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Senate

Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Bill 2013

Revised Explanatory Memorandum

(Circulated by the authority of the Minister for Financial Services and Superannuation, the Hon Bill Shorten)
This memorandum takes account of amendments made by the House of Representatives to the Bill as introduced

Glossary

The following abbreviations and acronyms are used throughout this revised explanatory memorandum.

Abbreviation Definition
Bill Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Bill 2013
CGT capital gains tax
CSC Commonwealth Superannuation Corporation
DFRDB Defence Force Retirement and Death Benefit
DFRDB Act Defence Force Retirement and Death Benefits Act 1973
FHSA First Home Saver Account
FW Act Fair Work Act 2009
FW Amendment Act Fair Work Amendment Act 2012
FWC Fair Work Commission
ITAA 1997 Income Tax Assessment Act 1997
PST pooled superannuation trust
Review the Super System Review
SIS Act 1993 Superannuation Industry (Supervision) Act 1993
TAA 1953 Taxation Administration Act 1953

General outline and financial impact

Loss relief and asset roll-over for transfer of amounts to a MySuper product

Schedule1 to this Bill amends the Income Tax Assessment Act 1997 to facilitate the Government's MySuper reforms by providing income tax relief to superannuation funds where there is a mandatory transfer of default members' account balances to a MySuper product in another superannuation fund.

Date of effect: These amendments apply to the income year of the superannuation fund that includes 1 July 2013 and the following income years if the accrued default amounts of members are transferred between 1 July 2013 and 1 July 2017. These dates are consistent with the date of introduction of MySuper and the deadline for the transfer of default members' accrued default amounts to a MySuper product.

Proposal announced: This measure was announced in the Minister for Financial Services and Superannuation's Media Release No. 020 of 24 April 2012. Extensions to this measure were announced in the Minister's Media Release No. 046 of 3 August 2012.

Financial impact: These amendments have a small unquantifiable cost to revenue over the forward estimates, estimated to be less than $10 million per annum.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.67 to 1.77.

Compliance cost impact: Low overall, comprising a low implementation impact and no change in ongoing compliance costs for the affected group.

Sustaining the superannuation contribution concession - consequential amendments: Defence force superannuation

Schedule 2 to this Bill amends the Defence Force Retirement and Death Benefits Act 1973 to make consequential changes to enable the Commonwealth Superannuation Corporation to pay amounts and to adjust the benefits under the Defence Force Retirement and Death Benefits scheme to reflect those payments.

Date of effect: This measure applies from the later of Royal Assent of this Bill and Royal Assent of the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013. This measure does not apply if the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 does not receive Royal Assent.

Proposal announced: Not previously announced.

Financial impact: These amendments are part of the sustaining the superannuation contribution concession and were included in the financial impact of that measure. There is no additional financial impact.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.22 to 2.26.

Compliance cost impact: These amendments are part of the sustaining the superannuation contribution concession and were included in assessing the compliance cost impact of that measure. There is no additional compliance cost impact.

Default superannuation

Schedule 3 to the Bill amends the Fair Work Amendment Act 2012 (FW Amendment Act) to introduce new requirements in relation to terms in modern awards that nominate default superannuation funds for employees who have not chosen a fund ('default fund terms'), and a process under which the Fair Work Commission (FWC) will review such terms every four years. The first such review must be conducted as soon as practicable after 1 January 2014.

Four yearly reviews of default fund terms operate in addition to the requirement that default funds must be authorised by the Australian Prudential Regulation Authority to offer a MySuper product, and are intended to provide a transparent and contestable process under which only funds that are in the best interests of employees are selected for inclusion as default funds in modern awards.

Under the current provisions of the FW Amendment Act, an 'employer MySuper product' (that is, a 'tailored MySuper product' or 'corporate MySuper product') cannot be reviewed by the FWC. Following the first four yearly review, superannuation contributions for default fund employees to whom a modern award applies will therefore not be permitted to be directed to a corporate MySuper product. Such contributions will only be able to be directed to a tailored MySuper product if the fund is specified in the relevant modern award, following positive assessment by the FWC of the fund's 'generic MySuper product'.

On 29 May 2013, the Minister for Superannuation and Financial Services, the Hon Bill Shorten MP, introduced the Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Bill 2013 (the Bill). The Bill includes measures to facilitate the Government's MySuper reforms.

The amendments to the Bill amend the FW Amendment Act to allow contributions for default fund employees to whom a modern award applies to be directed to an employer MySuper product, subject to the product being approved by the FWC and specified on the Schedule of Approved Employer MySuper Products.

The approval process for employer MySuper products is to be conducted by an Expert Panel of the FWC (constituted by both full-time members and experts in finance, investment management or superannuation) in two stages. In the first stage, the corporate or tailored MySuper product will be assessed against legislated criteria relating to the performance of the product. In the second stage, the Expert Panel will assess whether including the product on the Schedule of Approved Employer MySuper Products would be in the best interests of relevant default fund employees. The FWC will be required to ensure that employers and employees to which the product relates, and any organisation entitled to represent their industrial interests, have a reasonable opportunity to make submissions.

An application to the FWC to have an employer MySuper product included on the Schedule of Approved Employer MySuper Products can be made by the relevant employer or the fund, either as part of a four yearly review of default fund terms or within an interim period between such reviews. Allowing interim applications is intended to facilitate assessment of employer MySuper products for newly established employers and employers seeking to change their default superannuation arrangements to a more competitive employer MySuper product.

Employer MySuper products specified on the Schedule of Approved Employer MySuper Products will be required to be reassessed in the next four yearly review.

The FW Amendment Act currently requires the FWC to vary modern awards in four yearly reviews of default fund terms to specify at least two, but generally no more than 10, superannuation funds in relation to generic MySuper products. An amendment will change the maximum number of funds that can generally be specified in a modern award from 10 to 15. This is intended to ensure that funds (including those that offer high performing employer-specific subplans within a generic MySuper product) have a reasonable opportunity to be positively assessed by the FWC and specified in relevant modern awards.

A further amendment will ensure that the new requirements included in the FW Amendment Act in relation to both generic MySuper products and employer MySuper products do not apply before 1 January 2015.

Date of effect: Items 1-9 and 11-34 of Schedule 3 to the Bill commence on the day the Bill receives Royal Assent. Item 10 of Schedule 3 to the Bill commences on the later of either the start of the day the Bill receives Royal Assent, or immediately after the commencement of item 47 of Schedule 1 to the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Act 2013, but does not commence at all if item 47 does not commence.

Financial Impact Statement: Nil.

Human rights implications: Nil.

Chapter 1 - Loss relief and asset roll-over for transfer of amounts to a MySuper product

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to facilitate the Government's MySuper reforms by providing income tax relief to superannuation funds where there is a mandatory transfer of default members' account balances to a MySuper product in another superannuation fund.

1.2 References throughout this chapter are to the ITAA 1997 unless otherwise specified.

Context of amendments

1.3 On 29 May 2009, the Government announced the establishment of the Super System Review (Review) to comprehensively examine and analyse the governance, efficiency, structure and operation of Australia's superannuation system.

1.4 The Review focused on maximising the retirement incomes for Australians and improving regulation of the superannuation system.

1.5 On 16 December 2010, as part of its response to the Review, the Government announced reforms to the superannuation system called 'Stronger Super'. A key element was the introduction of MySuper from 1 July 2013, a simple and cost-effective superannuation product to replace existing default products.

1.6 MySuper products must have the same simple set of product features, irrespective of who provides them. This enables members, employers and market analysts to compare funds more easily based on a few key differences. It also ensures that members do not pay for any features they do not need or use.

