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  • Involuntary superannuation account transfer protocol: June 2015 webinar transcript

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    Introduction

    Hello and welcome to this presentation on the Involuntary superannuation account transfer (ISAT) protocol. My name is Mark Barnett. I will be presenting today along with Jo Castillo. We both work in the ATO's Superannuation Individuals and Funds segment. Our third presenter is Ben Mangan from the Superannuation Technical Leadership Complex Technical Unit and he will manage the Q&A segment.

    The ISAT Protocol was published on the ATO website two weeks ago as guidance for super providers and suppliers who’ll be transferring member accounts, not at the members’ instigation – an Involuntary Superannuation Account Transfer.

    In terms of what’s in the protocol:

    • APRA is responsible for prudential issues related to ISATs and the ATO is responsible for taxation-related issues, so those are the main content.
    • State government taxes payable upon transfer of dutiable property are not in the protocol.

    You can submit questions at any time throughout the webinar. We will have a designated Q&A section at the end of the presentation. We might not get to all of your questions today but we’ll endeavour to answer as many as possible and take the rest on notice.

    Definitions and distinctions (section 1.1)

    The numbers in the slide headings refer to sections in the protocol.

    Rollovers and transfers generally require a member’s consent, but there are exceptions at law.

    The terms rolled-over and transferred are distinguished by definition in the Superannuation Industry (Supervision) Regulations but for purposes of this discussion, we use the term transfer. The regulations define transfer as benefits paid out other than because of the satisfaction of a condition of release.

    If the member’s consent has not been given for the rollover or transfer of their account, it will constitute an ISAT. If members have been given the opportunity to ‘opt out’ of the transfer and haven’t done so, the subsequent transfer is involuntary.

    There are various terms used within industry for the two parties in a fund merger, but in the protocol (and this webinar) we use the terms ‘transferring’ and ‘receiving’ fund throughout.

    Where a fund moves a specific product (or multiple products) from one fund to another fund (there is no whole-of-fund merger) we are assuming this is not to be regarded as an ISAT. Depending on the circumstances this may constitute an internal rollover. A provider’s Australian Business Number (ABN) must change for there to be an ISAT.

    In this webinar we’ll be focusing on successor fund transfers, as they are the most complex.

    New law (section 1.3)

    The new law on the slide deals with ISATs, giving them legislative definition. It’s limited to the transfer of members’ accrued default amount to a MySuper product, or their balance to an eligible rollover fund (ERF) or a successor fund.

    The main effects on the slide legislate general industry practice.

    The new law has effect from 1 July 2015.

    Reporting – Member Contributions Statement and Rollover Benefits Statement (section 2)

    If the ISAT occurs at a date other than financial year end, a Members Contributions Statement (MCS) will be supplied by both transferring and receiving funds. The transferring fund must include in its MCS all contributions received before the ISAT and the receiving fund must report in its MCS all contributions it received after the ISAT.

    A Rollover Benefits Statement (RBS) or use of the Data Standard is not normally required when a fund moves an account from one super fund to a different super fund held by the same trustee or RSA provider, as there is only one superannuation provider involved. The Data Standard will be discussed in more detail a little later in this webinar.

    Reporting – lost member reporting (section 2.1)

    Types of lost member include:

    • lost inactive (the inactive member test applies only to members who have joined the fund as a standard employer-sponsored member)
    • lost uncontactable
    • a member who joined the fund from another super provider as a lost member, and has been ‘transferred’.

    The Lost Member Statement (LMS) updates the Lost Members Register (LMR) maintained by the ATO.

    The transferring fund is required to transfer the lost member status to the receiving fund so that they can report correctly in their LMS for the next period.

    The transferring fund also needs to remove all their members from the LMR by reporting them as ‘transferred’.

    The ISAT Protocol gives LMS steps for both transferring and receiving funds to accomplish this.

    It’s most important that the transferring fund advise the receiving fund of the date of last activity and contact with lost members it is transferring.

    Timing hint: if an ISAT occurs before the LMS due date, the transferring fund can lodge the LMS early, using the most current reporting period.

    Reporting – unclaimed super money (section 2.1)

    The money held for the lost member will remain with the super provider, unless it is less than $2,000 or insoluble (inactive accounts of unidentifiable members). In that case it is paid to ATO as unclaimed superannuation money (USM).

    These amounts are reported by funds on the USM statement.

    If a member has reached eligibility age (65 years), has not been in contact with the fund for 5 years, and the fund has not received an amount in respect of the member within 2 years, their account is transferred to the ATO as USM. An ISAT does not ‘restart the clock’ on the 5 year period, so the transferring fund should give the receiving fund information about the last date of contact and contribution for members aged 65 and over, to enable accurate USM reporting.

