Superannuation Update August 2010

General update

Superannuation election platform

In the light of the uncertainty in the 2010 Federal Election result, we recap the major parties’ superannuation election platforms:

ALP

The Prime Minister, the Deputy Prime Minister and the Minister for Financial Services, Superannuation & Corporate Law have announced¹ the ALP’s intention to introduce a number of superannuation-related policies if the ALP takes power. These include:

1. An increase in the superannuation guarantee to 12% and an extension of superannuation guarantee to workers who are aged between 70 and 75.
2. From 1 July 2012 the government will provide a contribution of up to $500 for workers with incomes up to $37,000 to ensure no tax will be paid on superannuation guarantee contributions by low income earners in 2012–13. 
3. Permanent increase of the superannuation concessional contribution cap to $50,000 from 1 July 2012 for people aged 50 years and over with total super account balances under $500,000.
4. Superannuation funds would be able to offer a ‘MySuper’ product from 1 July 2013 as the default option with minimal fees and bans on commissions. 
5. The Cooper Review recommendation that superannuation funds use tax file numbers as the primary method of identifying member accounts would be adopted from 1 July 2011. 
6. The ALP intends to more fully respond to the Cooper Review recommendations later in 2010. 
7. The ‘Securing Super’ package includes mechanisms designed to secure employees’ superannuation in the event that employers fail to meet their superannuation guarantee obligations. These include enhanced enforcement powers for the ATO and Fair Work Ombudsman, mandatory statement on employees’ payslips of the amount of superannuation actually contributed and compulsory notification in the event that contributions cease.
8. The ‘Fair Entitlements Guarantee’ package would seek to ensure that workers’ entitlements are protected ‘even if the company they work for enters liquidation and can’t pay them what they are owed’. The Fair Entitlements Guarantee will protect redundancy pay and replace the former Coalition Government’s General Employee Entitlements and Redundancy Scheme.
9. New standards would be applied to SMSFs from 1 July 2011 regarding collectables and personal use assets, such as artwork, to prevent giving rise to a personal benefit. The announcement is contrary to that put forward by the Cooper Review, which recommended SMSFs be prohibited from investing in collectables and personal use assets as these ‘should generally not be regarded as investments that build retirement savings’.

Liberal Party superannuation election platform

The Coalition released its superannuation policy² on 18 August 2010. The Coalition proposes:

1. The abolition of the superannuation guarantee age limit. 
2. The Australian Office of Financial Management examine issuing bonds for terms of up to 30 years.
3. A response to the Cooper Review by the end of the Coalition’s first term in government, with particular recognition that the SuperStream recommendation is ‘worthy of further consideration’ while noting that further industry discussion would be required before a decision could be made on the MySuper recommendation.
4. A response to Treasury modelling on the Henry Review’s recommendations relating to superannuation.

Greens’ superannuation election platform

The Australian Greens believe³ that ‘art works and other collectibles must continue to be legitimate investments for self-managed superannuation funds’.

Long-term superannuation returns

On 19 July 2010, ASIC registered Class Order CO 10/630 Long-term superannuation returns which refines the requirements relating to the reporting of long term superannuation performance, pending the commencement of amendments to the Corporations Regulations 2001.

The refinements, which were prompted by an application for relief by IFSA (now the Financial Services Council) and which are consistent with those announced by the Minister for Superannuation in February 2010, include:

• exceptions to the requirement in Superannuation Industry (Supervision) Regulation 7.9.20AA to provide statements of long term superannuation returns, in the case of:
  • super products which are non-investment or accumulation life insurance policies
  • super products with no investment component, and 
  • exit statements
• an extension, to 30 June 2011, of the transitional period during which trustees can use inserts to provide long term performance returns, and 
• allowing trustees of ADFs and PSTs to provide certain information through the trustee’s website.

Merkel v Superannuation Complaints Tribunal [2010] FCA 564 (4 June 2010)

On 4 June 2010, the Federal Court in Merkel v Superannuation Complaints Tribunal [2010] FCA 564⁴ considered the extent of the limitation of the Superannuation Complaints Tribunal’s (SCT) jurisdiction under the ‘management of the fund as a whole’ exception in section 14(6) of the Superannuation (Resolution of Complaints) Act 1993 (Cth).