1.7 The introduction of MySuper imposes heightened duties on trustees to act in the best financial interests of their members. Trustees have a duty to actively consider whether their investments are of a sufficient scale (in terms of assets and members) to competitively provide a MySuper product.

1.8 For some superannuation funds, this is expected to encourage, or necessitate, the transfer of default members' account balances to other funds. Funds not wishing to offer MySuper products are required under the MySuper rules to transfer existing default members' account balances to a superannuation fund offering a MySuper product by 1 July 2017.

1.9 If such transfers create an income tax liability from the realisation of fund assets, or if relevant losses remain with the transferring entity, the members whose balances are transferred would be adversely impacted.

1.10 This is particularly so as superannuation funds typically credit the value of unutilised losses to the account balances of their members. Without allowing a transferring entity to transfer losses to another fund, members' account balances would have to be reduced by the value of those losses.

Summary of new law

1.11 These amendments provide income tax relief to ensure default members of superannuation funds are not adversely affected if their superannuation benefits are mandatorily transferred to another fund as a result of the MySuper reforms.

1.12 In particular, these amendments ensure that a complying superannuation fund that mandatorily transfers account balances of default members to other funds under the MySuper reforms can:

transfer losses to other entities; and
defer an income tax liability for assets transferred to other entities so that a liability will not arise until an ultimate disposal of the asset by the other entity.

1.13 Where the superannuation fund invests in a life insurance company or a pooled superannuation trust (PST) to support its default members, the same relief is also provided to those entities.

Comparison of key features of new law and current law

New law Current law
Realised capital and tax losses can be transferred from a complying superannuation fund, a life insurance company or a PST to another entity where members' account balances have been mandatorily transferred to a MySuper product in another superannuation fund. Realised capital and tax losses cannot be transferred from a complying superannuation fund, a life insurance company or a PST to another entity where members' account balances have been mandatorily transferred to a MySuper product in another superannuation fund.
Income tax consequences may be deferred where an asset is transferred from a complying superannuation fund, a life insurance company or a PST to another entity where members' account balances have been mandatorily transferred to a MySuper product in another superannuation fund. Income tax consequences may arise where an asset is transferred from a complying superannuation fund, a life insurance company or a PST to another entity where members' account balances have been mandatorily transferred to a MySuper product in another superannuation fund.

Detailed explanation of new law

1.14 The introduction of MySuper from 1 July 2013 will see the introduction of a new, simple and cost-effective superannuation product that will replace existing default products.

1.15 As part of the transition to MySuper, some funds may decide, for example, that they do not have sufficient investment scale to offer a MySuper product. Under the MySuper provisions, these funds are required to transfer their default members' account balances to a fund offering a MySuper product by 1 July 2017.

1.16 These amendments provide income tax relief to ensure that members are not adversely affected if their superannuation benefits are mandatorily transferred under the MySuper reforms.

What relief is available under these amendments?

1.17 These amendments ensure that a complying superannuation fund can:

transfer a loss to another entity (see paragraphs 1.27 to 1.35); and
defer an income tax liability for assets transferred to other entities so that a liability will not arise until an ultimate disposal of the asset by the other entity (see paragraphs 1.36 to 1.48).

[Schedule 1, item 1, sections 311-1 and 311-5 and subsection 311-10(1)]

1.18 Where the superannuation fund invests in a life insurance company or a PST to support its default members, the same relief is also provided to those entities. [Schedule 1, item 1, subsection 311-10(1)]

1.19 Where a transferring entity is eligible for relief under these amendments and under the Division 310 merger relief provisions, the entity is able to choose which amendments apply to its particular transaction. However, regardless of the provisions the transferring entity chooses, it has access to the same income tax relief.

What conditions must be satisfied to access this relief?

1.20 For a transferring entity to access the loss transfer or asset roll-over, it must satisfy four key conditions.

Condition one - certain entities can access relief

1.21 The transferring entity accessing the relief must be a complying superannuation fund, a life insurance company or a PST. This entity must be either the fund that holds the default members' account balances, or be a life insurance company or a PST that the fund invests in to support its default members. [Schedule 1, item 1, subsection 311-10(2)]

1.22 Allowing a life insurance company or a PST to access this relief recognises the commercial reality that a significant amount of superannuation is invested by acquiring units in PSTs and insurance policies in life insurance companies rather than being directly invested by the fund.

Condition two - superannuation fund must transfer an accrued default amount and default members

Accrued default amount must be transferred

1.23 In order for the transferring entity to access income tax relief under these amendments, an accrued default balance must be compulsorily transferred to another fund that offers a MySuper product. Specifically, the relief covers cases where:

a complying superannuation fund does not offer a MySuper product, and as such it is required to transfer accrued default amounts to another fund offering a MySuper product (see subparagraph 29SAA(1)(b)(ii) and section 388 of the Superannuation Industry (Supervision) Act 1993 (SIS Act 1993); or
default members of a fund are not eligible to hold a MySuper product in that fund and, as a consequence, the accrued default amounts are transferred to another fund offering a MySuper product. This could happen, for example, where the fund offers a tailored MySuper product for a particular workplace and the members are not part of that workplace (see subparagraph 29SAA(1)(b)(i) of the SIS Act 1993).

[Schedule 1, item 1, paragraphs 311-10(3)(a) and (b)]

1.24 The concept of an 'accrued default amount' was introduced to the SIS Act 1993 by the MySuper reforms. This concept defines an amount which must be moved to a MySuper product by 1 July 2017. Broadly, this amount is the entire balance of a member's account where an investment choice has not been exercised or if it is held in a default investment option of the fund. [Schedule 1, item 12, subsection 995-1(1) (definition of 'accrued default amount')]

Default members must become members of a receiving entity

1.25 The default members must become members of a complying superannuation fund when the accrued default amounts are transferred to that fund. However, this does not mean the losses and assets that are the subject of this relief must be transferred to the same entity to which the members are transferred. The losses and assets may instead be transferred to a life insurance company or a PST that the fund invests in to support its default members. [Schedule 1, item 1, paragraph 311-10(3)(c), section 311-15, and paragraph 311-40(1)(b)]

Condition three - account balances must be transferred by certain time

1.26 The accrued default amounts and the default members must have been transferred between 1 July 2013 and 1 July 2017. These dates are consistent with the date of introduction of MySuper and the deadline for the transfer of a default member's accrued default amount to a MySuper product. [Schedule 1, item 1, subsection 311-10(4)]

Choosing the loss transfer

1.27 A transferring entity that is eligible for, and chooses to access, the loss transfer may transfer capital losses and tax losses to a receiving entity to the extent they are reasonably attributable to the default member's accrued default amounts. The transfer of these losses prevents the value of the losses remaining with the transferring fund and protects the value of the accrued default amounts of affected members. [Schedule 1, item 1, section 311-20]

1.28 As the transferring entity will hold assets that support its default members, these amendments permit an entity to liquidate its assets and then transfer cash and realised losses to the receiving entity. [Schedule 1, item 1, sections 311-20 and 311-35]

What losses can be transferred?

1.29 Where the loss transfer is chosen by a transferring entity, the capital and tax losses that can be transferred are determined by reference to whether the losses (and the underlying assets that generate the losses) are reasonably attributable to the accrued default amount of the default members. In addition, where the entity accessing the relief is a life insurance company or a PST, the losses must be reflected in the value of the fund's interest in the life insurance policy or the units in the PST. [Schedule 1, item 1, subsections 311-20(2) to (4)]

1.30 Where a transferring entity generates losses from the realisation of assets after the default members have been transferred to another fund, these amendments allow these losses to also be transferred to a receiving entity to the extent that the losses are attributable to the accrued default amounts of the default members who have already been transferred. This ensures the amendments do not restrict when a transferring entity must realise its assets to fund the transfer of its members to another fund. [Schedule 1, item 1, section 311-35]

What is the effect of transferring a capital loss?

