of paying a superannuation contributions surcharge or to give effect to a release authority for tax on excess contributions (see above) are not constrained by the operation of the maximum 10% limit on annual payments. Also, the 10% annual payment limit from a transition to retirement income stream does not apply where the annuitant or pensioner has satisfied a condition of release with a “Nil” cashing restriction. That is, the 10% limit on total annual payments from a transition to retirement income stream is a temporary restriction which is lifted once the recipient of the income stream has satisfied a condition of release with a “Nil” cashing restriction. In light of amendments preventing commutation payments from being counted (see “Commutations cannot satisfy minimum draw-down requirements” above), former SMSFD 2014/1 about counting commutation payments of an account based pension that is a TRIS towards the maximum and minimum annual amount has been withdrawn with effect from 1 July 2017. Restriction on factors for converting lifetime or life expectancy pensions A regulated superannuation fund must not use a factor, for converting a lifetime or life expectancy pension to a lump sum, that is greater than the pension valuation factor that would apply under SISR Sch 1B if the commencement day of the pension were the day on which it was commuted (reg 1.08(1)). The restriction does not apply to the use of a factor that APRA has approved in writing, or a factor for conversion in relation to a commutation to pay a superannuation contributions surcharge or to give effect to a non-member spouse’s entitlement under a payment split. Minimum standards under reg 1.06A for innovative income stream products — 1 July 2017 onwards

From 1 July 2017, an income stream product which meet the standards in reg 1.06A (and reg 1.06B about commutation restrictions: see below) is an annuity under reg 1.05(1) or a pension under reg 1.06(1) for the purposes of the SIS Act and for tax purposes, and payments under these income streams are superannuation income stream benefits for tax purposes. The standards in reg 1.06A are intended to cover lifetime products that do not meet the annuity and pension standards in reg 1.05(11A) and 1.06(9A) (which set out the standards for account-based and non-account-based income streams: see above). Examples of these lifetime products include deferred superannuation income streams and other innovative income stream products which commence from 1 July 2017. Regulation 1.06A applies to either a contract by a life insurance company or a registered organisation or the governing rules of a superannuation fund for the provision of a benefit supported by a superannuation interest of a member (eg income streams). The income streams provided under the reg 1.06A standards must be payable for a beneficiary’s remaining lifetime and the income stream payments can be guaranteed in whole or part by the income stream provider, or determined in whole or part through returns on a collective pool of assets or the mortality experience of the beneficiaries of the asset pool. The income streams may also have a deferral period for annual payments and are permitted to be commuted subject to a declining capital access schedule and the SISR preservation rules. A contract for the provision of an annuity benefit, or the rules for the provision of a pension benefit (the governing conditions) under reg 1.06A(2) and 1.06A(3) must meet four key elements: • benefit payments must not commence until a primary beneficiary has retired, has a terminal medical condition, is permanently incapacitated or has attained the age of 65 (these are the conditions for the release of benefits under items 101, 102, 102A, 103 and 106 in SISR Sch 1 where there is also no cashing restriction) • benefit payments, of at least annual frequency, must be made throughout a beneficiary’s lifetime following the cessation of any payment deferral period • after benefit payments start, there must be no unreasonable deferral of payments of the income stream • the income streams must comply with restrictions on amounts that can be commuted to a lump sum or for roll-over purposes based on a declining capital access schedule commencing from the retirement phase. Element 1 — Benefit payments can only commence after a relevant condition of release is satisfied The first element ensures that income streams payments can only commence once the primary beneficiary has met a condition of release mentioned in SISR Sch 1 items 101, 102, 102A, 103 or 106 (see above). It also ensures that providers of these income streams do not receive an earnings tax exemption until the primary beneficiary has satisfied a relevant condition of release which does not have any cashing restriction. The general standards for an income stream benefit to be taken as a pension or an annuity for the purposes of the SIS Act require the contract or governing conditions under which the income stream to not permit the capital supporting a superannuation income stream to be added to by way of contribution or roll-over after the income stream has commenced (reg 1.05(1)(a)(ii) and 1.06(1)(a)(ii)). This requirement continues to apply to superannuation income streams covered by reg 1.06A. Element 2 — Recognition of deferred income streams and an annual payment requirement The second element requires payment of the income stream benefit to be made at least annually unless the income stream is a deferred superannuation income stream and payment of the benefits have not yet started. After benefit payments for any income stream have started, they must continue throughout the life of a beneficiary. A “deferred superannuation income stream” is a benefit supported by a superannuation interest if the contract or rules for the provision of the benefit provide for benefit payments to start more than 12 months after the superannuation interest supporting the benefit is acquired, and for benefit payments to be made at least annually afterwards (SISR reg 1.03(1)).

The above requirements are consistent with the income tax law which applies in relation to superannuation income streams from 1 July 2017. Under ITAA97, the earnings tax exemption in relation to superannuation income streams from 1 July 2017 can only apply to complying superannuation funds, RSA providers and life insurance providers if the superannuation income stream is in the retirement phase. A superannuation income stream is in the retirement phase at a time if: • a superannuation benefit is payable from it at that time (ITAA97 s 307-80(1)) • it is a deferred superannuation income stream and a superannuation income stream benefit will be payable to a person after that time, and that person has retired, has a terminal medical condition, is permanently incapacitated or has attained the age of 65 (see ¶7-153). Element 3 — No unreasonable deferral of income stream payments Under this element, the amount of benefit payments must be determined using a method that ensures there is no unreasonable deferral of benefit payments after payment of the income stream has started, ie a genuine retirement income stream must be provided to a beneficiary, with benefit payments being set in a manner that does not circumvent the commutation rules or provide estate planning benefits. Specifically, reg 1.06A(3)(c) applies the following factors to determine whether there is any unreasonable deferral of benefit payments: • To the extent payments depend on the returns on an investment of the assets supporting the benefit — when the payments are made and when returns are derived. • To the extent that payments depend on the ages, life expectancies, or other factors relevant to mortality, of other individuals — the age, life expectancy, or other factors relevant to mortality, of those individuals. Factors that are relevant to mortality could include an individual’s gender, occupation or risk factors relating to their health. • To the extent that payments do not depend on returns, age or life expectancies — the relative sizes of annual total payments from year to year. • Any other relevant factors. The above factors: • provide some flexibility to enable benefit payments to be varied between years having regard to an indexation method, or investment returns and/or the mortality experience of beneficiaries, of a collective pool or of the fund, and • enable benefit payments to be set within a targeted but not guaranteed range, with scope for reserving to be applied to meet future payment targets. The overarching rule to ensure that payments are not unreasonably deferred requires a method for determining the amount of benefit payments to have an objective basis, and for the relevant factors applying to the method to be set out in the governing conditions for the income stream. For example: • a reversionary annuity purchased for $250,000 at age 60 with payments starting at age 80 would likely be considered unreasonable if the payments for the first twenty years were $1,000 per annum, but after that become substantial (eg $50,000 per annum for any following payment year) • an unreasonable deferral might be a pooled product where the payments, although not necessarily wholly deferred for any period, are very heavily-weighted to higher payments in later years and do not represent any alignment with investment returns or mortality experiences. Element 4 — Restrictions on accessing capital supporting the income stream The fourth element of the standards restricts the amount of capital from the income stream that can be accessed through a lump sum commutation or a commutation of an amount that is then rolled over within the superannuation system. These restrictions apply from the day that the primary beneficiary of the income stream enters the retirement phase.

A “retirement phase start day” for a benefit supported by a superannuation interest (within the meaning of the ITAA97) is: • for a deferred superannuation income stream — the later of the day that the primary beneficiary has satisfied a relevant condition of release that has a nil cashing restriction, and the day the superannuation interest is acquired • otherwise — the day that payments of the benefit supported by the superannuation interest start to be payable (reg 1.03(1)). This day aligns with the point in time that a credit for the superannuation income stream is applied to the transfer balance account of the beneficiary under ITAA97 Subdiv 294-B. SISR reg 1.06B provides a formula that restricts the maximum commutation amount that can be accessed (access amount) after 14 days from the retirement phase start day, on a declining straight line basis over the primary beneficiary’s life expectancy, or where a primary beneficiary is not alive on their retirement phase start day an eligible reversionary beneficiary’s life expectancy, on the retirement phase start day. The “access amount” is defined in reg 1.03(1) as the maximum amount payable on commutation of an interest on the retirement phase start day as determined by the governing rules or conditions for the annuity or pension rules. Any instalment amounts paid for an interest in a deferred superannuation income stream after the retirement phase start day are added to the access amount at the point in time that an instalment is paid. The maximum commutation amount is worked out by dividing the “access amount” by the beneficiary’s life expectancy period on the retirement phase start day and multiplying this by the remaining life expectancy at the time of commutation. If the primary beneficiary of a deferred superannuation income stream dies, before otherwise reaching his/her retirement phase start day, and the income stream reverts to an eligible beneficiary, the reversionary beneficiary’s life expectancy period is then used. To be an eligible beneficiary under SISR reg 6.21(2)(b), the reversionary beneficiary must have reached their own retirement phase start day on the death of the primary beneficiary to be an eligible reversionary beneficiary of a deferred superannuation income stream that has yet not started payments. If the reversionary beneficiary is a dependent beneficiary who does not satisfy this requirement, the compulsory cashing rule for death benefits in reg 6.21 requires that the trustee cash out the benefit as soon as practicable. This can be done by commuting the deferred superannuation income stream and either paying the deceased’s superannuation interests out as a lump sum to the beneficiary or paying it through one or more new pensions or annuities. The payment of the deceased’s interests by way of a pension or annuity will satisfy the compulsory cashing requirements if the new pension or annuity is in the retirement phase (see above). However, transition to retirement income streams and deferred superannuation income streams can only be in the retirement phase when the person to whom benefits are (or will be) payable has satisfied a relevant condition of release. The life expectancy period for an income stream is rounded down to a whole number of years then multiplied by 365 days. The remaining life expectancy is the life expectancy period less the number of actual days since the retirement phase start day. The reference to “actual days” takes account of all of the days in a leap year which is intentionally different to the approach in working out the life expectancy period (which uses a general 365-day multiplier). The maximum commutation amount is also reduced by the sum of all amounts previously commuted from the income stream prior to the time of the commutation. An income stream provider can set, or provide a method for calculating, the access amount on the retirement phase start day in the rules or contract for the income stream. Any such amount is the maximum amount that may be paid on commutation of the superannuation interest on the retirement phase start day or within 14 days starting on the retirement phase start day. The full access amount may be paid as a commutation amount if the income stream is commuted on the death of a beneficiary within the first half of the life expectancy period of the primary beneficiary.

Similarity to other income stream standards Commutation amounts are not restricted before the retirement phase start day, but the circumstances under which a commutation can be made remain subject to the SISR preservation rules. To ensure that income stream contracts cannot be used for early release purposes, the governing conditions for income streams covered by reg 1.06A must include the relevant SISR preservation rules. In addition, reg 1.06A also requires the governing conditions to ensure that a death benefit can only be transferred or paid to another person who is eligible to be paid or transferred a death benefit in a given form under the SISR cashing rules (reg 1.05(11B) and 1.06(9B)). Regulation 1.06A(4) permits an interest in a deferred superannuation income stream, which had not started payments prior to the death of a primary beneficiary, to revert (transfer) to a surviving spouse provided the surviving spouse is in the retirement phase. However, if the surviving spouse is not in the retirement phase, a reversion of the interest will only be permitted if the deferred superannuation income stream has commenced payments before the death of the primary beneficiary. In circumstances where a deferred superannuation income stream cannot revert to a surviving spouse, an annuity provider can still roll over any death benefit amount arising from the commutation of the income stream, so as to commence a new income stream which is immediately payable, to the surviving spouse. Ensuring innovative income stream do not overlap with existing standards The standards in reg 1.06A and 1.06B only apply to annuities or pensions that are not superannuation income streams which meet the existing standards in reg 1.06A or reg 1.05(11A) (see above). An income stream offered under reg 1.06A may also inadvertently meet the standards for a non-account based income stream in reg 1.06(9A) or reg 1.05(11A), and therefore not be governed under the reg 1.06A standards. To remove this uncertainty, reg 1.06A(5) permits the governing conditions for an income stream provided under reg 1.06A to state that they do not meet the standards in reg 1.05(11A)(b)(i) or (ii) or reg 1.06(9A) (b)(i) or (ii) for the purposes of the SISR annuity and pension standards. Such statements continue to have effect whether or not the statement is later changed or removed. Hybrid income streams Superannuation interests in innovative income stream products can still be offered as an investment option for, or as a separate interest as an add-on to, an interest in an income stream meeting the existing standards in reg 1.06(9A) or reg 1.05(11A). For example, an individual with an account-based pension can request that their fund trustee purchase a deferred annuity as part of the investment strategy of the fund. In these circumstances, the deferred annuity policy will be held by the fund, and income stream payments from the annuity will be paid to the trustee and credited to the member’s account. If these payment amounts are later on-paid to the member, they will need to be included in the minimum payment drawdown amount from the allocated pension account for the year. As the deferred annuity will be held as an investment of the fund, it will not count towards a member’s transfer balance account balance. Alternatively, the individual can commute part of his/her allocated pension and roll-over an amount to purchase a separate interest in a deferred annuity, in their own right. In these circumstances, the member would receive annuity payments directly from the annuity provider and these payments would not count towards the minimum drawdown amounts for their allocated pension. Deferred superannuation income streams, PIP and PIA A “deferred superannuation income stream” means a benefit supported by a superannuation interest if the rules or contract for provision of the benefit provides for payments of the benefit to start more than 12 months after the superannuation interest is acquired and for payments to be made at least annually afterwards (SISR reg 1.03(1)). A pooled investment pension (PIP) is a pension provided under the rules of a superannuation fund where those rules ensure that once income stream payments start, they continue for the remainder of an individual’s life (ITR97 reg 307-205.02D(2)). In addition, pension payments must be determined having regard to the age, life expectancy or other factors relevant to the mortality of each individual who has that kind of interest in the fund, and the pool of assets in the fund held for the collective benefit of those individuals. A pooled investment annuity (PIA) is a comparable product to a PIP but is instead provided by

a life insurance company (ITR97 reg 307-205.02E(2)). ATO guidelines — superannuation interests and minimum standards A “superannuation interest” in the SISA means a beneficial interest in a superannuation entity, while a superannuation interest in the ITAA97 means an interest in a superannuation fund, ADF, RSA, or an interest in a superannuation annuity, as affected by the ITAR (SISA s 10(1); ITAA97 s 307-200; 995-1(1); ITAR Pt 3 Div 307 Subdiv 307-D). Essentially, a member’s superannuation interest represents the member’s entitlement in the relevant superannuation entity or product, regardless of whether a lump sum or income stream is or will be paid from that interest. The Commissioner considers that the definition of “superannuation interest” generally refers to the rights of persons who have proprietary interests in trusts, interests under a trust that confer no proprietary interest in the assets of the trust, purely contractual rights (for example to a right to an annuity) and statutory rights to superannuation benefits. Accordingly, “interest in” a fund refers to a distinct claim of any kind against a fund, whether it be proprietary in character or not. However, various regulations made under the income tax law modify this general principle by creating special rules for what constitutes a superannuation interest (ATO fact sheet How many superannuation interests does a member of a superannuation fund have in their fund?: www.ato.gov.au/super/self-managed-superfunds/in-detail/smsf-resources/smsf-technical/interest-in-a-super-fund). The concept of superannuation interest for taxation purposes is discussed further in ¶8-165. In relation to superannuation interest, the key points are summarised below: • SMSFs – an amount that supports a superannuation income stream that is commenced from an SMSF is treated as a separate interest from immediately after the income stream commences (reg 307200.05) – in the case of multiple income streams commenced from the same SMSF, each income stream commenced gives rise to a separate interest from the interest to which each other income stream gives rise. Except for that case, a member of an SMSF always has just one interest in the SMSF (reg 307-200.02) • Other superannuation funds (non-SMSFs and non-public sector superannuation schemes) – an amount that supports a superannuation income stream that is commenced from such a fund is treated as a separate interest from immediately after the income stream commences (reg 307200.05) – in the case of multiple income streams commenced from the same fund, each income stream commenced gives rise to a separate interest from the interest to which each other income stream gives rise. Except for that case, it is a question of fact whether the various amounts, benefits and entitlements that a member has in a fund constitute one interest or several interests in the fund • Public sector superannuation schemes, including constitutionally protected funds (PSSSs) – the same principle (as above for other superannuation funds) applies, subject to an additional rule. However, for many PSSSs, the source of the various rights and obligations of scheme members is the legislation establishing the scheme, rather than a trust deed or a contract. An objective basis for discerning separate interests in the one scheme is likely therefore to be found in the relevant legislation than in any equitable or contractual relationship between trustee and member – additional rule — if a benefit is partly sourced from contributions to the scheme and earnings on those contributions and partly from some other source, the member’s interest is separated into two interests: one interest that consists of the contributions to the scheme and the earnings on those contributions; and one interest consisting of the remainder of the interest. For this purpose the “contributions and earnings” are reduced by the amount specified in any notice given under

ITAA97 s 307-285 for the benefit (reg 307-200.03). Superannuation income streams A superannuation fund is taken to be paying two distinct “superannuation income streams” (as defined in ITAA97 s 307-70(1)) if the superannuation product offered by the fund provides a member a single superannuation income stream, where the product provides for an agreed level of payments (supported by an investment in a life insurance policy) in the event the assets (other than the life insurance policy) supporting the member’s pension are exhausted (ID 2009/151). In this ID, the fund offered its members the option to receive pension benefits determined in the manner set out in reg 1.06(9A)(a) (see above). The fund offered its members a further option to ensure that a minimum level of payments would continue to be made for the member’s lifetime in the event the investments, held for the purpose of supporting the member’s pension benefits as determined in the manner set out in reg 1.06(9A)(a), were exhausted. The fund trustee purchased an insurance policy to cover the fund’s additional obligations to members under this further option. A member chose to receive benefits under both options. The trustee created and maintained an account in respect of the member, which recorded the trustee’s obligation to the member based upon the value of the investments held by the fund to support its obligation. The account did not include any amount in relation to the option, supported by the life insurance policy, to provide a minimum level of payments for the member’s life. However, the trustee reduced the value of the account by the amount of premiums payable on the insurance policy. The Commissioner explains that the structure of reg 1.06(9A) makes it clear that a particular pension is meant to be capable of satisfying only one pension type — a pension attributable to an account balance or one of the several pension types that are not attributable to an account balance. A pension must satisfy the requirements of either reg 1.06(9A)(a) or 1.06(9A)(b) throughout its life. A single pension cannot satisfy one or the other, or purport to satisfy the requirements of both, at different points in time. If a pension is to satisfy reg 1.06(9A)(a) of the SISR, it must be attributable to an account balance throughout its life. A hallmark of such a pension is that the account balance accurately measures the fund’s liability to a member. Consequently, it would be usual that once an account balance is reduced to nil, the fund’s liability to the member ceases. A further hallmark is that the amounts payable to the member are not fixed. In ID 2009/151, the arrangement results in two separate pensions payable to the member, the terms and conditions under which each is payable differ. Prior to the guaranteed pension phase, there is a pension for which there is an account balance. In the guaranteed pension phase, as long as the pension is payable for the member’s life it satisfies the requirements of a lifetime pension in relation to which there is no account balance. Under the arrangement, a member initially has a pension in relation to which there is an account balance. When the balance is reduced to nil, and only then, a separate pension becomes payable. That separate pension is one in relation to which there is no account balance. It is also a pension which is not payable until the contingent event triggers payment of the annuity from the life company to the superannuation fund. As these benefits are identified as separate pensions respectively in reg 1.06(9A)(a) and 1.06(9A)(b), they are separate superannuation income streams as defined in ITAA97 s 307-70(1). ATO guidelines — compliance with SISR minimum standards Pre-July 2007 pensions — conversion to account-based pension There is no need to commute a pre-July 2007 allocated pension for the purpose of converting it to an account-based pension under the pension standards which commenced from 1 July 2007 (ATO fact sheet Pension standards for self-managed super funds: www.ato.gov.au/Super/Self-managed-super-funds/Indetail/SMSF-resources/SMSF-technical/Pension-standards-for-self-managed-super-funds). Superannuation pensions which commenced before 20 September 2007 and complied with the pension rules at that time should continue to be paid under the former rules. This includes allocated pensions, market linked pensions, lifetime pensions, life expectancy pensions and transition to retirement pensions. Market linked, lifetime and life expectancy pensions as at 1 July 2007 generally cannot be commuted in order to commence another pension to adopt the minimum pension standards from that date (see

exception below). However, allocated pensions which commenced before 1 July 2007 can operate under the 1 July 2007 minimum pension standards without the need to commute and restart a new pension. Example Janet commenced an allocated pension on 1 January 2007 which complied with the rules for allocated pensions at the time. Janet decides to have her allocated pension operate under the post-June 2007 (new) minimum pension standards from 1 November 2007. Subject to the trust deed of the fund, Janet can do this without having to commute the allocated pension and recommence an account-based pension. For the account-based pension, the new minimum payment standards will apply from 1 November 2007 and the minimum annual payment amount will be based on the pension account balance at 1 July 2007. The fund trustee will need to keep a record of Janet’s request to change the payment rules for her pension. If Janet decides to continue the pension under the pre-1 July 2007 rules for allocated pensions, the SISR minimum and maximum drawdown limits that applied to the allocated pension would continue.

Generally, complying pensions (market linked, lifetime and life expectancy pensions) which commenced before 1 July 2007 cannot be commuted to start another pension to adopt the post-June 2007 pension rules. An exception applies to complying pensions (existing before 1 July 2007) which are commuted after 19 September 2007 in order to purchase a market linked pension. In these circumstances, the post-June 2007 minimum pension standards will apply to the new market linked pension, in addition to the rules that normally apply to market linked pensions. Example Robert commenced a market linked pension on 1 March 2007 and continues to receive the pension after 19 September 2007 under the former rules. On 1 December 2007, Robert decides to commute and roll over the pension to purchase a new market linked pension. Robert must ensure that the pension complies with the post-June 2007 minimum payment standards as well as the normal standards for market linked pensions.

ATO guidelines — commencement and cessation of income streams In the SISA, a “pension” includes a benefit provided by a superannuation fund that is taken under the SISR to be a pension. Essentially, this means that an income stream benefit provided by a superannuation fund to a member will be a “pension” for SIS and tax purposes only if the benefit is provided under the fund rules which comply with the minimum standards set out in SISR reg 1.06 and the relevant Schedule. For tax purposes, a “superannuation income stream benefit” is a superannuation benefit specified in the ITAR that is paid from a “superannuation income stream” (ITAA97 s 307-70; 995-1(1): ¶8-150). The ITAR provides that a “superannuation income stream” means an annuity or a pension for the purposes of the SISA in accordance with reg 1.05(1) or 1.06(1), or an income stream that is an annuity or pension within the meaning of the SISA which commenced before 20 September 2007 (ITAR reg 995-1.01). Taxation ruling TR 2013/5 sets out the ATO’s views on when a superannuation income stream commences and when it ceases, and consequently when a superannuation income stream is payable where a member with an accumulation interest in a taxed complying superannuation fund commences an income stream which is taken to be a pension under the SISR standards in reg 1.06(1) and 1.06(9A)(a). Determining when an income stream commences and ceases is important as there are tax consequences for both the superannuation fund and the member in relation to superannuation income stream benefits paid. For instance, a fund enjoys the current pension income exemption and CGT exemption for current pension assets only when the fund has current pension liabilities, ie from the time the income stream commenced until its cessation (see “Non-compliance with pension standards — tax consequences” below). A superannuation income stream commences on the first day of the period to which the first payment of the income stream relates, as determined by reference to the terms and conditions of the income stream agreed by the trustee and member, the fund rules and the SISR standards. Once an income stream commences, it is payable (ie there is an obligation to pay the benefits under that superannuation income stream) until such time as that income stream ceases. An income stream ceases when there is no longer a member who is entitled, or a dependent beneficiary of a member who is automatically entitled, to be paid an income stream benefit from the superannuation interest supporting the income stream, as determined by reference to the fund’s trust deed, the SISR standards and the particular facts and circumstances of the payment of the member’s or dependent beneficiary’s benefits. It is not the effect of ITAR reg 307-200.05 to ensure that, once an income stream commences, it can only cease once the amount in the relevant interest is exhausted. The common circumstances in which an income stream ceases are: • failure to comply with SISR pension standards and payment standards in an income year — this is the case even if a member remains entitled to receive a payment from the fund in relation to the purported income stream under the fund’s trust deed or general trust law concepts • exhaustion of capital — ie when the capital supporting the income stream has been reduced to nil, and the member’s right to have any other amounts applied (other than by way of contribution or roll over) to his/her superannuation interest has been exhausted • commutation — ie upon receipt of a valid request from a member or a dependent beneficiary to fully commute his/her entitlements to future superannuation income stream benefits for a lump sum entitlement • death — ie when the member in receipt of the income stream dies, unless a dependent beneficiary of the deceased is automatically entitled under the fund’s deed or income stream rules to receive an income stream at that time. The ATO fact sheets below provide additional information and answers to topical questions: • SMSFs: starting and stopping a pension (www.ato.gov.au/super/self-managed-super-funds/indetail/smsf-resources/smsf-technical/funds--starting-and-stopping-a-pension)

• APRA-regulated funds — starting and stopping a superannuation income stream (pension) (www.ato.gov.au/super/apra-regulated-funds/in-detail/apra-resources/apra-funds-starting-andstopping-a-super-income-stream-(pension)). On commutation, and whether the commutation payment counts towards the minimum pension amount, the ATO states: • a partial commutation payment that is not rolled over (that is, not transferred to another superannuation fund) can count towards the annual minimum pension payment amount • the payment that results from a partial commutation is a lump sum for the purposes of the superannuation laws and a lump sum payment includes a payment made by way of an asset transfer, known as an in-specie payment. This means that a partial commutation payment that is not rolled over counts towards the annual minimum pension amount, regardless of whether the payment is made in cash or in specie • a full commutation takes effect as soon as the trustee’s liability to pay periodic pension payments to a member is substituted in full with a liability to pay the member a lump sum. The account-based pension therefore ceases at this time. The liability to pay the lump sum arises as a consequence of the full commutation taking effect and therefore the superannuation income stream ceases before the time the lump sum payment to the member is made. As the payment of the commutation lump sum is made after the cessation of the account based pension, it cannot count towards the minimum annual pension amount. Non-compliance with pension standards — tax consequences A pension from a superannuation fund that does not comply with the relevant SISR pension standard applicable to it is not a pension for tax and SIS purposes. This may have tax and other consequences as discussed below. If an income stream fails to comply with the relevant pension standards in a year (eg account-based pensions failing to make minimum pension payments in a year or a transition to retirement pension exceeding the maximum 10% payment limit in a year as discussed above), the income stream ceases and this would mean that the superannuation benefit in question would neither qualify as a pension for SISA purposes nor a superannuation income stream benefit for tax purposes. A potential consequence is that the benefit does not qualify for concessional tax treatment as a superannuation income stream under ITAA97 Div 301 (eg the tax exemption for persons aged 60 or more or tax concession for those below age 60). Other potential consequences are that the benefit will also technically fail to satisfy any ITAA97 provision in which the expressions “superannuation income stream” or “superannuation income stream benefit” are used, such as s 295-385 dealing with exemptions for the income from assets set aside to meet current pension liabilities or s 295-390 dealing with income from other assets used to meet current pension liabilities and related tax provisions, or s 118-320 dealing with the CGT exemption for segregated current pension assets (¶7-130, ¶7-153). It is important to note that the concessional taxation of superannuation benefits and death benefits under ITAA97 Div 301 and 302 does not apply where a person receives an amount or benefit that does not meet the payment standards prescribed under the SISR or RSAR (ITAA97 s 304-10) (¶8-500).

