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Self Managed Super Fund (SMSF) Article
APRA's Circular Bomb-shell
By Tony Negline.
This article may be out of date.
29th November 2006
On the last Friday of September whilst most Australians were focused on AFL and rugby league finals, the Australian Prudential Regulation Authority dropped unexpected bombshells on the superannuation industry.
The payload of bombs was delivered via two superannuation circulars titled, “I.A.1 – Contribution and Benefit Accrual Standards for Regulated Super Funds” and “I.C.2 – Payment Standards for Regulated Super Funds”. (Incidentally the correct way to say the title I.A.1 is “one a one” because the first item is a roman numeral.)
Since the Superannuation Industry (Supervision) laws – or SIS as they are often referred to – were introduced just on thirteen years ago these two circulars have been republished regularly to take into account changes in the rules. All previous versions of these circulars were reasonably uncontroversial. If only this were true of the latest editions.
Circular I.A.1 says, “An eligible termination payment from an employer (employer ETP), a transfer from an overseas superannuation fund and a Capital Gains Tax exempt amount are examples of transfers or rollovers from outside the superannuation system. For the purposes of the SIS legislation these payments are contributions and are subject to the contribution standards.”
Now what does this mean? In APRA’s view anyone who wants to deposit certain types of benefits paid by their employer upon termination of employment or assets from an overseas retirement scheme or a small business CGT retirement exempt payment into their Australian super fund must satisfy the rules that allow super contributions to be made. This represents a radical departure from how the super industry processes these payments.
Since Eligible Termination Payments were introduced in 1983 they have never been seen as contributions. Which means the rules allowing super contributions were always seen as irrelevant. As a result some older investors who were no longer allowed to contribute to super were able to rollover some employer termination payments into super. Other investors used similar rules to move the proceeds from the sale of their small business into super. Often rolling over these payments was the only way these people, who often have little super, could get money into it.
APRA’s new interpretation particularly impacts people those aged at least 65. Those aged at least 65 but under 75 can only make super contributions if they satisfy a work test and no new contributions can be made for people aged at least 75. Importantly a super fund can only accept contributions for those aged at least 70 but under 75 if they are made personally by the member.
Is APRA’s view reasonable? Prior to this recent announcement all the super industry and government regulators had agreed that the super laws operated in a different way. For example, the March 2004 version of I.C.2 (which was jointly issued by APRA and the ATO) said, “…an employer ETP that is rolled-over to a regulated superannuation fund is not considered a contribution …” and specifically refers to small business CGT exempt payments being “rolled over into a regulated super fund”. This publication didn’t deal with transfers from overseas super funds.
APRA said that it arrived at this new view because it was looking at how the super laws might operate under the government’s proposed superannuation reforms.
So where to from here? At a practical level there are a number of problems presented by this new interpretation.
Firstly do super funds have to follow what these APRA Circulars say? This is not an easy question to answer. APRA circulars contain a disclaimer which says that the purpose of the documents “is to provide general guidance on how … APRA interprets and administers relevant legislation…APRA disclaims any liability for any loss or damage arising out of any use of this circular.”
It is prudent for all funds regulated by APRA – that is, all funds other than Self Managed Super Funds – to take this circular into account when determining administration protocols. Given the controversial nature of this recent announcement it is likely that some funds will decide to ignore it but will protect themselves with some fairly robust legal advice. This lack of consistency in the administration of super funds is not good for investors. Who do you believe and what is the consequences on your retirement money if they get it wrong?
Secondly when are super funds meant to apply these new rules? Should funds apply these revised rules since they came into existence? Some of the rules have been around since March 1994. Perhaps super fund should not apply them until some future date, such as July 2007, because many funds would need to change how they run their administration systems? Re-doing many years is not practical for a whole variety of reasons. At the time of writing APRA had not provided any guidance on what it thinks the super industry should do.
Thirdly, do Self Managed Super Funds have to apply these rules? The ATO have confirmed that they agree with APRA’s interpretation and believe that it should be applied within SMSFs
The super industry, and presumably most investors, would prefer to continue with current practice. The industry has approached the government and requested that it change the law so that it operates as it was always intended to do. Hopefully the government will have a positive announcement soon.
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