1.31 If the transferring entity transfers realised capital losses to a receiving entity, it effectively reduces its capital losses by the transferred amount. A corresponding capital loss is taken to have been made by the receiving entity on the day the default members' accrued default amounts are transferred. This ensures that the receiving entity can utilise the transferred loss against capital gains in that, or a future, income year. [Schedule 1, item 1, section 311-25]

1.32 Life insurance companies are required to segregate assets that support complying superannuation/First Home Saver Account (FHSA) policies under Division 320. Therefore, if the receiving entity is a life insurance company, the transferred capital loss is taken to be a loss from its complying superannuation/FHSA assets. This provides integrity by ensuring that losses from superannuation assets cannot be used to offset gains made from the ordinary asset class of a life insurance company. [Schedule 1, item 1, paragraph 311-25(c)]

Example 1.1 : Superannuation fund transfers capital losses As a result of the MySuper reforms, Small Super has decided not to offer a MySuper product, as it would not have sufficient investment scale to competitively provide such products to its default members.On 10 August 2013, Small Super transfers the accrued default amounts of its members to a MySuper product offered by Big Super. It has agreed to pay $4 million in cash by realising assets that are attributable to its default members. As part of this transaction, it also transfers $220,000 in capital losses comprising of $200,000 of earlier year net capital losses and $20,000 of transfer year capital losses.Under these amendments, Small Super is taken to not have made those losses and Big Super will recognise $220,000 of capital losses in determining its net capital gain or net capital loss for the 2013-14 income year. It will carry forward any unutilised losses to future income years.

What is the effect of transferring a tax loss?

1.33 If the transferring entity transfers realised tax losses to a receiving entity, it effectively reduces its tax losses by the transferred amount. A corresponding tax loss is taken to have been incurred by the receiving entity on the day the default members accrued default amounts are transferred. [Schedule 1, item 1, paragraphs 311-30(a),(b) and (d)]

1.34 If a taxpayer has more deductions for an income year than assessable income, the excess is a tax loss which may be deducted in a later income year (see sections 36-15 and 36-17). Therefore, to enable the receiving entity to deduct losses in the year of the account transfer, these amendments ensure that, for the purpose of sections 36-15 and 36-17, the amount of the loss transferred is taken to have been incurred by the receiving entity for the income year immediately prior to the transfer year. [Schedule 1, item 1, paragraph 311-30(c)] .

1.35 Similar to capital losses, if the receiving entity is a life insurance company, the transferred tax loss is taken to be a loss from its complying superannuation/FHSA assets. Again, this ensures that losses from superannuation assets cannot be used to offset gains made from the ordinary asset class of a life insurance company. [Schedule 1, item 1, subparagraphs 311-30(c)(i) and (d)(i)]

Example 1.2 : Superannuation fund transfers tax losses Following on from the previous example, Small Super transfers realised tax losses of $25,000, comprising a loss of $20,000 from a previous income year and $5,000 from the income year that members' accrued default amounts are transferred.Under these amendments, Small Super is taken to not have made those losses. For the purposes of the tax loss provisions, the losses are instead taken to have been made by Big Super for the income year immediately prior to the transfer year (that is, in the 2012-13 income year). This ensures that Big Super takes into account the loss of $25,000 in working out its taxable income for the 2013-14 income year.

Choosing the asset roll-over

1.36 Complying superannuation funds, life insurance companies and PSTs may choose an optional capital gains tax (CGT), depreciating asset and revenue asset roll-over for each asset that is transferred to another entity, provided they meet the gateway conditions discussed in paragraphs 1.20 to 1.26. [Schedule 1, item 1, section 311-10]

1.37 Where an asset roll-over is not chosen by the transferring entity, the entity may be able to transfer losses in respect of that asset if a loss arises as part of the realisation of the asset.

What assets are eligible for an asset roll-over?

1.38 Where a transferring entity chooses to transfer assets to a receiving fund, it can also choose a roll-over for those assets if they are reasonably attributable to the accrued default amount of the default members. In addition, where the entity accessing the relief is a life insurance company or a PST, the assets must be reflected in the value of the fund's interest in the life insurance policy or the units in the PST. [Schedule 1, item 1, subsections 311-40(1) and (2)]

Consequences of choosing asset roll-over for CGT assets

1.39 Section 295-85 makes the CGT regime the primary code for determining the tax consequences of the gains or losses generated on the realisation of certain assets owned by a complying superannuation fund or a PST. Section 320-45 provides for the same rules to apply for the complying superannuation/FHSA assets of life insurance companies.

1.40 If the asset roll-over is chosen by the transferring entity, it disregards any CGT consequences associated with the asset transfer. Also, the receiving entity is treated as having acquired the asset for the transferring entity's cost base (and reduced cost base). This ensures that any CGT consequences are deferred until a later dealing with that asset by the receiving entity. [Schedule 1, item 1, section 311-45]

Asset's date of acquisition

1.41 For assets subject to the CGT roll-over, the general acquisition rules in Subdivision 109-A apply - that is, the receiving entity acquires the asset when the asset is transferred to that entity.

1.42 However, for the purposes of the receiving entity satisfying the 12-month CGT discount ownership requirement (see subsection 115-25), these amendments recognise the period of ownership when the asset was owned by the transferring entity. [Schedule 1, item 5, table item 11 in subsection 115-30(1)]

1.43 Section 295-90 treats the trustee of a complying superannuation fund or a PST as having acquired on 30 June 1988 any assets it already owned on that date. An equivalent rule applies to life insurance companies in relation to complying superannuation/FHSA assets (see section 320-45). Therefore, as these entities will not own assets that are acquired before the introduction of the CGT regime on 20 September 1985, there is no need for the CGT roll-over to deal with pre-CGT assets.

Example 1.3 : Superannuation fund chooses CGT roll-over Pencil Super has decided not to offer a MySuper product to its default members. As part of an arrangement entered into with Pen Super, Pencil has agreed to transfer all of its default members to Pen. All assets that are reasonably attributable to the members' accrued default amounts are also transferred to Pen.Pencil owns a share in Sharpener Limited and its cost base (and reduced cost base) is $10.Under these amendments, any CGT consequences associated with the transfer of the share from Pencil to Pen are disregarded for Pencil. Furthermore, for Pen, the asset is treated as having a cost base (and reduced cost base) of $10. This ensures that any CGT consequences associated with the transfer are deferred until a later dealing with that asset by Pen.For the purposes of the CGT discount, Pen is treated as acquiring the share at the time when Pencil acquired the share.

Consequences of choosing asset roll-over for depreciating assets

1.44 Superannuation funds may own depreciating assets. If such assets are transferred to a receiving entity, this will cause a balancing adjustment event to occur (see section 40-295).

1.45 Where there is a difference between the asset's termination value (that is, the market value of the asset at the transfer date) and its adjustable value (that is, the original cost less the decline in tax value while it was held by the entity), a balancing adjustment event may result in an amount being assessable or deductible through the operation of section 40-285.