Investment Rules ¶3-400 Investment strategy standard — covenants, insurance, and reserves The trustee of a regulated superannuation fund must undertake all of the investment activities of the fund with four overriding principles in mind — the sole purpose test (¶3-200), the fund’s investment strategy (see below), the arm’s length rule (¶3-440) and the general trustee covenants (¶3-100). In addition, the trustee must have regard to other SISA or SISR provisions that deal specifically with the

particular investment concerned (eg investing in in-house assets, borrowing or lending money: ¶3-410 – ¶3-450), or other specific investment controls that may apply in a particular case or circumstance (¶3405). From time to time, the Regulators issue specific warnings about particular types of investments by superannuation funds (eg instalment warrants, hedge funds) which must also be taken into consideration (¶3-405). The concept of “investment” has a wide meaning in the SISA. An “asset” means any form of property and, to avoid doubt, includes money (whether Australian currency or currency of another country). To “invest” means apply assets in any way, or make a contract, for the purpose of gaining interest, income, profit or gain (SISA s 10(1)). Trustees must not recognise or sanction an assignment over a member’s interest or give a charge over a member’s benefits or the assets of the fund, except in specified circumstances (¶3-260). Setting up an investment strategy The trustee of a superannuation entity must formulate and give effect to an investment strategy that has regard to the whole of the entity’s circumstances, including: (a) the risk involved in making, holding and realising, and the likely return from, the entity’s investments, having regard to its objectives and its expected cash flow requirements (b) the composition of the entity’s investments as a whole, including the extent to which the investments are diverse or involve exposure of the entity to risks from inadequate diversification (c) the liquidity of the entity’s investments, having regard to its expected cash flow requirements (d) the ability of the entity to discharge its existing and prospective liabilities (SISR reg 4.09(2)). Generally, the trustees may evidence that they have addressed their minds to the relevant matters by documenting decisions in the fund’s investment strategy or minutes of trustee meetings that are held during the income year. From 7 August 2012, the scope of the operating standard was expanded to require the trustee to formulate, review regularly and give effect to an investment strategy that has regard to the relevant circumstances. The expression “review regularly” is not defined. Therefore, the regularity of reviews will depend on the facts and circumstances of the fund and its members in each case, such as annually, quarterly or on a “needs basis” based on the fund’s investments and/or investment activities, the contribution and benefit payment flows, and the members’ profile. The regular review requirement thus compels the trustees to take into account factors such as the changing circumstances of the fund and its members. Also, from 7 August 2012, the trustees of SMSFs must give consideration to members’ insurance as part of the fund’s investment strategy (see “Insurance in investment strategy” below). The above requirement is both a trustee covenant and a prescribed operating standard (see below). A practical approach A systematic approach for trustees to adopt when setting or reviewing a fund’s investment objective and strategy will include consideration of at least the following matters: • the statutory limitation or constraints on investments, eg the sole purpose test (¶3-200) or the inhouse asset rules (¶3-450) • any non-statutory limitations or constraints on investments in the fund’s trust deed, eg ethical or environmental issues • relevant reports from experts • in the case of defined benefit funds, benefit design, fund solvency, employer support and the general economic climate, as well as assumptions about contribution levels, salary escalation and investment earnings used in the actuarial reports, and

• the trustee duties and obligations under general trust law and SISA trustee covenants (eg to act in the best interest of all members: ¶3-100) and actual or potential trustee/member conflicts of interest, if any. A regulated superannuation fund’s investment in a geared unit trust may result in a reduction in the security of members’ entitlements. Consequently, the existence of a unit trust borrowing is a relevant consideration to be taken into account by the trustee in the formulation and implementation of the investment strategy of a fund under s 52(2)(f). Investment strategy — a covenant and operating standard The governing rules of a superannuation entity are deemed to contain a covenant requiring the trustee to formulate and give effect to an investment strategy for the entity in identical terms to the operating standard in SISR reg 4.09(2) as set out above (covenants are discussed at ¶3-100). The replication of a SIS covenant as a prescribed operating standard gives rise to different consequences where there is a breach. Specifically, where a trustee fails to comply with a covenant, this may only give rise to a civil liability action, whereas a trustee who intentionally or recklessly contravenes the operating standard in reg 4.09(2) is guilty of an offence punishable on conviction by a fine. Penalties under SISA are discussed in ¶3-820. Insurance in investment strategy From 7 August 2012, in addition to having regard to the four circumstances (see points (a) to (e) in SISR reg 4.09(2) above) when formulating, reviewing regularly and giving effect to an investment strategy for the fund, the trustees of an SMSF are required to consider whether they should hold a contract of insurance that provides insurance cover for one or more members of the fund, such as life insurance (reg 4.09(2)(e)). The additional requirement is a consequence of the Cooper Review in 2010 which noted that less than 13% of SMSFs have insurance, and that SMSF members were more likely to hold appropriate levels of insurance, or be able to hold insurance outside their superannuation, than members of other superannuation funds. Accordingly, the Review panel recommended that SMSF trustees be required to consider life and total and permanent disability insurance as part of their investment strategy (Recommendation 8.29). The trustees of SMSFs are expected to be self-reliant in determining the type and level of insurance cover members might require whether within or outside their SMSF and must have regard to the personal circumstances of their members and other legislative requirements, such as the sole purpose test in SISA s 62 (¶3-200). Members’ investment strategy choice Trustees of superannuation funds (other than those with fewer than five members) and ADFs generally must not be subject to direction in the exercise of their powers (SISA s 58: ¶3-150). Certain superannuation funds (eg those under a master trust arrangement) may offer their members with a choice of investment strategies which allow for investment in various combinations of different asset classes (eg property trusts, international shares). In such a case, a member may direct the trustee on the investment strategy to be followed in respect of his/her benefits (SISA s 52(4); SISR reg 4.02). The information regarding investment strategies is usually provided in product disclosure statements that are issued in accordance with the Corporations Regulations 2001 (reg 4.02(2), Note). Effectively, the above allows members to choose one or more investment strategies from a range of strategy choices formulated and provided by the trustee (ie a “beneficiary investment choice”) without breaching s 58. However, fund members (other than a member of a fund with fewer than five members) cannot direct the trustee to invest in a particular asset (ie a “beneficiary-directed investment”) as, in such a case, the trustee would be taken to be subject to a direction by the member. Reserves A superannuation entity may maintain reserves unless prohibited by its governing rules (SISA s 115). If an entity maintains reserves, the SIS covenant requires the trustee to formulate and give effect to a strategy for the prudential management of those reserves consistent with its investment strategy and

capacity to discharge its liabilities as and when they fall due (s 52(2)(g): ¶3-100). The common types of reserves that may be found in superannuation funds are: • investment fluctuation reserve — this is maintained to minimise the impact of market fluctuations on members’ account balances and smooth crediting rates over the years, thus enabling a higher or lower return to be distributed than actually received • operational risk or contingency reserve — this is maintained to mitigate operational risks such as errors in allocating investment earnings (unit pricing/crediting rate errors). Contingency reserves allow funds to meet costs of rectification of errors not met by third parties (eg insurance), or recoverable only at a later stage. Such reserves may be used to meet excesses applicable under insurance or indemnity arrangements • self-insurance reserve — funds (generally non-public offer defined benefit or hybrid funds) that selfinsure death and disability benefits are expected to maintain such reserves to fund current and future insurance claims and to allow for the inherent uncertainty regarding size, timing and credit risk aspects of claims. The term “reserves” is not defined in the SIS legislation. There is also no definition of reserve in ITAA97 or regulations. A reserve is commonly understood to be an account held within a superannuation fund that holds amounts that have not been allocated to a particular member. Such accounts have been used by superannuation funds for a number of different purposes. For both superannuation and income tax purposes, it is necessary to first determine whether such an account held by superannuation fund is a genuine reserve as opposed to a general account or mere accounting practice of the fund. The term “reserve” is referred to in both the SIS and income tax provisions. What constitutes a reserve under these provisions may differ and affect a range of matters including those relating to the operation of the fund and taxation consequences faced by members (SMSF Bulletin 2018/1) (see also “ATO guidelines on reserves of SMSFs” below). APRA’s Prudential Practice Guide SPG 222 — “Management of Reserves” (www.apra.gov.au/superannuation-standards-and-guidance: ¶9-720) provides guidelines to assist RSE licensees and their directors in complying with the SISA provisions relating to the maintenance and management of reserves by RSE licensees and, more generally, to outline sound practices in relation to this particular area of a licensee’s superannuation operations (for RSE licensee conditions, see ¶3-485). The APRA guide deals specifically with the management of the above types of reserves. The meaning of “reserves” for the purposes of SISA was discussed in Re VBN and APRA (No 5) [2006] AATA 710 by Deputy President Forgie and Senior Member Pascoe of the AAT. In a joint decision they considered at paragraph 442 that the word “reserves” in section 115 of the SISA did not have a specialised meaning that differs from its ordinary English meaning. They observed that both standard and specialist dictionaries gave consistent meanings that conveyed the notion of “actual monetary funds or assets” that were “put aside to meet future contingencies and demands”. Therefore, for the purposes of subregulation 292-25.01(4) of the ITAR 1997, “reserve” includes an amount set aside from the amounts allocated to particular members to be used for a certain purpose or on the happening of a certain event … … This conclusion does not rely upon the fact that the reserve was created by deducting amounts from the accounts of members. The process by which any amount is set aside is not central to determining if there is a reserve. It follows that allocations by the trustee from the self-insurance reserve to a member’s account are allocations from a reserve for the purposes of subregulation 292-25.01(4) of the ITAR 1997. ATO guidelines on reserves for certain tax purposes ATO guidelines on “reserves” may be found in ID 2015/21 (about concessional contributions and reserves) (replacing former ID 2012/32 which applied for the 2012/13 and earlier financial years) and ID 2015/22 (about excess contributions tax: concessional contributions and allocation from pension reserve account) (replacing ID 2012/84 which applied for the 2012/13 and earlier financial years). In ID 2015/21,

the ATO concluded that “reserve” as used in reg 292-25.01 of ITAR has a broad meaning and includes an amount set aside from the amounts allocated to particular members to be used for a certain purpose or on the happening of a certain event. The ATO stated in ID 2015/21 that in determining the amount of a person’s concessional contributions covered under ITAA97 s 291-25(3), the self-insurance reserve maintained by the trustee of the fund is a “reserve” for the purpose of reg 292-25.01(4) of the ITAR 1997. Relevantly, the ATO noted the following: “… According to the Macquarie Dictionary, 3rd edition 1998 a ‘reserve (noun)’ is ‘an amount of capital retained by a company to meet contingencies, or for any other purpose to which the profits of the company may be profitably applied … something reserved, as for some purpose or contingency; a store or stock’. The APRA has issued Prudential Practice Guide SPG 222: Management of reserves (SPG 222) which discusses the use of reserves in superannuation entities for the purposes of complying with Superannuation Industry (Supervision) Act 1993 (SISA) and Superannuation Industry (Supervision) Regulations 1994 (SISR). It describes reserves as monies which form part of the net assets of the fund and which have been set aside for a clearly stated purpose. It lists the most common types of reserves as operational risk reserves, self-insurance reserves and investment reserves. However, SPG 222 also states that while reserves in superannuation funds are monies that have not been allocated to members not all unallocated monies are reserves. Unallocated monies that are not reserves include suspense accounts used to record contributions and roll-overs pending allocation to members.” ATO concerns about the use of reserves by SMSFs The ATO has issued SMSF Regulator’s Bulletin SMSFRB 2018/1 which outlines the ATO’s concerns on the use of reserves by SMSFs, particularly in strategies that are designed to circumvent restrictions imposed in the superannuation and income tax legislation. The ATO expects that the use of reserves by SMSFs will be in limited circumstances and only for specific and legitimate purposes. Where an SMSF purports to hold an amount in a reserve as opposed to allocating directly to a member’s superannuation interest for the benefit of the member and their beneficiaries, outside these circumstances, the ATO will consider whether the trustee is acting in accordance with their obligations under the SIS Act. The use of reserves by SMSFs outside limited and legitimate circumstances may suggest that they are being used as part of a broader strategy to circumvent SIS and tax restrictions and the ATO will closely scrutinise such arrangements and consider the potential application of the sole purpose test under SISA s 62 and the anti-avoidance provisions under ITAA36 Pt IVA. The ATO states that the use of a reserve in an SMSF may raise the following regulatory concerns: a. whether the use of a “general” reserve to which a trustee allocates amounts (eg earnings) without a clearly articulated purpose that gives effect to a strategy consistent with the SMSF’s investment strategy and ability to discharge its liabilities is a reserve permitted by SISA s 115 b. whether the use of a reserve or an account by the trustee adheres to the sole purpose test in SISA s 62, and c. whether the trustee has satisfied SISA s 52B(2)(g) of the SISA, which requires trustees to formulate, review regularly and give effect to a strategy for the prudential management of reserves consistent with the fund’s investment strategy and its capacity to discharge liabilities (see also SISR reg 4.09). The types of arrangements that the ATO will scrutinise carefully with a view to determining whether ITAA36 Pt IVA applies will include (but not be limited to) the following (2017 superannuation reform measures): a. the intentional use of a reserve to reduce a member’s total superannuation balance to enable them to make non-concessional contributions without breaching their non-concessional contributions’ cap. The earnings from these non-concessional contributions may be taxed at a lower tax rate than would have been the case if the earnings were derived outside of the concessionally-taxed superannuation environment

b. the intentional use of a reserve to reduce a member’s total superannuation balance below $500,000 in order to allow the member to access the catch-up concessional contributions arrangements. This may allow the member to either claim a higher personal superannuation contributions deduction or have a higher amount of their salary and wage income subject to a salary sacrifice arrangement for an income year. Further, the earnings from these concessional contributions may be taxed at a lower tax rate than would have been the case if the earnings were derived outside of the concessionallytaxed superannuation environment c. the intentional use of a reserve to reduce the balance of a member’s transfer balance account below the member’s transfer balance cap to allow the member to allocate a greater amount to retirement phase and thereby having a greater amount of earnings within the SMSF being exempt current pension income, and d. the intentional use of a reserve to reduce a member’s total superannuation balance below $1.6m in order to allow the SMSF to use the segregated method to calculate its exempt current pension income. The ATO will not apply compliance resources to review arrangements entered into by SMSFs as described in the Bulletin before 1 July 2017 provided: a. the reserve was permitted by SISA s 115 and the governing rules of the SMSF, and b. the facts and circumstances do not indicate that the use of the reserve by the trustee was a means of circumventing the restrictions imposed by the 2017 superannuation reform measures. Other guidelines Prudential standards for RSE trustees which have been determined under SISA and superannuation prudential practice guides are discussed in ¶9-700 and following. [SLP ¶3-410]

¶3-405 Investment controls The trustee of a superannuation entity must comply with various other prudential requirements relating to its investments or investment function, including the following: • not to make a non-written appointment of an investment manager (SISA s 124) • not to have individuals as the fund’s investment manager (SISA s 125) (not applicable to SMSFs) • ensuring that the investment manager is not a disqualified person, and arranging for the dismissal of a disqualified investment manager (¶3-620) • ensuring that the investment management agreement made with the investment manager: (a) allows the trustee to obtain adequate information about the entity’s investments and investment performance and allows for termination of the agreement without liability (SISA s 102); and (b) does not exempt or limit the investment manager’s liability for negligence (SISA s 116) • ensuring that the proper records and accounts for investments are maintained for at least five years (¶3-340) • immediately informing the Regulator of “significant adverse events” (¶3-310) • complying with the rules about unclaimed money and superannuation benefits (¶3-380) (not applicable to PSTs) • taking all reasonable steps to immediately dispose of any investments in a PST if the fund becomes a non-complying superannuation fund or non-complying ADF, unless directed otherwise by the Regulator (SISR reg 4.10; 4.11) (not applicable to PSTs)

• complying with prescribed operating standards relating to investments, eg determination of costs and investment returns (SISR reg 5.01A) (not applicable to PSTs), reporting on member benefits and the fund’s financial situation (¶3-290), and giving members an investment strategy choice (see above). Penalties are imposed under the SIS legislation when any of the above prudential requirements are breached. Market value and valuation of assets The meaning of “market value” in SISA and ATO guidelines on the valuation of assets for various purposes are noted at ¶18-775. Co-ownership of property Several parties may co-own property under a “joint tenancy” (ie as joint tenants) or a “tenancy in common” (ie as tenants in common). The use of the word “tenant” indicates the way in which a freehold interest in property is held. It does not imply a leasehold interest in the property. Co-ownership of the property as joint tenants or tenants in common provide the owners with different rights based on the form of ownership. Joint tenants jointly own the same property. A joint tenant has a right to the whole property, not a right to an individual share of the property. When one joint tenant dies, the surviving joint tenant becomes the sole owner of the property (known as survivorship). Tenants in common jointly own a property. Unlike joint tenancy, each tenant in common is entitled to a distinct share of the property. That is, each tenant has a separate and individual title to the property, which is limited according to the estate or term granted to or acquired by the tenant. Interests in property owned by tenants in common can be in even proportions (eg two tenants, with each having a half share or interest) or uneven proportions (eg two tenants, with one holding a three-quarter share and other a quarter share). The interest proportions in the property must amount to 100%. These proportions are specified in the title to the property and recorded in the relevant registry. Tenants in common are generally not restricted in their dealings with their individual shares. For example, they may grant interests over the share or encumber it in any way, provided this does not interfere with or diminish the rights that the other tenants would otherwise have. Ownership of property as joints tenants is not considered appropriate for superannuation entities due to the lack of a separate share of an asset attributable to the entity. A superannuation fund that owns property with another party must, therefore, hold the property as tenants in common so as to preserve its interest in the property at all times. When a superannuation fund is formulating its investment strategy and is considering an investment as tenants in common, the Regulator’s view is that the trustee should weigh any risk that the strategy would be subordinated to the circumstances of the other party (eg in respect of a forced sale where the other titleholder is required to liquidate its asset). While effectively a forced sale would only be in respect of the other tenant’s share, it is commercially more realistic to expect that the whole property may be adversely affected by the sale, such as a forced sale, the timing of the sale, the price, and so on. For the purposes of the “business real property” definition (¶3-430), an eligible freehold interest in real property may be a partial interest in the real property, such as an interest held as a tenant in common. Rules and guidelines on particular investments Diversification and non-traditional investments The appropriate level of diversification and the method by which it is achieved will depend on the particular circumstances of each superannuation fund. Diversification to manage the risk and variability of returns involves spreading investments over a number of individual assets, asset classes (including property, fixed interest, cash and equities), countries and/or investment managers. This may also be achieved within each asset class (eg commercial and residential property, domestic and foreign equities, and long- and short-term fixed-interest investments). A well-formulated investment strategy would not ordinarily provide that all or a large proportion of the fund’s assets be invested in one asset (such as a single property) or a single asset class. The onus is on the trustees to justify the chosen investment

strategy in each case after taking into account the sole purpose test, all the matters specified in SISA s 52(2)(f) and the fund’s own circumstances. Investments in non-traditional assets (eg infrastructure, private equity and public-private partnerships) are acceptable in a diversified portfolio, provided the trustee has considered their expected return and diversification effect on the portfolio and can demonstrate appropriate expertise and process to manage such asset classes within the funds portfolio (former ID 2004/248: works of art; SMSFR 2008/2). SMSF investments in collectables and personal use assets SMSFs which have investments in “collectables” and “personal use assets” (eg artworks, jewellery, wine, cars recreational boats, etc) must comply with rules prescribed in SISR reg 13.18AA (s 62A). Instalment warrants and assets acquisition under limited recourse borrowing Superannuation funds can borrow money on a limited recourse basis to acquire an asset that the fund would be permitted to invest in directly (¶3-410, ¶3-415). As a related (bare) trust will be used in the majority of cases to hold the asset acquired under the borrowing arrangement, special rules provide that an investment in a related trust forming part of an eligible instalment warrant arrangement will be an inhouse asset only where the underlying asset would itself be an in-house asset of the fund if it were held directly (¶3-450). Contracts for differences (CFDs) Trustees of regulated superannuation funds are not prohibited by SISA from investing in CFDs and a fund’s investment strategy may permit such investments for hedging purposes. However, trustees will need to examine the product disclosure statement of the individual CFD product that the fund is investing in and the contract itself to ensure they do not breach the SIS legislation in any way (eg reg 13.14 which prohibits a charge on fund assets: ¶3-260). CFDs are synthetic financial products which enable an investor to access the price movement in shares and other instruments, such as stock indices, stock options, currencies and futures contracts, without owning the underlying product (ie it is a derivative product). When a CFD is opened, the investor pays a deposit into a CFD bank account and may be required to make additional margin payments to cover running losses on open positions. The money in the CFD bank account is the property of the CFD provider and the fund (investor) has no beneficial interest in the account. CFDs have a leveraging effect with consequent exposure to potentially large gains and losses stemming from exposure to short-term financial risk in relation to a relatively small deposit. A CFD provider may, under a related agreement, permit an investor to deposit assets with the provider as security against their obligations to pay deposits or margins. The ATO considers that superannuation funds investing in CFDs have not contravened SISA if they have not deposited fund assets with the CFD provider or entered into any collateral agreement that places a charge over any fund asset as: • there is no loan between the CFD provider and the fund (and, therefore, the borrowing prohibition in s 67 does not apply: ¶3-410). The requirement to pay a deposit and meet margin calls does not represent borrowing, but are contractual liabilities to make payments if and when required and are not repayments (Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (NSW) 97 ATC 5015; (1997) 37 ATR 479), and • the operation of a CFD bank account and obligation to pay deposits and margins does not create a charge over any assets of the fund as the parties are relying on the contract and not on any security interest to be created by the contract (ID 2007/56). A fund investing in CFDs will breach reg 13.14 where, under a separate written agreement with the CFD provider, fund assets are deposited with the provider as security in relation to the fund’s obligations to pay margins and the agreement sets out the circumstances under which the assets will be realised (ID 2006/57). Regulation 13.15A, which allows a fund to give a charge over assets in relation to options and futures contracts in accordance with the rules of an approved body, and in accordance with the fund’s derivatives risk statement, does not apply as a CFD is not an options contract or a futures contract and

the charge was not given in relation to the rules of an approved body (¶3-260). Maintenance of fund assets A superannuation fund’s assets (especially real property) must generally be held in the name of the trustees (eg as the trustee of a particular fund). The ATO’s view is that if the fund name does not appear on the registration of ownership of real estate, a caveat on the title should be lodged by the fund. The caveat may not be required if: • it is clear that fund assets have been used to acquire the property • the decisions relating to the acquisition have been appropriately documented, and • the contract refers to the trusteeship (ie there is sufficient supporting evidence that the property is a fund asset). The ATO explained that there was a need to ensure sufficient evidence of the ownership of fund assets in cases where liquidators and trustees in bankruptcy attach superannuation fund assets in liquidation or bankruptcy proceedings. However, caveats and declarations of trust should be seen as examples, and not the only form, of evidence acceptable to the ATO (NTLG Superannuation Subcommittee, 8 May 2006). The requirement to keep fund assets separate from those of the trustees personally or of the standard employer-sponsor is prescribed operating standard for SMSFs (¶5-433).

¶3-410 Borrowings by superannuation funds Subject to certain exceptions (see below), the trustee of a regulated superannuation fund must not borrow money, or maintain an existing borrowing of money. A transitional exemption from the borrowing restriction allowed public sector funds to maintain pre-existing borrowings until 1 July 2000 (s 67(6)). Similar restrictions on borrowings apply to ADFs and PSTs (¶3-680, ¶3-730). Section 67 is a civil penalty provision (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 if the provision is contravened (¶3-820). Borrow The term “borrow” is not defined in the SISA and therefore takes its ordinary meaning in its statutory context. While, the term “borrow” may apply to all appropriations from another party, whether in the form of money or any other type of assets, the prohibition in SISA s 67 restricts the scope of the types of borrowings to transactions involving the fund borrowing money or maintaining an existing borrowing of money. SMSFR 2009/2 states that, for the purposes of s 67(1), a borrowing is an arrangement under which there is a temporary transfer of money from one party (lender) to the fund (borrower) where there is an obligation or intention that the money (the principal amount) transferred will be returned or repaid (plus any interest payable as stipulated under the arrangement between the parties, whether payable in advance or during the term of the borrowing). It is not strictly necessary that money is ultimately repaid for the arrangement to be a borrowing of money. For example, a fund providing money’s worth to the lender (such as transferring an asset) to satisfy or fulfil the obligation or intention to repay the money borrowed. Further, where an obligation to repay is forgiven or is otherwise waived, or if an intention to repay on the part of the fund changes and there is otherwise no obligation to repay, the arrangement is a borrowing up until the point where an obligation or intention to repay no longer exists. While an obligation or intention to repay is a necessary feature of a borrowing, a limitation on the lender’s capacity to recover the amount lent on default by the borrower does not mean an arrangement is not properly characterised as a borrowing. A limited recourse loan is an example of a borrowing even though the lender’s recourse on default is limited to assets whose value may be less than the principal amount outstanding at that time.

Liabilities and borrowings Not all liabilities of a superannuation entity are borrowings. Whether a particular transaction constitutes a borrowing depends on the facts and applicable legal principles in any given case. In general, a transaction that gives rise to a debtor/creditor relationship does not necessarily give rise to a lender/borrower relationship and, hence, may not necessarily be a borrowing for the purposes of the restriction. Examples of borrowings Amounts paid on behalf of, or owed by, superannuation entities which would constitute borrowings include: • a loan, whether secured or unsecured • in normal circumstances, a bank overdraft, or • a transaction where the borrower and lender are the same legal entity. Examples of transactions involving amounts paid on behalf of, or owed by, regulated superannuation funds which generally would not constitute borrowings include: • amounts payable by a superannuation fund because of expenses paid on behalf of the fund by an agent or other person entitled to reimbursement • normal commercial delays in the payment of expenses incurred by a superannuation fund • financial leasing arrangements and hire purchase transactions in general (see “Example — instalment purchase agreement” below) • liability of a fund to pay benefits to members as they fall due • prepaid contributions (which are properly characterised at the time of payment as contributions) • purchases of assets by a fund where ownership of the assets passes to the trustee before the instalments are finalised (eg investment in endowment warrants or instalment receipts). Example — margin lending account As part of its investment strategy, an SMSF maintains a margin lending account with a cash and a loan component which are used in combination for the acquisition of shares. As part of the margin account arrangement, the SMSF can draw down additional amounts to finance the acquisition of additional shares. Each draw down under the account involves a temporary transfer of money to the SMSF with an obligation to repay and is a borrowing. Each additional amount drawn from the account gives rise to a further borrowing. The SMSF will contravene s 67(1)(a) each time it draws down the margin lending account unless one of the exceptions apply.

Example — contracts for difference As part of its investment strategy, an SMSF invests in contracts for difference. The investment requires the fund to make additional payments if a loss arises from movements in the prices of the asset or indices underlying the investment. This requirement to pay a deposit and meet margin calls does not represent borrowing. No money has been temporarily transferred to the SMSF under the arrangement. The payments made by the SMSF are pursuant to contractual liabilities that do not involve repayments, and therefore, the SMSF has not contravened s 67(1)(a).

Example — instalment purchase agreement An SMSF acquires an asset from a vendor (not a related party of the SMSF) under an agreement where the SMSF will make 10 equal payments to the vendor and in return title to the asset will pass from the vendor to the SMSF. The agreement and surrounding circumstances do not reflect a transfer of money from the vendor to the SMSF.

This agreement does not give rise to a borrowing of money. Instead the arrangement provides for the acquisition of an asset by the SMSF by way of instalment payments. Even though the agreement provides financial accommodation to the SMSF, not all forms of such accommodation are borrowings of money. Accordingly, the SMSF trustees have not contravened s 67(1)(a). Note that arrangement involving the SMSF borrowing money, including making a similar series of payments as repayment of the borrowing, may satisfy the requirements of an “instalment warrant borrowing arrangement” under s 67(4A) (see below). In such a case, while the arrangement will involve a borrowing by the SMSF, the exception in s 67(4A) may apply so that the borrowing is not prohibited.

Example — sale and repurchase arrangement To have access to money to increase its investments, an SMSF enters into an arrangement with a financier as follows: • the SMSF sells shares to the financier for an amount of money, and • the SMSF and the financier enter into a forward purchase agreement under which the SMSF will re-purchase shares from the financier at a specified time for a price equal to the money paid by the financier plus a further amount calculated by applying an interest rate. This arrangement effects a borrowing of money by the SMSF and is prohibited by s 67(1). The two necessary features of a borrowing — the temporary transfer of money from the financier to the SMSF, and the obligation or intention on the part of the SMSF to repay the money — are both present.

