House of Representatives

Tax and Superannuation Laws Amendment (2014 Measures No. 1) Bill 2014

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 1 - Unlawful payments from regulated superannuation funds - promotion of illegal early release schemes

Outline of chapter

1.1 Schedule 1 to this Bill amends the Superannuation Industry (Supervision) Act 1993 (SIS Act) to introduce penalties to deter and penalise persons who promote illegal early release schemes.

Context of amendments

1.2 Superannuation legislation imposes restrictions on when and in what form a person can access their superannuation benefits. Generally, access is based upon an individual attaining a certain age ('preservation age'). The law prescribes certain exemptions to this rule under which superannuation benefits may be released before preservation age. Illegal early release refers to cases where superannuation benefits are withdrawn contrary to these restrictions and where the relevant exemptions do not apply.

1.3 Illegal early release schemes are generally promoted to people as a means of accessing their superannuation benefits before they are eligible to do so. This activity undermines the Government's retirement income policy.

1.4 Illegal early release schemes commonly involve requesting a fund regulated by the Australian Prudential Regulation Authority to pay a member's superannuation benefits to the bank account of a purported self managed superannuation fund (SMSF) that has been set up for the purpose of receiving such transfers and subsequently paying money out to participants in the scheme.

1.5 Promoters of illegal early release schemes have in the past exploited vulnerable people within the community by encouraging members to submit applications to rollover their superannuation balances to such purported SMSFs. In these situations the promoters have taken commissions of up to 50 per cent of the member's superannuation balance.

1.6 Some schemes have facilitated the illegal release of up to $8 million in superannuation benefits and generated millions in commissions for promoters. In some cases promoters have gone further and exploited identity data for other criminal purposes or stolen the member's entire balance.

1.7 There are no specific penalties for promoters of illegal early release schemes who are not themselves trustees of a regulated superannuation fund. Often a promoter will not be a trustee of a purported superannuation fund used in a scheme, but will recruit other people for this role. This limits the Commissioner of Taxation's (Commissioner's) ability to pursue existing penalties in the SIS Act.

1.8 Schedule 1 to this Bill introduces civil and criminal penalties for illegal early release scheme promoters in order to discourage the promotion of such schemes. This measure was previously introduced as Schedule 1 to the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 and implements recommendation 8.24 of the Super System Review .

Summary of new law

1.9 Schedule 1 to the Bill provides that a person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with payment standards prescribed in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).

1.10 Promoting such a scheme may result in a civil penalty being imposed, as the new law is a civil penalty provision. The SIS Act already provides for civil and criminal consequences for contravening a civil penalty provision.

Comparison of key features of new law and current law

New law Current law
A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards prescribed in the SIS Regulations. No equivalent.
A person who promotes a scheme that has resulted, or is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards, contravenes a civil penalty provision. The SIS Act provides for civil and criminal consequences of contravening a civil penalty provision. No equivalent.

Detailed explanation of new law

1.11 A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards prescribed in the SIS Regulations. [Schedule 1, item 1, subsection 68B(1)]

1.12 Person is not defined in the SIS Act; however, it takes its meaning from section 2C of the Acts Interpretation Act 1901 to include a body corporate and an individual.

Promote

1.13 Promote in relation to a scheme includes, but is not limited to, entering into a scheme, inducing another person to enter into a scheme, carrying out a scheme, commencing to carry out a scheme, and facilitating entry into, or the carrying out of, a scheme. [Schedule 1, item 1, subsection 68B(3)]

1.14 Whether a person promotes a scheme will be determined on an objective case-by-case basis, considering the whole of the circumstances. Factors which may indicate that a person has promoted a scheme include, but are not limited to:

the person markets or encourages interest in the scheme (this may be marketing directly in the conventional sense, or otherwise). This may include (but is not limited to) conduct such as:

-
distributing marketing material in relation to such a scheme;
-
advising persons to consider entering into the scheme; or
-
employing or recruiting other persons to conduct or market the scheme,

the person devises or designs the scheme or part of the scheme. This may include (but is not limited to) conduct such as:

-
setting up the legal or financial architecture of the scheme;
-
constructing or commissioning the production of documents that are to be used as part of the scheme; or
-
establishing mechanisms to obtain, or facilitate circumstances that may allow persons involved in the scheme the ability to obtain financial or other benefits in relation to the scheme,

the person facilitates the means by which the participants can participate in the scheme. This may include (but is not limited to):

-
providing some or all of the necessary paperwork for participants to sign; or
-
directing them to complete the necessary documents,

the person has provided information to the participants as to how to undertake activities which ultimately result in the individual accessing their superannuation benefits without meeting a condition of release; and
the person undertakes the relevant activities with the intention that they will result or are likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.