1.46 These amendments ensure that, if the asset roll-over is chosen by the transferring entity, section 40-285 does not apply to the transfer of the depreciating assets. In addition, the receiving entity can deduct the decline in value of the asset using the same method and effective life that the transferring entity was using. This ensures that any income tax consequences associated with the depreciating asset are deferred until a further balancing adjustment event happens to the asset in the hands of the receiving entity. [Schedule 1, item 3, table item 7 in subsection 40-340(1)]

Consequences of choosing asset roll-over for revenue assets

1.47 A revenue asset is an asset for which a profit or loss on disposal would be taken into account in calculating assessable income other than as a capital gain or capital loss (see section 977-50). The asset must also be neither trading stock nor a depreciating asset.

1.48 For revenue assets subject to the asset roll-over, the transferring entity is taken to have realised the asset for an amount that would result in it not making a profit or loss on that realisation. Furthermore, the receiving entity is taken to have acquired the revenue asset for that amount. This ensures that any income tax consequences are deferred until a later dealing with that asset by the receiving entity. [Schedule 1, item 1, section 311-50]

Example 1.4 : Superannuation fund chooses revenue asset roll-over Further to the previous example, as part of the transfer of assets from Pencil to Pen, Pencil transfers all of its revenue assets to Pen, where they are also treated as revenue assets of Pen.In relation to one of Pencil's assets that it accounts for on revenue account, the market value is $200,000 and the cost is $120,000.Under these amendments, on the transfer of the asset, Pencil is treated as if it has received $120,000 for that asset. In addition, Pen is treated as having acquired that asset for $120,000. This ensures that any income tax consequences associated with the transfer are deferred until a later dealing with that asset by Pen.

Method for making the choice to transfer loss or roll over asset

1.49 The choice to access this relief will have specific consequences for both the transferring and the receiving entity. Therefore, whilst only the transferring entity is required to choose this relief, the consequences associated with doing so would usually be considered by both parties during the negotiation of the transfer of the accrued default amounts of members.

1.50 The transferring entity's choice to access the relief will be evidenced by the manner in which it completes its income tax return for the income year in which the accrued default amounts are transferred. This mechanism is based on section 103-25, which applies to choices made under the CGT provisions. [Schedule 1, item 1, section 311-60]

Application provisions

1.51 These amendments apply to the income year of the entity accessing the relief that includes 1 July 2013 and following income years if the accrued default amounts of members are transferred between 1 July 2013 and 1 July 2017. These dates are consistent with the date of introduction of MySuper and the deadline for the transfer of default members' accrued default amounts to a MySuper product. [Schedule 1, items 1, 2 and 13, subsection 311-10(4)]

Repeal provisions and related amendments

1.52 These amendments, including the consequential amendments discussed below in paragraphs 1.56 to 1.66, will be automatically repealed on 2 July 2019. This recognises the fact that the amendments cease to apply at the end of 1 July 2017. [Schedule 1, items 14 to 20, 23 and 24, and clause 2, table items 6 to 8] Superannuation deduction provisions

1.53 The superannuation deduction provisions in subsection 290-170(5) provide that a member can give a deduction notice to a successor fund in relation to a contribution they made to an original fund. To ensure consistency, these amendments ensure that a member whose accrued default amount is mandatorily transferred under the MySuper reforms can also receive the same treatment (see paragraphs 1.59 to 1.62).

1.54 Whilst the deduction provisions relating to MySuper cases are repealed on 2 July 2019, it is still possible after this date for there to be a successor fund transfer, and as such, the provisions dealing with successor fund transfers are reactivated, to the extent they were repealed with the MySuper amendments. This reactivation, which applies to deduction notices and variations from 2 July 2019, ensures the successor fund deduction provisions continue to operate uninterrupted. [Schedule 1, items 21 and 22, and subitem 25(1)]

1.55 A taxpayer's claim for a deduction may be disallowed a number of years following the taxpayer's contribution to a fund. In these cases, the taxpayer is required to vary their deduction notice following this outcome (see the requirements in subsection 290-180(4)). Therefore, this may mean that the variation deduction provisions (described in paragraph 1.60) may be utilised after the provisions are repealed. To cater for this situation, these provisions in respect of variations of deduction notices for MySuper members still have effect after their repeal. Similarly, in this situation the fund can still claim a deduction under subsection 295-490(1) for the amount of the variation after the repeal of these provisions. [Schedule 1, subitem 25(2)]

Consequential amendments

Further consequences for a transferring entity or receiving entity that is a life insurance company

1.56 Where a complying superannuation/FHSA asset is transferred to or from a life insurance company, a deemed sale or deemed acquisition of the asset for its market value may occur under section 320-200.

1.57 To ensure the CGT, depreciating asset and revenue asset roll-overs provided by these amendments are not overridden by a deemed sale or acquisition of the asset under section 320-200, these amendments provide that section 320-200 does not apply in relation to asset realisations subject to the asset roll-over. [Schedule 1, item 1, subsection 311-55(1)]

1.58 Similarly, where the receiving entity is a life insurance company, an asset acquired under the asset roll-over is taken to be a complying superannuation/FHSA asset of the company, and not life insurance premiums relating to that asset class, which would otherwise be assessable. This rule, which broadly resembles sections 320-315 and 320-320 that apply to life insurance business transfers, ensures that the Division 320 life insurance business taxation provisions do not override the relief provided by these amendments. [Schedule 1, item 1, subsection 311-55(2)]

Claiming a tax deduction where members have been mandatorily transferred under the MySuper reforms

1.59 Members who make a personal contribution to a complying superannuation fund may be able to claim an income tax deduction if they give a notice to that fund and the conditions of Subdivision 290-C are satisfied. However, an individual cannot give such a notice to a complying superannuation fund if they have ceased to be a member of the fund.

1.60 These amendments provide that, where a member has not given a notice in relation to their contribution to the original superannuation fund before their accrued default amount is mandatorily transferred to another fund, they are able to give a notice to their new fund and still deduct all or part of their contribution. Taxpayers are also able to give a variation notice to their new fund in respect of a contribution they made to their original fund. [Schedule 1, items 6 and 7, subsections 290-170(6) and 290-180(6)]

1.61 Currently, an exception to the rule described in paragraph 1.59 ensures that members who are compulsorily transferred to another fund under the successor fund transfer rules are able to retain their ability to claim a personal tax deduction. However, this exception may not always be satisfied for mandatory MySuper transfers. Therefore, these amendments operate in the same way as the successor fund transfer provisions to ensure members have access to the same deduction rules that would apply if their account balance were transferred under those provisions.

1.62 Where a member gives a notice to the new fund, the amount of the contribution covered by the notice is included in the assessable income of the new fund. In these cases, the amount is included in the member's concessional contributions and the member's non-concessional contributions is reduced by the same amount. In addition, where a member provides the new fund with a variation notice that reduces the amount covered by a deduction notice, the amendments ensure the fund either reduces the amount included in its assessable income or deducts the amount of the variation in the same way as a successor fund can under the superannuation deduction provisions. [Schedule 1, items 8, 10 and 11, paragraphs 292-25(2)(b) and 292-90(2)(b), and table item 2A in subsection 295-190(1) and table item 2A in subsection 295-490(1)]

Individuals subject to reduction in income tax concession for contributions made to a superannuation fund

1.63 Schedule 3 to the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 reduces the tax concession that individuals with incomes above $300,000 receive on concessional contributions made to a superannuation fund by imposing a tax of 15 per cent on these contributions (Division 293 tax).

1.64 In general, an individual's concessional contributions are those that are assessable income for the superannuation fund. In cases involving successor fund transfers, a contribution may be assessable income for the successor fund where an individual gives a valid deduction notice to that fund in respect of a contribution made to the original fund.