Exception: temporary borrowing to pay benefits, surcharges or settlements As exceptions to the borrowing rule, a fund may borrow: • to enable the fund to pay a benefit or superannuation surcharge liabilities, or • to settle contracts to acquire certain investments. Conditions of borrowing to pay benefits or surcharge • The borrowing is to enable the trustee to make benefit payments to members as required by law or the trust deed, or payments of the surcharge required under the Superannuation Contributions Tax (Assessment and Collection) Act 1997 which, apart from the borrowing, the trustee would not be able to make. • The period of the borrowing does not exceed 90 days. • If the borrowing were to take place, the total amount borrowed by the trustee would not exceed 10% of the value of the assets of the fund (SISA s 67(2), (2A)). Conditions of borrowing to make contract settlements A trustee may also obtain temporary borrowings, for a period not exceeding seven days, if: • the purpose of the borrowing is to cover settlement of transactions to acquire certain securities (eg shares, bonds, etc) • at the time the relevant investment decision was made, it was likely that the borrowing would not be needed • the borrowing is not covered by an exemption determination made by the Regulator • the period of borrowing does not exceed seven days • if the borrowing were to take place, the total amount borrowed by the trustee would not exceed 10% of the value of the assets of the fund (s 67(3)). Exception: borrowing under limited recourse arrangements From 24 September 2007 to 7 July 2010, SISA former s 67(4A) provided an exception to the general prohibition in s 67 for limited recourse borrowings that meet certain conditions commonly found in

instalment warrant arrangements. For such borrowings, the in-house asset rules (¶3-450) also provide that an investment in a related trust forming part of an instalment warrant arrangement which meets the borrowing exception would be an in-house asset only where the underlying asset would itself be an inhouse asset if it were held directly by the fund (s 71(8), (9)). This means that an investment in a related trust instalment warrant is not automatically counted against the in-house asset limit. Former s 67(4A) was repealed from 7 July 2010. In its place, s 67A and 67B provided a revised limited recourse borrowing exception applicable to arrangements entered into on or after 7 July 2010 (including an arrangement that is a refinancing of a borrowing of money under an arrangement entered into before, on or after that date). The limited recourse borrowing exception under s 67A and 67B is discussed in ¶3415. The replacement of former s 67(4A) addressed prudential concerns in limited recourse borrowing products and practices, including: • the use of personal guarantees to underwrite the lender’s risk in the borrowing arrangement • borrowing arrangements over multiple assets which can potentially allow the lender to choose which assets are sold in the event of a default on the loan, and • arrangements where the asset subject to the borrowing can be replaced at the discretion of the trustee or the lender. The rules under s 67A and 67B are intended to provide better protection for superannuation funds by ensuring that: • the recourse of the lender and of any other person against the superannuation fund trustee for default on the borrowing is limited to rights relating to the acquirable asset • the asset within the arrangement can only be replaced in prescribed circumstances that arise from owning the original asset, and • the borrowing is referable and identifiable only over a single asset (excluding money) or, in prescribed circumstances, a collection of assets which are identical and are treated as a single asset. [SLP ¶3-490]

¶3-415 Limited recourse borrowing arrangements As an exception to the restriction on borrowings in SISA s 67(1) (¶3-410), the trustee of a regulated superannuation fund (RSF trustee) may borrow money, or maintain a borrowing of money, under an arrangement covered by s 67A and 67B (commonly called a “limited recourse borrowing arrangement” (LRBA)). The s 67A and 67B borrowing exception replaced that provided by former s 67(4A) (¶3-410). It applies to an “arrangement entered into on or after 7 July 2010 (including an arrangement that is a refinancing of a borrowing of money under an arrangement entered into before, on or after 7 July 2010)”. That is, while the exception does not apply retrospectively to existing limited recourse borrowing arrangements under former s 67(4A), it applies to a refinancing of a borrowing of money under a pre-7 July 2010 arrangement. A refinancing does not cover a re-negotiation of an existing borrowing with the same lender involving simply a variation of a loan contract that continues to exist, unless the re-negotiation amounts to a rescission or replacement of the original contract. Refinancing is also not the only way that a new arrangement may arise. For example, a change to the terms and conditions of an arrangement that fundamentally alters the character of the arrangement may mean that the new arrangement must comply with s 67A. The following topics are discussed in this paragraph: • Conditions under s 67A

• Examples of limited recourse borrowing arrangements • Acquirable asset and collection of assets • When is an acquirable asset “acquired” under s 67A(1)(a) • Protection of fund assets — trustee guarantees and indemnity • RSF trustee breach of duty • Replacement asset • Trust deed and investment strategy • Interaction with in-house asset rules • Stamp duty • GST • ATO guidelines • Taxpayer Alert — property investments using LRBA or related unit trust. For the ATO’s safe harbour rules to avoid adverse taxation consequences in LRBAs, see ¶5-448. Conditions under s 67A A limited recourse borrowing arrangement under SISA s 67A must meet the following conditions: (a) the money is or has been applied for the acquisition of a single acquirable asset, including: (i) expenses incurred in connection with the borrowing or acquisition, or in maintaining or repairing the acquirable asset (eg conveyancing fees, stamp duty, brokerage or loan establishment costs, as these are considered to be intrinsically linked to the purchase of the acquirable asset), but not expenses incurred in improving the acquirable asset, and (ii) money applied to refinance a borrowing (including any accrued interest on a borrowing or because of a replacement asset under s 67B) in relation to the single acquirable asset (and no other acquirable asset) (b) the acquirable asset is held on trust so that the RSF trustee acquires a beneficial interest in the acquirable asset (c) the RSF trustee has a right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest (d) the rights of the lender or any other person against the RSF trustee for, in connection with, or as a result of (whether directly or indirectly) default on the borrowing (or the sum of the borrowing and charges related to the borrowing) are limited to rights relating to the acquirable asset (for example, under condition (d), any right of a person to be indemnified by the RSF trustee because of a personal guarantee given by that person in favour of the lender is limited to rights relating to the acquirable asset) (e) if, under the arrangement, the RSF trustee has a right relating to the acquirable asset (other than a right described in item (c)) — the rights of the lender or any other person against the RSF trustee for, in connection with, or as a result of (whether directly or indirectly) the RSF trustee’s exercise of the RSF trustee’s right are limited to rights relating to the acquirable asset, and (f) the acquirable asset is not subject to any charge (including a mortgage, lien or other encumbrance)

except as provided by item (d) or (e) (see ID 2010/185 below). The ATO has issued SMSF Ruling SMSFR 2012/1 which explains key concepts relevant to the application of the limited recourse borrowing arrangement (see “ATO guidelines” below). Examples of limited recourse borrowing arrangements Direct loan from bank

Indirect loan from bank

Charge on asset, SMSFs as joint borrowers, terms of borrowing and arm’s length rule Section 67A(1)(f) of SISA requires that the asset being acquired under the arrangement must not be subject to a charge other than in relation to the borrowing by the SMSF. If the trustee of the holding trust in a limited recourse borrowing arrangement grants a charge over the asset in the holding trust in favour of a person other than the lender under the arrangement, the SMSF (the borrower) will contravene the borrowing prohibition in s 67(1) (ID 2010/185). In ID 2010/185, the SMSF enters into a borrowing arrangement on 15 July 2010 where the corporate trustee of a holding trust will acquire a residential property from a party unrelated to the SMSF. The trustees (ie members) of the SMSF are the directors of the corporate trustee of the holding trust. To facilitate the acquisition, one member of the fund borrows money from a financial institution and on-lends the money to the SMSF for investment into the holding trust. Under the terms of the arrangement, the corporate trustee of the holding trust holds the residential property on trust for the SMSF subject to a charge in favour of the financial institution to secure the loan to the member. As the charge in this case is granted to secure the borrowing by the member from the financial institution, rather than the borrowing by the SMSF from the member, the arrangement fails the requirement of in s 67A(1)(f). Two SMSFs who jointly borrows under a limited recourse borrowing arrangement involving a single holding trust will contravene s 67(1) (see ID 2010/172: ¶3-410). Where the other party to a transaction is not at arm’s length to the SMSF, s 109(1)(b) requires that the

terms and conditions of the transaction must not be more favourable to the other party than would be reasonably expected if the parties were at arm’s length (¶3-440). In ID 2010/162, an SMSF entered into a limited recourse borrowing arrangement on 1 June 2009 to acquire an income producing asset for the SMSF. The lender was a related party of the SMSF and the interest rate under the arrangement was lower than the rate that would be available to the SMSF from an arm’s length lender for an otherwise similar loan. In this case, the SMSF’s borrowing does not contravene s 109(1)(b) as the terms and conditions of the borrowing are not more favourable to the other party than would be reasonably expected if the parties were dealing with each other at arm’s length. It is expected that establishing the arrangement and borrowing are both documented and conducted in a business-like manner in the same way as an arrangement when dealing with an arm’s length lender. Acquirable asset and collection of assets An asset is an “acquirable asset” if it is not money (whether Australian or foreign currency) and the SISA or any other law does not prohibit the RSF trustee from acquiring the asset (SISA s 67A(2)). The most common example of any other law is the Trustee Act of a state and territory. The definition of acquirable asset excludes limited recourse borrowing arrangements that involve money as an asset (eg arrangements over multiple assets that are traded for money and managed in a similar fashion to margin accounts). The term “asset” is to be read in the singular, so that it is not interpreted as permitting borrowing arrangements over multiple non-identical assets. The policy intent of s 67A is to prohibit borrowing arrangements over multiple assets that can potentially allow the lender to choose which assets are sold in the event of a default on the loan. An asset can cover a collection of assets that are identical and have the same market value (s 67A(3)). Examples of a collection that can be treated as a single “acquirable asset” include: • a collection of shares of the same type in a single company (eg a collection of ordinary shares in X Ltd) • a collection of units in a unit trust that have the same fixed rights attached to them • a collection of economically equal and identical commodities (eg a collection of gold bars, irrespective of whether they might, for example, have different serial numbers). Examples of collections that would not be permissible include: • a collection of shares in a single company that have different rights (eg ordinary and preference shares) • a collection of units in a unit trust of different classes that have different rights attached to them or are potentially subject to differing trustee discretion • a collection of shares in different entities, and • a collection of buildings each under separate strata title, irrespective of whether the buildings are substantially the same at the time of acquisition. To ensure that an acquirable asset is always interpreted in the singular, the words “collection” and “identical” should be interpreted as ensuring that an acquirable asset is one or more things that within the arrangement are seen and treated as a whole. For example, a collection of shares must be acquired and disposed of as a collection and could not, for example, be sold down over time. In the case of the purchase of real property for example, a single title for land and the accompanying house on it would be considered a single acquirable asset, but additional items such as furnishings would not be allowed to be purchased through the same limited recourse borrowing arrangement. Furnishings (or “non-fixtures” of the property) can be acquired through separate limited recourse borrowing arrangements over a single acquirable asset or bought outright (but not held as security under the borrowing arrangement over the property).

The acquisition of leased property may be covered. For the purposes of s 67A, the lease itself should not be considered as a separate asset as long as it is dealt with together with the property under the arrangement (and therefore does not need to satisfy the requirements of s 67A(3)). When is an acquirable asset “acquired” under s 67A(1)(a) An acquirable asset is acquired at the time when the trustee of the holding trust (security trustee) gains a legal interest in the asset. At the same time, the RSF trustee gains a beneficial interest in the asset as required by SISA s 67A(1)(b). The “beneficial interest” arises on creation of the security trust over the acquirable asset. The RSF trustee has a right to acquire the legal interest upon repayment of the loan. The purpose of s 67A(1)(a)(ii) is to clarify that the RSF trustee can refinance an existing limited recourse borrowing. This may allow the RSF trustee to minimise the risk of default on a borrowing resulting from a temporary inability to make a repayment, eg due to solvency issues from benefit payment obligations. Protection of fund assets — trustee guarantees and indemnity Some lenders providing limited recourse borrowing arrangements to superannuation funds require the fund trustees, or third parties such as fund members, to provide guarantees of the borrowing to underwrite the lender’s risk from the limited recourse nature of an instalment warrant arrangement. Such an issue was raised in TA 2008/5 (¶3-410). The SISA does not prevent a lender exercising rights under a guarantee given by a third party since the lender’s rights under such guarantees are not rights against the trustee of the fund. Accordingly, the lender has rights against the guarantor’s assets if there is a default on the borrowing. The guarantor subsequently has a common law right to recover losses (which may exceed the value of the asset which was the subject of the borrowing) from the principal debtor (ie the trustee of the fund) and the trustee may then arguably seek indemnity out of the fund’s assets. Where a guarantee is given by a trustee in a personal capacity, one issue that arises is whether a lender’s entitlement to recourse against the trustee’s personal assets may lead to the trustee claiming indemnity out of the fund’s assets. The conditions in SISA s 67A do not explicitly refer to guarantees given the variety of ways that collateral agreements may be used to circumvent the limited recourse nature of the arrangement. However, conditions in s 67A(1)(d), (e) and (f) are intended to protect fund assets from such claims by limiting the rights of the lender or any other person against the RSF trustee for, or in connection with, or as a result (direct or indirect) of a default on a borrowing or charges related to the borrowing, to rights relating to the acquirable asset. The acquirable asset under a s 67A borrowing arrangement must be held in trust (s 67A(1)(b)). This trust structure is a feature of traditional instalment warrants that helps to quarantine the other assets of the superannuation fund from the investment risk that the limited recourse borrowing arrangement presents. In summary: • a guarantor’s rights against the RSF trustee are limited as the rights of the lender are limited, so that no claim against the RSF trustee should arise which could give rise to a claim for indemnity from fund assets (s 67A(1)(d)) • the rights of the lender or any other person against the RSF trustee are limited to rights relating to the acquirable asset. No guarantee arrangement can be enforceable against the RSF trustee other than the rights relating to the acquirable asset (s 67A(1)(e)) • the acquirable asset cannot be subject to any other charge than that associated with the direct borrowing arrangement (s 67A(1)(f)). The ATO has suggested that one way in which the rights of a guarantor may be excluded or limited is by the express terms of the guarantee (see ID 2010/170: ¶3-410). TR 2010/1 (on superannuation contributions) states (at para 38): “38. When a guarantor makes a contribution by paying a debt of a superannuation provider the timing

of the contribution will be determined by whether or not the guarantor has a right to be indemnified by the superannuation provider. If the guarantor has no right of indemnity, the contribution is made when the guarantor satisfies the provider’s liability. If the guarantor has a right of indemnity, a contribution is only made when the guarantor takes formal steps to forgo that right, for example by executing a deed of release, or the guarantor is barred under the law from enforcing the right of indemnity.” The ATO’s view is that where the acquirable asset in a limited recourse borrowing arrangement is forgone by the SMSF trustee in circumstances where there is no longer a debt payable by the SMSF trustee, then a subsequent payment under the guarantee does not result in a contribution. That view is consistent with the first sentence of para 38 of TR 2010/1 which concerns the guarantor satisfying the trustee’s debt. The ATO also states that the content below published on its website on 29 July 2010 clarifies the position: “Personal guarantees and contributions to the SMSF If a guarantor makes a payment to the lender under an arrangement where they have foregone [sic] their usual rights of indemnity against the principal debtor (the SMSF trustee) in respect of the guarantee, this is a contribution to the SMSF if it satisfies a liability of the SMSF. This might happen, for example, if the guarantor paid the borrowing and the acquirable asset was transferred to the SMSF trustee under the arrangement. In contrast, there is no contribution if the SMSF trustee has exercised a right to ‘walk away’ from the arrangement (and has lost the acquirable asset to the lender) and has no further liability, but the lender still exercises a right to call on the guarantee for a shortfall after disposal of the original asset.” Effect of unlimited guarantee for a post-6 July 2010 arrangement If there is a third party guarantee in relation to a borrowing by an SMSF trustee that does not satisfy the requirements of s 67A(1)(d) and (e), then that borrowing and the maintenance of it are in contravention of s 67(1) irrespective of whether the borrowing is part of an arrangement that would otherwise satisfy the requirements of s 67A. Section 67A does not by its own operation affect the rights of the parties to the guarantee. RSF trustee breach of duty Section 67A(1)(d) and (e) of SISA do not apply to a right of a member or another trustee of the regulated superannuation fund to damages against the RSF trustee for a breach by the RSF trustee of any of the RSF trustee’s duties as trustee (s 67A(5), (6)). That is, members and co-trustees may pursue a claim for damages against a trustee that makes a decision to acquire an asset under a limited recourse borrowing arrangement in breach of its obligations as trustee, bearing in mind that the trustee is prevented from seeking any indemnity against fund assets by s 56 and 57 (¶3-150). Replacement asset Former s 67(4A)(b) of SISA previously required that a superannuation fund borrowing must be used or maintained to acquire “the original asset, or another asset (the replacement)”. That condition created uncertainty over what constituted the replacement asset and gave rise to arrangements that could place fund assets at risk. For example, a lender could require a trustee to replace an asset within an arrangement if its value fell below a certain level, with an asset of greater value than the outstanding loan. For borrowing arrangements under s 67A, the specific circumstances permitting a replacement asset are set out in s 67B(3) to (8), or as prescribed by the SISR. For example, if the original asset consists of a share in a company or a collection of shares in a company (or a unit in a unit trust or a collection of units in that unit trust), the replacement asset consists of a share in that company or a collection of shares in that company (or a unit in a unit trust or a collection of units in that unit trust), and the original asset and the replacement asset have the same market value at the time the replacement occurs (s 67B(3)). The replacement asset may be a share or a collection of shares in another company, or a unit or a collection of units in another unit trust, if the replacement occurs as a result of a takeover, merger, demerger or restructure of the company or unit trust (s 67B(5)).

If the original asset consists of a share or a collection of shares in a company and the replacement asset consists of a stapled security or a collection of stapled securities: • each of those stapled securities consists of a single share or a single collection of shares of the same class, stapled together with a single unit, or a single collection of units of the same class, in a unit trust, and • the replacement occurs under a scheme of arrangement of the company (s 67B(6)). If the original asset consists of a unit or a collection of units in a unit trust and the replacement occurs as a result of an exercise of a discretion granted under the trust deed of that unit trust to the trustee of that unit trust, the replacement asset must consist of a unit or a collection of units in that unit trust (s 67B(7)). If the original asset consists of an instalment receipt that confers a beneficial interest in a share in a company or a collection of shares in a company, the replacement asset must consist of that share or collection (s 67B(4)). An instalment receipt means an investment under which: • a listed security is held in a trust until the purchase price of the security is fully paid, and • the security, and property derived from the security, is the only trust property (s 10(1)). As commonly understood, an instalment receipt is a product that does not ordinarily involve a borrowing; rather, it is the purchase of another asset by instalments. The use of “instalment receipt” in s 67B(4) in the context of replacement assets specifically means a limited recourse borrowing arrangement over an instalment receipt as the acquirable asset. This is not the same as a superannuation fund using an instalment receipt to purchase an asset without any borrowing, which is not relevant to s 67A or 67B. The following examples of circumstances that do not permit a replacement asset are given in the explanatory memorandum to Act No 100 of 2010: • securities liquidated or traded or both for different assets only as a consequence of implementing an investment strategy • money or cash is not eligible as a replacement asset under any circumstances. This includes circumstances where the original asset would otherwise be replaced with an eligible replacement asset plus cash, for example shares in X Ltd replaced by shares in Y Ltd and a pool of cash as a result of a takeover of X Ltd by Y Ltd • replacement asset arising from an insurance claim covering the loss to the original asset • the replacement by way of improvement of real property • a series of titles over land replacing a single title over land that has been subdivided, and • a replacement of a title over real property as a result of government action such as the resumption of all or part of a property or rezoning. Trust deed and investment strategy Trustees should ensure any such asset acquisition under the borrowing arrangements are permitted by the fund’s trust deed and have been taken in consideration when formulating the fund investment strategy as required by SISA s 52(2)(f) (¶3-400). Interaction with in-house asset rules If an asset (investment asset) of a superannuation fund is an investment in a related trust (as described in SISA s 67A(1)(b)) in connection with a fund borrowing under s 67A(1) and the only property of the related trust is the acquirable asset, the investment asset is an in-house asset only if the acquirable asset would be an in-house asset if it were held directly by the fund (s 71(8), (9)). This means that an investment in a related trust under s 67A is not automatically counted against the in-house asset limit. This is to facilitate the majority of cases where the holding trust under the limited recourse borrowing arrangement is a related (bare) trust.

Example The Family Superannuation Fund has invested 5% of its assets in in-house assets. As such, the fund is prohibited from acquiring further in-house assets by s 83 (¶3-450). The fund trustee cannot use a s 67A borrowing arrangement to acquire a beneficial interest in another in-house asset, for example, where the acquirable asset is a share in a company controlled by a member of the Family Superannuation Fund, as this would breach the in-house asset restriction. However, the fund trustee can use the borrowing arrangement to acquire a beneficial interest in an unrelated asset, for example, listed shares in an unrelated company. As the underlying asset would not be an in-house asset if held directly, the investment in the related holding trust will not be an in-house asset and there will be no breach of the in-house asset restriction.

An ATO determination made pursuant to s 71(1)(f) provides certainty on the operation of in-house asset exception in s 71(8) at the beginning of an LRBA where a borrowing has not yet begun or the related trust does not yet hold the acquirable asset, or where the asset continues to be held in the related trust after a borrowing has been repaid (SMSF (Limited Recourse Borrowing Arrangements — In-House Asset Exclusion) Determination 2014). Specifically, an investment in a related trust held by an SMSF as a required part of an LRBA is not an in-house asset of the SMSF in the circumstances described in the instrument. The circumstances include: • where an SMSF holds the investment asset before both the commencement of a borrowing referred to in s 71(8)(b) and the related trust beginning to hold the asset referred to in s 71(8)(c). This includes where it is intended for there to be more than one such borrowing under one LRBA (eg a borrowing to fund the payment of a deposit under the contract for the acquisition of the acquirable asset and another borrowing to fund payment of the balance of the acquisition cost of the acquirable asset), but none of those borrowings has yet begun and the related trust does not yet hold the asset referred to in s 71(8)(c) • when the related trust does not yet hold the asset referred to in s 71(8)(c) even though one or more borrowings referred to in s 71(8)(b) have begun • where the asset is still held in the holding trust after the s 71(8)(b) borrowing has been repaid (in practice, the transfer of the asset referred to in s 71(8)(c) from the holding trust to the SMSF trustee is unlikely to happen at the same time as the borrowing under the LRBA is repaid) • where there are multiple borrowings covered by s 67A(1) (or, as relevant, former s 67(4A) under one LRBA). In this case, the investment asset will be excluded, through the operation of s 71(8), from being an in-house asset of the fund until the last of such borrowings under the LRBA is repaid, provided the requirements of s 71(8) are continually met until that time. Stamp duty Each state and territory imposes stamp duty on dutiable property (or on conveyances of property). Duty is imposed either on a fixed rate ad valorem (according to value) basis or on a nominal basis, subject to exemptions and concessions which may apply. The current stamp duty Acts are: • New South Wales — Duties Act 1997 (NSW) • Victoria — Duties Act 2000 (Vic) • Western Australia — Duties Act 2008 (WA) • Queensland — Duties Act 2001 (Qld) • Tasmania — Duties Act 2001 (Tas) • Australian Capital Territory — Duties Act 1999 (ACT) Non-Rewrite States

• South Australia — Stamp Duties Act 1923 (SA) • Northern Territory — Stamp Duties Act 1978 (NT). Coverage of the stamp duty Acts is outside the scope of this Guide. Stamp duty commentary may be found in the Wolters Kluwer Australian Master Tax Guide or Stamp Duties services. Stamp duty in the “non-Rewrite States” is imposed largely in the traditional manner, ie on “instruments” necessary to evidence transfers of property, although the legislation has been widened over time to impose duty even where no written document is brought into existence. Generally, duty is payable by the transferee and is levied on the higher of the consideration for the dutiable transaction and the unencumbered value of the dutiable property. Stamp duty will, in most cases, apply to the GST inclusive amount of the consideration. For example, if the agreed purchase price is $1m and, in addition to this amount, the vendor collects from the purchaser $100,000 on account of GST, duty will be payable on $1.1m. The converse does not apply, ie GST will not have to be paid on stamp duty payable on a dutiable matter. Duty is payable within three months after a transfer. This period begins for a written instrument when the instrument is first executed, ie when any party signs or seals an instrument regardless of whether the other parties have done so. Duty may be payable on any instrument whereby property is legally or equitably transferred to or vested in a person. For example, in NSW, the following transactions in relation to dutiable property are also potentially dutiable: (a) agreements for sale or transfer; (b) declarations of trust; (c) surrenders of interests in land; (d) foreclosures of mortgages; and (e) vesting of dutiable property by, or as a consequence of, a court order (s 9). Stamp duty concessions In particular cases, superannuation operations may enjoy special concessions in the form of an exemption or a fixed, rather than an ad valorem, rate of duty (eg duty of $50 is chargeable on a transfer of, or an agreement to transfer, dutiable property from a person (transferor) to a single member SMSF. See, eg the following provisions in the Duties Act 1997 (NSW): • s 60 — Instruments relating to superannuation • s 61 — Transfers of property in connection with persons changing superannuation funds (Nifuno Pty Ltd atf Stephen Forbes Pension Fund v Chief Commissioner of State Revenue [2019] NSWCATOD 3) • s 62 — Transfers between trustees and custodians of superannuation funds or trusts • s 62A — Transfers to self managed superannuation funds • s 62B — Declaration of trust by custodian (see below) Instalment warrant arrangements In an instalment warrant arrangement, whether a stamp duty exemption or nominal stamp duty is available on the eventual transfer of the property (asset) from the custodian (security trust) to the trustee of the SMSF will be based on the actual instalment warrant documents and the relevant stamp duty legislation in each case. For example, on the ultimate transfer of the property from the custodian to the SMSF and based on the particular facts of the instalment warrant arrangement, either of the exemptions below may apply. • If the initial declaration of trust has been exempted from duty, stamp duty would apply to the subsequent transfer of the property to the SMSF. • Alternatively, no duty is payable on the subsequent transfer of the property from the custodian to the trustee of the SMSF if evidence is produced which proves that: – duty was paid when the property was acquired by the custodian, and

– for the whole period from the time the trust was declared by the custodian to the time when the property was transferred to the trustee of the SMSF, the trustee of the SMSF was always the only beneficiary and the beneficiaries (who are natural persons) of the SMSF were always the only beneficiaries of the SMSF. An instalment warrant arrangement with a bare trust structure in most cases appears to be consistent with the “apparent purchaser” provision in some duties legislation under which an exemption from duty is available if: • the instalment warrant trustee is a mere “apparent purchaser”, and • the SMSF is the real purchaser which has provided all the money for the purchase of the dutiable property. Under such provisions, either a nil or nominal duty liability arises (eg s 34 and 36 of the Duties Act 2000 (Vic); s 55 and s 62B of the Duties Act 1997 (NSW); s 117 of the Duties Act 2008 (WA); s 39 of the Duties Act 2001 (Tas) and s 56 of the Duties Act 1999 (ACT)). GST The GST regime under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is discussed in ¶7-800 and following. Where an SMSF enters into a bare trust instalment warrant arrangement to purchase commercial property, and all of the conditions for a supply of a going concern in GST Act s 38-325 are met, it may be possible for the supplier of the commercial property and the SMSF (as the recipient) to treat the supply as GST-free. Briefly, the entity that makes an acquisition, in a bare trust arrangement, is the beneficiary, rather than the trustee (GSTR 2008/3, para 52, 78). Whether this is the case will depend on the circumstances of the case. It should be added that in the context of a bare trust arrangement, the writing requirement in s 38-325(1) (c) is met if the trustee agrees in writing that the supply is of a going concern. In such a case, the trustee will be treated as acting on behalf of the beneficiary. Thus, the beneficiary will meet the requirement for a supply of a going concern, if all of the other requirements of a supply of a going concern are met (GSTR 2008/3, para 81–83). Accordingly, if the instalment warrant trustee agrees with the vendor of a commercial property, in writing, that the supply of the property is a supply of a going concern, and all of the other conditions for a supply of a going concern are also met, the supply will be GST-free. A discussion of the conditions to be met for a supply to be a supply of a going concern is found in GSTR 2002/5. Otherwise, if GST is payable/claimable on the purchase of the property, and all of the conditions for a creditable acquisition in GST Act s 11-5 are met, it would seem that the SMSF, as the beneficiary trust, may be entitled to claim input tax credits on the purchase of the commercial property. ATO guidelines ATO SMSF Ruling SMSFR 2012/1 explains key concepts relevant to the application of the limited recourse borrowing arrangement (LRBA) provisions as they apply to an SMSF that enters into an LRBA, including: • what is an “acquirable asset” and a “single acquirable asset” • “maintaining” or “repairing” the acquirable asset as distinguished from “improving” it, and • when a single acquirable asset is changed to such an extent that it is a different (replacement) asset. Although the analysis and examples developed in the ruling focus primarily on real property, the principles discussed can also apply to other types of assets. This ruling does not discuss other issues arising from

an LRBA, such as the application of the in-house asset rules if an asset remains in the holding trust once the borrowing has been repaid. The ruling also sets out the ATO’s opposition to the alternative view that the reference to an “asset” in SISA s 67A and 67B is concerned not with the physical properties of the object but only with the legal proprietary rights which are acquired. Under the legal proprietary rights approach, if borrowed funds are applied to acquire an estate in land under an LRBA, and subsequently a substantial improvement is made to that land, for example the erection of a building, this would not result in an improvement to the asset, nor a different asset, as the relevant asset is the proprietary rights which have not changed. While accepting that the alternative view has merit, the ATO considers that it is not the preferred view. The accounting approach to determining what is the single acquirable asset is also not preferred. The ATO considers that it is necessary to have regard to both the legal form and substance of what has been acquired in order to determine whether it is an acquirable asset as defined in s 67A(2) and whether it is a single acquirable asset. Taxpayer Alert — property investments using LRBA or related unit trust Taxpayer Alert TA 2012/7 warns SMSF trustees and advisors to exercise care so as to ensure any arrangements entered into by an SMSF to invest in property are properly implemented, particularly those involving LRBAs or the use of a related unit trust. The ATO is concerned that some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified, and unwinding the arrangement may involve a forced sale of the asset which could cause a substantial loss to the fund. Background — property investments using LRBA and using a related unit trust Different conditions apply for LRBAs entered between 25 September 2007 and 6 July 2010 inclusive and those entered into on or after 7 July 2010. Some of the requirements of the borrowing exception for SMSFs under SISA are that the investment is made through a holding trust and not held directly by the SMSF trustee, and that the investment is in a single acquirable asset. These arrangements are commonly referred to as LRBA. Subject to limited exceptions, the trustee or investment manager of an SMSF is prohibited from intentionally acquiring assets from a related party. One exception is where the asset is an investment in or loan to a related party, commonly referred to as an “in-house asset”. However the total market value of the SMSF’s in-house assets must not at any time exceed 5% of the total market value of the fund’s assets. Where in-house assets for an SMSF exceed the 5% limit, the trustee needs to rectify the breach, usually within 12 months. An SMSF’s investment in a related unit trust is excluded from the definition of an in-house asset where the unit trust complies with the regulatory requirements contained in SISR Div 13.3A. Therefore, such investments are excluded from the calculation of the 5% limit. Furthermore, the general prohibition on SMSFs acquiring assets from a related party does not apply where the SMSF’s investment is in a unit trust which complies with those requirements. LRBAs covered by the Alert TA 2012/7 applies to arrangements with features substantially equivalent to the following: Arrangement 1 — Property investments using LRBA 1. An SMSF enters into an LRBA post-7 July 2010 to acquire an asset. 2. The arrangement has at least one of the following features: (a) the borrowing and the title of the property is held in the individuals’ name and not in the name of the trustee of the holding trust. The SMSF funds part of the initial deposit and the ongoing loan repayments (b) the title of the property is held by the SMSF trustee, not the trustee of the holding trust (c) the trustee of the holding trust is not in existence and the holding trust is not established at the

time the contract to acquire the asset is signed (d) the SMSF trustee acquires a residential property from the SMSF member (e) the acquisition comprises two or more separate titles and there is no physical or legal impediment to the two titles being dealt with, assigned or transferred separately, or (f) the asset is a vacant block of land. The SMSF intends to use the same borrowing to construct a house on the land. The land is transferred to the holding trust prior to the house being built. Arrangement 2 — Property investments using related unit trust 1. An individual or individuals (“the fund members”) establish an SMSF and roll over their existing superannuation benefits into the SMSF. Alternatively the individual or individuals are a member of an existing SMSF. 2. A unit trust (“the unit trust”) is established for the purpose of acquiring a property. Alternatively an existing unit trust can also be used for the same purpose. 3. The unit trust is a related unit trust. 4. The fund members subscribe for units in the unit trust. 5. The fund members may borrow money from a commercial lender to fund the subscription to units in the unit trust. 6. The SMSF also subscribes to units in the unit trust. 7. The trustee of the unit trust purchases an asset (“the asset”) such as a property which is rented out. 8. The arrangement has one or more of the following characteristics: (a) the asset acquired by the unit trust is used as a security for the money borrowed by the members to subscribe units in the unit trust (b) the assets of the unit trust include an asset that was acquired from a related party of the superannuation fund which is not business real property, and/or (c) the assets of the unit trust include real property which is leased to a related party of the superannuation fund, and the real property subject to the lease is not a business real property.

