Focus: Superannuation April 2005
Choice of funds legislation: Regulations released
In brief: Employers will need to comply with the provisions of the new choice of superannuation fund legislation from 1 July this year. Senior Associate Lois Dannecker outlines some of the requirements.
- Background to the Regulations
- What are the minimum insurance requirements for default funds?
- Insurance requirements: transitional period for existing contributions
- What are the exceptions to the insurance requirements?
- What information must an employee provide to an employer when choosing a fund?
- Standard choice form
- SCFs for existing employees who have choice
- SCFs for new employees who have choice
- Exemptions to the prohibition on employer kick-backs offered by funds
- Information packs to employers
- Practical tips
- What's next?
Regulations have now been released in relation to the choice of fund legislation that commences on 1 July 2005.1 The regulations impose requirements that relate to:
- the minimum insurance cover to be provided by default funds;
- the information to be provided by employees when choosing a fund;
- the standard choice form; and
- inducements for fund membership.
We reported on the legislative changes that impose new requirements on employers and trustees of superannuation funds as a result of the introduction of the choice legislation, which gives employees the right to choose a fund for compulsory employer contributions (see AAR Focus: Superannuation, October 2004). The legislation provides a number of exemptions from the requirements. Consequently, certain employees will not be eligible to choose a fund.
Both the amending legislation and the regulations will require employers to put procedures in place that ensure compliance from 1 July 2005.
When an employer makes contributions to a default fund for an employee, it is the employer's responsibility to ensure that, for each employee, the fund's features meet the requirements for insured death benefit cover, subject to several exceptions. The regulations prescribe minimum levels of insurance that vary according to the employee's age. Default funds are not required to provide insurance for members who are aged 56 or more. There are three options to meet the prescribed minimum levels:
- the default fund offers minimum lump sum amounts for
the following age ranges:
- 20-34 years of age: minimum of $50,000;
- 35-39 years of age: minimum of $35,000;
- 40-44 years of age: minimum of $20,000;
- 45-49 years of age: minimum of $14,000; and
- 50-55 years of age: minimum of $7,000;
- the default fund offers minimum weekly premiums of at least $0.50 (or its equivalent) for persons under the age of 56 years; or
- if the contributions are made to a defined benefit superannuation scheme on behalf of a member, the scheme provides a death benefit with a future service component that is equivalent to the minimum lump sum amounts described above.
Subject to exceptions (outlined below), employers must comply with these minimum requirements as from 1 July 2005, unless the transitional period applies. There is a transitional period of three years from 1 July 2005 to 30 June 2008 during which employers who have been contributing to a fund before 1 July 2005, which does not provide the minimum insurance for an employee, may continue to contribute to that fund, or a successor fund, for that employee until 30 June 2008. This transitional period is not available for contributions to a new fund or for a new employee employed after 1 July 2005.
Default funds contributed to by employers are not required to meet the minimum insurance requirements in the following circumstances:
- if on or after 1 July 2005 the employer is making contributions under a federal award for an employee to a fund that does not provide the minimum insurance and continues to contribute to a fund under that award for the employee;
- the insurance cover is not available from the fund normally used by the employer because of the particular employee's health, occupation, hours worked (eg casual employees) or other circumstances;
- the rules of the fund that applied on 11 March 2005 for an employee provided for a minimum death benefit of $50,000 and the employer continues to contribute to that fund (or successor fund);
- the contributions are made on behalf of an employee to a Retirement Savings Account (RSA) or capital guaranteed fund; or
- the employer has an arrangement with the employee outside superannuation that provides insurance cover that includes death cover at a level that is at least equivalent to the prescribed minimum, provided the arrangement does not provide a potential benefit to the employer upon the death of the employee (eg key personnel insurance).
An employer is entitled to refuse to accept an employee's choice of fund if the employee fails to provide the following prescribed information:
- information about the chosen fund:
- full name of the fund;
- ABN, if available;
- trustee statement that the fund is a complying superannuation fund;
- if the fund is a self managed superannuation fund, Australian Taxation Office (ATO) evidence that the fund is a regulated superannuation fund; and
- the fund's number or identifier that relates to the product provided to the employee, if applicable.