1.65 Subject to Schedule 3 becoming enacted, these amendments ensure the same outcome arises in respect to members whose accrued default amounts are transferred mandatorily under the MySuper reforms. This means that when members give a valid deduction notice to their new fund in respect of a contribution they made to their original fund, the amount of contributions covered by the notice is taken into account when applying the Division 293 tax. [Schedule 1, item 9, subparagraph 293-30(2)(b)(ii) and clause 2, table item 4]

Guide material for CGT cost base rules

1.66 The guide material in section 112-97 that lists the cost base modifications outside of the core CGT provisions (Part 3-1 and 3-3 of the ITAA 1997) is amended to include the CGT roll-over provided by these amendments. [Schedule 1, item 4, table item 36 in section 112-97]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

MySuper loss transfer and asset roll-over

1.67 This Schedule 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

1.68 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to facilitate the Government's MySuper reforms by providing income tax relief to superannuation funds where there is a mandatory transfer of default members' account balances to a MySuper product in another superannuation fund.

1.69 In particular, these amendments ensure that a complying superannuation fund that mandatorily transfers account balances of default members to other funds under the MySuper reforms can:

transfer losses to other entities; and
defer an income tax liability for assets transferred to other entities so that a liability will not arise until an ultimate disposal of the asset by the other entity.

1.70 Where the superannuation fund invests in a life insurance company or a pooled superannuation trust to support its default members, the same relief is also provided to those entities.

Human rights implications

1.71 This Schedule engages and promotes the right to an adequate standard of living as contained in article 11(1) of the International Covenant on Economic, Social and Cultural Rights.

1.72 Article 11(1) recognises the right of everyone to an adequate standard of living, including adequate food, clothing and housing, and to the continuous improvement of living conditions. Superannuation promotes the right to a financially secure future by providing individuals with the capacity to provide for their retirement.

1.73 MySuper is designed to improve the simplicity, transparency and comparability of default superannuation products. MySuper products have a simple set of product features, irrespective of who provides them, enabling members to compare funds more easily, based on a few key differences - cost, investment performance and the level of insurance coverage. Moving members into a MySuper product ensures members will not pay for unnecessary features they will not use. This will ultimately result in higher retirement incomes for members as a result of lower fees and charges.

1.74 The introduction of MySuper also imposes heightened duties on trustees to act in the best financial interests of their members. Trustees have a duty to actively consider whether their investments are of a sufficient scale (in terms of assets and members) to competitively provide a MySuper product.

1.75 For some superannuation funds, the MySuper reforms are expected to necessitate the transfer of default members' account balances to other funds. If such transfers create an income tax liability from the realisation of fund assets, or if relevant losses remain with the transferring entity, the members whose benefits are transferred would be adversely impacted. This is particularly so as superannuation funds typically credit the value of unutilised losses to the account balances of their members.

1.76 Schedule 1 ensures members are not financially disadvantaged in that way where their account balance is transferred under the MySuper reforms. Without these amendments, members would be adversely impacted as their account balance would have to be reduced by the value of those losses.

Conclusion

1.77 This Schedule is compatible with human rights. It promotes the right to adequate living standards by increasing the retirement savings of individuals.

Minister for Financial Services and Superannuation, the Hon Bill Shorten

Chapter 2 - Sustaining the superannuation contribution concession - consequential amendments: Defence force superannuation

Outline of chapter

2.1 Schedule 2 amends the Defence Force Retirement and Death Benefits Act 1973 (DFRDB Act) to give effect to changes that are necessary as a result of implementing the sustaining the superannuation contribution concession contained in Schedule 3 of the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013.

2.2 The amendments allow a lump sum to be paid from a superannuation interest in the Defence Force Retirement and Death Benefits (DFRDB) scheme to meet a debt account discharge liability for Australian Defence Force members of the scheme who are very high income earners. As a result a member's superannuation benefits, including any reversionary pension to be paid to the surviving spouse of a deceased member, is reduced.

Context of amendments

2.3 The changes are required to enable amounts to be released from the DFRDB scheme. This is required as a result of implementing the sustaining the superannuation contribution concession contained in Schedule 3 of the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 which imposes tax on concessional contributions of Australian Defence Force members of the DFRDB scheme who are very high income earners.

2.4 The sustaining the superannuation contribution concession was announced in the Minister for Financial Services and Superannuation's Media Release No. 024 of 8 May 2012.

Summary of new law

2.5 The amendments allow a lump sum to be paid from a superannuation interest in the DFRDB scheme to meet a debt account discharge liability for Australian Defence Force members of the scheme who are very high income earners. As a result a member's superannuation benefits, including any reversionary pension to be paid to the surviving spouse of a deceased member, is reduced.

Detailed explanation of new law

2.6 The Defence Force Retirement and Death Benefits Act 1973 (DFRDB Act) is amended to enable a lump sum to be paid from a superannuation interest in the DFRDB scheme to meet a liability for debt account discharge liability for Australian Defence Force members of the DFRDB scheme who are very high income earners. This results in the member's superannuation benefits, including any reversionary pension to be paid to the surviving spouse of a deceased member, being reduced.

2.7 The existing definition of 'benefit' in section 3(1) of the DFRDB Act is repealed and replaced with a new definition of 'benefit' to expressly include a release authority lump sum as a part of the benefit that is payable under the DFRDB scheme. The new definition enables release authority lump sums to fall within the appropriation included in subsection 125(3) of the DFRDB Act. [Schedule 2, item 1, definition of 'benefit' in subsection 3(1) of the DFRDB Act]

2.8 A definition of 'release authority lump sum' is included in subsection 3(1) of the DFRDB Act and refers to section 49K which sets out what a release authority lump sum is. [Schedule 2, item 2, definition of 'release authority lump sum' in subsection 3(1) of the DFRDB Act]

2.9 A note is inserted after subsections 24(2A) and 32A(4) of the DFRDB Act to make it clear that any lump sum to be paid as a result of an election to commute retirement pay or Class C invalidity pay respectively is calculated after a release authority lump sum has been paid (that is, if the member gives a release authority to the Commonwealth Superannuation Corporation (CSC) and a lump sum has not been paid as a result of an election to commute under section 24 or 32A). [Schedule 2, items 3 and 4, note in subsections 24(2A) and 32A(4) of the DFRBD Act]

2.10 The existing subsection 48(5) of the DFRDB Act is repealed and replaced with a new provision to ensure that an amount payable to the personal representative of the member (or to such persons that CSC determines) in respect of a contributing or recipient member who dies without leaving dependants is adjusted to reflect any retirement or invalidity pay or a release authority lump sum amount paid to the member while still alive. [Schedule 2, item 5, subsection 48(5) of the DFRBD Act]

2.11 The amendments introduced in new Part VIB of the DFRDB Act allow a release authority lump sum to be paid by CSC if:

a person presents a release authority issued under item 3 of the table in subsection 135-10(1) in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) introduced by Schedule 3 of the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013; and
at the time they provide a release authority to CSC, no benefit has been paid.

2.12 Any lump sum paid by CSC in compliance with a release authority must be in accordance with Subdivision 135-B in Schedule 1 to the TAA 1953. [Schedule 2, item 6, section 49K of the DFRDB Act]

2.13 The amendments in Schedule 3 of the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 include sections 135-85 and 135-95 of Schedule 1 to the TAA 1953 limit the amount that a superannuation provider can pay in respect of a release authority to the lesser of the following amounts:

the amount the release authority was issued for;
a lower amount specified, by the individual or the Commissioner of Taxation, than the amount for which the release authority was issued for; or
the total amount of all the superannuation lump sums of all the superannuation interests held by the superannuation provider for the person (this recognises that an amount cannot be paid to the extent it exceeds the sum held).