The ATO’s concerns — SIS regulatory issues

The ATO considers that these arrangements give rise to possible issues, being whether: Arrangement 1 — Property investments using LRBA (a) the investment arrangements may be in breach of the sole purpose test in s 62 (¶3-200) (b) s 67 which prohibits the SMSF trustee from borrowing money or maintaining an existing borrowing may have been breached (¶3-410) (c) the asset acquired is not a single acquirable asset as required under s 67A(2) as it is comprised of two or more proprietary rights (see “Acquirable asset and collection of assets” above) (d) the acquirable asset is subject to a charge which would prohibit an SMSF trustee from borrowing money, or maintaining a borrowing of money under s 67A(1)(f), and (e) the deposit paid by the SMSF and/or loan repayment by the SMSF may be considered as a payment of superannuation benefits which contravenes SISR Pt 6 where the title of the property is not held by the trustee of the holding trust Arrangement 2 — Property investments using related unit trust (f) the investment arrangements may be in breach of the sole purpose test in s 62 (g) the SMSF’s investment in the unit trust fails to meet the requirements of reg 13.22C (¶3-450), and (h) the SMSF’s investment in the unit trust is an in-house asset under s 71, therefore counting towards the 5% limit under s 83 (¶3-450). The ATO’s concerns — taxation issues The ATO considers that these arrangements may give rise to possible issues, being whether: Arrangement 1 — Property investments using LRBA (a) the member(s) may be required to include the SMSF loan repayments in their assessable income, and (b) the income and its associated deductions from the investment should be declared by the individual member(s), rather than by the SMSF where the investment is not held for the beneficial interest of the SMSF Arrangement 2 — Property investments using related unit trust (c) the SMSF may become a non-complying superannuation fund for tax purposes and must include amounts of income from previous years in its assessable income under ITAA97 s 295-325 (¶7-250) (d) the unit trust may incur a CGT liability in relation to the disposal of the property (e) the members and the SMSF may be required to include a capital gain in their assessable income an amount on redemption of their units in the unit trust.

¶3-420 Loans/financial assistance to superannuation fund members Except as permitted by the SISA, the trustee (or investment manager) of a regulated superannuation fund is prohibited from lending money of the fund or giving any other financial assistance using resources of the fund to a member or a relative of a member of the fund (SISA s 65; SMSFR 2008/1). Section 65 is a civil penalty provision (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 if the provision is contravened (¶3-820). The prohibition in s 65 applies to dealings with a member or a relative, rather than the wider concept of

“related party” (¶3-470). While loans to related parties are permitted, and are treated as in-house assets under SISA Pt 8 (¶3-450), the lending of money or provision of financial assistance to a member or relative remains prohibited under s 65 (s 65(7)). This is to remove any doubt about the interaction of the Pt 8 in-house asset provisions and the s 65 prohibition. Relative and member A “relative” of an individual means: (a) a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his/her spouse (b) a spouse of the individual or of any other individual referred to in item (a) (SISA s 10(1)). For the purposes of item (a), if one individual is the child of another individual because of the definition of child in s 10(1) (¶3-020), relationships traced to, from or through the individual are to be determined in the same way as if the individual were the natural child of the other individual (s 10(5)). The definition of “member” is modified by regulations for the purposes of particular SISA provisions (s 15B). In particular, if a superannuation interest in a fund is subject to a payment split, or a non-member spouse interest has been created under SISR reg 7A.03B, and before the payment split the non-member spouse was not a member of the fund, the non-member spouse is treated as being a member of the fund in which the interest is held for the purposes of the prohibition on lending to members in s 65 (and the inhouse asset rules in SISA Pt 8 and various other provisions) (reg 1.04AAA). Scope of s 65 A “loan” includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings (SISA s 10(1)). “Giving financial assistance” is not defined, but the expression under its ordinary meaning would cover transactions such as providing guarantees for private loans of members, charging fund assets for the benefit of members, the release of an obligation and the forgiveness of a debt (SMSFR 2008/1, see “ATO guidelines” below). A partnership does not have a separate legal identity; rather, it is two or more persons carrying on a business in common. Therefore, a loan by a fund to a partnership made up of fund members would breach s 65, as the loan to the partnership is actually a loan to the members (ID 2003/711). For other examples, see SMSFR 2008/1 below, ID 2002/516 (no breach when fund money was unintentionally deposited in member’s bank account) and former ID 2002/702 (a breach occurs where free residential accommodation was provided by an SMSF to a member). In SMSFR 2008/1 (see “ATO guidelines” below), the Commissioner takes a very broad view of the scope of the s 65 prohibition. Among other things, the Commissioner states that: • the expression “financial assistance” … extends beyond other kinds of disposition of money or property … and can take the form of the giving of a security, charge or guarantee or the taking on of an obligation, or any other arrangement that, on an objective assessment of the purpose of the arrangement, is in substance a financial accommodation (para 7) • the requirement in s 65(1)(b) that assistance must be given to “a member of the fund or a relative of a member of the fund” for paragraph 65(1)(b) … does not limit the application to transactions directly between the SMSF and a member or relative of a member. Paragraph 65(1)(b) is also contravened if the SMSF enters into an arrangement whereby SMSF resources are used to give financial assistance to a member or a relative of a member through a third party or an interposed entity (para 10, 18) • assistance is given to a member or a relative of a member if there is some benefit, aid or help given to that person. … it is not necessary to determine the purpose for which the financial assistance is given. Paragraph 65(1)(b) will be contravened if financial assistance is given to a member or a relative of a member using the resources of the SMSF irrespective of the purpose for which such

assistance might be given or whether the member or member’s relative sought such assistance (para 51). Additional restrictions for public offer funds The trustee of a public offer superannuation fund (¶3-500) must not lend money of the fund to, or invest money of the fund in, the trustee itself or a related body corporate (SISR reg 13.17A). The restriction does not prevent investments by a fund in a related body corporate if the investments relate to the issue of a life insurance policy by a life insurance company that is a related body corporate, to a deposit with an authorised deposit-taking institution (ADI) or approved non-ADI financial institution, or the related body corporate is an ADI, an approved non-ADI financial institution and the investments (prescribed investments) comply with the rules and limits specified in reg 13.17AA. An ADI means a body corporate that is an ADI for the purposes of the Banking Act 1959 or a state bank. ATO guidelines SMSFR 2008/1 explains the meaning of “any other financial assistance”, what constitutes “using the resources of the fund” and what constitutes the giving of financial assistance to “a member of the fund or a relative of a member of the fund” for the purposes of SISA s 65(1)(b). In the Commissioner’s view, assistance is given to a member or a relative of a member if some aid or help or a benefit is given to that person whether or not such assistance was requested and the assistance given is financial in nature. The expression “financial assistance” has no technical meaning; therefore, it has its ordinary meaning so as to extend beyond the provision of loans or other kinds of disposition of money or property, eg the giving of a security, charge or guarantee or the taking on of an obligation, or any other arrangement that, on an objective assessment of the purpose of the arrangement, is in substance a financial accommodation. The Commissioner considers that the resources of a fund are used if an arrangement relies on the fund’s assets, whether or not there is a positive, negative or nil effect on the net assets as a result of that arrangement. Thus, this can include any arrangement if the assets of the fund are converted into other assets, diverted, diminished or put at risk, or if there is any prejudice to the financial position of the fund. The assistance must be given to “a member of the fund or a relative of a member of the fund”. This condition does not limit the application of the prohibition to transactions directly between the fund and a member or relative of a member, that is, s 65(1)(b) is contravened if the fund enters into an arrangement whereby the fund’s resources are used to give financial assistance to a member or a relative of a member through a third party or an interposed entity. Another entity can give financial assistance to a member or relative of a member in any of the ways that an SMSF can give financial assistance to a member or relative (see SMSFR 2008/1, para 12–16). There is a sufficient connection between the financial assistance given by another entity to a member or relative of a member and using the resources of an SMSF to give that financial assistance if: • the financial assistance would not have been given by the entity had the SMSF not entered into an arrangement with that entity that relies on SMSF resources • the entity is in effect passing on financial assistance given to it by the SMSF. This also includes money or assets flowing from the SMSF through a chain of related entities to the member or a relative of a member of the SMSF, or • there is something else to indicate that financial assistance given by the entity relied upon, or was in some way conditional or dependent upon, SMSF resources. For example, financial assistance is indirectly given if the SMSF agrees to sell an asset (at market value) to another entity and as part of that arrangement, the other entity releases the member or relative from a financial obligation owed to it by the member or relative, or if the SMSF transfers an asset to another entity and the other entity transfers the asset to the member or relative. Arrangements or transactions that by their nature contravene s 65(1)(b) include the trustee or investment manager of an SMSF doing any of the following:

• giving a gift using the resources of the SMSF to a member or a relative of a member • selling a fund asset to a member or relative of a member for less than its market value, or purchasing an asset for greater than its market value • acquiring services from a member or a relative of a member on non-arm’s length terms (eg paying for unnecessary services or paying an amount for services in excess of an arm’s length amount) • providing security or a charge over the fund’s assets or giving a guarantee or an indemnity for the benefit of a member or a relative of a member • forgiving a debt of a member or a relative of a member, or releasing a member or a relative of a member from an obligation to the SMSF, including where the amount is not yet due and payable, or delaying recovery action for a debt owed to the SMSF, and • satisfying or taking on a financial obligation of a member or a relative of a member (SMSFR 2008/1, para 86). The factors that indicate that the purpose of an arrangement or transaction is in substance to provide financial assistance using the resources of an SMSF include: • the arrangement or transaction exposes the SMSF to a credit risk, or exposes the SMSF to a financial risk, from a member or a relative of a member • the arrangement or transaction is on non-arm’s length terms that are favourable to the member or relative of a member • the arrangement or transaction is not a usual or normal commercial arrangement in the context in which SMSFs operate • the arrangement or transaction is not consistent with the investment strategy of the SMSF • under the arrangement or transaction an amount is paid by the SMSF, and later repaid to the SMSF, in amounts or in a manner that may be equated in a commercial sense with the repayment of a loan whether with or without an interest component, and • the arrangement or transaction results in a diminution of the assets of the SMSF whether immediately or over a period of time (SMSFR 2008/1, para 15). ATO warnings on LRBA with related parties The ATO’s warnings deal with SMSF loan arrangements where the trustees provide loans or other direct or indirect financial assistance from the fund to a member or a member’s relative, for example, using assets of the fund to guarantee a personal loan of a member. The ATO gives the following advice to SMSF trustees considering lending arrangements: “Before lending any money, you should consider your fund’s investment strategy and determine whether the investment is legal and, in particular, whether lending money to people providing you with services or advice is in the best long-term interests of your members. If you are not sure about making these types of investments choices, we recommend that you seek advice before entering into such arrangements.” If a decision is made to go ahead and lend money from the SMSF, the ATO’s advice on implementing the arrangement includes having an appropriate written loan agreement with all relevant terms and ensuring it is conducted on an arm’s length basis with interest and repayments received (see also www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsf-technical/limitedrecourse-borrowing-arrangements---questions-and-answers). Taxpayer Alert — investing in an unrelated trust which on-lends to a member

TA 2010/5 describes an arrangement where an SMSF invests funds in an unrelated trust which on-lends the funds to a member or a relative of the member of the fund so as to circumvent the SISA s 65 prohibition. This alert applies to arrangements with features that are substantially equivalent to the following: 1. An organiser sets up a trust (the trust) which purports to offer fixed rate interest yielding investments to allegedly unrelated entities. 2. An SMSF invests in the trust. 3. The organiser (who may also be the trustee of the trust) or a licensee/franchisee of the organiser, sources borrowers (the borrowers) to borrow funds from the trust. 4. The borrowers may include a member of the SMSF that invested in the trust or a relative of an SMSF member. 5. Each borrower enters into a loan agreement (the loan) with the trust. The loan amount (or total loan amounts of all borrowers associated with the SMSF) may be comparable to the amount the SMSF invested in the trust. 6. The terms of the loan may include: • a range of available interest rates • a range of interest payment terms, including flexibility in the repayment date (provided the funds are paid sometime in the future) • security over the loan in the form of a mortgage, personal guarantee or caveat, and/or • the use of borrowed funds for multiple purposes, including business, investment or personal use. 7. Each borrower makes interest only repayments on the loan to the trust for a substantial period of the loan. 8. The trustee of the trust pays the SMSF an interest yield on their purported investment. 9. Investment and loan fees payable under the arrangement may be considered excessive. The basic structure of the arrangement can be summarised diagrammatically as below.

The ATO considers that arrangements of this type give rise to the SIS regulatory issues and taxation issues, being whether: SIS issues • the sole purpose test in s 62 may have been breached, eg a purpose is to obtain a present day benefit for members or a related party, rather than for the purpose of providing retirement benefits for the members (¶3-200) • the trustee of the SMSF may have breached the s 65 lending prohibition • the members of the SMSF may have illegally accessed superannuation benefits if they do not repay the loan from the trust • the trustee of the SMSF may have contravened s 109 which requires that investments to be made and maintained on an arm’s length basis (¶3-440) • the SMSF’s investment in the trust may be an in-house asset under s 71(1) and, therefore, subject to the 5% limit (¶3-450) • s 85 may apply to a person undertaking an arrangement where the arrangement artificially reduces the market value ratio of the SMSF’s in-house assets to avoid application of the in-house asset restrictions (¶3-450) Tax issues • income derived by the SMSF may be “non-arm’s length income” for the purposes of ITAA97 s 295550 (¶7-170) • payment of interest above the commercial rate to the trust by the member or relative, which is subsequently paid to the SMSF as an investment yield, may in fact be superannuation contributions and therefore should be reported for excess contributions tax purposes under ITAA97 Div 292 (¶6500, ¶12-530) • any fee or commission received by the trust, licensee/franchisee and/or organiser of this arrangement may be assessable income for the relevant income year • the borrowing expense incurred by the borrower (member or relative) may be deductible under ITAA97 s 8-1 or 25-25, and the extent to which it is deductible • any investment fee purportedly incurred by the SMSF may be deductible under s 8-1 and the extent to which it may be so deductible (¶7-150) • the general anti-avoidance provisions in ITAA36 Pt IVA (¶16-080) may apply to all or part of the arrangement, and • any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of TAA Sch 1 Div 290 (¶16-070). [SLP ¶3-470]

¶3-430 Acquisition of assets from a related party The trustee (or investment manager) of a regulated superannuation fund must not intentionally acquire an asset from a related party of the fund, except as permitted by the SISA (SISA s 66(1)). Special exemptions also apply to a fund with fewer than five members, such as an SMSF or a small APRA fund. A “related party” of a fund means a member or a standard employer-sponsor of the fund, and their Part 8 associates (this is discussed in detail at ¶3-470). The meaning of “member” is also modified in relation to

superannuation interests in a fund subject to a payment split, or where a non-member spouse interest has been created under SISR reg 7A.03B (reg 1.04AAA: ¶3-420). There are anti-avoidance provisions which apply to prevent a fund from setting up or undertaking a scheme which would result in the fund acquiring assets through interposed entities having a connection with a related party (s 66(3)) (see “Prohibition of avoidance schemes” below). A person who contravenes s 66(1) or (3) is guilty of an offence punishable on conviction by a term of imprisonment not exceeding one year (s 66(4)). The prohibition covers the intentional acquisition of an asset. Therefore, the prohibition will be breached only if the trustee knowingly acquires the asset from a related party; an inadvertent acquisition will usually not offend s 66 unless an avoidance scheme is involved. This qualification appears to provide some relief to trustees, particularly of large funds, who may not always be aware of the identity of a vendor, nor of any association between the vendor and a related party. The term “acquire” is not defined. Generally, “acquire” is taken to mean the trustee becoming the legal or equitable owner through the purchase or transfer of any asset. Subject to a contrary intention (see further below), the term “asset” means “any form of property”, and it includes money, whether Australian currency or foreign currency (s 10(1)). The phrase “any form of property” has a very wide meaning and includes every type of right, interest or thing of value that is legally capable of ownership and can be alienated or transferred to the trustees. The property may be personal or proprietary, legal, equitable or statutory, or tangible or intangible. Examples of asset or property include an estate or interest in land, a house, a car, a boat, machinery, shares, a chose in action, a mining exploration licence, a mining lease, a rental lease, and intellectual property rights. All forms of in specie contributions to a superannuation fund would therefore be covered. The issue of units in a unit trust to a trustee of a regulated superannuation fund, in consideration for the payment of subscription moneys for those units, amounts to an acquisition of an asset in terms of s 66. This view is consistent with the decision of the Full Federal Court in Allina 91 ATC 4195. Accepting money, cheques and promissory notes For the purposes of s 66, the phrase “acquire an asset” does not include accept money (s 66(5)). A trustee or investment manager, therefore, does not contravene s 66(1) by accepting a contribution of money, eg Australian or foreign currency (cash), a money order, or an account held by the fund is credited with funds by way of an electronic funds transfer (SMSFR 2010/1, para 132). SMSFR 2010/1 provides extensive guidelines and examples on the application of s 66(1) to contribution of assets (in specie contributions) by a related party to an SMSF. One issue that arises is whether a trustee accepts money, or an asset other than money, if the trustee accepts a cheque (including a bank cheque) or a promissory note from a related party. According to the ATO, a cheque (whether a personal cheque or a bank cheque and whether it is post-dated or is able to be presented immediately) is “money” for the purposes of s 66 and its acquisition by fund does not contravene s 66(1). This view recognises that typically a cheque is a medium of exchange, and that the value of a cheque to the fund is in the payment of a sum of money to the fund and not as an asset other than money (SMSFR 2010/1). A promissory note is an unconditional promise in writing (and signed) that is made by one party (the maker) to another (the payee or bearer) to pay on demand or at a fixed or determinable future time a sum certain in money. If a promissory note is an object of exchange rather than a medium of exchange, it is not money for the purposes of s 66. A promissory note is an object of exchange if, for example, it is issued at a discount from face value to raise finance and/or is traded at a discount from face value on a secondary market. Further, as value has been given for the promissory note its payment can be enforced. The acquisition of such a promissory note is the acquisition of an asset other than money and contravenes s 66(1) unless an exception applies (SMSFR 2010/1). If a promissory note is issued to a fund by the maker (eg a member of the SMSF) for no consideration and the note is payable at face value at a certain future date or on demand, it is the Commissioner’s view that the promissory note is money for the purposes of s 66. Therefore, its acquisition by the fund does not contravene s 66(1). However, this does not mean that the contribution of a promissory note does not give rise to other compliance issues, for example, s 65 (which prohibits lending to members (¶3-430)) may be relevant if contribution of a promissory note gives rise to an amount owing by a member or a relative of a

member to the fund. Example Linda is a member and trustee of her SMSF. Linda (as the maker) issues a promissory note to the SMSF (payee) that is payable at face value at a specified future date. The SMSF does not provide any consideration to Linda for the promissory note. The promissory note is a medium of exchange and is not in this case an object of exchange. Linda acquires the promissory note in her role as trustee of the SMSF. Linda as trustee of the SMSF does not contravene s 66(1) by acquiring the promissory note.

The ATO has issued TA 2009/10, which discusses in detail arrangements involving the non-commercial use of negotiable instruments (promissory notes) by superannuation funds — see ¶5-450. Acquisition of “services” The issue of the acquisition of “services” is discussed in SMSFR 2010/1 (para 17–19). Such a case may arise, for example, where an SMSF engages a related party on commercial terms to do work on land owned by the fund, ie a contract for services using goods and materials supplied by the related party. Although the provision of “services” (the substance of the transaction) will not breach s 66(1), care must be taken if the goods and materials are not insignificant in value and function as this may be taken to be an acquisition of assets (ie the goods and materials) from the related party. Exceptions to prohibitions — permitted acquisitions The trustee (or investment manager) of a regulated superannuation fund can intentionally acquire an asset from a related party of the fund under the following exceptions: • the asset is a listed security acquired at market value (s 66(2)(a)) • for a fund with fewer than five members (ie an SMSF or a small APRA fund) — the asset is business real property and is acquired at market value (s 66(2)(b)) • the asset is acquired under a merger between regulated superannuation funds (s 66(2)(c)) • the Regulator has determined in writing that the asset is of a kind that may be acquired by the fund, or a class of funds of which the fund is included (s 66(2)(d)) • the asset is an in-house asset that is acquired at market value and the acquisition does not result in the fund breaching the in-house asset threshold (s 66(2A)) • the asset is acquired for the member of the acquiring fund because of reasons directly connected with a relationship breakdown of the member (s 66(2B)). The permitted acquisition categories are discussed below. The “market value” of an asset means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made: • the buyer and the seller dealt with each other at arm’s length in relation to the sale • the sale occurred after proper marketing of the asset • the buyer and the seller acted knowledgeably and prudentially in relation to the sale (s 10(1)). Exception: Acquiring listed securities (s 66(2)(a)) A “listed security” means a security listed for quotation in the official list of: • a licensed market within the meaning of the Corporations Act 2001 (CA), s 761A (ie a financial market the operation of which is authorised by an Australian market licence) • an approved stock exchange within the meaning of ITAA97 (or ITAA36 former s 470), or

• a market exempted under the CA s 791C (SISA s 66(5)). The most common examples of listed securities for the purposes of s 66(2)(a) are shares, units, bonds, debentures, options, interests in managed investment schemes or other securities that are listed on the Australian Securities Exchange or a foreign stock exchange. A “security” generally means an instrument (document) issued by a government, semi-government body, statutory body, or public company in return for funds invested for a specified purpose by purchasers. It includes bonds, debentures, shares, units and interests in managed investment schemes. A “licensed market” under CA s 761A means a financial market the operation of which is authorised by an Australian market licence. A “financial market” (as defined in CA s 767A) is, broadly, a facility through which transactions involving financial products, including securities, are made. Under CA s 791A, an entity operating a financial market must be the holder of an Australian market licence to operate legally as a financial market in Australia unless exempted under CA s 791C from the licensing requirement. An example of a holder of an Australian market licence is ASX Limited (formerly the Australian Stock Exchange Limited and now operating as the “Australian Securities Exchange”). An “approved stock exchange” means a stock exchange listed in Sch 5 of the Income Tax Regulations 1997 (ITAR reg 995-1.05). They include both domestic exchanges (ie the Australian Stock Exchange Limited, the Bendigo Stock Exchange Limited and the National Stock Exchange of Australia Limited) and foreign exchanges (such as the New York Stock Exchange, the NASDAQ Stock Exchange, the London Stock Exchange, the Shanghai Stock Exchange, the Singapore Stock Exchange, etc). For the ATO’s views on acquisition of shares acquired by a superannuation fund under an employee share scheme where the fund pays less than the market value of the asset, see Factsheet Employee share scheme options and acquisition of shares by self-managed super funds (www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsf-technical/employeeshare-scheme-options-and-acquisition-of-shares-by-self-managed-super-funds). Exception: Acquiring business real property (s 66(2)(b)) The trustee (or investment manager) of a fund with fewer than five members (ie an SMSF or small APRA fund) may use 100% of its assets to acquire business real property of a related party at market value (SISA s 66(2)(b)). (Prior to 23 December 1999, acquisition of such assets was restricted to a limit of 40% of total assets of the fund.) “Business real property” in relation to an entity means: • any freehold or leasehold interest of the entity in real property • any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer, or • any class of interest in relation to real property, as prescribed by the Regulations, that is held by the entity (s 66(5)), where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate. The Commissioner has issued detailed guidelines on the business real property exception in SMSFR 2009/1 (see below and ¶5-450). Real property refers to interests in or over land, including fixtures attached to the land such as buildings. Accordingly, investments in licences (eg a water licence, fishing licence) and contractual arrangements (eg leasehold interest in real property with non-severable interest in an afforestation arrangement attached) cannot qualify as business real property. It is possible for two or more separate parties to have a legal interest in the same piece of real property by virtue of being registered as co-owners. Co-ownership or property sharing occurs where two or more persons share the same interest in land simultaneously. This indicates that the business real property exception will apply in situations where an SMSF obtains a partial interest in the real property, provided the real property is used wholly and exclusively in one or more businesses.

