House Of Representatives

Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007

Explanatory Memorandum

(Circulated by the authority of the Minister for Revenue and Assistant Treasurer, the Hon Peter Dutton MP)

Chapter 3 Accounts, reporting obligations etc

Outline of chapter

3.1 Schedule 3 to this Bill amends the SIS Act, SMSF Taxation Act and the ITAA 1936 to:

·
consolidate and rationalise the prudential reporting requirements under the SIS Act;
·
distinguish between reporting requirements relating to RSEs and SMSFs; and
·
remove the regulatory gap that exists in the SIS Act for the reporting of contraventions of the market conduct and disclosure provisions in the Corporations Act.

Context of amendments

3.2 The prudential reporting requirements for superannuation entities are located in four Parts of the SIS Act and Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). This has the effect of creating unnecessary complexity and potential confusion as to reporting obligations. In addition, the terminology used in the SIS legislation can make it difficult to determine which reporting obligations relate to SMSFs and which relate to APRA-regulated superannuation entities, as both are 'superannuation entities'. The reporting obligations for SMSFs (regulated by the ATO differ slightly from those requirements imposed on APRA-regulated entities.

Summary of new law

3.3 New Part 4 of the SIS Act will contain the reporting obligations for RSEs and SMSFs. These amendments apply from the date of Royal Assent.

Comparison of key features of new law and current law

New law Current law
The reporting obligations under the SIS Act will be found under new Part 4. The reporting obligations under SIS are found in Parts 4 and 13 of the SIS Act.

Detailed explanation of new law (items 8, 10, 12, 14)

3.4 The SIS Act is the principal legislation establishing the prudential framework for the regulation of the superannuation industry, including the prudential reporting requirements of superannuation entities. The purpose of the reporting requirements is to assist the regulator in the prudential supervision of the superannuation industry.

3.5 The prudential reporting requirements in the SIS Act are currently located in Parts 4 and 13. The consolidation and rationalisation of the prudential reporting requirements in the SIS Act aims to ensure ease of compliance by superannuation entities. This assists the regulator in its prudential supervision activities and promotes confidence that the entities providing superannuation services are prudently managed.

3.6 In accordance with the Superannuation Safety Amendment Act 2004 , an amendment was made that from 1 July 2006, the definition of 'approved deposit fund' would delete a reference to the fund being maintained by an approved trustee. Accordingly, a fund which was formerly an Approved Deposit Fund, prior to 1 July 2006, because it had an approved trustee is no longer an ADF if the trustee has not become an RSE licensee. The fund will also not meet the definition of an RSE in subsection 10(1) of the SIS Act because it is not an ADF. This situation leads to the unintended result that the trustee of the fund will not be in breach of the offence provision in section 29J of the SIS Act because that provision only applies to a trustee of an RSE.

3.7 By removing the reference to an RSE licensee in the definition of an ADF this will ensure that section 29J applies as intended. That is, ADFs that operate with an unlicensed trustee will be subject to the offence provisions in section 29J. This provision will provide a strong incentive for those funds to adhere to the licensing provisions under the SIS Act.

3.8 Item 8 repeals the current Part 4 of the SIS Act and replaces it with a new Part 4 which consolidates the reporting obligations for RSEs and SMSFs that were previously found in Parts 4 and 13 of the SIS Act. The consolidation and rationalisation of the prudential reporting requirements in the SIS Act aims to ensure ease of compliance by superannuation entities. This assists the regulator in its prudential supervision activities and promotes confidence that the entities providing superannuation services are prudently managed.

3.9 The new Part 4 is titled accounts, audit and reporting obligations for superannuation entities and includes requirements:

·
under new section 35A to keep accounting records (existing section 111 of the SIS Act);
·
under new section 35B to prepare reporting documents/accounts and statements (existing section 112 of the SIS Act);
·
under new section 35C relating to the audit of accounts and statements (existing section 113 of the SIS Act);
·
under new section 35D to lodge annual returns (existing section 36A of the SIS Act); and
·
under new section 36 to lodge audit reports (existing section 36 of the SIS Act).

3.10 Item 8 also clarifies which reporting requirements apply to RSEs and which reporting requirements apply to SMSFs. SMSFs and RSEs are both 'superannuation entities', but as SMSFs are regulated by the ATO, the reporting requirements differ slightly from those requirements imposed on RSEs. These amendments to the SIS Act aim to clearly distinguish between the reporting requirements that apply to RSEs and SMSFs.

3.11 More specifically, item 8 also makes technical amendments to current section 36 clarify the intent and improve the operation of the SIS Act. The purpose of section 36 of the SIS Act is to impose the requirement for RSEs to lodge an audit report with APRA.

3.12 Current subsection 36(4) is repealed under this item. Pursuant to current subsection 36(4) if the return given under FSCODA (the APRA annual return) is not given on a data processing device, or by way of electronic transmission, that is, it is provided in hard copy format, the copy of the audit report may be endorsed as being a true copy on the return. Therefore, the trustee may sign the annual return stating that a copy of the audit report provided to APRA is a true copy.

3.13 However, this does not occur in practice. If a copy of the audit report is provided in hard copy, the trustee will endorse that it is a true copy on the audit report and not the annual return. Therefore, this provision does not operate as intended.

3.14 Current subsection 36(5) is also being repealed. Pursuant to subsection 36(5) SMSFs were explicitly exempted from this requirement. However, in 2001, subsection 36(5) was amended to include a reference to FSCODA. In its current form subsection 36(5) is no longer effective in exempting SMSFs from this requirement and therefore, technically, SMSFs are currently required to lodge an audit report under subsection 36(1) with APRA. However, in practice SMSFs are not meeting this requirement because it is not the intent of the provision.