1.15 Whether or not a person has received consideration in respect of the scheme is not determinative of whether a person has promoted the scheme. The fact that a person has received consideration in respect of a scheme is an indication that they may have promoted a scheme, however, this is not a necessary element to establish. Often promoters of such schemes will deduct a portion of the superannuation benefits as either a 'fee' or on the basis that they will remit an amount for tax on behalf of the participant in the scheme. Amounts purportedly deducted as tax are never remitted to the Australian Taxation Office (ATO). In some cases, a promoter may take all of the superannuation benefits and not pass on any amount to a participant.

Scheme

1.16 Scheme means any agreement, arrangement, understanding, promise or undertaking, whether express or implied, or whether or not enforceable, or intended to be enforceable by legal proceedings, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. [Schedule 1, item 1, subsection 68B(3)]

1.17 Whether a person has promoted a scheme will be determined on a case-by-case basis having regard to the whole of the circumstances. In identifying whether a scheme exists, consideration should be given to a continuum, a sequence of events, a course of action or a course of conduct, rather than focusing on particular transactions at particular points in time.

Likely to result

1.18 A person will contravene the new civil penalty provision if a scheme is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.

1.19 Therefore, the Commissioner may seek civil and criminal penalties if a scheme is likely to result, but has not actually resulted, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.

1.20 Whether a scheme is likely to result in a payment being made from a regulated superannuation fund, otherwise than in accordance with the payment standards, is determined by an objective analysis.

Example 1.1 ABC Superannuation Fund receives a rollover request from John, a member of Smith Superannuation Fund, an SMSF. ABC Superannuation Fund, as part of the rollover process, confirms with the ATO whether John is a member of the Smith Superannuation Fund. The ATO advise that John is not a member and, as a result, ABC Superannuation Fund rejects the rollover request. The Commissioner obtains information under his formal powers from ABC Superannuation Fund that identifies that Mr X is behind the rollover request from John. Neither John nor Mr X receive any money. Despite no money having been received by John or Mr X, penalties for a contravention of section 68B of the SIS Act may still be sought by the Commissioner.

Payment standards

1.21 A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards. [Schedule 1, item 1, subsection 68B(1)]

1.22 The payment standards are prescribed in Part 6 of the SIS Regulations. The payment standards impose restrictions on when and in what form a person can access their superannuation benefits.

1.23 This provision will apply to cases where a scheme has resulted, or is likely to result in superannuation benefits being withdrawn contrary to these restrictions.

Penalties

1.24 Prior to these changes, there are no specific penalties for promoters of illegal early release schemes who are not themselves trustees of a regulated superannuation fund. Often promoters and those involved in promotion will not be trustees of a purported superannuation fund used in these schemes, and instead recruit parties for this role. This limits the Commissioner's ability to pursue existing penalties in the SIS Act.

1.25 Promoters are principally dealt with by the Australian Securities and Investments Commission which relies on its powers regarding the provision of unlicensed financial advice to take action. The Commissioner's current compliance activity focuses on other compliance methods that disrupt or close down schemes from operating, such as freezing the assets of the SMSF under his powers in section 264 of the SIS Act. It is intended that the operation of these powers will remain unchanged.

1.26 A person who promotes a scheme that has resulted, or is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards contravenes a civil penalty provision. [Schedule 1, item 1, subsection 68B(2), item 2, paragraph 193(ca)]

Civil penalties

1.27 The SIS Act contains a number of civil penalty provisions (see section 193 of the SIS Act). Contravention of a civil penalty provision may result in a fine not exceeding 2,000 penalty units (see subsection 196(3) of the SIS Act). A penalty unit is defined in section 4AA of the Crimes Act 1914 . Subsection 4B(3) of the Crimes Act 1914 provides that where a body corporate is convicted of an offence a Court may impose a pecuniary penalty up to five times the amount of the maximum penalty.