The definition of business real property includes property on which the entity conducts business (eg a shop or factory) or property which is the subject of the entity’s business (eg land where the entity is in the business of buying or selling land). Shares in a property-owning company are not business real property as shares are not real property. Business real property specifically includes real property used in one or more “primary production business” (as defined in ITAA97) where a portion of the property (not exceeding two hectares) contains a dwelling that is used primarily for domestic or private purposes (s 66(5)). As noted above, the real property must be used wholly and exclusively in one or more businesses, whether carried on by the entity or not, including a business which has temporarily ceased operating. “Business” includes any profession, trade, employment, vocation or calling carried on for the purposes of profit, including the carrying on of primary production and the provision of professional services, but not occupation as an employee (s 66(5)). Whether an entity is in fact running a business is determined on a case-by-case basis, having regard to certain factors. Essentially, there must be some organised activity, which may be demonstrated by: • the keeping of separate records • the size of the operation and the capital investment involved • whether transactions are conducted continuously or systematically, or merely ad hoc • the time spent on the activity • whether a business plan exists • whether there is a reasonable expectation of profit, and • whether employees are involved. As the definition of “business” is inclusive, the question of whether a business as ordinarily understood is in existence remains one of fact and degree requiring the consideration of all the ordinary indicators of business noted above. An activity that is not designed or carried out for the primary or specific purpose of profit may still, after consideration of all relevant factors, be regarded as a business for the purpose of s 66(5). In the case of a not-for-profit enterprise, it is typically a requirement that the entity’s stated purpose is something other than to produce profit. However, if the activity otherwise satisfies the ordinary indicators of a business, a not-for-profit enterprise may still be classified as a “business” for the purposes of s 66(5). For additional guidelines on what activities constitute a “business” or “primary production business”, see TR 97/11 and SGR 2005/1 (SMSFR 2009/1, para 37, 119, 120). Residential property will generally not satisfy the business use requirement and, therefore, will not qualify as business real property. The mere renting out of a property is not considered to constitute the carrying on of a business. Where residential property forms part of a business of owning and leasing residential properties, the business real property exception may be satisfied (SMSFR 2009/1, para 192). Exception: Mergers and Regulators’ determinations (s 66(2)(c) and (d)) From 12 May 1998, there are two further exceptions to the general prohibition on acquisition of assets from related parties. The first covers assets acquired by the trustee of a regulated superannuation fund under a merger between regulated superannuation funds, where this would result in the acquisition of assets from a related party (SISA s 66(2)(c)). The term “merger” is not defined in the SISA. A merger in this context refers to all the assets and liabilities of two or more separate funds being transferred into either one of the funds or into a new fund. This will generally result in one fund ceasing to exist and the combined entity operating under one or other of the original trusts. The same situation applies to SMSFs, for example where a family group has more than one fund and these are consolidated via a merger. Again, the process is effected as a roll-over from one fund to the other. In the context of s 66(2)(c), the following situations would be considered mergers:

• all the assets and liabilities of SMSFs A, B and C (transferor funds) are transferred to the trustee(s) of new SMSF D (transferee fund) and SMSFs A, B and C are wound up, or • SMSF E transfers its assets and liabilities to the trustee of existing SMSF F and SMSF E is wound up (National Tax Liaison Group (NTLG) Superannuation Technical Sub-group minutes, September 2010, Issue 6.10). Note that while income tax loss relief may be available under ITAA97 Div 310 where an SMSF merges with an APRA regulated superannuation fund with five or more members, it is not available for mergers between SMSFs or small APRA funds as at least one of the merging funds is required to have five or more members just before the merger (¶7-130 “Loss transfer and CGT roll-over relief for merging superannuation funds”). The second exception applies if APRA (or the Commissioner in respect of SMSFs) makes a written determination that an asset is of a kind that may be acquired by any fund or by a class of funds in which a particular fund is included (s 66(2)(d)(i)). An APRA determination allows a regulated superannuation fund to acquire from a related party of the fund, at market value, units in a unit trust that is registered as a managed investment scheme under the Corporations Act 2001 where the trustee of the unit trust is the responsible entity of the registered scheme and is a related party of the fund (Superannuation Industry (Supervision) (Related Party Assets) Determination No 1 of 2010). An ATO determination allows an SMSF to acquire an asset from a related party in the following circumstances: • the asset is acquired for the benefit of a particular member of the acquiring fund by way of a transfer or roll-over from another regulated superannuation fund (the transferor fund) • the asset represents the whole or part of either: – the member’s own interests in the transferor fund, or – the member’s entitlements as determined under Pt VIIIB of the Family Law Act 1975 (FLA) in relation to the interests of the member’s spouse or former spouse in the transferor fund, and • the transfer or roll-over occurs as a result of that member’s marriage breakdown (Self Managed Superannuation Funds (Assets Acquired on Marriage Breakdown) Determination 2006, 28 August 2006) (Determination SPR 2006/MB1). This exception for in specie acquisitions resulting from a marriage breakdown applies retrospectively from 28 December 2002 (the commencement date of the FLA regime allowing the splitting of a member’s interest in a superannuation fund on marriage breakdown: see Chapter 14). The exception provided by the ATO determination had limitations as: • it did not apply to opposite-sex or same-sex de facto relationships, and • it did not cover transfers or roll-overs made to APRA-regulated superannuation funds. The ATO determination was also inconsistent with legislative changes which extended the CGT roll-over on a marriage and relationship breakdown under the ITAA97 to in specie transfers of a member’s personal superannuation interests from a small superannuation fund to another complying superannuation fund (¶14-980). The deficiencies in the exception under the ATO determination have been addressed, from 17 November 2010, for acquisitions of assets which occur because of a member’s relationship breakdown (s 66(2B), (2C)). A “relationship” covers a marriage, and opposite-sex and same-sex de facto relationships (s 71EA). Exception: Purchase of in-house assets This exception provides for the interaction between the prohibition on acquisition of assets from a related party under SISA s 66 and the in-house asset provisions (¶3-450) which allow a certain percentage of

fund assets to be invested in, or lent or leased to, related parties. The exception applies where the trustee or investment manager of a superannuation fund acquires assets from a related party of the fund and the acquisition: • constitutes an investment that is an in-house asset (as defined in s 71), or would be an in-house asset if not for the in-house asset transitional arrangements in s 71A to 71D, or is covered by any of the exceptions set out in s 71(1)(b) to (f), (h) and (j), or is a life insurance policy issued by a life insurance company other than a policy acquired from a member of the fund or a relative of a member • is at market value • does not result in the level of in-house assets exceeding the level permitted by the in-house asset rules (s 66(2A)). For example, under s 66, a fund would be prohibited from acquiring shares in a private company that is a related party, such as a company associated with a standard employer-sponsor. However, under the inhouse asset provisions, the fund can make an investment in a related party (in this case, buy shares in the private company) provided the investment does not cause the fund’s in-house asset level to exceed the in-house asset limit (5% of the market value of fund assets for 2002/03 and later years). The exception in s 66(2A) will therefore permit the acquisition of the in-house asset from the related party if the relevant conditions are met. Another example is where a regulated superannuation fund with fewer than five members jointly owns business real property with a related party by investing in the related entity that holds the property where the entity complies with the prescribed conditions in SISR reg 13.22A to 13.22D (¶3-450). As these regulations were made under s 71(1)(j)(ii), the exception in s 66(2A) will operate to allow the acquisition of the asset (in this case, shares or units in the related entity) from the related party without breaching the general prohibition on acquisition of assets from related parties under s 66. Prohibition of avoidance schemes A person must not enter into, commence to carry out, or carry out a scheme if the person entered into, commenced to carry out, or carried out the scheme or any part of the scheme with the intention that: • the scheme would result, or be likely to result, in the acquisition of an asset by a trustee or an investment manager of a regulated superannuation fund, where the asset is acquired from a person who has a connection (either direct or indirect through one or more interposed companies, partnerships or trusts) with a related party of the fund, and • that acquisition would avoid the application of the prohibition in s 66(1) to the fund (s 66(3)). A “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, and • any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise (s 66(5)). To determine if there is a contravention of s 66(3), the Regulator will examine the scheme as a whole, and not just the isolated transactions within the scheme (Lock 03 ESL 06). That case involved a scheme where superannuation funds (Funds) were used to acquire all of the units in a unit trust that had previously acquired land from persons who later became members of the Funds. At the time of the relevant transactions, s 66(1) prohibited acquisitions from members or their relatives and did not apply more broadly to acquisitions from related parties. The Commissioner contended that each Fund was part of a scheme that was implemented with the intention that the applicants, as trustees of a regulated superannuation fund, would acquire or be likely to acquire an asset from a member of the Fund in a

manner which would avoid the prohibition in s 66(1). The principle in Lock’s case was applied in ID 2011/84 where the ATO decided that, considering the arrangement as a whole, it was a scheme to which s 66(3) applied as it was structured with the intention of enabling the SMSF’s acquisition of units in a unit trust from a party that is not a related party of the SMSF. The facts in ID 2011/84 are as follows: “An entity established an arrangement (the trade exchange) that facilitated the provision of goods and services through barter transactions between its members. Members who participate in the arrangement become entitled to receive credits in the form of ‘trade dollars’ for the goods or services they provide. The entity acts as a third party record keeper, using the ‘trade dollars’ to monitor the value of cashless barter transactions. A trustee of a unit trust is a member of a trade exchange. The trustee of the unit trust is empowered by the trust deed to accept a mixture of trade dollars and Australian currency as consideration for the issue of units in the trust. That is, another member of the trade exchange can purchase a unit for X dollars in Australian currency and Y trade dollars, the permitted ratio being set by the trustee of the unit trust according to particular criteria. The unit trust invests in income producing assets using both trade dollars and Australian currency. Distributions to unit holders can be made in a mixture of trade dollars and Australian currency. The trustee of the unit trust indicated that it was prepared to enter into an arrangement with a company that is a member of the trade exchange and the trustee of an SMSF that has as a member an employee of that company. The trustee of the unit trust is not a related party of the SMSF; nor is the unit trust a related trust of the SMSF. The company is a related party of the SMSF because a member of the SMSF together with her relatives have a majority voting interest in the company (see definition of ‘related party’ in SISA s 10(1) and ‘Part 8 associate of an individual’ in SISA s 70B). The parties to the arrangement agreed to take the following steps:   Step 1: the company purchases a number of units in the unit trust (P units) using the prescribed ratio of Australian currency and trade dollars (say X dollars and Y trade dollars)   Step 2: the company contributes an equivalent amount in Australian currency as an employer superannuation contribution to the SMSF (X + Y dollars) with a view to claiming a tax deduction for the contribution   Step 3: the SMSF uses the amount of the contribution (X + Y dollars) to purchase P units from the unit trust   Step 4: the unit trust redeems the units owned by the company for the same amount of Australian currency (X + Y dollars). The net result of the arrangement is that: • the SMSF owns units in the unit trust • the unit trust has accepted X dollars Australian currency and Y trade dollars in consideration for the issuing of the units, and • the company has converted X dollars and Y trade dollars into (X + Y) dollars Australian currency. The company also made a superannuation contribution for which it intends to claim an income tax deduction of $(X + Y).” [SLP ¶3-480]

¶3-440 Fund investments — arm’s length rule

The arm’s length rule in SISA s 109 for investments or the maintenance of investments by the trustee or investment manager of a superannuation entity has two components. The rules do not prevent trustees or investment managers from dealing with related or associated parties, but are intended to ensure that investments are made or maintained on a commercial basis or on such terms (eg the sale and purchase price of an investment should be at full market value and returns on the investment reflect a true market rate of return). Firstly, the trustee or investment manager of a superannuation entity must not invest money of the entity unless either the trustee or manager and the other party to the relevant transaction are dealing with each other at arm’s length in respect of the transaction. If the trustee or investment manager and the other party are not dealing with each other at arm’s length in respect of the transaction, the terms and conditions of the transaction must be no more favourable to the other party than those that are reasonable to expect would apply if the parties were dealing at arm’s length in the same circumstances (s 109(1)). Secondly, if at any time during the term of any investment, the trustee or investment manager is required to deal in respect of the investment with another party that is not at arm’s length, the trustee or investment manager must deal with the other party in the same manner as if that party were at arm’s length with the trustee or investment manager (s 109(1A); ID 2010/162: lower interest rate on limited recourse borrowing, see ¶3-415). There is no definition of “arm’s length” in the SISA. Whether a transaction is undertaken on an arm’s length basis is determined based on all the circumstances of the investment. The general test is whether a prudent person acting with due regard to his/her own commercial interests would have made such an investment. Some factors to consider are whether: • the purchase price is fair, given the expected return on the asset, the risks to which the asset is exposed, and the relative liquidity of the asset • the projected returns of income and/or capital, and whether they are in line with market expectations • the contract or agreement adequately protects the interests of the superannuation fund, with clear legal identification of all parties and their rights and obligations • valuations have been obtained, where appropriate. While none of the above factors by itself will determine an investment as being on an arm’s length basis, they constitute evidence in support of that inference. SMSFR 2009/3 sets out the Commissioner’s views on the potential contravention of the arm’s length rule if an SMSF is presently entitled to a distribution from a related or non-arm’s length trust and payment of this amount is not sought (¶5-435). Section 109 is a civil penalty provision (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 if the provision is contravened (¶3-800). A contravention does not affect the validity of a transaction (s 109(3)). For a case where the court dismissed an application for penalties for a breach of s 109 on the basis of the statutory defences afforded by s 221(2) and 323(3)(2) (acting honestly, reliance of incorrect advice), see the Dolevski v Hodpik case at ¶3-820. Market value and valuation of assets The meaning of “market value” in SISA and ATO guidelines on the valuation of assets for various purposes are noted at ¶18-775. [SLP ¶3-460]

¶3-450 In-house asset rules A regulated superannuation fund is subject to restrictions on its investments in in-house assets (SISA s 69 to 85).

Subject to certain exceptions (see below), an “in-house asset” is defined in s 71(1) as an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund (see below “Assets — what are in-house assets?”). The in-house asset rules are prescribed in SISA Pt 8 and they: • impose a maximum limit of investments in in-house assets of 5% of total fund assets based on market value (or 10% in pre-2000/01 years) (s 82(1)) • require a fund with in-house assets in excess of the 5% limit as at the end of the 2000/01 year of income or a later year of income, to dispose of the excess in accordance with a written plan (s 82(2)) • prohibit the acquisition of new in-house assets if the market value ratio of the fund’s in-house assets exceeds 5% (s 83; 84(1)) • prohibit a fund from entering into any scheme which would avoid the application of the in-house asset rules (s 85(1)). The in-house asset rules are civil penalty provisions (s 193). Civil and criminal penalties may be imposed in accordance with SISA Pt 21 if any provision is contravened (¶3-820). A contravention does not affect the validity of a transaction (s 84(2); 85(2)). The in-house asset rules are discussed under the headings below: • Market value and in-house asset ratio • Assets — what are in-house assets? • What are excluded as in-house assets? • Widely held unit trust • Deemed in-house assets • Investment in a related trust • Investments in unit trusts • Exception — LRBA and investment in related trust • Exception — investment in non-geared unit trusts and companies • Conversion of a geared unit trust to a non-geared unit trust • Lease and lease arrangements • Alternative in-house asset rules — defined benefit funds • Sub-funds, unrelated employer-sponsor in group of employer-sponsors • Cases of breach of in-house asset rules. Market value and in-house asset ratio A regulated superannuation fund must not acquire an in-house asset if the market value ratio of its inhouse assets exceeds 5%, or would exceed 5% if the asset was acquired (SISA s 83(2), (3)). Therefore, periodic valuation of a fund’s in-house asset investments must be carried out as required to monitor compliance with this requirement. In addition, valuation of assets is necessary as s 82 requires the fund to dispose of in-house assets if, at the end of an income year, the market value ratio of its in-house assets exceeds the 5% limit.

The general formula for working out a fund’s market value ratio of in-house assets is set out in s 75(1) as below: Number of whole dollars in value of in-house assets of the fund ×100  Number of whole dollars in value of all the assets of the fund  The term “value” in the formula means “market value” which is defined to mean, in relation to an asset, the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made: • the buyer and the seller dealt with each other at arm’s length in relation to the sale • the sale occurred after proper marketing of the asset, and • the buyer and the seller acted knowledgeably and prudentially in relation to the sale (s 10(1)). For example, at the time of purchasing units in a related unit trust, the cost of the units to the superannuation fund will typically be equivalent to the market value of the units. At some later point in time, the market value of the units may or may not be equivalent to that historical cost (purchase price) of the units. It is therefore necessary to undertake a market valuation of the units so as to determine the market value of the units held by the fund in the related unit trust (SMSFD 2008/2). It is not intended that obtaining a market valuation should be onerous or expensive for the trustees. A market valuation may be undertaken by either a qualified valuer or a person without formal qualifications (including the fund trustees), provided the valuation is based on reasonably objective and supportable data. However, using a qualified valuer should be considered where the value of the asset represents a significant proportion of the fund’s value or where the nature of the asset indicates that the valuation is likely to be complex or difficult. Under the ATO’s general valuation principles, a valuation must be arrived at using a “fair and reasonable” process. Generally, a valuation is considered fair and reasonable where it: • takes into account all relevant factors and considerations likely to affect the value of the asset • has been undertaken in good faith • results from a rational and reasoned process, and • is capable of explanation to a third party (ATO’s Valuation guidelines for self-managed superannuation funds: ¶18-775). Assets — what are in-house assets? In the SISA, an “asset” means any form of property and, to avoid doubt, includes money (whether Australian currency or currency of another country), and “invest” means to apply assets in any way, or make a contract, for the purpose of gaining interest, income, profit or gain (SISA s 10(1)). A “loan” includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings. It would not cover, for example, the situation where a fund pays its own administrative expenses and is subsequently reimbursed by an employer-sponsor. A “lease arrangement” means any agreement, arrangement or understanding in the nature of a lease (other than a lease) between a trustee of a superannuation fund and another person, under which the other person is to use, or control the use of, property owned by the fund, whether or not the agreement, arrangement or understanding is enforceable, or intended to be enforceable, by legal proceedings (s 10(1)). The in-house asset rules originally covered only assets of a superannuation fund that were loans to, or investments in, a standard employer-sponsor or an associate of the standard employer-sponsor of the fund. The meaning of “in-house asset” was extended, from 12 August 1999, to apply to loans to, or investments in, a “related party” of the fund, an investment in a related trust of the fund, or an asset of the

fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund, subject to certain transitional arrangements which are discussed below (s 71). A “related party” of a fund means a member or a standard employer-sponsor of a fund and their Part 8 associates (¶3-470). The meaning of “member” is also modified in relation to superannuation interests in a fund subject to a payment split, or where a non-member spouse interest has been created under SISR reg 7A.03B. Essentially, a non-member spouse who was not a member of the fund before the payment split is treated as being a member of the fund in which the interest is held for the purposes of the in-house asset rules and the prohibition on lending to members in s 65 and various other provisions (reg 1.04AAA). The definition of “related party” is extensive and complex, and is discussed at ¶3-470. A “related trust” of a superannuation fund means a trust that a member or a standard employer-sponsor of the fund “controls”, other than an excluded instalment trust of the fund. The ATO’s Ruling SMSFR 2009/4 discusses in detail the core concepts in the definition of “in-house asset” — “asset”, “loan”, “investment in”, and “lease and lease arrangement”. The Commissioner states that the object of the in-house assets rules in SISA Pt 8 is to limit the inherent risks to superannuation assets posed by investment in related parties or related trusts. It is therefore the risks associated with the reliance on those entities for the return on the investment that Pt 8 is concerned with. Where fund money or assets are applied to the benefit of a related party or trust for the purpose of receiving income, interest, profit or gain from that entity, a sufficiently close connection will be established between the investment and that entity to enable it to be described as an investment “in” that entity. It is the reliance on the related party or related trust for payment on the investment which will be determinative as this is what gives rise to the financial risk that the rules in Pt 8 are designed to reduce (SMSFR 2009/4, para 88). Example — annuity arrangement The trustees of an SMSF enter into an annuity contract with a related party, Johnson Pty Ltd. The contract stipulates a purchase price of $75,000 to be paid by the SMSF in exchange for four annual payments of $25,000 payable on 30 June of each year. The annuity contract entered into by the SMSF for the purpose of providing an income stream is an investment of the SMSF. In addition, the responsibility for payment of this income is with Johnson Pty Ltd. Consequently, the annuity is an investment in Johnson Pty Ltd and is an in-house asset of the SMSF (if no in-house asset exception applies).

If a superannuation fund makes a contractual funding contribution in exchange for contractually enforceable rights to receive payments from a related party, that will constitute an investment in the related party (see also “Joint venture arrangements — related trusts” below). Example Under a contract, Joe (as trustee of his SMSF) contributed money towards the acquisition of an asset by Joseph Pty Ltd (a company controlled by Joe’s family and, therefore, a related party of the SMSF). Under the contract: • Joseph Pty Ltd controls and manages the asset and is entitled to all receipts from the asset • the SMSF is entitled to receive payments from Joseph Pty Ltd, calculated as a proportion of the proceeds from sale, lease or use of the asset. The relevant proportion equals the SMSF’s contributions to the asset’s acquisition cost • the SMSF acquires no legal, equitable or other interest in the asset and is not required to guarantee or indemnify the repayment of any of Joseph Pty Ltd’s borrowings or other obligations • the SMSF’s pecuniary interest in the arrangement is limited to its entitlement to receive the contractual payments from Joseph Pty Ltd. The arrangement is considered to be an investment by the SMSF in Joseph Pty Ltd. The SMSF contributes capital to Joseph Pty Ltd which is utilised for commercial benefit by the company; and in exchange, the SMSF obtains rights to a share of the profits obtained from the commercial usage of that asset in proportion to the SMSF’s contribution. Therefore, the return on the investment is reliant on Joseph Pty Ltd and the financial risk of that investment is with it. Consequently, as the SMSF has entered into a contract to receive income from Joseph Pty Ltd, this arrangement is an investment in Joseph Pty Ltd.

What are excluded as in-house assets?

Assets which are specifically excluded as in-house assets are (SISA s 71(1)(a)–(j)): • a life policy issued by a life insurance company • a deposit with an authorised deposit-taking institution (eg a bank) • an investment in a PST, where the trustees of the fund and the PST acted at arm’s length in relation to the investment • an asset of a public sector fund consisting of an investment in securities issued under the authority of: (a) the Commonwealth or a state or a territory government; or (b) a public authority constituted under a Commonwealth, state or territory law, where the public authority is neither a standard employersponsor nor an associate of a standard employer-sponsor of the fund • an asset which the Regulator (APRA or the Commissioner) determines by written notice to a fund is not an in-house asset of the fund (PS LA 2009/8 outlines the circumstances where the Commissioner would exercise his discretion to issue a determination that an asset is not an in-house asset: ¶5-455) • an asset which the Regulator determines by legislative instrument is not an in-house asset of any fund or a class of funds in which the fund is included (see “Exception — LRBA and investment in related trust” below) • if the superannuation fund has fewer than five members (ie an SMSF or a small APRA fund) — real property subject to a lease, or to a lease arrangement enforceable by legal proceedings, between the trustee and a related party of the fund if, throughout the term of the lease or lease arrangement, the property is “business real property” of the fund (see “Leases and lease arrangements” below) • an investment in a widely held unit trust (see below) • property owned by the superannuation fund and a related party as tenants in common, other than property subject to a lease or lease arrangement between the trustee and a related party of the fund (for discussion of tenancies in common, see ¶3-400), or • an asset included in a class of assets prescribed by the Regulations (see SISR Div 13.3A) not to be an in-house asset of any fund or a class of funds to which the fund belongs (see “Exception — investment in non-geared unit trusts and companies” below). Despite the above exceptions provided in s 71(1)(a) to (j), the Regulator may deem that a loan, investment or an asset of a superannuation fund subject to a lease or lease arrangement is an in-house asset in circumstances (see “Deemed in-house assets” below). Also, an anti-avoidance provision allows the Regulator to treat a loan, investment or an asset of a superannuation fund subject to a lease or lease arrangement as an in-house asset. This applies where the persons who entered into or carried out an agreement were aware that the result would be that a loan would be made to, or an investment made in, or an asset would become subject to a lease with, a related party of the fund (not applicable to investments in life policies, deposits with banks and other approved institutions, investments in PSTs and widely held unit trusts). An example of this when a fund invests in a non-associated entity which in turn invests in related party (s 71(2) to (2B)). Widely held unit trust A trust is a “widely held unit trust” (for the purposes of the exception to the in-house asset definition in SISA s 71(1)(h), see above) if: • it is a unit trust in which entities have fixed entitlements to all of the income and capital of the trust • no fewer than 20 entities between them have fixed entitlements to 75% or more of the income or capital of the trust (s 71(1A)). For this purpose, an entity and the Part 8 associates (¶3-470) of the entity are taken to be a single entity.

A hybrid trust will not come within the definition of a widely held trust. For the purposes of determining an in-house asset of a public sector superannuation fund, a reference to a Part 8 associate of an employer-sponsor of the fund is a reference to a body corporate where either of the following conditions is satisfied: • the body corporate is sufficiently influenced by, or a majority voting interest (¶3-470) in the body corporate is held by, the employer-sponsor, or • the employer-sponsor is sufficiently influenced by, or a majority voting interest in the employersponsor is held by, the body corporate (s 71(7)). Deemed in-house assets A loan or investment of a superannuation fund, or an asset subject to a lease or lease arrangement, other than an in-house asset, may be deemed to be an in-house asset if: • the loan, investment, lease or lease arrangement was made under an agreement, and the persons who entered into or carried out the agreement were aware that, as a result of the agreement, a loan or investment would be made to or in a related party, or an asset would be subject to a lease or lease arrangement with a related party, or an investment would be made in a related trust of the fund (see example below) (s 71(2)), or • the Regulator, by written notice, determines that the loan, investment or asset subject to a lease or lease arrangement with a specified related party or related trust of the fund (including a person taken to be a standard employer-sponsor of the fund under s 70A) is an in-house asset of the fund (s 71(4)) (see Aussiegolfa case below). Determination under s 71(2) Example ABC Trust and ABC Company are the employer-sponsors of a superannuation fund (the “Fund”). The Fund invests $100,000 under an agreement in XYZ Company, which is not a related party. As a result of the agreement, XYZ Company makes a loan of $60,000 to ABC Trust and a loan of $40,000 to ABC Company. The $100,000 investment by the Fund in XYZ Company is an in-house asset under s 71(2). The in-house asset is treated as one of $60,000 with respect to the ABC Trust and one of $40,000 with respect to ABC Company, and both amounts are taken into account when determining the in-house asset limits.

The deeming rule in s 71(2) does not apply to investments in life policies, deposits with banks and other approved institutions, investments in PSTs and widely held unit trusts. However, where it applies, the asset can be treated as two or more assets for the purposes of the in-house asset rules. An “agreement” includes any arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings. Aussiegolfa case In Aussiegolfa Pty Ltd As Trustee of the Benson Family Superannuation Fund 2018 ATC ¶10-471, the trustee of the Benson Fund (an SMSF) sought review by the AAT of the Commissioner’s determination under SISA s 71(4)(b) that units it held in a fund were to be treated as an investment in a related trust. The matter before the AAT was heard after the Federal Court (in Aussiegolfa Pty Ltd (Trustee) 2017 ATC ¶20-643) had dismissed the trustee’s application seeking declarations that the Benson Fund was not in breach of the “sole purpose test” and the “in-house asset test” under SISA s 62 and 83 respectively. The Benson Fund had participated in an investment scheme involving fractional interests in property. It invested in a studio apartment through the acquisition of units in a fund (the Burwood Sub-Fund) managed by DomaCom Australia Ltd. The studio apartment was leased to a daughter of a Benson family member. The purpose of this arrangement was to test the impact of a residential property held by an SMSF being used by a related party on the SMSF’s status as a complying superannuation fund. The Commissioner had made a determination under s 71(4)(b) deeming the arrangement an in-house asset, and had also decided that the Benson Fund breached the in-house asset test and the sole purpose test.

The primary judge in the Federal Court (2017 ATC ¶20-643) held that the Sub-Fund was a separate trust, and not a widely held trust within the meaning of SISA s 71(1A). The units in the Sub-Fund were in-house assets and this meant that the precondition for a s 71(4) determination was not satisfied and the determination was not valid. Notwithstanding that, the court said that the Sub-Fund was a related trust. The primary judge also found that the Benson Fund was in breach of the sole purpose test as it was maintained at least partly for the purpose of providing accommodation to Mr Benson's daughter. The AAT (in 2018 ATC ¶10-471) set aside the Commissioner’s decision to make determination under s 71(4)(b) and revoked the determination. The AAT said [at 15]: “15. In the present case the objective condition that needs to exist before a determination can be made under s 71(4)(b) is absent because the reasons and conclusions in the Federal Court proceedings would also lead the Tribunal to decide that the investment by Aussiegolfa in DomaCom was in units which are assets that consist of an in-house asset. The facts and reasons in the decision of the Federal Court should be read with these reasons to the extent that they relate to whether the investment in the Burwood Sub-Fund consists of an in-house asset. It follows, therefore, that the condition for making a determination under s 71(4)(b) is absent and that the Tribunal should set it aside. It is desirable, however, to say that the Commissioner’s determination would have been affirmed if the asset had been found to have consisted of an investment other than an in-house asset. That is because the investment would be in substance, and in practical effect, the same as an in-house asset and within the purpose sought to be achieved by limiting investments in in-house assets to 5%, even though it might in legal form not be an in-house asset.” The full Federal Court (in 2018 ATC ¶20-664; [2018] FCAFC 122) allowed an appeal in part. It held that the Sub-Fund units constituted an in-house asset; the primary judge was correct to conclude that there was a distinct trust associated with the Sub-Fund units and that the units held by the taxpayer in the DomaCom Fund (or the Sub-Fund) constituted an investment in a “related trust” of the Benson Fund. As the units constituted an in-house asset, the precondition for the s 71(4) determination was absent and the AAT's decision to set aside the determination was correct. However, the primary judge was wrong to conclude that the leasing of the property to Mr Benson’s daughter breached the sole purpose test. As the property would be leased at market rent, there did not appear to be any financial or other non-incidental benefit to be obtained by Ms Benson or Mr Benson. Accordingly, the court concluded that the fund would be maintained solely for the core purposes, or the core purposes and the ancillary purposes set out in s 62 upon the leasing of the property to Ms Benson. Investment in a related trust A superannuation fund’s investment in a related trust of the fund is an in-house asset, subject to certain exceptions. A “related trust” means a trust that a member or a standard employer-sponsor of the fund controls (¶3470), other than an excluded instalment trust of the fund. An “excluded instalment trust” is a trust: • that arises because the trustee or investment manager of the fund makes an investment under which a listed security (the underlying security) is held in trust until the purchase price of the underlying security is fully paid • where the underlying security, and property derived from the underlying security, is the only trust property • where the investment in the underlying security held in trust is not in itself an in-house asset of the fund. The excluded instalment trust exception prevents the in-house asset definition applying to trust arrangements set up to hold shares payable in instalments (eg instalment receipts or similar arrangements). The extension of the in-house asset definition to investments in a related trust of a superannuation fund applies from 12 August 1999, subject to the transitional arrangements discussed below. Joint venture arrangements — related trusts

TA 2009/16 warns about circumvention of in-house asset rules by SMSFs using related party arrangements under which the fund enters into an agreement (sometimes referred to as a joint venture agreement) with a related trust to acquire assets such as rental property in order to obtain certain taxation and superannuation benefits. These arrangements and the ATO concerns are discussed further at ¶5455. Investments in unit trusts An investment in a unit trust is a popular investment strategy for superannuation funds, with the unit trust being used as a vehicle for purchasing property (whether or not on a geared basis) or for the unit trust to purchase assets which it then leases back to the fund on a commercial basis. A typical example would be a fund investing in a unit trust which, in turn, purchases real property. The trustee of the unit trust would usually borrow for the purchase with the property as collateral. A fund’s investment in a widely held unit trust (see above) is not an “in-house asset”. Trustees should have regard to the potential application of the public trading trust provisions in ITAA36 Pt III Div 6C. Certain unit trusts, called “public trading trusts” are treated as if they are companies for tax purposes and are taxed at the company rate of tax with any distributions to unitholders assessable on the same basis as dividends. Basically, a “public trading trust” must have two limbs — it is a “public unit trust” (as defined in ITAA36 s 102P) and it is also a “trading trust” (as defined in ITAA36 s 102N). A unit trust is deemed to be a public unit trust where an exempt entity holds a beneficial interest in 20% or more of the property or income of the unit trust (ITAA36 s 102P(2)). An “exempt entity” is defined to mean, among other things, a complying superannuation fund, complying ADF or PST (ITAA36 s 102M). The 20% test requires the beneficial interest of the units to be traced through any other interposed trusts (ITAA36 s 102P(10)). From 5 May 2016, membership interests held in a trust by tax exempt entities and complying superannuation entities which are entitled to a refund of franking credits are disregarded for the purposes of applying the 20% tracing rule. This means that complying superannuation funds are no longer included in the tracing rule and unit trusts with these investors will not invoke Div 6C. For example, a unit trust owned by an SMSF which owns real estate that is primarily used for development purposes (rather than only rental income) will not be taxed as a company. Former ATO ID 2001/66 stated that the terms of the fund’s trust deed in that case meant that its members could not be said to be the holders of the units in the unit trust. As a result, the unit trust could not rely on s 102P(10) to avoid being taxed as a company. A public unit trust will be a public trading trust if it is carrying on a trading business or controls or is capable of controlling a trading business carried on by another party (ITAA36 s 102N). A “trading business” is any business that is not wholly one of investment in land for rental, or investment or trading in loans, securities, shares, units in unit trusts, future contracts, forward contracts, currency swaps, interest rate swaps, or rights or options in respect of any of these or any similar instruments (ITAA36 s 102M). Unit trusts which are confined to investment in property to derive rental income would not normally come within the trading trust limb as noted above. However, this would not be the case, for example, if the unit trust were to be engaged in land development (former ID 2001/66). As noted above, investments in widely held trusts are not in-house assets. Most other superannuation fund investments in a related trust would be caught by the in-house asset rules. However, small superannuation funds are permitted to continue to invest in a trust (or company) which invests only in business real property or other approved assets if certain conditions are met (see “Exception — investment in non-geared unit trusts and companies” below). It should be noted that any investment in a geared unit trust may result in a reduction in the security of members’ entitlements. Consequently, the existence of a unit trust borrowing is a relevant consideration to be taken into account by the trustee of a superannuation fund in the formulation and implementation of the fund’s investment strategy under s 52(2)(f) (¶3-400). Exception — LRBA and investment in related trust Section 71(8) provides an exception to the definition of “in-house asset” that is relevant to an SMSF’s investment in a holding trust (related trust) as part of a limited recourse borrowing arrangement (LRBA).