    MCS, LMS and USM reporting are all due on 31 October and LMS and USM are also due on 30 April each year.

    The USM statement should be lodged first, before the LMS, so the member does not see duplicated amounts of lost and ATO-held money on ATO online services.

    Temporary Residence Notifications received from the ATO

    An ISAT transferring fund must either lodge a:

    • USM statement and pay the former temporary resident member’s entitlement to the ATO before the ISAT, or
    • if the money has been transferred to the new fund, the transferring fund should still report to the ATO for that member with a status of ‘transferred’.

    Amending Member contributions Statements (section 2.2)

    If, after lodging an MCS, you discover any material errors or omissions in the information you reported, you must lodge an amended MCS within 30 days of becoming aware of these errors.

    This obligation has no time limitation and is not altered by any subsequent events such as the closure of the member's account or the commencement of a pension.

    In a successor fund transfer, a plan should be agreed to manage amendments to MCS.

    Only the fund which lodged an MCS can amend that MCS, but an administrator of both the transferring and receiving funds in a merger can amend it. However, the TFN, ABN, client ID and member account number must match in an amendment, though the client ID may be different in the new fund.

    If a fund uses a different ID or member numbers, the online display and ATO integrated core processing (ICP) system shows two accounts, when only one exists, this will confuse members who may contact the fund.

    The cancellation of the transferring fund's ABN will mean amendment is more difficult.

    Aligning the transfer date with the end of the reporting period (June 30) makes it easier.

    Once it can reliably ascertain the correct member account balances, inward rollovers accepted, etc. it is possible for the transferring fund to lodge its MCS early, prior to 31 October following the financial year end (the normal due date) and even before 30 June.

    Rollover data standards in an ISAT (section 2.3)

    This section of the protocol has recently been revised, for clarity. However, the meaning is unchanged.

    Where a single trustee has been installed for merging funds, use of the RBS or Data Standards Rollover MIG is not required, and it is not mandatory if:

    • both parties agree it’s a successor fund transfer as defined in tax law
    • sufficient information is transferred for    
      • correct preservation treatment
      • correct taxation of final benefit
      • amendment of MCS lodged by transferring fund.
       

    Where data is transferred, the definition of data items and format and structure of data may not correspond between two systems. Use of the data standard in ISATs will result in greater alignment between registry systems, so data migration should progressively improve in years to come.

    TFN notices and release authorities (sections 3.1, 3.6)

    TFN notices

    The ATO sends notices advising correct TFNs for members following MCS lodgment and funds are obligated to record those TFNs, as well as those provided via the SuperTICK process.

    A super fund can claim a no-TFN tax offset for no-TFN tax paid in any of the previous three income years, if in the current year a TFN is provided for the relevant member for the first time, by:

    • an employer
    • the ATO, or
    • with a rollover from another fund.

    However, a fund is not entitled to claim this offset if the no-TFN-quoted contribution was made to a different fund that was then either wound up or became part of the fund through a merger.

    This issue highlights the importance of early communication with members to encourage provision of TFNs prior to an ISAT to minimise the impact on fund and member.

    Release authorities

    The obligation to act on a release authority passes from the transferring fund to the receiving fund at the date of merger. This obligation should be included in the drafting of any Deed of Agreement between transferring and receiving fund trustees.

    The payment of a release authority is a superannuation benefit – however, a super fund is not required to calculate either the tax-free component or the taxable component of the superannuation benefit when the amount is released, or to reduce either the tax-free component or the taxable component of the superannuation interest at that time.

    The cashing order for benefits paid is based on preservation treatment, starting with unrestricted, non-preserved benefits.

    If a fund has any issues with complying with release authorities it can email the Super CRT mailbox and we can work with you.

    It's not proposed to discuss in detail in this webinar defined benefit/hybrid funds.

    Government payments (section 4.1)

    The ATO will send a fund a Remittance Advice (RA) and Recovery Notice (RN) to give advice on credit payments and requests for repayment of co-contributions, super guarantee charge, Superannuation Holding Account special account and First Home Saver Account payments. A Payment variation advice (PVA) is sent to the ATO by a fund when a member’s account is closed and RA and/or RN is rejected.

    The transferring fund should advise ATO of date from which it cannot receive government payments. At the same time, if possible, advise the new destination for government payments for entitled members. The final Income Tax Return (ITR) for the fund will automatically update this ‘wound up’ date

    For the receiving fund, there are benefits in an ISAT for a receiving fund using SuperTICK to provide a valid destination for Government payments for new members. On or shortly after the date of merger, a receiving fund can use the SuperTICK new member account functionality; so that new member accounts are created in ATO systems for all transferred members– that way the ATO will have the opportunity to send money to the new accounts in the fund. There will also be reduced PVAs to action and online display of the new account, enabling the new members to consolidate other super accounts to the new (receiving) fund.