3.15 Item 8 also amends current paragraph 113(3)(b) so that it includes a reference to the Corporations Act and Corporations Regulations 2001 (Corporations Regulations). Pursuant to current subsection 113(1) of the SIS Act, each trustee of a superannuation entity must appoint an approved auditor to provide the trustee with an audit report in the approved form. Current subsection 113(3) expands on what is an approved form.

3.16 Current paragraph 113(3)(b) provides that the approved form must include a statement by the auditor relating to compliance with the provisions in the SIS Act, SIS Regulations and FSCODA, as identified in the form. There is no reference to the Corporations Act and Regulations in this provision. However, the approved form requires the approved auditor to provide a statement that the entity has complied with the provisions of the Corporations Act and Regulations, identified in the form. This amendment ensures that the provisions in the Corporations Act and Regulations are also captured in paragraph 113(3)(b).

3.17 Item 10 amends paragraph 129(1)(a) of the SIS Act to include a reference to paragraph (b) of the definition of 'regulatory provision' in section 38A of the SIS Act. Pursuant to current section 129 of the SIS Act, an auditor or actuary who in the performance of their functions, forms an opinion that it is likely that a contravention of the SIS Act, SIS Regulations or FSCODA may have occurred, may be occurring, or may occur, must tell the trustee of the superannuation entity about the matter in writing. If the contravention or potential contravention may affect the interests of members or beneficiaries, the auditor or actuary is also required to notify the Regulator in writing.

3.18 Under section 129 there is currently no obligation on the auditor or actuary to report contraventions of the market conduct and disclosure provisions of the Corporations Act to the trustee or the regulator. This is contrary to the situation that existed before amendments were made by the FSR legislation which transferred the market conduct and disclosure provisions from the SIS Act to the Corporations Act. These amendments will ensure that contraventions of the relevant Corporations Act provisions are reported. The reporting of contraventions of the relevant Corporations Act provisions is to apply to RSEs and not SMSFs.

3.19 Items 11 and 12 amends subsection 130A(1) to include the giving of information to APRA if the auditor or actuary considers that the information will assist ASIC in performing its functions under the Corporations Act.

3.20 Pursuant to current section 130A of the SIS Act, an auditor or actuary may give the Regulator information about the superannuation entity or trustee in the performance of their functions if they consider that the information will assist the regulator in performing its functions under the SIS Act, SIS regulations or FSCODA. For the purposes of this section, the regulator is APRA in relation to RSEs and the ATO in relation to SMSFs.

3.21 However, this provision does not provide for the giving of information to the regulator to assist the ASIC in the performance of its functions under the Corporations Act. Therefore, this amendment will ensure that auditors and actuaries may provide information to the Regulator (APRA) where they consider the information will assist ASIC in performing its functions under the Corporations Act.

3.22 Item 14 introduces a number of savings and applications provisions into the SMSF Taxation Act so that if immediately before the commencement of this Schedule subsection 111(2) or 112(4) of the SIS Act applied to a trustee, then that subsection continues to apply. Also, if before the commencement of this Schedule an auditor requested that a trustee of a superannuation entity give the auditor a document under subsection 113(1A) of the SIS Act and the request had not been complied with, the trustee's obligation continues to apply.

3.23 In addition, sections 35B, 35C and 35D of the SIS Act apply in relation to a superannuation entity in respect of the year of income in which those sections commence and each later year of income.

Consequential amendments (items 1, 2, 4-7, 9, 13)

3.24 Items 1 and 2 are amendments to correct a misdescribed amendment.

3.25 Item 1 inserts reference to a report submitted under section 13 of FSCODA. Item 2 repeals item 152 of Schedule 2 under the Financial Sector (Collection of Data - Consequential and Transition Provisions) Act 2001 . This removes the reference to section 36 SIS Act under paragraph 9(2)(a) of Financial Institutions Supervisory Levies Collection Act 1998 .

3.26 The proposed amendment was misdescribed as a result of two amendments in separate Bills attempting to amend paragraph 9(2)(a) at the same time.

3.27 Item 3 makes consequential amendments to the ITAA 1936 to reflect the change in numbering of section 36A of the SIS Act to section 35D of the SIS Act.

3.28 Item 4 is a consequential amendment as a result of consolidating the reporting obligations for RSEs and SMSFs. It updates a table in section 4 of the SIS Act to reflect the consolidated reporting requirements in Part 4 of the SIS Act.

3.29 Item 5 repeals part of a table in section 4 of the SIS Act which refers to Part 13 of the SIS Act which is being repealed under the proposal to consolidate the reporting obligations under the SIS Act.

3.30 Item 6 is a consequential amendment as a result of consolidating the reporting obligations for RSEs and SMSFs. It amends a reference under subparagraph 6(1)(a)(vii) to Part 13 which is being consolidated into the new Part 4 of the SIS Act.

3.31 Item 7 inserts new subsection 29(1A), to provide APRA with the power to cancel the registration of a RSE, where the entity moves from APRA-regulation to ATO-regulation after converting to an SMSF. Current section 29N provides that APRA must cancel the registration of an RSE where the trustee lodges a reporting document stating that the entity has been wound up. However, this provision does not give regard to the instance where an RSE switches to become a fund regulated by the ATO. The fund will no longer be an RSE, but there are currently no grounds for APRA to cancel the registration of the fund.

3.32 Item 9 repeals Part 13 of the SIS Act as the reporting requirements previously found in Part 13 will be moved to the new Part 4 of the SIS Act.

3.33 Item 13 is a consequential amendment that amends a reference to current section 36A in section 15DA of the SMSF Taxation Act so that it refers to the new numbering in the SIS Act.


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