If, at a time, an asset (the investment asset) of a superannuation fund is an investment in a related trust of the fund: • the related trust is one described in s 67A(1)(b) in connection with the LRBA under s 67A(1), and • the only property of the related trust is the acquirable asset mentioned in s 67A(1)(b). In the circumstances above, the investment asset is an in-house asset of the fund at the time only if the acquirable asset would be an in-house asset if it were an asset of the fund at the time. This exception and LRBAs are discussed further in ¶3-415 (see “Interaction with in-house asset rules”). Exception — investment in non-geared unit trusts and companies Certain investments of a superannuation fund are excluded from the meaning of “in-house asset” in SISA s 71(1) if the requirements of SISR reg 13.22B (which applies to assets acquired before 28 June 2000) or reg 13.22C (which applies to assets acquired on or after 28 June 2000) are met (SISA s 71(1)(j)(ii); SISR Div 13.3A). These provisions effectively allow investments made by superannuation funds with fewer than five members in related companies and unit trusts to be excluded as in-house assets in the prescribed circumstances. Generally, the conditions in reg 13.22B or 13.22C (in Div 13.3A) are: • the company or trust does not borrow • there is no charge over an asset of the company or trust • the company or trust does not invest in or loan money to individuals or other entities (other than deposits with authorised deposit-taking institutions) • the company or trust has not acquired an asset from a related party of the superannuation fund (after 11 August 1999) other than business real property acquired at market value • the company or trust had not acquired an asset (apart from business real property acquired at market value) that had been owned by a related party of the superannuation fund in the previous three years (not including any period of ownership prior to 11 August 1999) • the company or trust does not, directly or indirectly, lease assets to related parties, other than business real property • the company or trust does not conduct a business • the company or trust conducts all transactions on an arm’s length basis. The above concession means that an SMSF or small APRA fund (ie funds with fewer than five members) may jointly invest with members and employer-sponsors in a company or unit trust that owns real property which is used for business purposes, and the business real property may be leased to members and employer-sponsors. This provides greater flexibility to funds which prefer to have such joint investments using a company or a trust, rather than a tenancy in common arrangement (which is also an exception to the in-house asset definition, as discussed above). This flexibility allows a fund to effect a change in ownership of the investments by selling the shares in the company or units in the unit trust instead of disposing of the business real property itself. Regulation 13.22B or 13.22C ceases to apply to a fund’s investment in a company or unit trust if an event in reg 13.22D(1) happens. In addition, if that happens, neither reg 13.22B nor 13.22C can apply to any other existing or future investment by the fund in that company or unit trust, ie any such investment of the fund is not excluded from being an in-house asset of the fund (reg 13.22D(3)). The events specified in reg 13.22D(1)(a) to (n) happen if the number of members in the fund increases to five or more, or if the particular company or the trustee of the unit trust (in which the fund has invested in): • acquires an interest in another entity (for example, acquiring shares or units in another company or unit trust respectively) • makes a loan to another entity, unless the loan is a deposit with an authorised deposit-taking

institution • gives a charge, or allows a charge to be given, over, or in relation to, a company or unit trust asset • borrows money • conducts a business • becomes a party, either directly or indirectly, to a lease arrangement involving a related party of the fund that does not involve business real property • conducts a transaction other than on an arm’s length basis • acquires an asset (other than business real property acquired at market value) from a related party of the fund, or • acquires an asset (other than business real property acquired at market value) from any party if the asset had been an asset of a related party of the fund since the later of: – the end of 11 August 1999, or – the day three years before the day on which the asset was acquired by the fund. SMSFD 2008/1 states that the happening of an event in reg 13.22D(1) (eg the fund ceases to have fewer than five members) does not necessarily mean that reg 13.22B or 13.22C ceases to apply to all investments held by the fund in related companies or unit trusts, or that reg 13.22C cannot apply to future investments in other related companies or unit trusts, as the scope for reg 13.22B or 13.22C applying or continuing to apply to the fund’s investments will depend on the nature of the event that happens. Example 1 — the number of members of SMSF increases to five On 1 June 2000, an SMSF invests in related unit trusts (Trust A and Trust B). At that time the SMSF had four members and its investments in Trust A and Trust B satisfy all the requirements of reg 13.22B. Therefore, the investments are not in-house assets of the SMSF. On 1 February 2007 the number of members in the SMSF increases to five for the period until 31 July 2007, when the number reduces to four members and has subsequently remained at four members since. The effect of the event in reg 13.22D(1)(a) (ie increase in members to more than four) is that reg 13.22B ceases to apply to the investments in Trust A and Trust B. By virtue of reg 13.22D(3), neither reg 13.22B nor 13.22C can apply to the existing investments, or any future investments, by the SMSF in Trust A or Trust B. Therefore, the existing investments, and any future investments, in Trust A and Trust B are not excluded from being in-house assets of the SMSF. That is, assuming that no other exception in s 71(1) applies, the fund’s investments in Trust A and Trust B are in-house assets of the fund. On 15 August 2007, the SMSF invests in another related unit trust (Trust C). The investment in Trust C would be an in-house asset of the SMSF but for s 71(1)(j)(ii) and reg 13.22C. As the number of members of the SMSF is less than five at the time of the investment in Trust C, reg 13.22C can apply to the fund’s investment in Trust C provided all the other requirements of reg 13.22C(2) are met. If that is the case, the SMSF’s investment in Trust C is excluded from being an in-house asset of the fund.

Example 2 — a unit trust in which the SMSF has an investment borrows money On 1 June 2000, an SMSF invests in a related unit trust (Trust D). On 1 January 2007 the SMSF invests in another related unit trust (Trust E). Both investments would be in-house assets of the SMSF but for s 71(1)(j)(ii) and reg 13.22C and 13.22D. Assume that the SMSF’s investment in Trust D satisfies all the requirements of reg 13.22B (and therefore is not an in-house asset) and that the investment in Trust E satisfies all the requirements of reg 13.22C (and therefore is also not an in-house asset). On 15 May 2007, the trustees of Trust D borrow money, which is an event listed in reg 13.22D(1)(c)(i). The effect of this is that reg 13.22B ceases to apply to the SMSF’s investment in Trust D, and reg 13.22D(3) ensures that neither reg 13.22B nor 13.22C can apply to the existing investment, or any future investments by the SMSF, in Trust D. Therefore, the existing investment, and any future investments, in Trust D are not excluded from being in-house assets of the SMSF. Assuming that no other exception in s 71(1) applies, the fund’s investments in Trust D are in-house assets of the fund. However, the SMSF’s investment in Trust E is not affected by the borrowings by the trustees of Trust D. Therefore, reg 13.22C continues to apply and the SMSF’s investment in Trust E is excluded from being an in-house asset of the fund. Any later investments made by the SMSF in a related company or unit trust other than Trust D can also be excluded from being an in-house asset of the SMSF provided that the conditions in reg 13.22C are met in relation to that investment.

In specie distributions from a unit trust to an SMSF An anomaly appears to trigger the in-house assets rules where a related unit trust (which satisfies the Div 13.3A conditions) makes an in specie distribution to an SMSF unitholder because Div 13.3A refers only to the SMSF’s investment in the unit trust without referring to in specie distributions received from the trust. With in specie distribution of additional units in the related trust, the ATO’s view is that this “acquisition of assets” will be allowed if the fund does not already own all of the units in the trust and the trust is issuing additional units in the trust, or if the fund reinvests its entitlement to the trust income in the trust. Provided the Div 13.3A requirements are satisfied, the exception in s 66(2A)(a)(iv) will apply to the acquisition. That exception applies to an asset that is taken not to be an in-house asset under s 71(1)(j), which in turn links with Div 13.3A. In a case where there is an in specie distribution of the unit trust’s other assets, the general acquisition rules apply and such an acquisition can only take place if it is covered by an exemption in s 66 (NTLG Superannuation Subcommittee, 8 May 2006). Other ATO guidelines Under Div 13.3A, an asset of a fund that is an investment in a related company or unit trust will not be included as an in-house asset provided the conditions in reg 13.22B or 13.22C are met. Regulations 13.22B(2)(f)(i) and 13.22C(2)(f)(i) require that the assets of the related company or unit trust do not include an interest in another entity, and reg 13.22D(1)(b)(i) states that reg 13.22B or 13.22C will cease to apply if an interest in another entity becomes an asset of the company or unit trust, ie the investment will cease to be excluded from the in-house assets of the SMSF. The term “interest” is not defined in the SISA. If a related unit trust of an SMSF has assets including units in a unit trust that is not related to the SMSF, the related trust has an interest in another entity for the purposes of Div 13.3A (ID 2008/51). Similarly, if a related unit trust of an SMSF has assets including shares in a listed company, the related unit trust has an interest in another entity for the purposes of Div 13.3A. A share in a listed security is an interest in that company and, therefore, an interest in another entity for the purposes of Div 13.3A (ID 2008/52). SMSFR 2009/3 sets out the Commissioner’s views on the potential contravention of the in-house asset rules if an SMSF is presently entitled to a distribution from a related or non-arm’s length trust, and payment of this amount is not sought (¶5-455). Conversion of a geared unit trust to a non-geared unit trust The SISA provides transitional in-house asset arrangements in SISA s 71A to 71E to facilitate the change in the definition of in-house asset from 12 August 1999 (see “Assets — what are in-house assets?” above). Briefly, under s 71A, units in a unit trust held by a superannuation fund as at 11 August 1999 are not included in the fund’s in-house assets. Reinvestments of distributions from the unit trust in additional units may also not be included in the fund’s in-house assets (see s 71D), and where an election had been made under s 71E, certain additional units in the unit trust can be purchased by the fund up to the value of loans outstanding in the unit trust as at 11 August 1999. The provisions of s 71D apply unless the election is made to apply s 71E. Under SISR Div 13.3A, certain units acquired by funds in certain unit trusts or companies are excluded as in-house assets if the requirements of either reg 13.22C or 13.22D are met. Division 13.3A commenced on 28 June 2000 and apply to fund investments in ungeared unit trusts or companies at that date, or to new investments made by funds in unit trusts or companies subsequent to that date (see above). ATO guidelines — borrowings As noted above (see “Exception — investment in non-geared unit trusts and companies”), certain SMSF and small APRA fund investments in a related company or related unit trust in accordance with reg 13.22B and 13.22C in Div 13.3A are excluded from the meaning of in-house asset (SISA s 71(1)(j)(ii); reg 13.22B applies to investments before 28 June 2000, the commencement date of Div 13.3A, and reg 13.22C applies to investments on or after 28 June 2000). If any of the events set out in reg 13.22D(1)

happen in respect of an asset to which reg 13.22B or 13.22C apply, those provisions will cease to apply to all current and future investments in that company or unit trust. Of particular relevance is reg 13.22D(1) (c)(i) which applies where the company or unit trust borrows money. ATO ID 2012/52 states that s 71(1)(j)(ii) applies to an additional investment in a related unit trust by an SMSF where s 71A applies to the SMSF’s original investment in the unit trust, the trustee of the unit trust did not borrow any additional money after 28 June 2000 and all borrowings were discharged before the additional investment was made, as the requirements of reg 13.22C are met. The facts of ID 2012/52 are as follows: • An SMSF acquired units in a related unit trust prior to 12 August 1999 and continued to hold the units. • On 28 June 2000, the trustee of the unit trust (TUT) had an amount of outstanding borrowings. The TUT did not borrow any further money after 28 June 2000 and later discharged all outstanding borrowings. • Subsequent to the TUT repaying all outstanding borrowings, the SMSF acquired additional units in the unit trust. Neither s 71D nor 71E applies to the additional investment. In the above case, the ATO states that reg 13.22D(1) applies to events which happen on or after 28 June 2000. For this reason the borrowing made prior to 28 June 2000 will not trigger the operation of reg 13.22D notwithstanding that it was not discharged prior to 28 June 2000. As the additional units in the unit trust were acquired on or after 28 June 2000 and an event in reg 13.22D has not occurred, reg 13.22C applies to these new units. Regulation 13.22C(2)(e) requires that the unit trust does not have outstanding borrowings when the trust units were acquired by the SMSF. This requirement is satisfied in the present case because the borrowings were discharged in full before the units were acquired. On the basis that the other paragraphs of reg 13.22C(2) are also satisfied and that none of the events listed in reg 13.22D(1) has occurred since 28 June 2000, the new units in the trust are excluded from being in-house assets under s 71(1)(j)(ii). While reg 13.22B would not exclude the original units in the trust acquired prior to 12 August 1999 from being in-house assets because of the borrowing which existed on 28 June 2000, s 71A still applies to exclude those units from the definition of in-house asset. By contrast, the ATO decided in ID 2012/53 that s 71(1)(j)(ii) does not apply to an additional investment in a related unit trust by an SMSF where s 71A applies to the SMSF’s original investment in the unit trust, the trustee of the unit trust borrowed additional money after 28 June 2000 and the total borrowings were discharged before the SMSF acquired the additional trust units. The sequence of events in ID 2012/53 is noted below: • 12 August 1999 — SMSF holds related unit trust (RUT) • 28 June 2000 — RUT has outstanding borrowings • on or after 28 June 2000 — RUT makes further borrowings • after further borrowings but before additional units are acquired — RUT repays all outstanding borrowings • after RUT repays outstanding borrowings — SMSF acquires additional units in RUT. Regulation 13.22D(1) applies to events which happen on or after 28 June 2000. For this reason, the borrowing made prior to 28 June 2000 will not trigger the operation of reg 13.22D notwithstanding that it was not discharged prior to 28 June 2000. When the RUT borrowed money after 28 June 2000, the event set out in reg 13.22D(1)(c)(i) happened in relation to the original units in the related unit trust to which reg 13.22B applied. Consequently, reg 13.22B ceased to apply to the SMSF’s original investment in the unit trust at that time. In addition, reg 13.22D(3) has the effect of excluding any other investments in the unit trust from the application of reg 13.22C.

As reg 13.22C does not apply to the acquisition of additional units in the unit trust, those units will not be excluded from being in-house assets by s 71(1)(j)(ii). Notwithstanding that reg 13.22B no longer applies to the SMSF’s original investment in the unit trust, s 71A continues to apply to exclude those units from the definition of in-house asset. Leases and lease arrangements The in-house asset definition in SISA s 71(1) was extended from 12 August 1999 to cover an asset of a superannuation fund subject to a lease or lease arrangement (subject to the transitional arrangements provided by SISA s 71A to 71E; see earlier editions of the Guide for the transitional rules). For funds with fewer than five members (eg an SMSF or a small APRA fund), an important exception that a fund asset that is real property subject to a lease or to a lease arrangement enforceable by legal proceedings between the trustee and a related party of the fund, which, throughout the term of the lease or lease arrangement, is “business real property” (¶3-430, ¶5-450) of the fund is not an in-house asset (s 71(1)(g)). That is, any other property of such funds that is subject to a lease or lease arrangement is an in-house asset. The term “lease” is not defined in the SISA and, therefore, is given its ordinary meaning. In respect of real property, a lease is a “demise” that grants a leasehold estate in the property to the lessee for a term. That is, the lessee has an interest in the land (a “chattel real”) (this may be contrasted with a licence to enter land which confers no interest in the land). The key test of a lease is one of whether exclusive possession of the property is granted, ie the tenant has not only the right to occupy the property, but to exclude access to all others, including the legal owner. A key difference between a lease of real property and a lease of non-real property (a lease of chattels) is that no proprietary interest in the asset is created in respect of a chattel lease. However, the right of possession granted to the hirer under the agreement, although not referred to as “exclusive possession”, nonetheless includes the right to debar or exclude others, including the legal owner, from possession. The Commissioner’s view is that the term “lease” in s 71(1) in respect of non-real property means a legally enforceable hiring agreement involving the payment of consideration by the hirer in exchange for enforceable temporary possession of the asset (SMSFR 2009/4, para 23). A “lease arrangement” means any agreement, arrangement or understanding in the nature of a lease between the trustee of a superannuation fund and another person under which the other person uses or controls the use of property owned by the fund, whether or not the agreement, arrangement or understanding is enforceable or intended to be enforceable by legal proceedings (s 10(1)). An arrangement “in the nature of” a lease will therefore resemble a lease and have some, but not necessarily all, of the characteristics of a lease. This will include informal arrangements under which a person uses or controls the use of fund assets, even where no rent is payable for that possession, but not arrangements for the holding of assets on a custodial basis or where the only purpose is for repairs to be made to the assets. Where a fund enters into a lease or lease arrangement with respect to part of a property, only that part of the property that is leased to a related party of the fund is an in-house asset (eg one flat in a block of flats or part of a paddock is leased to a relative). Example An SMSF owns a residential home which is leased to an unrelated third party, except for the garage at the rear of the property with its own street access. This garage is specifically excluded from the residential lease and the tenant has no access to it. Instead, one of the members of the fund uses the shed for storage of a vintage car and holds the keys and alarm to the garage. No rent is paid but the member pays for insurance and a monitored alarm. The part of the property comprising the garage is subject to a lease arrangement with the member (a related party) and consequently is an in-house asset of the SMSF.

Where an asset is leased or subject to a lease arrangement for part of a year, the full value of the asset is an in-house asset for the period that it is leased or subject to the lease arrangement.

Example A superannuation fund owns a beach house with a market value of $300,000 which it leased to a member for two months of the year. The full market value of the beach house is included in the in-house asset ratio of the fund during that two-month period that the property was leased to the member.

Alternative in-house asset rules — defined benefit funds Defined benefit funds with large accumulated surpluses may comply with alternative in-house asset rules which will enable them to retain their existing in-house assets rather than to sell them, as required under the primary in-house asset rules described above (SISA Pt 8 Div 3A s 83A to 83E). For the alternative rules in Div 3A to apply: • the fund must be a defined benefit fund with an employer-sponsor that is a listed public company or an associate of a listed public company • the market value of the fund’s assets is not less than the “base amount” (120% of the greater of the fund’s liabilities in respect of vested benefits or the fund’s accrued actuarial liabilities) • the trustee has decided that Div 3A is to apply to the fund in respect of the year of income (s 83B) • the market value of the fund’s in-house assets at the end of the year of income must not exceed the “maximum permitted amount” in relation to the fund (effectively the total amount of in-house assets that the fund may hold is: (a) 5% for 2000/01 (10% in earlier years) of 120% of the fund’s liabilities; plus (b) any amount of assets exceeding 120% of the fund’s liabilities (s 83C): see example below) • at the end of the year of income: – the market value of the fund’s in-house assets (other than shares in the capital of listed public companies) must not exceed 5% of the base amount for 2000/01 (or 10% in earlier years), ie the market value of any in-house assets exceeding the prescribed percentage of the base amount must consist of shares in the capital of listed public companies – the fund’s in-house assets must not include more than 5% of the voting shares in any listed public company that is the employer-sponsor or an associate of the employer-sponsor (s 83D) • the fund is prohibited from acquiring in-house assets unless the market value of the fund’s in-house assets has ceased to exceed 5% of the base amount for 2000/01 (or 10% in earlier years) (s 83E). Example A defined benefit fund has liabilities of $100m. For Div 3A to apply, the fund must have assets of at least $120m (the “base amount”). If the market value of the fund’s assets is $150m, the “maximum permitted amount” of in-house assets that the fund may have is calculated as follows:

5%×$120m+($150m −$120m) ie $6m+$30m=$36m Any amount of in-house assets exceeding 5% for 2000/01 (or 10% in earlier years) of the base amount must consist of shares in the capital of a listed public company which is the employer-sponsor or an associate of the employer-sponsor.

Sub-funds, unrelated employer-sponsor in group of employer-sponsors Sub-funds within a regulated superannuation fund which have separately identifiable assets and beneficiaries are to be treated as regulated superannuation funds in their own right, so that the in-house asset rules will apply to the individual sub-funds (SISA s 69A). Where a fund has two or more unrelated employer-sponsors, the employer-sponsors are treated separately for the purposes of the in-house asset rules. This rule does not apply to SMSFs (s 72).

For example, if a fund has two unrelated employer-sponsors, the in-house asset ratio for each unrelated employer-sponsor is calculated by dividing the costs of the in-house assets in the employer-sponsor (or an associate) by the costs of total fund assets and multiplying by 100. In each case, the in-house asset ratio as calculated must not exceed the 5% in-house asset ratio (for 2000/01 and later years). Example A superannuation fund has two unrelated standard employer-sponsors, A and B. The in-house asset ratio in respect of the in-house assets of A and B are calculated as:

In-house assets of A ×100 Total funds assets In-house assets of B ×100 Total funds assets In each case, the ratio as calculated must not exceed the 5% in-house asset limit (for 2000/01 and later years).

Similarly, unrelated groups of associated employer-sponsors are treated separately for the purposes of the in-house asset rules. Example A, B, C and D are four standard employer-sponsors, where A and B are related (group 1) and C and D are related (group 2) and groups 1 and 2 are unrelated. The in-house asset rules will apply to each unrelated group’s in-house assets as follows:

In-house assets of A and B Total funds assets

×100

In-house assets of C and D ×100 Total funds assets In each case, the in-house asset ratio as calculated above must not exceed the prescribed ratio for the year (5% in 2000/01 and later years; 10% in earlier years).

Cases of breach of in-house asset rules The in-house asset rules are civil penalty provisions in the SISA and trustees may be subject to severe penalties where the rules are breached (¶3-820). For a case where the court dismissed an application for penalties for a breach of the in-house asset rules on the basis of the statutory defences afforded by SISA s 221(2) and 323(3)(2) (acting honestly, reliance of incorrect advice), see the Dolevski v Hodpik case at ¶3-820. In many cases, a breach of the in-house asset rules will also result in a superannuation fund losing its complying fund status and entitlement to tax concessions (Re QX971 v APRA 99 ESL 1). For a case where several superannuation funds were found to have breached s 85 (which prohibits a fund from entering into any scheme which would avoid the application of the in-house asset provisions), see APRA v Holloway 01 ESL 12. There, the funds were part of a scheme involving the use of unit trusts (which made loans to the employer-sponsors) and the leasing of fund assets to the employer-sponsors (see further ¶3-200). The following interpretative decisions provide further examples of the application of the in-house asset rules: ID 2002/388 — arrangements involving a lease of residential property from a related unit trust; former ID 2002/697 — loan to property trust. [SLP ¶3-510]

¶3-470 Related party The term “related party” of a superannuation fund is relevant for the purposes of the prohibition on the

acquisition of assets by funds (¶3-430) and the in-house asset investments of a fund (¶3-450). A related party of a superannuation fund means any of the following: • a member of the fund or a Part 8 associate of a member • a standard employer-sponsor of the fund or a Part 8 associate of a standard employer-sponsor of the fund (SISA s 10(1)). The term “member” has its ordinary meaning. In the SISA, a “member” includes a person who receives a pension from the fund or a person who has deferred his/her entitlement to receive a benefit from the fund (s 10(3)). The meaning of “member” can be modified by regulations to provide that a person is to be treated, or is not to be treated, as being a member of a superannuation fund for the purposes of the SISA or specified provisions of the Act (s 15B). If a superannuation interest in a fund is subject to a payment split under the family law, or a non-member spouse interest has been created under SISR reg 7A.03B, and before the payment split the non-member spouse was not a member, reg 1.04AAA provides that the non-member spouse is treated as being a member of the fund in which the interest is held for the following purposes: • the definition of SMSF in s 17A, except s 17A(5) (¶5-200, ¶5-220) • the prohibition on lending to members in s 65 (¶3-420) • the in-house asset rules in SISA Pt 8 (¶3-450). A “Part 8 associate” of a member or a standard employer-sponsor is defined in terms of an individual, partnership or company as the primary entity (s 70B to 70E). In broad terms, Part 8 associates are those entities that are relatives of the individual, partners, companies that are controlled or majority-owned, or entities that control the primary entity, as discussed further below. A separate definition of a “related trust” is used to cover an investment in a controlled trust (¶3-450). A “standard employer-sponsor” is an employer who contributes to the fund (or has ceased only temporarily to contribute) for the benefit of a member or a member’s dependants wholly or partly pursuant to an arrangement between the employer and the trustee of the fund (s 16(2)). A typical standard employer-sponsored fund would be a company superannuation fund or an industry fund covering employees. However, where an employer allows employees to select the fund to which the employer will contribute, and the employer has no other association with the fund, the fund is not a standard employersponsored fund. Examples of such funds are personal superannuation funds operated by banks and life offices and certain master trusts. Note, however, that for the purposes of the in-house asset rules, the Regulator may also determine that a person is taken to be a standard employer-sponsor. Part 8 associate of an individual Each of the following is a Part 8 associate of an individual (the “primary entity”), whether or not the primary entity is in the capacity of trustee (SISA s 70B): (1) a relative of the primary entity (2) if the primary entity is a member of a superannuation fund with fewer than five members (ie an SMSF or a small APRA fund): (a) each other member of the fund (b) if the fund is a single member SMSF whose trustee is a company — each director of that company (c) if the fund is a single member SMSF whose trustees are individuals — those individuals

(3) a partner of the primary entity or a partnership in which the primary entity is a partner (4) if a partner of the primary entity is an individual — the spouse or a child of that individual (5) a trustee of a trust (in the capacity of trustee of that trust) where the primary entity controls the trust (6) a company that is sufficiently influenced by, or in which a majority voting interest is held by: (a) the primary entity (b) another entity that is a Part 8 associate of the primary entity, or (c) two or more entities covered by (a) or (b).

The meaning of “relative” is defined in s 10(1) (or before 1 July 2008, in former s 70E(4)) (¶3-020). The terms “company” and “partnership” have the same meanings as in ITAA97. Subject to a contrary intention, a “company” means a body corporate, or any other unincorporated association or body of persons, but does not include a partnership or a non-entity joint venture, and a “partnership” means: • an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly, or • a limited partnership (ITAA97 s 995-1(1)). Sufficient influence, majority voting interest and control The expressions “sufficient influence”, “majority voting interest” and “controls a trust” are relevant for the purposes of the definition of a Part 8 associate of an individual, company or partnership. A company is “sufficiently influenced” by an entity or entities if the company, or a majority of its directors, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts) (s 70E(1)(a)). An entity or entities hold a “majority voting interest” in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company (s 70E(1)(b)). An entity “controls a trust” if: • a group in relation to the entity has a fixed entitlement to more than 50% of the capital or income of the trust • the trustee or a majority of the trustees of the trust is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts), or • a group in relation to the entity is able to remove or appoint the trustee, or a majority of the trustees, of the trust (s 70E(2); ID 2002/697). For the above purposes, a “group”, in relation to an entity, means: • the entity acting alone • a Part 8 associate of the entity acting alone • the entity and one or more Part 8 associates of the entity acting together, or • two or more Part 8 associates of the entity acting together. Part 8 associate — primary entity is an individual The following diagram shows the Part 8 associate of a primary entity that is an individual (ie a member or an employer-sponsor).