Criminal penalties

1.28 If a person contravenes a civil penalty provision, either:

dishonestly, and intending to gain, whether directly or indirectly, an advantage for that, or any other person; or
intending to deceive or defraud someone,

the person is guilty of an offence punishable on conviction by imprisonment for not longer than five years (see subsection 202(1) of the SIS Act).

Application and transitional provisions

1.29 The amendments made by Schedule 1 to this Bill apply to actions that occur after Royal Assent.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Unlawful payments from regulated superannuation funds

1.30 Schedule 1 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.31 Schedule 1 to this Bill inserts a new provision, section 68B into the Superannuation Industry (Supervision) Act 1993 (SIS Act) that prohibits a person from promoting a scheme that has resulted, or is likely to result, in the illegal early release of superannuation benefits. The new provision is a civil penalty provision. The consequences of contravening a civil penalty provision are provided for in Part 21 of the SIS Act under a provision of general application that applies to all civil penalty provisions.

1.32 Superannuation legislation imposes restrictions on when and in what form a person can access their superannuation benefits. Generally, superannuation benefits can only be accessed once a person has reached their 'preservation age', which is between 55 of 60, depending on the person's date of birth. The law prescribes certain exemptions to this rule which allow superannuation benefits to be released before a person reaches their preservation age where is it considered appropriate to do so. Illegal early release refers to cases where superannuation benefits are withdrawn contrary to these restrictions and where the relevant exemptions do not apply.

1.33 Promoters of illegal early release schemes have in the past exploited vulnerable people by encouraging them to rollover their superannuation balances into a fraudulent superannuation fund. Promoters have at times taken 'commissions' of up to 50 per cent of the member's superannuation balance, or stolen the entire balance.

1.34 The aim of the new provision is to discourage promoters of illegal early release schemes and to provide the regulator (either the Commissioner of Taxation for self managed superannuation funds (SMSFs) or the Australian Prudential Regulation Authority for other regulated superannuation funds) with the ability to pursue penalties under the current civil penalty regime in the SIS Act.

1.35 The Attorney-General's Department has been consulted in the use of a civil penalty provision for this measure.

Human rights implications

1.36 This Schedule does not engage any of the applicable rights or freedoms.

1.37 In forming this view, consideration has been given as to whether the imposition of a civil penalty for a violation of the proposed section 68B in proceedings under Part 21 of the SIS Act would involve the 'determination of a criminal charge' within the meaning of article 14 of the International Covenant on Civil and Political Rights (ICCPR) and, if so, whether the application of the rules of evidence and of the procedure applicable in civil proceedings would be inconsistent with that article.

1.38 Article 14 of the ICCPR contains the right to a fair trial and fair hearing, and minimum guarantees in the determination of a criminal charge.

1.39 In interpreting the international human rights treaties, the views of the United Nations Committees established under the treaties, including those expressed in General Comments and Recommendations, are also generally treated as a persuasive source of guidance (although such views are not binding on State parties).

1.40 In General Comment 32, the United Nations Human Rights Committee set out its views in relation to Article 14(1) of the ICCPR. It stated:

The right to a fair and public hearing by a competent, independent and impartial tribunal established by law is guaranteed, according to the second sentence of article 14, paragraph 1, in cases regarding the determination of criminal charges against individuals or of their rights and obligations in a suit at law. Criminal charges relate in principle to acts declared to be punishable under domestic criminal law. The notion may also extend to acts that are criminal in nature with sanctions that, regardless of their qualification in domestic law, must be regarded as penal because of their purpose, character or severity [citing Communication No. 1015/2001, Perterer v. Austria , para. 9.2]. [1]

1.41 There is little other jurisprudence from the United Nations Human Rights Committee as to when it considers that a penalty designated as civil in domestic law may be found to constitute a criminal charge because of its nature, purpose or severity.

1.42 The Committee's general reference to international human rights bodies may encompass the European Court of Human Rights (ECHR). Australia is not a party to the European Convention on Human Rights 1950 (Convention). As a result, it is not bound by the jurisprudence of the ECHR. However, the Convention protects some rights that are analogous to those in the ICCPR and therefore the case law from the ECHR may be useful in considering how the United Nations Human Rights Committee may interpret similar provisions in the ICCPR. However, in this context, Article 6 (right to a fair trial) of the Convention does not contain the same wording as Article 14 of the ICCPR.