    Minimum pension payments (section 5.1)

    Pensions can be paid annually, half-yearly, quarterly or monthly. Members who receive only one pension payment a financial year can usually specify the date of payment.

    In an ISAT a new pension starts from the receiving fund (TR 2013/5 Income tax: when a superannuation income stream commences and ceasesExternal Link).

    For ISATs other than 30 June, the ATO view is that the law requires both fund trustees to ensure that minimum payment requirements are met for transferred accounts in pension phase.

    Otherwise the funds’ deduction is at risk for exempt current pension income from assets supporting that pension.

    Lump sums (section 6.1)

    Data will need to be transmitted to the receiving fund about each member to enable a disability modification calculation to be done if the member later becomes disabled and claims a disability super lump sum. That data is the member’s:

    • service period start date
    • any earlier service period start date for amounts rolled over.

    Fund income tax (section 7.1)

    Administration expenses

    Taxation Ruling TR 2010/1External Link clarifies that rollover amounts received by a fund fall under the definition of a contribution. The result is that amounts transferred as part of a merger will constitute a roll-over superannuation benefit and therefore, in turn, will also be regarded as a contribution. Contributions are to be included in the fund’s assessable income for the purposes of determining deductions, so that the entities can deduct amounts incurred in obtaining the contributions.

    Where an expense is incurred entirely for the purpose of gaining or producing assessable income, including obtaining contributions, it will be deductible. However, the administrative expenses incurred by a fund may not be incurred entirely in respect of gaining contributions or other assessable income. The expenses may also be incurred in part in gaining other non-assessable income (including exempt income).

    Administration expenses incurred in the course of a superannuation fund merger are subject to the principles outlined in Taxation Ruling TR 93/17External Link and must be apportioned in a ‘fair and reasonable’ manner.

    By excluding these (extraordinary) roll-over benefits from the numerator and denominator of the apportionment formula in the addendum to Taxation Ruling TR 93/17, the formula would yield a ‘fair and reasonable’ assessment of expenses relating to the gaining or producing of assessable income (that is, a fair and reasonable income tax deduction).

    We are still awaiting finalisation of the addendum to the TR 93/17 ruling.

    There is also a possible separate product to deal with deductibility of merger costs, rather than inclusion in the ruling. Which fund can claim the deduction would be addressed.

    The ATO is currently considering whether amendment requests, both increasing and decreasing the tax liability of a merged/non-continuing fund, can be legally undertaken by the continuing fund and if not, what alternatives are available.

    CGT and loss relief in ISATs is available as shown on slide 14 (Fund Income tax relief (7.1).

    Relief for assets transferred from one product to a MySuper product within the same fund is still on the Treasury agenda but we’ve had no news.

    Conclusions

    The ISAT protocol contains checklists covering:

    • data to be transferred
    • administrative obligations of the transferring fund the ATO view of best practice for ISATs.

    A checklist for changing administrators is under development – for the next version of the protocol.

    The ATO can help and advise with ISATs – just email the Super CRT mailbox. At the moment we’re assisting funds and administrators with two current complex mergers. Learning more about the tax-related issues that can arise helps us too.

    If there have been issues in the past with an ISAT about which you wish to make a voluntary disclosure to the ATO, possibly involving superannuation reporting and administrative obligations, there is a webpage Making a voluntary disclosure about superannuation reporting and administrative obligations which gives guidelines about the process and this link is also provided in the protocol.

    Questions and answers

    When reporting a member as transferred on the Lost Member Statement, what should the money status be?

    In the Lost Member Statement specification, T = Transferred. A member status of T is used where an account for a member previously reported as lost or inactive has been either:

    • transferred as a lost member to another superannuation provider
    • reported and paid as USM to the ATO
    • reported and paid as USM to a State or Territory authority.

    Specification 7.73 - Member money status – identifies where a member’s superannuation money is held. This field should only be populated when Member status is T, otherwise zero fill.

    Valid values are:

    • 00 – still held by reporting provider or paid to member
    • 01 – paid to the ATO as USM
    • 02 – paid to NSW as USM
    • 03 – paid to VIC as USM
    • 04 – paid to QLD as USM
    • 05 – paid to WA as USM06 – paid to SA as USM07 – paid to TAS as USM
    • 08 – paid to ACT as USM
    • 09 – paid to NT as USM
    • 10 – transferred to another superannuation provider

    Member money status therefore identifies if the money is paid to the ATO, another fund or State and Territory. In an ISAT, the transferring fund will report the transferred lost member’s money status as 10.