Part 8 associate of a company Each of the following is a Part 8 associate of a company (the primary entity), whether or not the primary entity is in the capacity of a trustee (SISA s 70C): (1) a partner of the primary entity or a partnership in which the primary entity is a partner (2) if a partner of the primary entity is an individual — the spouse or a child of that individual (3) a trustee of a trust (in the capacity of trustee of that trust), where the primary entity controls the trust (4) another entity (the “controlling entity”) where the primary entity is sufficiently influenced by, or a majority voting interest in the primary entity is held by: (a) the controlling entity (b) another entity that is a Part 8 associate of the controlling entity, or (c) two or more entities covered by (a) or (b) (5) another company (the “controlled company”) which is sufficiently influenced by, or in which voting interest in the controlled company is held by: (a) the primary entity (b) another entity that is a Part 8 associate of the primary entity, or (c) two or more entities covered by (a) or (b) (6) if a third entity is a Part 8 associate of the primary entity because of (4) above — an entity that is a Part 8 associate of that third entity because of s 70B, 70C or 70D. Part 8 associate — primary entity is a company The following diagram shows the Part 8 associate of a primary entity that is a company (ie an employersponsor).

Part 8 associate of a partnership Each of the following is a Part 8 associate of a partnership (the primary entity) (SISA s 70D): (1) a partner in the partnership

(2) if a partner in the partnership is an individual — any entity that is a Part 8 associate of that individual because of s 70B (see above) (3) if a partner in the partnership is a company — any entity that is a Part 8 associate of that company because of s 70C (see above). Part 8 associate — primary entity is a partnership The following diagram shows the Part 8 associate of a primary entity that is a partnership (ie an employersponsor).

¶3-475 Trustees must not offer inducements to influence employers From 6 April 2019, a trustee of a regulated superannuation fund (or an associate of a trustee) must not: • supply, or offer to supply, goods or services to a person, or a relative or associate of a person, or • supply, or offer to supply, goods or services to a person, or a relative or associate of a person, at a particular price, or • give or allow, or offer to give or allow, a discount, allowance, rebate or credit in relation to the supply, or the proposed supply, of goods or services to a person, or a relative or associate of a person, if that action could reasonably be expected to: • influence the choice of the fund into which the person pays superannuation contributions for employees of the person who have no chosen fund, or • influence the person to encourage one or more of the person’s employees to remain, or apply or agree to be, a member of the fund (s 68(1)). Also, a trustee of a regulated superannuation fund (or an associate of a trustee) must not refuse to: • supply, or offer to supply, goods or services to a person, or a relative or associate of a person, or • supply, or offer to supply, goods or services to a person, or a relative or associate of a person, at a particular price, or • give or allow, or offer to give or allow, a discount, allowance, rebate or credit in relation to the supply, or the proposed supply, of goods or services to a person, or a relative or associate of a person, if it is reasonable to conclude that the refusal is given because: • the person has not chosen the fund as the fund into which the person pays superannuation contributions for employees of the person who have no chosen fund, or • the person has not encouraged one or more of the person’s employees to remain, or apply or agree to be, a member of the fund (s 68A(3)). The prohibition applies as part of the integrity rules in conjunction with the choice of fund regime under which employers are required to provide their employees with a choice of superannuation funds to which their superannuation guarantee contributions would be paid (¶12-052). A similar prohibition applies to RSA providers under the RSA Act.

The above prohibitions are similar to those imposed under s 68A (as it then read before 6 July 2019) with two main changes: • a lower test applies for connecting the actions of the funds by using an objective or “reasonableness” standard to determine the intended effect of that action on the employer, and • civil and criminal consequences can apply as s 68A has been recategorised as a civil penalty provision (see below). Exceptions Sections 68(1) and (3) do not apply in relation to a supply of a kind prescribed in the regulations. SISR reg 13.18A allows a trustee (or an associate) to: • supply a business loan on a commercial arm’s length basis to an employer where only the employer is required to be a member of the fund • supply a “clearing house” service (¶3-220, ¶12-230) to an employer which forwards the contributions and related information made by the employer on behalf of their employees to their chosen funds • provide an employer or the employer’s employees with advice or administrative services • supply goods or services to an employer where the supply is also available to all of the employer’s employees who are members of the fund on terms not less favourable than the terms offered to the employer. Examples of goods and services under the last exception are providing members with discounted computers, low cost health insurance, or a discounted shopping service (so as to enable members to acquire discounted accommodation or entertainment) as a result of becoming a member of the superannuation fund concerned. Penalty for contravention Sections 68A(1) and (3) are civil penalty provisions (as defined in SISA s 193), and SISA Pt 21 therefore provides for civil and criminal consequences of contravening, or being involved in a contravention of, those subsections. ASIC has general administration of s 68A and can apply to the Court for a civil penalty order when a contravention of a civil penalty provision occurs. SISA Pt 21 specifies a maximum penalty amount of 2,000 penalty units.

RSE Licensing and Registration ¶3-480 Trustee licensing and RSE registration The SISA requires superannuation entities to be licensed by APRA and registrable superannuation entities (RSEs) to be registered with APRA. A “constitutional corporation” (ie a trading or financial corporation formed within the limits of the Commonwealth) or other body corporate or a group of individual trustees may apply for an RSE licence. A “group of individual trustees” is licensed as a group, ie each individual trustee is not required to have a licence (¶3-485). A “RSE” means a regulated superannuation fund, an ADF or a PST, but not an SMSF (SISA s 10(1)). An RSE, therefore, includes a public offer superannuation fund (¶3-500), a small APRA fund (¶5-650) or an eligible rollover fund (¶3-520). In summary: • all trustees operating an APRA-regulated superannuation entity must hold an RSE licence (therefore, trustees of SMSFs or public sector superannuation schemes are excluded)

• an “RSE licence” means a licence granted by APRA under s 29D and an “RSE licensee” means a constitutional corporation, body corporate or group of individual trustees that holds an RSE licence granted under that section • all superannuation entities, other than SMSFs and exempt public sector superannuation schemes (EPSSSs), must be registered with APRA (only an RSE licensee can register a superannuation entity: ¶3-490) • in order to obtain an RSE licence, the trustee or group of individual trustees must have a risk management strategy • in order to register a fund or trust, the trustee or group of individual trustees must have a risk management plan for that fund or trust. The RSE licence is not the same as the Australian financial services licence (AFSL) issued by ASIC to providers of financial services under the Corporations Act 2001 (¶4-600 and following). The RSE licence has a different focus which enables the licensee to conduct different business operations. However, trustees should note that holding an AFSL is a requirement for undertaking certain types of business activities under an RSE licence, eg where the trustee is dealing in a financial product or providing advice about financial products. For information on the interaction of RSE and AFS licensing, see ASIC INFO Sheet 86 “How do the RSE and AFS licensing application processes work together?” (available at www.asic.gov.au). Entities applying for RSE licences and RSE registration should note that stringent penalties are imposed for providing false or misleading information (Criminal Code Act 1995, s 137.1). Also, where information that is disclosed to APRA appears to indicate a breach of the law, APRA is authorised under Australian Prudential Regulation Authority Act 1998, s 56 to pass that information to ASIC or any other financial sector supervisory agency specified in the regulations. Authorisation to issue MySuper products An RSE licensee that wishes to offer a MySuper product is required to apply to APRA for authorisation to do so under SISA Pt 2C. An authorisation will include conditions requiring the RSE licensees to comply with additional duties and obligations (see ¶9-100).

¶3-485 Applying for an RSE licence Part 2A of SISA provides for the granting of a registrable superannuation entity (RSE) licence to constitutional corporations, other bodies corporate and groups of individual trustees. An RSE licensee that wants to offer MySuper products must have APRA authorisation under SISA Pt 2C and must comply with additional obligations under their RSE licences (the MySuper regime is discussed in Chapter 9). A person commits an offence if the person makes a representation that the person is, or is a member of a group that is an RSE licensee and the representation is false (s 29JCA). This is a strict liability provision, with a penalty of 60 penalty units. Group of individual trustees A “group of individual trustees” means a group of trustees each of whom is an individual trustee. A group of individual trustees can collectively hold a single RSE licence, which licenses the members of the group. Therefore, an RSE licence given to a group of individual trustees resides with the group (the RSE licensee) and is not affected by changes in the composition of the group (SISA s 13A). The following rules apply in relation to how the group/individual trustees fulfil their obligations under the SIS legislation when an RSE licence is given to a group. • The duties and obligations of trustees in respect of the regulated superannuation funds under the group continue to reside with each of the individual members of the group.

• Any individual trustee who is a member of a group of individual trustees may discharge any duty or obligation for all of the other members of the group, except where documents must be signed by the RSE licensee in which case all members are required to sign the documents. • It is sufficient for a direction, notice or other document given to an RSE licensee that is a group of individual trustees to be given to any one member of the group, who then has an obligation to appropriately inform the other members of the group of the direction, notice or document. • For the purposes of the SISA penalty provisions, the obligations and duties of the RSE licensee fall separately and individually upon each member of the group. Therefore, each member of the group is considered a principal and is liable for his/her own acts and omissions in ensuring that the RSE licensee has fully discharged its obligations and duties. • A “due diligence” defence is available to a member of the group who has exercised due diligence in the event that an RSE licensee does not discharge its obligations and duties. Classes of licence The two main classes of RSE licence are: (1) a public offer entity licence — this enables the holder to operate public offer RSEs (2) a non-public offer entity licence — this enables the holder to operate RSEs that are not public offer entities (eg an employer superannuation fund) (SISA s 29B; SISR reg 3A.01; 3A.02). The SISR may provide for other classes of RSE licences. If a trustee is licensed to operate one or more non-public offer entity funds in addition to a public offer entity fund, the trustee will be given a single licence known as an “extended public offer entity licence” (reg 3A.03). Only a body corporate that is a constitutional corporation can apply for a licence in respect of a public offer entity, or in respect of a fund where the primary benefit paid is a lump sum, rather than a pension. APRA may appoint an acting trustee to a superannuation entity where the trustee of the entity is either suspended or removed under s 134 (¶3-130). The acting trustee must have an RSE licence approved by APRA. Requirements for RSE licence application An application for an RSE licence must be in the approved form, contain the information required by the approved form, and be accompanied by the application fee prescribed by the SISR (see below) (SISA s 29C(4)). While an application is pending, changes to the information or documents which have been provided must be notified to APRA. APRA may also request specified information relating to the application from the applicant (s 29C). Licence application fees and variation fees The fees for RSE licence application fees are set out in SISR reg 3A.06. A reduced fee of half of the prescribed fees is payable if an applicant is re-applying for a particular class of RSE licence, where the initial application was refused or withdrawn within the preceding 12 months of the re-application. The fees which are payable for an application for variation of an RSE licence are specified in SISA s 29F(2)(c): APRA must approve application if conditions are met APRA must grant an RSE licence to an applicant for a licence (whether a body corporate or group of individual trustees) if the following requirements are met. • APRA has no reason to believe that the applicant would fail to comply with the RSE licensee law if the RSE licence were granted.

• APRA has no reason to believe that the applicant would fail to comply with any condition imposed on the RSE licence if it were granted. • APRA is satisfied that: – if the application is made by a body corporate — the body corporate meets the requirements of the prudential standards relating to fitness and propriety for RSE licensees, or – if the application is made by a group of individual trustees — the group as a whole meets the requirements of the prudential standards relating to fitness and propriety for RSE licensees and each of the members of the group meets the requirements of the prudential standards relating to fitness and propriety for members of groups of trustees that are RSE licensees (for APRA prudential standards, see ¶9-700). • If the applicant is not a constitutional corporation, APRA is satisfied that the body corporate or each member of the group of individual trustees only intends to act as a trustee of one or more superannuation funds that have governing rules providing that the sole or primary purpose of the fund is the provision of old-age pensions. • The application has not been withdrawn, refused or treated as withdrawn or refused (s 29D). Compulsory conditions on all licences The following conditions are imposed on all RSE licences (SISA s 29E(1)). • The RSE licensee (if the RSE licensee is a group of individual trustees, each of the members of the group) must comply with the RSE licensee law. • The duties of a trustee in respect of each RSE of which it is an RSE licensee must be properly performed by the body corporate and each of the members of the group of individual trustees. • The RSE must have an ABN, or must have made an ABN application that has not been refused. • The RSE licensee must ensure that each RSE of which it is the RSE licensee is registered under SISA Pt 2B (¶3-490). • The RSE licensee must ensure that each RSE of which it is the licensee has an ABN. • The RSE licensee must notify APRA of any change in the composition of the RSE licensee within 14 days after the change takes place. • The RSE licensee must comply with any other conditions prescribed by the SISR. Additional conditions are imposed on various types of RSE licences or licensees, as specified in s 29E(3) to (7), or on a particular RSE licence under s 29EA. A condition may be expressed to have effect despite anything in the prudential standards (s 29EA(2A)). An “RSE licensee law” means the SISA or SISR, the FSCDA, the Financial Institutions Supervisory Levies Collection Act 1998 and: • prudential standards (as defined in s 34C(4): ¶9-700) • the provisions of the Corporations Act 2001 listed in the definition of “regulatory provision” (¶2-140) and their prescribed Regulations • any other provisions of any other Commonwealth law specified in regulations (s 10(1)). For RSE licensees who apply for authority to offer MySuper product, an additional condition is imposed on each RSE licensee who makes an application under s 29S for authority to offer a class of beneficial interest in a regulated superannuation fund as a MySuper product (¶9-100) which requires RSE licensee to give effect to elections made in accordance with s 29SAA, 29SAB and 29SAC as discussed in ¶9-120

(s 29E(6B)). Reporting “significant” breach of licence conditions An RSE licensee that becomes aware that it has breached or will breach a condition imposed on its RSE licence, and the breach is or will be “significant”, must give APRA a written report about the breach as soon as practicable, and in any case no later than 10 business days, after becoming aware of the breach (s 29JA(1)). A breach is or will be “significant” if the breach is or will be significant having regard to any one or more of the following factors: • the number or frequency of similar previous breaches • the impact the breach has or will have on the RSE licensee’s ability to fulfil its obligations as trustee of the superannuation entity • the extent to which the breach indicates that the RSE licensee’s arrangements to ensure compliance with the RSE licensee law might be inadequate • the actual or potential financial loss arising or that will arise from the breach to the beneficiaries of the entity or to the RSE licensee, and • any other matters prescribed by the SISR (s 29JA(1A)). A breach must be notified within 10 business days after becoming aware that a breach has occurred. Failure to notify APRA of a breach of a prudential requirement is a strict liability offence (50 penalty units). APRA breach reporting form and method APRA’s guidelines and form for breach notification may be found at www.apra.gov.au/breach-notification. Variation, cancellation of licence and other matters An RSE licensee may apply to APRA for one or both of the following: • variation of its RSE licence so that the RSE licence is an RSE licence of a different class • variation or revocation of a condition that APRA has imposed on its RSE licence. A variation application must be in the approved form, contain the required information and be accompanied by the application fee (if a variation of licence, see above) (SISA s 29F). APRA may, in writing, cancel an RSE licence if: • requested by the RSE licensee in the approved form • the RSE licensee is a disqualified person (¶3-130) • the RSE licensee has breached a licence condition or APRA has reason to believe that the RSE licensee will breach a licence condition • the RSE licensee has failed, or APRA believes the RSE licensee will fail, to comply with an APRA direction under s 131D(1) or DA(1) (s 29G).

¶3-488 Approval to hold controlling stake in an RSE licensee Part 2A Div 8 of SISA deals with: • application to APRA for approval to hold a controlling stake • approval to a person to hold a controlling stake in an RSE licensee • APRA’s directions to a person to relinquish control over an RSE licensee

• consequences of a direction to relinquish control. Division 8 commenced on 6 July 2019. The provisions in Div 8 only apply to RSE licensees that are body corporates. A person commits an offence if the person holds a controlling stake in an RSE licensee without approval from APRA under s 29HD to hold a controlling stake in the RSE licensee (s 29JCB). This is a strict liability offence. A penalty of 400 penalty units applies for each day on which the person holds a controlling stake in the RSE licensee without approval. The offence is subject to an infringement notice (s 223A(1)(aa)). This is to address the situation where the person holding a controlling stake in an RSE licensee has not been aware of the requirement to obtain approval but is otherwise considered to be satisfying their fiduciary obligations. Application to APRA for approval to hold a controlling stake A person may apply to APRA for approval to hold a controlling stake in an RSE licensee (29HA(1)). The application must be in the approved form and contain the information required by the firm. A person holds a “controlling stake” in an RSE licensee that is a body corporate if the person holds a stake of more than 15% in the RSE licensee (s 10(1)). A stake in an RSE licensee is a person’s shareholding (including the shareholdings of their associates) and votes associated with that shareholding. APRA must make a decision on the application within 90 days of receiving the application or, where APRA requested further information from the applicant, within 90 days of receiving all the information requested, unless APRA has extended the period by another 30 days (s 29HC(1), (2)). Approval to hold a controlling stake in an RSE licensee APRA must approve an application to hold a controlling stake in an RSE licensee if and only if: • the application is in the form required and with the correct information • the applicant has provided all the information requested or the request has been disposed, and • APRA has no reason to believe that, because of the person’s controlling stake in the RSE licensee, or the way in which that controlling stake is likely to be used, the RSE licensee may be unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A (s 29HD). If APRA gives a person approval to hold a controlling stake in an RSE licensee, APRA must notify the RSE licensee in writing of the approval (s 29HE). Refusal to approve If APRA refuses the application, APRA must take all reasonable steps to ensure that the applicant is given a notice of the decision and the reasons for the refusal (s 2(HF)). APRA’s decision to refuse to give approval is reviewable by the AAT (s 10(1) of definition of “reviewable decision” para (dla)). Where APRA does not decide on an application within 90 days (or 120 days for extensions) of receiving the application, the application is taken to be refused (s 29HC(4)). Direction to relinquish control APRA may direct a person to relinquish control of an RSE licensee in the three situations set out in s 131EB(1) to (3). Situation 1 APRA may direct a person to relinquish control of an RSE licensee if: (a) the Regulator has reason to believe that:

(i) the person has a controlling stake in the RSE licensee, or (ii) the person has practical control of the RSE licensee, and (b) the Regulator has reason to believe that because of: (i) the person’s controlling stake, or practical control, of the RSE licensee, or (ii) the way in which control has been, is or is likely to be exercised, the RSE licensee has been, is or is likely to be unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A (s 131EB(1)). The above requirements are similar to the conditions for APRA to approve an application for controlling stake in the RSE licensee (see above). The likelihood of interference with the RSE licensee’s ability to fulfil its obligations, due to the person controlling the RSE licensee, is the key consideration in APRA’s assessment of either approval of an application or the issue of a direction to relinquish control. The main difference between the conditions for an approval of an application and the giving of a direction is that a direction can be given to a person’s practical control over an RSE licensee who does not have a controlling stake in the RSE licensee. Practical control A person has “practical control” over an RSE licensee if the person does not hold a controlling stake in the RSE licensee and either of the following is satisfied: • the directors of the RSE licensee are accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person, or • the person, alone or together with their associates, is in a position to exercise control over the RSE licensee (s 10(1), s 131EC). Practical control therefore occurs irrespective of whether the person’s directions, instructions or wishes or their position to exercise the control originate from the person alone, or together with their associates. Situation 2 APRA may give a person a direction to relinquish control of an RSE licensee if: (a) the Regulator has reason to believe that the person has a controlling stake in the RSE licensee, and (b) the person does not have approval under s 29HD to hold a controlling stake in the RSE licensee (s 131EB(2)). Situation 3 APRA may give a person a direction to relinquish control of an RSE licensee if: (a) the Regulator has reason to believe that the person has a controlling stake in the RSE licensee (b) the person has approval under s 29HD to hold a controlling stake in the RSE licensee, and (c) information given to the Regulator in relation to the application for approval was false or misleading in a material particular (s 131EB(3)). To avoid doubt, a direction under s 131EB(1) or (3) to a person to relinquish a controlling stake in an RSE licensee may be given even if the person has approval to hold a controlling stake in the RSE licensee (s 131EB(4)). The s 131EB direction must be in writing, and APRA must give the person subject to the direction a copy of the direction and a statement of APRA’s reasons (s 131EB(5) and (6)). APRA may revoke a direction to relinquish control of an RSE licensee in writing and a copy of the revocation must be given to the person subject to the direction (s 131EB(7) and (8)).

APRA’s decision to give a person a direction under s 131EB is reviewable by the AAT (s 10(1) definition of “reviewable decision” in s 10(1) para (taac)). Consequences of a direction to relinquish control A person who receives a direction to relinquish control of an RSE licensee must take necessary steps to ensure that: • the directors of the RSE licensee are not accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person (either alone or together with associates) • the person (either alone or together with associates) is not in a position to exercise control over the RSE licensee, and • the person does not hold a controlling stake in the RSE licensee (s 131ED(10)). That is, a person receiving the direction must take necessary steps so that the person does not hold a controlling stake or have practical control of the RSE licensee. Action must be taken within 90 days of being given a copy of the direction or before the end of the longer period where APRA has given written notice allowing a longer period to comply with the direction (s 131ED(2)). A person who intentionally or recklessly contravene the direction is guilty an offence punishable on conviction by a penalty of 400 penalty units (s 131ED(3)). Interim orders Where the AAT has made an order to stay (or otherwise affect the operation or implementation of the decision to give the direction or part of the direction), APRA may apply to the Federal Court of Australia to seek orders that the person not exercise control until the AAT completes its review of the direction (s 131EE(1)). The Federal Court may make such orders as the court considers appropriate to ensure that the person does not, during the period to which an order of the Tribunal relates, exercise control over the RSE licensee in a manner that results in the RSE licensee being unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A (s 131EE(2)). The Regulator may apply to the Federal Court of Australia for orders under s 131EE(4) if: (a) a direction to relinquish control over an RSE licensee is in force in relation to a person, and (b) the Regulator has reason to believe that the person may, during the period under s 131ED(2) during which the person is required to take steps under the direction (the compliance period), exercise control over the RSE licensee in a manner that results in the RSE licensee being unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A (s 131EE(4)). Under s 131EE(4), the Federal Court may make such orders as the court considers appropriate to ensure that the person does not, during the compliance period, exercise control over the RSE licensee in a manner that results in the RSE being unable to satisfy one or more of the trustee’s obligations contained in a covenant set out in s 52 to 53, or prescribed under s 54A. Remedial orders If the direction is in force, APRA may apply to the Federal Court to seek an order to enforce the direction (s 131EF(1)). The Federal Court may make such orders as the court considers appropriate to ensure that: • the directors of the RSE licensee are not accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person (either alone or together with associates)

• the person (either alone or together with associates) is not in a position to exercise control over the RSE licensee, and • the person does not hold a controlling stake in the RSE licensee (s 131EF(2)). The Court may make orders under s 131EF only if it is satisfied that the conditions in 31EF(3) are met. The Federal Court’s orders include: (a) an order directing the disposal of shares, or (b) an order restraining the exercise of any rights attached to shares, or (c) an order prohibiting or deferring the payment of any sums due to a person in respect of shares held by the person, or (d) an order that any exercise of rights attached to shares be disregarded (s 131EF(4)). In addition to the powers under s 131EF(2) and (4), the Federal Court also has the power to: • make an order to direct any person to do or refrain from doing a specific act for the purpose of securing compliance with any order the court has made, and • make an order containing ancillary or consequential provisions that the court thinks just (s 131EF(6)).

¶3-490 Registering an RSE Part 2B of SISA provides for the registration of a registrable superannuation entity (RSE) (s 29K to 29QC). There is no fee payable for registering an RSE. Only the holder of an RSE licence can apply for registration of an RSE (s 29L(1)). The s 29QB and 29QC requirements to ensure trustee remuneration information is made publicly available and for consistent information reporting are discussed in ¶9-650 and ¶9-660. An RSE licensee may breach the licence condition imposed by s 29E(1)(d) if an RSE of which it is the RSE licensee is not registered. A breach of a licence condition may lead to a cancellation of the licence (¶3-485). RSE trustees that want to offer MySuper products must have APRA authorisation under SISA Pt 2C and must comply with additional obligations under their RSE licences (see Chapter 9). Requirement for RSE registration An application for registration of an RSE must be made on the approved form (see “APRA guidelines” below), contain the information required by the approved form, and be accompanied by: • an up-to-date copy of the trust deed by which the RSE is constituted (except to the extent that the trust deed is constituted by the governing rules of the entity) • an up-to-date copy of the governing rules of the RSE (except to the extent that the governing rules are constituted by a Commonwealth law or by unwritten rules) (SISA s 29L). If the applicant (RSE licensee) is a group of individual trustees, the copy or statement must be signed by each of the members of the group (s 13A(6)). While an application is pending, changes to the information or to documents which have been provided, must be notified to APRA. APRA may also request specified information relating to the application from the applicant (s 29LA). APRA must decide an application by an RSE licensee for registration of an RSE: • within 21 days after receiving the application, or

• if the applicant was requested to provide additional information — within 21 days after receiving all of the information requested. The period for deciding an application may be extended by up to seven days if APRA informs the RSE licensee of the extension in writing and within the period in which it would otherwise be required to decide the application. In this case, APRA must decide the application within the extended period. If an application has not been decided by the period by which it is required to have been decided, APRA is taken to have decided to refuse the application (s 29LB).

¶3-495 RSE licensees must provide information about RSE at AMM From 6 April 2019, SISA imposes an obligation on RSE licensees to hold an annual members’ meeting (AMM) to discuss the key aspects of the fund and to provide members with a forum to ask questions about all areas of the fund’s performance and operations (Pt 2B Div 5 s 29P to 29PE). The chair of the board of directors, a director and an executive officer of an RSE licensee (if the RSE licensee is a body corporate), an individual trustee (if the RSE licensee is a group of individual trustees), relevant auditors and actuary must attend the AMM. At the AMM, the members must be given reasonable opportunity to ask questions about the RSE, the RSE licensee (and its responsible officers) or each individual trustee, the audit or the actuarial investigation of the entity, and any other information included with the notice of the meeting. To minimise compliance costs, superannuation funds can hold the AMM by electronic means. The AMM requirements do not apply in relation to an RSE that is: (a) a superannuation fund with fewer than five members, or (b) an excluded approved deposit fund, or (c) a pooled superannuation trust, or (d) an eligible rollover fund. Annual Members’ Meeting The RSE licensee of an RSE must hold an annual meeting of members of the entity for each year of income of the entity (s 29P(1)). The meeting must be held within three months of the notice of the meeting having been given and the notice must be given within six months after the end of the entity’s income year (s 29P(3), (4)). An RSE licensee therefore has up to nine months after the end of the entity’s income year in which to hold an AMM. The requirement to hold an AMM does not limit the RSE licensee’s ability to hold more than one AMM, or to hold AMMs in multiple locations. Furthermore, the RSE licensee is able to determine the platform in which the AMM is to be held — in person, electronically or a combination of both. This is to ensure that the RSE licensee has sufficient flexibility to engage with their members in a way that suits their members and minimises cost. It is an offence to contravene the obligation to hold an AMM. The penalty for the RSE licensee or an individual trustee (if the RSE licensee is a group of individual trustees) committing the offence is 50 penalty units (s 29P(8)). Notice of AMM The RSE licensee must give notice of the meeting 21 days before the AMM to: • all members of the RSE • all responsible officers of the RSE licensee that is a body corporate

• any person who has been an auditor of the entity for the income year, and • any person who has been an actuary of the entity during the income year. A responsible officer includes a director and an executive officer of the RSE licensee (s 10(1)). The notice must also include the agenda of matters to be discussed at the AMM. Regulations may prescribe any other information that must be included with the notice (eg that the annual report or information on operational matters of the fund be included with the notice of the AMM). A failure to comply with the obligation to provide the AMM notice and the information to be included in or with the notice is an offense (penalty: 50 penalty units) (s 29P(8)). Obligation to attend the AMM The chair of the board of directors, a director and an executive officer of an RSE licensee, relevant auditors and actuaries must attend the AMM, if they are given the notice of the AMM (s 29PAA). A director is not required to attend the AMM if other directors would be attending and those directors would constitute a quorum of directors for a board of directors meeting. Where the RSE licensee is a group of individual trustees, each of the individual trustees must attend the AMM. Unless there is a reasonable excuse for not attending, the persons who are required to attend will be subject to a penalty of 50 penalty units for non-attendance. Whether a reason for non-attendance is considered a reasonable excuse is considered on a case-bycase basis in light of the circumstances. Conduct at the AMM At the AMM, the RSE licensee must give members reasonable opportunities to ask questions about: • the RSE • the RSE licensee and its responsible officers, where the RSE licensee is a body corporate • each individual trustee where the RSE licensee is a group of individual trustees • any audit of the entity for the income year • any actuarial investigation of the entity for the income year, and • any information included with the notice of the AMM. It is an offence to contravene the obligation to give members reasonable opportunity to ask questions (penalty: 50 penalty units). If the chair of the board of directors, a director or an executive officer of an RSE licensee is asked a question by a member at the AMM, they must answer the question at the AMM unless it is not reasonably practicable to do so. Otherwise, the question must be answered within one month. The same obligation applies for questions to an individual trustee or an auditor or an actuary (s 29PC(1) and (2), 29PD(1) and (2), 29PE(1) and (2)). Unless a defence is available, the responsible officer, individual trustee, auditor or actuary will be subject to a penalty of 50 penalty units for not answering the questions at the AMM or within one month of the AMM. Defences to not answering the questions A responsible officer of an RSE licensee, an individual trustee, an auditor or an actuary does not need to answer a question if: • the question is not relevant to an action or failure or act by the RSE licensee in relation to the RSE or

one or more of its members • the question is not relevant to the RSE • it would be in breach of the governing rules of the RSE, the SIS Act or any other law to answer the question • answering the question would result in detriment to the members taken as a whole, or • any other circumstances prescribed by regulations (s 29PB(3), 29PC(3), 29PD(3) and 29PE(3)). An auditor or an actuary also does not need to answer a question if: • the question is not relevant to an audit or an actuarial investigation of the RSE • the question is not relevant to any matter that might reasonably be expected to be apparent to the auditor or actuary in relation to the entity • it would be in breach of the governing rules of the RSE, the SISA or any other law to answer the question, or • answering the question would result in detriment to the members of the RSE, taken as a whole, or • in any other circumstances prescribed by the regulations (s 29PD(3) and 29PE(3)). Recording of the AMM The RSE licensee must ensure that the minutes of AMM are prepared and made available on the RSE’s website to all members, including those that were not able to attend (s 29P(6)(a) and (c)). The minutes would include material matters raised at the AMM, the answers to any questions asked at the meeting that a person is obliged to answer, either at or after the AMM (s 29P(6)(b)). It is an offence to contravene the obligation to prepare the minutes or to make them available on the entity’s website to all members (penalty: 50 penalty units) (s 29P(8)).