This decision arose from a complaint by Ms Merkel in relation to a superannuation fund trustee’s application of its policy on the payment of interest on the death benefit to be paid to Ms Merkel in respect of her husband. The policy provided that interest be paid on death benefits at the cash investment option rate from the date of the member’s death. The trustee’s rationale for this policy was to ensure that no death benefit would be subject to the volatilities of the market and would not, therefore, fall below the value of the benefit as at the date of death.

Mr Merkel’s benefit had been invested in growth and balanced options before his death. In the circumstances in 2008, the interest paid on the death benefit was less than would have been paid if Mr Merkel’s investment choices had continued to apply after his death until the date of payment.

After reviewing the documents of each party, SCT staff concluded that the matter related to the implementation of the trustee’s investment switching policy in respect of all deceased members and therefore was outside the SCT’s jurisdiction as it related to the ‘management of the fund as a whole’. Ms Merkel was not given the documents on which SCT staff relied nor allowed to make submissions. The SCT itself did not consider the jurisdiction issue.

In reviewing the SCT staff’s decision on jurisdiction, Justice Gray of the Federal Court held that:

• It is the terms of the complaint itself which should primarily determine whether the complaint relates to the management of the fund as a whole. The SCT staff erred in focusing on the trustee’s policy rather than the member’s complaint.
• The SCT failed to have proper regard to case law, including Vision Super Pty Ltd v Poulter [2006] FCA 849 and Employers First v Tolhurst Capital Ltd [2005] FCA 616 regarding the meaning of ‘management of the fund as a whole’.
• In accordance with the Vision Super and Employers First decisions, the ‘fact that a complaint is about how the particular account of a member is dealt with is of the greatest significance…the fact that a trustee has dealt with other members in a similar way is of no significance’. 
• It was the application of the policy to Ms Merkel’s circumstances, rather than the trustee’s adoption of the policy, which was the subject of this challenge. This was a ‘complaint that the application of a rule or policy to the particular case was unfair or unreasonable [and] was manifestly one relating to the interest of the individual member, and not to the management of the fund as a whole’.
• Ms Merkel was not afforded procedural fairness.

The Federal Court held that because the SCT staff had decided that the complaint was outside the jurisdiction of the SCT, there had been no ‘determination’ by the SCT and therefore there was technically no right of appeal. The matter was remitted back to the SCT with a direction that the SCT hear and determine Ms Merkel’s complaint, as it was within jurisdiction.

AAT Case [2010] AATA 475, Re Care Provider and FCT (28 June 2010)

On 28 June 2010, the Administrative Appeals Tribunal (AAT) arguably expanded the scope of the ‘domestic work’ exception to the superannuation guarantee obligation to include workers ‘employed’ by an intermediary.⁵

The case concerned a taxpayer who owned a ‘community support services’ business as an intermediary, whereby workers supplied domestic services such as cooking or cleaning to elderly or ill clients. The workers were offered assignments by the taxpayer as each assignment arose.

The Commissioner for Taxation (Commissioner) ruled that the taxpayer had failed to make superannuation contributions in accordance with the Superannuation Guarantee (Administration) Act 1992 (Cth) (SG Act), on the basis that the 21 workers were ‘employees’. The AAT was required to consider whether the workers fell within the definition of ‘exempt employees’, on the basis that their work was wholly or principally of a domestic or private nature’ in accordance with section 12(11) of the SG Act.

The Commissioner had argued:

while the work done for the end-user may be objectively viewed to be of a domestic or private nature that of itself cannot determine the nature of the work done for the Applicant. The work done when viewed from the Applicant’s point of view (as the payer) was labour provided in the course of the Applicant’s business and not work done for the Applicant personally or work that related to the Applicant’s home, household affairs or family organisation.

The AAT held that the workers were indeed performing domestic work, ‘even if they were employees of the taxpayer’ for the following reasons:

• All tasks performed by the workers were based in or around the home, or alternatively, had a close connection with the client’s home life.
• When considering the domestic work exception, it is necessary to examine the nature of the work, rather than the identity or attributes of the person paying for the work or the relation between the payer and worker.