2.14 In addition to the limits contained in the amendments in Schedule 3, these amendments include a further limitation on the maximum amount that can be paid as a release authority lump sum under the DFRDB Act. The amendments specify that the amount of a release authority lump sum must not have the effect of reducing the person's benefit(s) specified in the election below zero, after first taking into account any reduction under another provision of the DFRDB Act, such as a person's surcharge deduction amount (if an election under section 124 is made before giving CSC the release authority) or a reduction as a result of a family law split. [Schedule 2, item 6, section 49L of the DFRDB Act and item 7, subsection 124(3) of the DFRDB Act]

2.15 The release authority lump sum amount is to be paid before any lump sum arising from the commutation of retirement pay or Class C invalidity pay is calculated, if a release authority is given to CSC before any commuted amount of retirement pay or Class C invalidity pay is paid. However, where a commuted amount has been paid, the reduced retirement pay or invalidity pay is further reduced to take account of a release authority lump sum. [Schedule 2, item 6, section 49M of the DFRDB Act]

2.16 The manner of calculating reduced retirement pay of Class C invalidity pay is set out in the following formula:

Pre-reduction rate - [Release authority lump sum / Conversion factor]

2.17 For the purposes of the formula, the 'pre-reduction rate' will be the actual rate of retirement pay or Class C invalidity pay otherwise payable to the person (noting that this includes any other provision in the DFRDB Act that affects the rate of pension). The conversion factor is to be determined by CSC and made by legislative instrument. [Schedule 2, item 6, section 49N of the DFRDB Act]

2.18 A DFRDB scheme member who effectively ceased to be an eligible member of the Defence Force in order to contest an election, who is unsuccessful at the election and who is not reinstated may be entitled to invalidity pay (or dependants may be entitled to death benefits) in circumstances where an amount of benefit is repaid to the Commonwealth within 90 days (or such further period as CSC determines) of the declaration of the poll. Paragraph 55(5)(a) of the DFRDB Act is modified to not require payment of a release authority amount that may have been paid when the member ceased to be an eligible member of the Defence Force. [Schedule 2, item 6, section 49P of the DFRDB Act]

2.19 The retirement pay of a recipient member of the DFRDB scheme who re-enters for a period of further service for 12 months or more and again becomes a DFRDB scheme contributing member is cancelled. Retirement pay is recalculated when the further period of service is completed based on the member's total period of service. The re-calculated retirement pay is required to be adjusted to reflect any release authority lump sum payment made when the member first claimed the retirement pay. [Schedule 2, item 6, section 49Q of the DFRDB Act]

Application and transitional provisions

2.20 The consequential amendments to the DFRDB Act apply from the later of Royal Assent of this Bill and immediately after Royal Assent of the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013.

2.21 This measure does not apply if the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 does not receive Royal Assent. The contingent commencement provision reflects that these consequential amendments are only required if the sustaining the superannuation contribution concession contained in the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 is enacted.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Sustaining the superannuation contribution concession - consequential amendments: Defence force superannuation

2.22 Schedule 2 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

2.23 Schedule 2 to this Bill amends the Defence Force Retirement and Death Benefits Act 1973 as a result of the sustaining the superannuation contribution concession.

2.24 The purpose of Schedule 2 to this Bill is to make consequential changes to enable the Commonwealth Superannuation Corporation to pay amounts under the Defence Force Retirement and Death Benefits scheme and adjust benefits under the scheme to reflect those payments.

Human rights implications

2.25 Schedule 2 to this Bill does not engage any of the applicable rights or freedoms.

Conclusion

2.26 Schedule 2 to this Bill is compatible with human rights as it does not raise any human rights issues.

Minister for Financial Services and Superannuation, the Hon Bill Shorten

Chapter 3 - Default superannuation

Outline of chapter

3.1 Schedule 3 to the Bill amends the Fair Work Amendment Act 2012 (FW Amendment Act) to:

allow an employer to make contributions for default fund employees to whom a modern award applies to a superannuation fund in respect of an employer MySuper product, subject to the product being approved by the Fair Work Commission (FWC) and specified on a Schedule of Approved Employer MySuper Products;
establish a two-stage approval process under which an Expert Panel of the FWC will assess employer MySuper products to determine whether they are in the best interests of the relevant default fund employees;
change the maximum number of funds that can generally be specified in a modern award in relation to a generic MySuper product from 10 to 15;
ensure that the new requirements in modern awards in relation to both generic MySuper products and employer MySuper products do not apply before 1 January 2015;
provide that the new requirements in relation to employer MySuper products will not apply in respect of a modern award (for example, a modern enterprise award) made between 1 January 2014 and 31 December 2017, until the second four yearly review of default fund terms; and
make other consequential and technical amendments.

Allowing contributions to employer MySuper products

Employer MySuper products

3.2 An 'employer MySuper product' will be defined in new subsection 23A(1B) of the Fair Work Act 2009 (FW Act) as a tailored MySuper product or a corporate MySuper product. [Schedule 3, items 1 and 5]

3.3 A 'tailored MySuper product' is defined in new subsection 23A(2) of the FW Act as a MySuper product in relation to which section 29TB of the Superannuation Industry (Supervision) Act 1993 (SIS Act 1993) is satisfied. A tailored MySuper product can be offered by a public offer superannuation fund to one large employer (and its 'associates') where the employer and its associates have more than 500 employees who are members of the fund.

3.4 A 'corporate MySuper product' is defined in new subsection 23A(3) of the FW Act as a MySuper product offered by a non-public offer fund with a single employer-sponsor or associated employer-sponsors. A corporate MySuper product is administered in-house by an employer.

Default fund terms in modern awards

3.5 Modern awards specify particular funds to which employers are required to make compulsory superannuation contributions for the benefit of employees who have not chosen a fund ('default fund employees'). A failure to make contributions for such employees to a default fund specified in the award constitutes a contravention of the award, exposing the employer to civil penalties under the FW Act.

3.6 The FW Amendment Act provides that, following the first four yearly review of default fund terms in modern awards, such terms must require employers to make contributions for default fund employees either to a fund that is specified in the default fund term in relation to a 'generic MySuper product' or to a particular category of fund (for example, an exempt public sector superannuation scheme or a defined benefit scheme). Employer MySuper products (tailored and corporate MySuper products) are not currently included as a category of fund to which default contributions under modern awards are permitted.

3.7 The FW Amendment Act is amended to provide that default fund terms in modern awards must permit an employer to make contributions, for the benefit of a default fund employee, to a superannuation fund that offers an employer MySuper product that:

relates to the employer; and
is on the Schedule of Approved Employer MySuper Products.