Public Offer Entities and ERFs ¶3-500 RSE licensing and other rules A public offer entity is subject to additional rules under the SISA, which require it to have an RSE licensee as its trustee and which impose restrictions on its dealings in superannuation interests (see below). What is a public offer entity? A public offer entity is a public offer superannuation fund, an ADF other than an excluded ADF, or a PST (¶3-010). A “public offer superannuation fund” is: • a regulated superannuation fund that is not a standard employer-sponsored fund (¶3-120) • a standard employer-sponsored fund which has at least one member who is: (a) not a standard employer-sponsored member, ie a member in respect of whom an employer-sponsor contributes or would contribute pursuant to an arrangement between the employer-sponsor and the trustee of the fund; and (b) not a member of a “prescribed class” • a standard employer-sponsored fund which has made a written election in the approved form to be treated as a public offer fund (an election is irrevocable, but APRA may declare that a fund is not a public offer fund), or

• a superannuation fund which APRA has declared to be a public offer fund (SISA s 18). A fund that is declared by APRA not to be a public offer fund may be subject to certain conditions. A trustee must not fail to notify APRA if a specified condition has been breached (s 18(7B)). This is a strict liability offence (¶3-820). A member of a prescribed class means: (a) a former standard employer-sponsored member who, on ceasing to be such a member, has remained a member of the fund at all times; (b) a spouse or former spouse of an existing or former standard employer-sponsored member of the fund in relation to whom the fund has accepted eligible spouse contributions from the member; or (c) a spouse or former spouse of an existing or former standard employer-sponsored member of another fund which has the same standard employer-sponsor as the fund that has accepted eligible spouse contributions (SISR reg 3.01). Examples of public offer funds are personal superannuation funds, master trusts, and employersponsored funds which have a personal superannuation section or have elected to become a public offer fund. RSE licensing A person must not be, or act as, a trustee of a registrable superannuation entity (RSE) unless the person holds an RSE licence (¶3-480) that enables the person to be the trustee of the entity or the person is a member of a group of individual trustees that enables the members of the group to each be a trustee of the entity (SISA s 29J(1)). A person must not be, or act as, a trustee of an RSE if the person is a body corporate and is not the only trustee of the RSE (s 29J(4)). A failure to comply is an offence which is punishable upon conviction by a term of imprisonment or a fine, or both. The licensing of corporate trustees, or groups of individual trustees, under the SISA is significant for the reasons below. • A fund cannot be an ADF unless it is maintained by an RSE licensee that is a constitutional corporation (¶2-320). • The trustee of a public offer entity cannot offer superannuation interests under SISA s 152 (see below) unless it is a constitutional corporation. • A person must not be, or act as, the trustee of a small APRA fund (ie a fund with fewer than five members that is not an SMSF: ¶5-650), unless the person is an RSE licensee that is a constitutional corporation. • A person contravenes SISA s 29J(1) if the person does not hold an RSE licence. RSE trustees that want to offer MySuper products must have APRA authorisation under SISA Pt 2C and must comply with additional obligations under their RSE licences (see Chapter 9). Trustee representation A public offer superannuation fund must comply with trustee representation rules which require policy committees to be set up in respect of each employer-sponsor in the fund and equal member and employer representation on the committees (¶3-120). Dealings in superannuation interests The trustee of a public offer entity must comply with provisions relating to the issuing, offering or making of invitations of superannuation interests set out in SISA Pt 19 and the Corporations Act 2001. A “superannuation interest” means a beneficial interest in a superannuation entity (s 10(1)). Basically, the trustee of a public offer entity: • must not engage in conduct involving issuing, offering to issue or inviting the making of applications for the issue of superannuation interests in the entity unless the trustee is an RSE licensee (see above) and the entity is constituted by a deed as a trust (this prohibition does not prevent the trustee from engaging or authorising persons such as agents or brokers to act on its behalf) (SISA s 152)

• must not issue a superannuation interest to a person or permit a person to become a standard employer-sponsor of the entity, except pursuant to an eligible application and the application form was included in or accompanied by a Product Disclosure Statement, or where the issue gives effect to a transfer to a successor fund (CA s 1016A: ¶4-150) • must comply with the prescribed rules in relation to commission and brokerage payments, and rules on fair dealing in relation to issue and redemption of superannuation interests (SISA s 154 to 156) • must provide ongoing disclosure of material changes or of significant events (CA s 1017B: ¶4-150) • must comply with stop orders issued by ASIC and with prescribed rules in relation to receipt of money for applications for the issue of superannuation interests (CA s 1017E; 1020E; 1021O) • must provide a “cooling-off” period during which superannuation interests issued to a person may be redeemed at the person’s request (CA s 1019A; 1019B: ¶4-180) • must not make a statement or disseminate information that is false or materially misleading (CA s 1041E: ¶4-500). Superannuation entities are also subject to provisions in the CA which prohibit fraudulently inducing a person to become a member or employer-sponsor (CA s 1041F), dishonest conduct (CA s 1041G), misleading or deceptive conduct in relation to a product or in dealings in superannuation interests (CA s 1041H) and “insider trading” in connection with the issue of superannuation interests (CA s 1043A) (¶4500). [SLP ¶2-360, ¶4-000]

¶3-520 ERF prudential requirements An eligible rollover fund (ERF) is a superannuation entity that operates as temporary repositories for the superannuation of members who have lost connection with their superannuation accounts. ERFs are subject to prudential regulation under the SISA (see below). An RSE licensee of a prescribed class may apply to APRA for authority to operate a regulated superannuation fund as an ERF (SISA s 242A). Approved deposit funds cannot operate an authorised ERF (29E(6D)). An application for authority to operate a regulated superannuation fund as an ERF must be in the approved form, contain the information required by the approved form and RSE licensee’s and the fund’s ABNs, and be accompanied by an election made under s 242B and 242C. The election under s 242B must be in writing and in the approved form in which the RSE licensee elects: (i) to take the action required under the prudential standards in relation to amounts held in the ERF, if the authority to operate the fund as an ERF is cancelled under s 242J(1), and (ii) to do so before the end of a period of 90 days beginning on the day on which notice of the cancellation is given to the RSE licensee under s 242J(3). A trustee of a regulated superannuation fund is not subject to any liability to a member of the fund for an action taken to give effect to an election made in accordance with s 242B (s 242R). The election under s 242C must be in writing and in the approved form in which the RSE licensee elects that, if the authority is given, the RSE licensee will not charge any member of the fund a fee all or part of which relates directly or indirectly to costs incurred by a trustee of the fund: (i) in paying conflicted remuneration to a financial services licensee, or a representative of a financial services licensee, or (ii) in paying an amount to another person that a trustee of the fund knows, or reasonably ought to know, relates to conflicted remuneration paid by that other person to a financial services licensee, or

a representative of a financial services licensee. “Conflicted remuneration” has the same meaning as in Pt 7.7A of the Corporations Act 2001 (¶4-530). Section 242C(3) gives “conflicted remuneration” an extended meaning to also have the meaning it would have if: (a) financial product advice provided to the RSE licensee mentioned in s 242C(1) by a financial services licensee, or a representative of a financial services licensee, mentioned in s 242C(1)(a)(i) or (ii) were provided to the RSE licensee as a retail client, and (b) financial product advice provided to the other person mentioned in s 242C(1)(a)(i) or (ii) by a financial services licensee, or a representative of a financial services licensee, mentioned in that subparagraph were provided to the other person as a retail client (a similar extended meaning applies in s 29SAC: see ¶9-120). Obligations of an ERF An ERF operates like any other regulated superannuation fund and is subject to the same conditions and prudential requirements applying to those funds (¶3-000). In addition, an ERF must comply with operating standards specifically prescribed for ERFs (SISR reg 10.06) and with additional obligations apply as below: • each trustee of an ERF must promote the financial interests of the beneficiaries of the fund, in particular returns to those beneficiaries (after the deduction of fees, costs and taxes) (s 242K), and • each director of a corporate trustee of an ERF must exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the obligations referred to in s 242K (s 242L). The reference to a reasonable degree of care and diligence is a reference to the degree of care and diligence that a superannuation entity director would exercise in the corporate trustee’s circumstances. A person must not contravene s 242K or 242L (s 242M(1)) (this is a civil penalty provision, as defined by s 193). There are civil and criminal consequences for contravening, or of being involved in a contravention of, a civil penalty provision (¶3-820), but a contravention does not result in the invalidity of a transaction (s 242M(3)). A prudential standard determined under s 34C may require an RSE licensee whose authority to operate a regulated superannuation fund as an ERF is cancelled under s 242J(1) to transfer any amounts held in the ERF to a regulated superannuation fund that is an ERF or offers a MySuper product (s 242Q). The prudential standard may also set out requirements that must be met for such transfers and deal with other matters relating to such amounts. For prudential standards made under s 34C, see ¶9-720. Transfers to ERFs The trustee of a regulated superannuation fund or ADF (transferor fund) may, on behalf of a beneficiary of the fund, apply to an ERF for the issue of a superannuation interest in the ERF, ie for the beneficiary to become a member of the ERF. The consideration for the issue of the superannuation interest in the ERF is the amount of the beneficiary’s withdrawal benefits in the transferor fund that is transferred to the ERF (SISA s 243; SISR reg 10.02(3)). Once an ERF issues a superannuation interest in accordance with an application, the beneficiary in the transferor fund ceases to have any rights against the transferor fund, and a person who has a contingent right against the transferor fund to a death or disability benefit also ceases to have the contingent right against the transferor fund. At the same time, corresponding rights are acquired by the beneficiary or other person against the ERF (s 243; 251). A person claiming entitlement to a benefit held by an ERF may apply in the approved form to the trustee of the fund for payment of the benefit (s 248; 252).

Transfer from ERF to another fund From 10 May 2016, a member’s benefits in an ERF may also be transferred to another superannuation fund or RSA without the member’s consent if the ERF trustee believes on reasonable grounds that the member has an interest in the receiving fund or EPSSS or with the RSA provider, and the receiving fund or RSA provider has received at least one contribution or roll-over in respect of the member within the last 12 months (reg 6.29(1)(ba)) (¶3-284).

Superannuation Service Providers ¶3-600 Auditors and actuaries A “superannuation actuary” means an RSE actuary (ie a person who is appointed as an actuary of a registrable superannuation entity) or an SMSF actuary. An “SMSF actuary” means a person who is a Fellow or an Accredited Member of the Institute of Actuaries of Australia. A “superannuation auditor” means an RSE auditor (ie a person who is appointed as an auditor of a registrable superannuation entity) or an approved SMSF auditor (¶5-508). An “approved auditor” means a person included in a class of persons specified in the SISR but does not include: • a person who is disqualified from being or acting as an auditor of all superannuation entities under SISA s 130D (which allows the court to disqualify an auditor or actuary in relation to an APRAregulated superannuation entity), or • a person in respect of whom a disqualification order is in force under SISA s 131 (which allows the Commissioner to disqualify an auditor or actuary in relation to an SMSF) (SISA s 10(1)). A person who is a disqualified person commits an offence if he/she is or acts as superannuation auditor or superannuation actuary of a superannuation entity (see “Offence for disqualified person to be an auditor or actuary” below). To be an “approved auditor” of an APRA-regulated superannuation entity, a person must be: (a) the Auditor-General of the Commonwealth, a state or territory or a delegate of the Auditor-General; or (b) a registered auditor under Div 2 of Pt 9.2 of Corporations Act 2001. The requirement (which applied before 24 September 2007) that the approved auditor must be associated with a professional accounting organisation (as prescribed in SISR Sch 1AAA) is no longer relevant given that auditing standards now have the force of law (¶15-650). To be the approved auditor of an SMSF, the person may be one of the persons above (as for an APRAregulated entity) or be associated in a specified manner with a professional accounting organisation (as prescribed in Sch 1AAA) (reg 1.04(2)(a)). To be able to audit an SMSF on or after 1 July 2013, a person must be registered by ASIC as an “approved SMSF auditor” as discussed in ¶5-508. A person who holds himself/herself out as an actuary or an approved auditor when he/she is not is guilty of a strict liability offence, punishable by a fine of up to 50 penalty units (s 131B: ¶5-500). Disqualification under s 130D and 131 The Commissioner may disqualify a person from being an approved auditor or actuary of an SMSF if: • the person has failed, whether within or outside Australia, to carry out or perform adequately and properly: (a) the duties of an auditor or actuary under the SIS legislation or FSCDA; (b) any duties required by law to be performed by an auditor or actuary; or (c) any functions an auditor or actuary is entitled to perform in relation to the SIS legislation or FSCDA, or • the person is otherwise not a fit and proper person to be an approved auditor or actuary for the purposes of the SISA (SISA s 131).

On application by APRA, the Federal Court has a similar power of disqualification in relation to a person who is the approved auditor or actuary of an APRA-regulated superannuation entity (s 130D). Regardless of whether a s 130D or 131 disqualification order has been issued, the Regulator may refer details of the matter to the professional association relevant to the person. The Regulator has a similar power of referral in the case of an actuary who has failed to carry out adequately and properly the duties of an actuary under the SIS legislation or any law or is otherwise not a fit and proper person to be an actuary (s 131A(3)). APRA may give a written direction to the trustee of a superannuation entity to end the appointment of a person as the approved auditor or actuary of the entity if satisfied that the person is disqualified under s 130D or 131, or the person is not a fit and proper person to hold the appointment, or the person has failed to perform adequately and properly the duties or functions of the appointment under the SIS legislation or the FSCDA (s 131AA). Offence for disqualified person to be an auditor or actuary A person commits an offence if the person, knowing that he/she is disqualified under SISA s 130D or 131 from being or acting as an auditor or actuary of a superannuation entity, is, or acts as, an auditor or actuary of a superannuation entity for the purposes of the SISA (s 131C). This is a two-tier fault liability and strict liability provision, and the penalties as specified in the provision apply in case of a breach. Actuarial investigation A defined benefit fund is required to have an actuarial investigation, at least once every three years, by an actuary who is required to give the trustee an actuarial report. Other actuarial functions in connection with superannuation funds are discussed at ¶3-330. Financial audit In respect of each year of income, the financial statements and accounts of a superannuation entity must be audited by an approved auditor who is required to give a report, in the approved form, of the operations of the entity, and the registrable superannuation entity (RSE) licensee (if any) of the entity to the trustee of the entity within the prescribed time (SISA s 35AC; 35C; former s 113; SISR reg 8.03(a)). Auditors should choose the appropriate report — one applicable to a fund applying Australian Accounting Standards and the other applicable to a fund adopting a financial reporting framework other than Australian Accounting Standards. Compliance audit The approved auditor of a superannuation entity must undertake a mandatory compliance audit of the entity in addition to the normal audit of the entity’s accounts, statements and financial position (SISA s 35AC; former s 113(3)(b)). The compliance audit requires the auditor to give a statement as to whether the entity, and the RSE licensee (if any), has complied with provisions of the SIS legislation and the FSCDA, as identified in the compliance audit form, for the whole of the entity’s year of income. The approved form for the auditor’s report (for 1996/97 onwards) incorporates the concept of materiality when forming an opinion on a fund’s compliance with specific provisions of the SIS legislation. In this regard, auditors will need to measure materiality against the appropriate guidelines issued by their professional bodies in terms of the qualitative and quantitative matters which must be considered. Audit report to be given to trustees The auditor of a superannuation entity must give an audit report, in the approved form, to each trustee on the financial and compliance audit of the entity within the prescribed period after the end of the year of income (¶3-315, ¶5-500). Reporting contraventions to trustees and Regulator If, in connection with the audit or actuarial function of a superannuation entity, an auditor or actuary considers that a contravention of the SIS legislation or the FSCDA may have occurred, may be occurring or may occur, the auditor or actuary must, as soon as practicable, tell a trustee of the entity about the matter in writing. If the superannuation entity is not an SMSF and the contravention is of such a nature

that it may affect the interests of members or beneficiaries of the entity, the auditor or actuary must also tell the Regulator in writing (SISA s 129(3)). If the superannuation entity is an SMSF and the matter is specified in the approved form issued by the ATO, the auditor or trustee must tell the Regulator about the matter in the approved form (¶5-530) (s 129(3)(c)). An offence against s 129(3) is a strict liability offence. The auditor or actuary need not inform the trustee or Regulator if he/she honestly believes that the trustee or Regulator has already been told of the matter (s 129(3A)). Penalties apply for misrepresentation by any person in this regard. An auditor or actuary is not liable in a civil action or civil proceeding in relation to telling the trustee or the Regulator about a matter under s 129(3). Section 129 does not apply if the auditor or actuary honestly believes that the opinion that he/she has formed is not relevant to the performance of audit or actuarial functions. A similar notification obligation arises if, in connection with the audit or actuarial function of a superannuation entity, an auditor or actuary forms the opinion that the financial position of the entity may be, or may be about to become, “unsatisfactory” (as defined in SISR reg 9.04: ¶3-330). In that case, the auditor or actuary must, as soon as practicable after forming the opinion, tell the Regulator and a trustee of the entity about the matter in writing (s 130). The approved form Auditor/Actuary contravention report (NAT 11239) and Completing the auditor/actuary contravention report (NAT 11299) are available at www.ato.gov.au/Forms/Auditor-actuary-contraventionreport-instructions. Self-incrimination A person is not excused from complying with a requirement under SISA s 129 or 130 to give information on the ground that doing so would incriminate the person or make the person liable to a penalty. However, the information given in compliance with such a requirement is not admissible in evidence against the person in a criminal proceeding or a proceeding for imposing a penalty, other than a proceeding in respect of the falsity of the information, in certain circumstances (s 130B). Providing information to assist Regulators An auditor or actuary of a superannuation entity may give to the Regulator information about the entity or a trustee of the entity obtained in the course of, or in connection with, the performance audit or actuarial functions under the SIS legislation or the FSCDA if the auditor or actuary considers that giving the information will assist the Regulator in performing its functions under the legislation. A person who, in good faith, gives such information to the Regulator is not subject to any action, claim or demand by, or any liability to, any other person in respect of the information (SISA s 130A). An auditor must notify APRA in writing as soon as practicable, and in any case within 28 days, of becoming aware of circumstances that amount to an attempt by any person to: • unduly influence, coerce, manipulate or mislead the auditor in connection with the performance of the auditor’s functions or duties, or • otherwise interfere with the performance of the auditor’s functions or duties (s 130BA). It is an offence for an employee, officer or trustee of a regulated superannuation entity to knowingly give false or materially misleading information relating to the affairs of the entity to an auditor of the entity, or to knowingly allow such information to be so given. Likewise, it is an offence to allow such information to be so given, in circumstances where the person did not take reasonable steps to ensure the information was not false or materially misleading (s 130BB). [SLP ¶4-400]

¶3-620 Investment managers and custodians An “investment manager” of a superannuation entity for the purposes of the SISA means a person appointed by a trustee of a fund or trust to invest on behalf of the trustee or trustees of the fund or trust. “Invest” means apply assets in any way or make a contract for the purpose of gaining interest, income,

profit or gain. A “custodian” of a superannuation entity means a person (other than the trustee) who performs custodial functions in relation to the entity’s assets under a contract with the entity’s trustee or investment manager. Eligibility and appointment The rules for appointment as an investment manager or custodian of a superannuation entity include the following: • the trustee of the entity must not make a non-written appointment of an investment manager (SISA s 124) • an investment manager must not appoint or engage a custodian without the written consent of the trustee of the entity (SISA s 122) • an investment manager or custodian must be a body corporate (not applicable to an SMSF) • the body corporate custodian of the superannuation entity must have at least $5m in net tangible assets, or the trustee of the entity is entitled to the benefit of an approved guarantee for the due performance of the body corporate’s duties as a custodian, where the sum of the approved guarantee and the value of net tangible assets of the body corporate is not less than $5m (SISA s 123; 125; 11E “approved guarantee”) • a person must not intentionally be or act as an investment manager, a custodian, or a responsible officer of a body corporate that is an investment manager or a custodian of a superannuation entity if the person is, and knows that he/she is, a disqualified person (SISA s 126K). The meaning of “disqualified person” is the same as that discussed in relation to the eligibility rules for appointment as the trustee of a superannuation entity (¶3-130). An individual who is a disqualified person because of a conviction for an offence which does not involve serious dishonest conduct may apply under the SISA for a waiver of the disqualified person status (s 126B to 126F). Prudential requirements The investment manager of a superannuation entity is subject to a number of prudential requirements (some of which are identical to those applying to trustees) under the SISA. These include: • a prohibition on loans to members, subject to exceptions (SISA s 65) • a prohibition on acquisition of members’ assets, subject to exceptions (SISA s 66) • a requirement that investments must be on an arm’s length basis (SISA s 109) • a requirement that the investment management agreement between the trustee and investment manager must not limit the investment manager’s liability (SISA s 116) • a requirement to provide information to the trustee or the Regulator (SISA s 102; 255; 264). APRA prudential standards and practice guides Prudential Standard SPS 231 Outsourcing requires all outsourcing arrangements involving material business activities entered into by an RSE licensee to be subject to appropriate due diligence, approval and ongoing monitoring. Investment management is a material business activity of a trustee that is an RSE licensee and all risks arising from outsourcing material business activities must be appropriately managed to ensure that the RSE licensee is able to meet its obligations to its beneficiaries. Trustees of superannuation entities must ensure that proper selection processes and due diligence examinations are undertaken, including the identification and consideration of conflicts of interest. For prudential standards for RSE trustees which have made under SISA and APRA prudential practice guides, see ¶9-720 and following. [SLP ¶4-200, ¶4-270]

ADF Prudential Requirements ¶3-650 Prudential requirements for ADFs The trustee of an ADF must comply with all the prudential requirements under the SIS legislation applicable to ADFs as well as with the duties and obligations imposed on superannuation entities generally. As an ADF may be a public offer entity or an eligible rollover fund, the special rules in the SIS legislation applying to those entities (see below) may also be relevant. The main prudential requirements affecting ADFs and service providers to ADFs are discussed at the paragraphs noted below: • disclosure of information and reporting requirements under the Corporations Act 2001 and its Regulations (see Chapter 4) • prescribed operating standards and reporting requirements under SISA (¶3-658 – ¶3-662) • investment rules and controls, including restrictions on loans and borrowings (¶3-680) • public offer entity rules (¶3-500) • eligible rollover fund rules (¶3-520) • governing rules of ADFs (¶3-100) • unclaimed money rules (¶3-380) • appointment and removal of trustees (¶3-130) • protection for trustees (¶3-140 – ¶3-150) • other administration obligations (common to trustees of all superannuation entities) (¶3-340) • auditors’ duties (¶3-600) • investment managers’ and custodians’ duties (¶3-620) • ASIC’s prudential requirements (¶3-860). An ADF for which there is a registrable superannuation entity (RSE) licensee must not accept deposits unless it is registered under the SISA (¶3-490) (SISR reg 4.11A). An excluded ADF (ie a single beneficiary fund: ¶3-010) is exempted from some or all of the above prudential requirements. Penalties may be imposed for breaches of the SIS legislation (¶3-800) and, in certain circumstances, the ADF will not qualify for concessional tax treatment as a complying ADF (¶2-300). All of the SIS prudential requirements continue to apply to an ADF regardless of whether it satisfies or has failed to satisfy the conditions for concessional tax treatment as an ADF in a particular year. [SLP ¶3-290]

¶3-658 ADFs providing information to the Regulators The trustee of an ADF is required under the SISA to provide information periodically, and in specified circumstances, to APRA or ASIC, such as: • the provision of annual returns and quarterly returns under the FSCDA (¶9-750) • the provision of information by new ADFs (SISA s 254(1); SISR reg 11.05)

• immediately notifying APRA in writing after being aware of the occurrence of an event which has a significant adverse effect on the ADF’s financial position (s 106) • providing information or reporting on matters requested by APRA or ASIC (s 254(2)) • notifying changes in the ADF’s contact details or a decision or resolution to wind up the ADF (reg 11.07). The requirements are common to superannuation entities regulated by APRA (except where noted otherwise) and are discussed at ¶3-310. [SLP ¶3-690 – ¶3-710, ¶5-000]

¶3-660 Minimum benefits of ADF members The trustee of an ADF must comply with operating standards dealing with a member’s “minimum benefits” which ensure that costs and investment returns are determined in a fair and reasonable manner as between members, and that members’ minimum benefits are kept in the fund until they are cashed, rolled over or transferred in accordance with the SISR (SISR Pt 5). The minimum benefits rules are identical to those applying to regulated superannuation funds as discussed at ¶3-230. A member’s “minimum benefits” in an ADF are the amount of the member’s accumulated deposit in the fund, plus investment earnings, reduced by costs applicable to those amounts (reg 5.01(1); 5.07). [SLP ¶3-300]

¶3-662 Preservation and payment of benefits by ADFs Like regulated superannuation funds, ADFs are required to comply with rules for the preservation, portability and payment of members’ benefits (SISR Pt 6). A member’s benefits in an ADF will consist of preserved benefits (PBs) and/or unrestricted non-preserved benefits (UNPBs). Unlike superannuation funds, ADFs do not have restricted non-preserved benefits (RNPBs). A member’s PBs in an ADF are the amount of the member’s total benefits less the amount of the member’s UNPBs (reg 6.05). An employment termination payment (called an eligible termination payment (ETP) before 1 July 2007) rolled over to an ADF is a PB (previously, such ETP roll-overs were UNPBs). A member’s benefits transferred to an ADF (the transferee fund) that were PBs in the source from which they were received continue to be PBs in the transferee fund (reg 6.06). A member’s UNPBs in an ADF are the sum of: (1) the amount of the member’s benefits in the fund at the end of the day immediately before the commencement day, less the amount of the member’s benefits in the fund that were required to be preserved by the Occupational Superannuation Standards Regulations (OSSR), reg 21 (2) the amount of the member’s benefits that have become UNPBs in the fund because the member has satisfied a “condition of release” and there is no “cashing restriction” in relation to those benefits as provided in SISR reg 6.12 (3) rolled-over amounts under ITAA36 former s 27D (as in force before 1 July 2007) received by the fund in respect of the member on or after the commencement day (but before 1 July 2004) where those amounts arise from eligible termination payments (ie ETPs) by employers before 1 July 2007 (ie rolled-over ETPs from superannuation funds, ADFs or RSAs, or from deferred annuities within the meaning of the SISA or OSSR are not included) (4) any amount of UNPBs received by the fund in respect of the member on or after the

commencement day (5) the amount of any investment earnings for the period before 1 July 1999 on the amounts mentioned in (1) to (4) above (SISR reg 6.11). The conditions of release and cashing restrictions applicable to benefits in ADFs are set out in SISR Sch 1 (¶3-280). Payment standards The payment standards for ADFs are similar to those for regulated superannuation funds (¶3-286) but differ in relation to the cashing of benefits. In essence, “cashed” means payment out of the “superannuation system” (as defined in SISR reg 5.01(1)). Compulsory cashing of benefits — a member’s benefits in an ADF must be cashed as soon as practicable after the member reaches age 65 or dies. The benefit must be cashed as a single lump sum or in two lump sums (eg an interim lump sum payment of the benefit when the member’s entitlement arises and the remainder of the benefit when that amount is finally ascertained). In certain cases, a roll-over to a regulated superannuation fund or an RSA may be allowed (SISR reg 6.25). Voluntary cashing of benefits — a member’s UNPBs may be cashed at any time. PBs may only be cashed after a condition of release and cashing restrictions, if any, are satisfied (reg 6.23; 6.24). These restrictions are identical to those applying to regulated superannuation funds (¶3-286). Temporary residents who have left Australia may access their superannuation benefits held in an ADF if they comply with the procedures in reg 6.