The business of being a trustee – An update on recent developments in litigation

Class actions

The recent spate of corporate collapses of managed investment schemes and other investment vehicles has sparked the commencement of class actions against trustees of investment schemes, together with other involved parties including directors, related entities providing finance to investors and financial advisers.

The class actions generally involve allegations of breaches of various duties introduced as part of the FSR reforms, including allegations of:

• misleading and deceptive conduct in the provision of financial services (including advice)
• the making of implied representations regarding the sufficiency of fees and viability of investments, and
• defective product disclosure statements.

These class actions have necessarily focused the spotlight on the nature of trustee duties, both statutory and equitable, together with the duties imposed on financial advisers at common law, in equity and by statute.

Such litigation also indicates an increased awareness by lawyers, litigation funders and the public generally of the duties owed to people in the investment context, especially in relation to disclosure, together with an increased appetite for aggrieved parties to bring group proceedings to redress alleged breaches.

This legal climate highlights the importance of proactively considering disclosure obligations on an ongoing basis.

Finch v Telstra Super Pty Ltd – application for special leave to appeal to the High Court

This case arose from the trustee’s rejection of Mr Finch’s total and permanent invalidity (TPI) claim. In February this year, we reported⁶ that Mr Finch was seeking special leave to appeal to the High Court following the Court of Appeal finding for the trustee.

Mr Finch’s application for special leave was heard in April. Justices Gummow and Crennan referred his application for leave to an enlarged bench for argument as if on appeal. It is possible that there will be argument regarding whether the test applicable to the review of the exercise of trustee discretion should be harmonised with the test applied by the Superannuation Complaints Tribunal.

The High Court will hear the application for special leave in September.

Cooper Review – trustees to give reasons for decisions

Trustee obligations in relation to decision making have been brought into sharp focus by the recently published Final Report of the Cooper Review into superannuation.

The Cooper Review has recommended the amendment of section 101 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) to require trustees to provide a member with reasons for its decision in relation to a member’s formal complaint.

The Cooper Review does not describe the precise nature of any required statement of reasons. It is possible that any amendment to the SIS Act will borrow from the regime applicable to administrative decision makers pursuant to the Administrative Decisions (Judicial Review) Act 1977 (Cth). An amendment of this nature would impose on trustees the significant requirement to set out the particulars of their findings on material questions of fact together with references to the evidence or other material on which those factual findings were based, so as to give an aggrieved member an opportunity to determine whether the trustee’s decision was properly reached.

Freehills update

• An article by Michael Vrisakis ‘Fund Governance: Just what is a common fund?’ was published in the Australian Superannuation Law Bulletin August 2010 issue.
• Michael’s articles ‘Bulletin Board: Liability for consequential loss in financial services contracts’ and ‘Bulletin Board: Limited recourse superannuation borrowings as financial products’ were published in the Financial Services Newsletter June 2010 and July/August 2010 issues respectively.
• Natalie Gullifer was quoted in The Australian Financial Review in relation to AUSTRAC’s recently-increased enforcement activity in relation to anti-money laundering law compliance (page 4, 26 July 2010).
• Natalie Gullifer spoke on the Cooper Review recommendations to the ASFA Legislation Discussion Group in Melbourne on 22 July 2010.

Endnotes

1. Australian Labor Party news article, ‘Labor helps families with simpler low-cost super’ 
2. Coalition Election Policy 2010: The Coalition’s Plan for Real Action on Superannuation 
3. Australian Greens Policy Initiative: The Greens will Save Super Art 
4. Merkel v Superannuation Complaints Tribunal [2010] FCA 564 
5. Care Provider and Commissioner of Taxation [2010] AATA 475 (28 June 2010) 
6. Freehills article, ‘Superannuation Update February 2010: General update: Telstra Super Pty Ltd v Finch [2009] VSCA 318 (Supreme Court of Victoria, Court of Appeal, 23 December 2009)’

More information

For information regarding possible implications for your business, contact a member of the Superannuation team.