[Schedule 3, item 11, new subsection 149D(1A)]

3.8 The new requirement that contributions can only be directed to a fund in respect of an employer MySuper product if the product has been approved by the FWC and included on the Schedule of Approved Employer MySuper Products will not apply until the FWC varies the modern award as part of the first four yearly review of default fund terms, which cannot occur before 1 January 2015. [Schedule 3, item 34, new clause 2A of Schedule 3 to the FW Act]

Approval process for employer MySuper products

The Schedule of Approved Employer MySuper Products

3.9 The FW Amendment Act is amended to insert a new Subdivision D of Division 4A of Part 2-3 of the FW Act, which provides for a two-stage process under which the FWC will assess employer MySuper products for inclusion on the Schedule of Approved Employer MySuper Products. [Schedule 3, item 30]

3.10 The FWC will be constituted as an Expert Panel when conducting both stages of the assessment process for employer MySuper products. [Schedule 3, item 32, new subsections 617(4) and (5)]

3.11 In each four yearly review of default fund terms, the FWC must make and publish the Schedule of Approved Employer MySuper Products and repeal any previous Schedule. [Schedule 3, item 30, new subsection 156L(1)]

3.12 The effect of an employer MySuper product being included on the Schedule is that an employer can make contributions, for the benefit of a default fund employee to whom a modern award applies, to a superannuation fund that offers the product, pending reassessment of the product as part of the next four yearly review. [Schedule 3, item 11, new subsection 149D(1A)]

3.13 Whether or not an employer MySuper product is included on the Schedule is not intended to affect the ability of an employee to choose a fund, or employers and employees to agree to enter into an enterprise agreement which nominates a different default superannuation fund or remains silent on default superannuation.

Applications for inclusion on the Schedule

3.14 Applications to have an employer MySuper product included on the Schedule of Approved Employer MySuper Products may be made by a superannuation fund that offers the product or an employer to which the product relates. [Schedule 3, item 30, new subsection 156N(1)]

3.15 Before making the Schedule, the FWC must publish a notice specifying the period in which such applications may be made as part of a four yearly review, referred to as the 'standard application period'. [Schedule 3, item 30, new section 156M and new paragraph 156N(2)(a)]

3.16 Applications to have an employer MySuper product included on the Schedule can also be made within an 'interim application period'. An interim application period between two four yearly reviews commences immediately after the Schedule of Approved Employer Products is made as part of the first four yearly review, and ends on 31 December, immediately before the year of the next four yearly review. [Schedule 3, item 30, new paragraph 156N(2)(b)]

3.17 If the FWC makes a determination to include an employer MySuper product on the Schedule as part of an interim application, the Schedule must be amended to specify the product, and published as amended. [Schedule 3, item 30, new subsections 156L(3) and (4)]

3.18 Applications must be accompanied by any fees prescribed by the regulations and must include information relating to the 'first stage criteria' referred to in new section 156F of the FW Act. [Schedule 3, item 30, new subsection 156N(3)]

3.19 The FWC must publish any application made. However, if the FWC is satisfied that the application includes information which is confidential or commercially sensitive, then the FWC may decide not to publish the information. If it does so, the FWC must instead publish a summary of the information which contains sufficient detail to allow a reasonable understanding of the substance of the information, without disclosing anything that is confidential or commercially sensitive. [Schedule 3, item 30, new subsections 156N(4)-(6)]

3.20 Only one application in relation to an employer MySuper product may be made in the period that commences at the start of the 'standard application period' and finishes at the end of the 'interim application period'. For example, if in respect of the first four yearly review, the period specified in the notice published by the FWC under new subsection 156M of the FW Act is 1 February 2014, then only one application could be made in respect of an employer MySuper product in the period from 1 February 2014 until 31 December 2017. [Schedule 3, item 30, new subsection 156N(7)]

Determining applications for inclusion on the Schedule

3.21 If an application is made to have an employer MySuper product included on the Schedule of Approved Employer MySuper Products, the FWC must make a determination about whether to include the product on the Schedule. [Schedule 3, item 30, new subsection 156P(1)]

3.22 When making or amending the Schedule of Approved Employer MySuper Products, and when determining applications to have an employer MySuper product included on the Schedule (whether the application is made as part of a four yearly review or in an interim application period), the FWC must be constituted as an Expert Panel. [Schedule 3, item 32, new subsections 617(4) and (5 ))]

3.23 For these purposes, the Expert Panel will consist of seven FWC Members and must include:

the President, or a Vice President or Deputy President appointed by the President to be the Chair of the Panel; and
three Expert Panel Members who have knowledge of, or experience in, finance, investment management or superannuation.

[Schedule 3, item 33, new subsection 620(1A)]

3.24 The FWC must not include an employer MySuper product on the Schedule of Approved Employer MySuper Products unless the product satisfies the first stage test and the second stage test. [Schedule 3, item 30, new subsection 156P(2)]

The first stage test

3.25 An employer MySuper product satisfies the first stage test if the FWC is satisfied that including the product on the Schedule of Approved Employer MySuper Products would be in the best interests of 'default fund employees', or a particular class of those employees, taking into account:

the information provided in the application;
the first stage criteria; and
any submissions made in relation to satisfying the first stage test. [Schedule 3, item 30, new section 156Q]

3.26 'Default fund employee' is defined in new subsection 149C(2) of the FW Act, as an employee who is covered by a modern award and has no chosen fund, within the meaning of the SIS Act 1993.

3.27 The first stage criteria are provided in new section 149F of the FW Act and are the same as those the FWC is required to consider when determining applications to include a generic MySuper product on the Default Superannuation List. The criteria reflect those recommended by the Productivity Commission in its Report into Default Superannuation Funds in Modern Awards (Report No. 60) and include areas such as investment return, fees and costs, governance practices, insurance offered and administrative efficiency.

3.28 The FWC must ensure that all persons and bodies have a reasonable opportunity to make written submissions to the FWC about whether an employer MySuper product satisfies the first stage test. [Schedule 3, item 30, new subsection 156R(1)]

3.29 If a person or body makes such a submission and the person or body has an interest in relation to the superannuation fund that offers the product, or another superannuation fund referred to in the submission, then the person or body must disclose that interest in the submission. [Schedule 3, item 30, new subsection 156R(2)]

3.30 The FWC must publish any submission that is made. [Schedule 3, item 30, new subsection 156R(3)]

The second stage test

3.31 To be included on the Schedule of Approved Employer MySuper Products, an employer MySuper product must also pass the second stage test. [Schedule 3, item 30, new subsection 156P(2)]

3.32 An employer MySuper product passes the second stage test if the FWC is satisfied that including the product on the Schedule of Approved Employer MySuper Products would be in the best interests of default fund employees of an employer to which the product relates, or a particular class of those employees, taking into account:

any submissions that were made in relation to satisfying the second stage test; and
any other matter the FWC considers relevant. [Schedule 3, item 30, new section 156S]

3.33 The FWC must ensure that employees and employers to which the employer MySuper product relates, and any organisation that is entitled to represent their industrial interests, have a reasonable opportunity to make written submissions concerning whether the product satisfies the second stage test. [Schedule 3, item 30, new subsection 156T(1)]

3.34 If any person or body makes such a submission and the person or body has an interest in relation to a particular superannuation fund referred to in the submission, the person or body must disclose that interest in the submission. [Schedule 3, item 30, new subsection 156T(2)]

3.35 The FWC must publish any submission that is made. [Schedule 3, item 30, new subsection 156T(3)]

Number of funds that can be specified in a modern award

3.36 The FW Amendment Act currently requires the FWC to vary modern awards as part of a four yearly review to ensure that default fund terms specify at least two, but generally no more than 10, superannuation funds in relation to generic MySuper products. More than 10 funds can be specified if the FWC is satisfied it is warranted, taking into account the range of occupations of employees covered by the modern award.

3.37 The FW Amendment Act is amended to increase the maximum number of funds that can generally be specified in a modern award from 10 to 15. [Schedule 3, items 24, 26 and 28, new paragraph 156H(1)(b), note to new subsection 156H(1) and new subsection 156H(3)]

3.38 This amendment is intended to ensure that funds offering high performing generic MySuper products (including funds that offer employer-specific sub-plans within a generic MySuper product which provide discounted administrative fees and more beneficial insurance arrangements) have reasonable prospects of being positively assessed by the FWC and specified in relevant modern awards.