    What are the requirements of both the transferring and receiving fund in relation to calculation of tax components and how those tax components are to be displayed on the RBS where one is provided (or reported using the Data Standard)?

    The SuperStream standard generally provides an efficient mechanism for transferring the relevant data needed for ISATs. The Standard does accommodate additional data requirements that are negotiated by mutual agreement between the parties to a rollover transaction.

    An alternative method of data transfer is acceptable in successor fund transfers. The Standard may still be used in appropriate circumstances, but is not mandatory in circumstances where legacy systems are the means by which member data is transmitted between funds. Ultimately, a transferring fund has an obligation to give sufficient information about member accounts to the receiving fund to enable correct taxation of eventual benefits paid to members and the transferring fund must ensure at a minimum that the data prescribed by the Rollover MIG is conveyed to the receiving fund.

    In relation to RBSs, how should transferring funds complete the RBS in instances where the tax-free component exceeds the transfer amount? At the moment, the paper RBS rules state that the values in the tax component fields must equal the rollover/transfer amount.

    This refers to the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015 which received Royal Assent on March 19 2015

    We propose changing the approved form of the RBS to accommodate this circumstance. Note that the SuperStream rollover standard will allow for this currently as there are no edit checks/validations around the current requirement - just stated rules.

    There is nothing in the SuperStream Standard including the rollover MIG that will prevent the Standard from operating as needed to give effect to this law.

    If the rollover is processed via SuperStream, how should other information not defined in the Standard be shared between funds? For example Division 293 tax, deferred debt accounts, pension payment data, refund of no-TFN tax data, etc.

    The SuperStream Standard and the Rollover Benefits Statement (RBS) contain the same data fields, apart from Kiwi Saver. The Rollover MIG was initially built based on the RBS so they should align and conceptually the data message defined by the Rollover MIG (rollover transaction message) is the RBS provided by a transferring fund to a receiving fund.

    Rollover components include:

    • Tax-free component
    • KiwiSaver tax-free component (paper RBS only)
    • Taxable component Element taxed in the fund
    • Taxable component Element untaxed in the fund.

    Preservation amounts include:

    • Preserved amount
    • KiwiSaver preserved amount (paper RBS only)
    • Restricted non-preserved amount
    • Unrestricted non-preserved amount.

    The proportions of an account in pension phase will continue after the ISAT, because the proportions of the pension continue, having been calculated by the transferring fund at the date the pension commenced.

    For an interest that is not an income stream, the crystallised segment becomes part of the contributions segment – that is, the tax free component recorded and reported in the successor fund. Refer to ITAA 1997 section 307-220External Link for more information.

    How many years of contributions data should be transferred in an ISAT?

    Contributions data that should be transferred in an ISAT include the dates of contributions during that year and ideally data for the last 5 years.

    Generally records are required to be kept for 5 years - for further information regarding the ATO position on record keeping obligations see Practice Statement PSLA 2005/2External Link.

    What is the rule when the transferring fund accepts Trans-Tasman Rollovers, but the Receiving fund does not? How would the receiving fund store these amounts in their registry systems if they have not been built to cope with this measure?

    Participating in the Trans-Tasman retirement savings portability scheme is voluntary for Australian super funds. A successor fund transfer cannot proceed if a receiving fund cannot accept Trans-Tasman rollovers. The question here is whether equivalent rights are being maintained and therefore whether the receiving fund can be a successor fund. For more information see the APRA circular: 'Equivalent-Rights' for Members in Successor-Fund TransfersExternal Link.

    The receiving fund would know it had no systems in place to store those components as required by law, with the result that it knows it will never be able to tax the member’s end benefit correctly and would therefore be non-compliant and liable to penalty when it pays benefits to member without taxing them appropriately. The NZ sourced amounts held in Australia are subject to certain rules that apply only to money transferred from a KiwiSaver scheme and held in an Australian super fund which include that it can only be accessed when the member reaches New Zealand's retirement age (currently 65).

    So there is potential for the receiving fund to breach the preservation rules by releasing NZ sourced amounts incorrectly.

    From a SuperStream Standard point of view, the Rollover Message Implementation Guide (MIG) does not currently apply where a rollover containing a Kiwi Saver component is sent from a transferring fund to a receiving fund. The rollover would be processed outside the Standard and a paper-based RBS would be used. If the receiving fund were unable to accept the rollover it would be returned to the transferring fund. This will be the situation until version 2.0 of the Rollover MIG applies from 1 October 2016.

      Last modified: 04 Aug 2015QC 46413