- information about the employee:
- account name in the fund;
- the employee's membership number or other unique identifier used by the fund to refer to the employee's account, if applicable; and
- the employee's payroll number or other unique identifier used by the employer to refer to the employee, if applicable.
- method of payment for the employee's contributions and details necessary to make the payment.
To meet their superannuation guarantee obligations, employers must act on the employee's choice within two months of receiving the employee's valid notice. A monetary penalty applies to an employer who makes a contribution for an employee to a fund other than the fund chosen by the employee.
The Regulations prescribe the standard choice form (SCF) that employers must give to employees to enable them to give notice of their chosen fund. The form, known as the 'Choice of superannuation fund Standard choice form' is downloadable from the ATO's website (www.ato.gov.au).
In most cases, an employer must give the SCF to employees who are in its employment on 1 July 2005 no later than 29 July 2005. An employer is not required to give the SCF to such employees if the employee has given notice of their choice to the employer, in writing, by 29 July 2005, and the employer is able to contribute to that fund. Where an employer receives and accepts a written notice of employee choice before 1 July 2005, the nominated fund becomes the chosen fund on the date the first post-1 July 2005 contribution is received, or on 1 September 2005, whichever is the earlier.
Employers must give an SCF to new employees who can choose a fund and commence with the employer after 1 July 2005 within 28 days of them starting employment, unless the employee has notified their choice to the employer, in writing, within that 28-day period. If the employee has notified the employer within that 28-day period and the employer is not able to contribute to the chosen fund, the employer is then required to give an SCF to the employee within 28 days of becoming aware that it is not able to contribute to the fund.
The Regulations prohibit conduct by fund trustees that amounts to offering goods and services to employers as an inducement to their employees becoming members of the fund, or refusing to supply goods and services because employees have not agreed to become members. The kinds of goods and services that are exempt from the inducement prohibition and therefore can be provided to any person by the trustees of superannuation funds, or their associates are:
- supply of a business loan on a commercial arm's length basis;
- supply of a clearing house service for the forwarding of contributions and information to other funds or RSAs on behalf of the person in relation to employees of the person who have chosen those funds;
- supply of advice or of an administration service to a person or the employees of the person where the supply relates to the payment of contributions to the fund; and
- supply or offer to supply goods or services to a person only if the supply or offer is available to the employees of the person who are members of the fund, and the terms of the supply or offer are not less than the terms supplied or offered to the person.
Information packs on superannuation choice are now being mailed to employers by the ATO. These packs include information for employees.
Employers should keep good records of SCFs
An employer has a right to refuse to accept an employee's choice if that employee has already made a choice in the preceding 12 months. The operative date for the 12-month period is the date a valid notice of choice was given by the employee, not the date on which the choice took effect. Employers intending to exercise their right to refuse the employee's choice in this circumstance will need to rely on good record-keeping of SCFs.
Employers can use clearing houses to make the payments
The exercise of choice by employees may well add to an employers' burden in administrating superannuation. Employers may find it more efficient to use clearing houses for the payment of superannuation contributions to multiple funds by making use of cheque-splitting facilities.
Impact on employers' business administration systems
The legislative changes may require employers to modify their employee administration systems, including payroll and communication systems. The legislation will also impact on organisational compliance systems.
Trustee and employer communication about superannuation products
The choice of fund legislation will see trustees, and perhaps employers, communicating with employees about the features of superannuation funds. Trustees and employers who are not authorised to provide financial advice under an Australian financial services licence will need to carefully distinguish between the provision of advice and the communication of information on superannuation funds to employees to ensure compliance with the regulation of financial advice under the Corporations Act.
The Federal Treasurer has announced that further legislative amendments will
be introduced to clarify the operation of choice legislation, in particular, in
relation to employers who already provide choice to their employees and should
not have to select a default fund. The Federal Government has also stated its
intention to legislate to override state awards for superannuation and therefore
extend choice to employees under those awards. We will report on these in the
- Superannuation Guarantee (Administration) Amendment Regulations 2005 and Superannuation Industry (Supervision) Amendment Regulations 2005
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