1.43 The ECHR has held that there are three key criteria for determining whether a matter should be characterised as a criminal charge: [2]

the domestic classification of the offence; [3]
the nature of the offence (including whether the proceedings are instituted by a public body with statutory powers of enforcement; whether the matter has a punitive, deterrent or compensatory purpose; whether the law applies to a specific group or is generally binding in nature; whether the imposition of the penalty is dependent upon a finding of guilt; how similar procedures are treated in other Council of Europe Member States; and whether an offence creates a criminal record); [4] and
the nature and severity of the potential penalty (the imposition of penalties including fines which can be commuted into a period of imprisonment in particular have been found to constitute a criminal penalty by the ECHR, as has a penalty resulting in detention). [5]

1.44 The civil penalty regime in the SIS Act consists of two distinct elements.

1.45 Firstly, the Regulator may seek a civil penalty order from the Federal Court of Australia (FCA) declaring that the person has contravened a provision and imposing a monetary penalty of up to 2,000 penalty units. [6] The court may also or alternatively order a person to pay compensation where they are satisfied that a superannuation fund has suffered loss or damage as a result of the contravention. [7] An application for a civil penalty order is a civil proceeding, [8] and the parties are required to comply with the civil rules of evidence and procedure.

1.46 In civil proceedings, the law provides for specific relief from liability for contravention of a civil penalty provision where a person acted honestly and having regard to all of the circumstances of the case it appears to the court that the person ought to be excused for the contravention. [9]

1.47 Secondly, contravention of a civil penalty provision may constitute an offence only where a person contravenes dishonestly, intending to gain, whether directly or indirectly, an advantage for a person, or intending to deceive or defraud someone. The prosecution of an offence is a separate criminal proceeding conducted by the Commonwealth Director of Public Prosecutions. The FCA does not have jurisdiction with respect to a proceeding for an offence. A person guilty of an offence may be imprisoned for not longer than five years.

1.48 There is therefore a clear demarcation between what constitutes a civil and a criminal penalty under Part 21 of the SIS Act.

1.49 As to purpose, Australian case law indicates that a civil penalty for a contravention should be sufficiently high to demonstrate the importance of not contravening the relevant part of the SIS Act, but not so high as to be oppressive. [10] The law specifically states that the court is not to make a civil penalty order unless it is satisfied that the contravention is a serious one. [11] Consideration of the deterrent or compensatory purpose of the penalty applies differently in the Australian context as a civil penalty order is enforceable as a judgment of the FCA, [12] and no term of imprisonment may apply as an alternative. By contrast, in international jurisprudence, the deterrent purpose of a monetary penalty was a relevant consideration in determining whether a penalty was the 'determination of a criminal charge', in the case where a monetary penalty could be converted into a term of imprisonment. [13]

1.50 Further, in the Australian context the amount of loss or damage caused (and any compensation that might already have been paid) has also been recognised as a relevant factor to consider when determining the amount of a civil penalty. [14]

1.51 Part 21 of the SIS Act specifies a maximum penalty amount of 2,000 penalty units which encompasses all types of superannuation funds in the industry, from large funds regulated by Australian Prudential Regulation Authority with more than one million members, [15] to SMSFs which may hold one individual's retirement savings. Whilst the maximum penalty amount applies to all types of superannuation funds, a court will determine the appropriate amount of any monetary penalty.

1.52 The case law to date indicates that the higher end monetary penalty orders, for example over $50,000, have only been applied in very serious circumstances and where multiple contraventions of the SIS Act have occurred. The FCA has found that multiple contraventions may be properly seen as one contravening course of conduct, [16] and therefore the maximum potential penalty is not multiplied in the case of several contraventions. Cases involving SMSFs have attracted significantly lower penalties, reflecting the size of the superannuation fund (four members or less), the value of the assets involved and the fact that the contraventions have not usually impacted on third parties. [17]

1.53 Following the analysis above, the civil penalty provisions do not involve the 'determination of a criminal charge' within the meaning of article 14 of the ICCPR, and consequently that Schedule 1 to this Bill does not engage any human rights.

Conclusion

1.54 This Schedule is compatible with human rights as it does not raise any human rights issues.


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