New requirements not to apply before 1 January 2015

3.39 The FW Amendment Act is amended to include a transitional provision which has the effect that the new requirements to be included in modern awards in relation to both generic MySuper products and employer MySuper products will not apply before 1 January 2015.

3.40 The transitional provision provides that in the first four yearly review of default fund terms, determinations varying the default fund term of a modern award under new sections 156H or 156J of the FW Act must take effect at the same time and must not take effect before 1 January 2005. [Schedule 3, item 34, new clause 2A of Schedule 3 to the FW Act]

3.41 Variations to default fund terms made under new section 156H are to specify at least two, but no more than 15, superannuation funds in relation to generic MySuper products that have been positively assessed by the FWC.

3.42 Variations made by the FWC under section 156J will ensure that default fund terms of modern awards comply with other requirements, including that such terms must permit contributions to funds that offer an employer MySuper product that is on the Schedule of Approved Employer MySuper Products.

Any new modern awards created between 1 January 2014 and 31 December 2017

3.43 If a modern award (for example, a modern enterprise award made under Schedule 6 to the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009) is made in the period that starts on 1 January 2014 and ends on 31 December 2017, the award will not be required to comply with the new requirement in relation to employer MySuper products until it is varied as part of the second four yearly review of default fund terms in 2018. Such an award will permit contributions to be made to a fund in respect of an employer MySuper product that is not included on the Schedule of Approved Employer MySuper Products, pending assessment of the product by the FWC in the 2018 review. [Schedule 3, item 34, new clause 2B of Schedule 3 to the FW Act] .

Other consequential and technical amendments

Publishing documents under Division 4A of Part 2-3 of the FW Act

3.44 An amendment provides that if the FWC is required under new Division 4A of Part 2-3 of the FW Act to publish a document, then the FWC must publish the document on its website or by any other means it considers appropriate. This requirement applies, for example, to publication of the Default Superannuation List and the Schedule of Approved Employer MySuper Products. [Schedule 3, item 30, new Subdivision E, new section 156U] '

Generic MySuper products' to be renamed standard MySuper products'

3.45 Technical amendments are being made to the terminology used in the FW Amendment Act to describe MySuper products other than tailored and corporate MySuper products. In the FW Amendment Act, the term 'generic MySuper product' includes MySuper products relying on the exception in section 29TA of the SIS Act 1993 from the general rule of only one MySuper product per fund. General understanding and usage of the term 'generic MySuper product' in the superannuation sector would not cover these section 29TA 'goodwill' products. To avoid any possibility of confusion, the term 'generic MySuper product' in the FW Amendment Act is being replaced by the term 'standard MySuper product'. [Schedule 3, items 4, 5, 7, 8, 12, 15-20, 22, 23, 25, 27 and 31]

Contributions to funds in respect of a tailored MySuper product where the fund is specified in the modern award

3.46 Under new subsection 149D(1) of the FW Act, default fund terms of modern awards will be required to specify superannuation funds in relation to their 'standard MySuper products' (formerly referred to as 'generic MySuper products).

3.47 The FW Amendment Act is amended to include a note under subsection 149D(1), indicating that if a fund is specified in the default fund term of a modern award in relation to a standard MySuper product and the fund also offers a tailored MySuper product that a default fund employee is entitled to hold, then any contributions made by the employer to the fund for the benefit of that employee will be paid into the tailored MySuper product, rather than the standard MySuper product. This is consistent with proposed new section 29WB of the SIS Act 1993 (to be inserted by item 47 of Schedule 1 to the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2013), which requires a fund's trustee to direct a default fund employee's contributions to a tailored MySuper product where one exists in relation to the relevant employer. [Schedule 3, item 10]

3.48 Default fund terms in modern awards will therefore permit an employer to make contributions to a fund in respect of a tailored MySuper product in two circumstances. Such contributions will be able to be made where the tailored MySuper product is specified in the most recent Schedule of Approved Employer MySuper Products. In addition, such contributions will also be permitted to be made where the fund has been positively assessed in relation to its standard MySuper product in the last four yearly review of modern awards and is specified in the modern award. STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Bill 2013

3.49 These amendments are 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

3.50 Schedule 1 to the FW Amendment Act amends the FW Act to introduce new requirements in relation to modern award terms about default superannuation, and a process under which the FWC will review such terms every four years.

3.51 The amendments in the Bill ensure that superannuation contributions for default fund employees to whom a modern award applies can be directed to a fund in respect of an employer superannuation product, subject to the product being assessed by the FWC as being in the employees' best interests.

3.52 Employer MySuper products typically offer more favourable terms and conditions for members (for example, lower or discounted fees and more favourable insurance arrangements).

Human rights implications

3.53 The amendments engage and promote the right to just and favourable conditions of work in Article 7 of the International Covenant on Economic, Social and Cultural Rights (ICESCR) by minimising disruption for employees and continuing to protect their best interests.

3.54 Requiring corporate and tailored MySuper products to be assessed by an Expert Panel within the FWC will improve the transparency, objectivity and contestability of default superannuation fund selection and increase competition within the sector.

Conclusion

3.55 The amendments are compatible with human rights.

Minister for Financial Services and Superannuation and Minister for Employment and Workplace Relations, the Hon Bill Shorten

Index

Schedule 1: Loss relief and asset roll-over for transfer of amounts to a MySuper product

Bill reference Paragraph number
Item 1, section 311-10 1.36
Item 1, sections 311-1 and 311-5 and subsection 311-10(1) 1.17
Item 1, subsection 311-10(1) 1.18
Item 1, subsection 311-10(2) 1.21
Item 1, paragraphs 311-10(3)(a) and (b) 1.23
Item 1, paragraph 311-10(3)(c), section 311-15, and paragraph 311-40(1)(b) 1.25
Item 1, subsection 311-10(4) 1.26
Item 1, section 311-20 1.27
Item 1, sections 311-20 and 311-35 1.28
Item 1, subsections 311-20(2) to (4) 1.29
Item 1, section 311-25 1.31
Item 1, paragraph 311-25(c) 1.32
Item 1, paragraphs 311-30(a),(b) and (d) 1.33
Item 1, paragraph 311-30(c) 1.34
Item 1, subparagraphs 311-30(c)(i) and (d)(i) 1.35
Item 1, section 311-35 1.30
Item 1, subsections 311-40(1) and (2) 1.38
Item 1, section 311-45 1.40
Item 1, section 311-50 1.48
Item 1, section 311-60 1.50
Item 1, subsection 311-55(1) 1.57
Item 1, subsection 311-55(2) 1.58
Items 1, 2 and 13, subsection 311-10(4) 1.51
Item 3, table item 7 in subsection 40-340(1) 1.46
Item 4, table item 36 in section 112-97 1.66
Item 5, table item 11 in subsection 115-30(1) 1.42
Items 6 and 7, subsections 290-170(6) and 290-180(6) 1.60
Items 8, 10 and 11, paragraphs 292-25(2)(b) and 292-90(2)(b), and table item 2A in subsection 295-190(1) and table item 2A in subsection 295-490(1) 1.62
Item 9, subparagraph 293-30(2)(b)(ii) and clause 2, table item 4 1.65
Item 12, subsection 995-1(1) (definition of 'accrued default amount') 1.24
Items 14 to 20, 23 and 24, and clause 2, table items 6 to 8 1.52
Items 21 and 22, and subitem 25(1) 1.54
Subitem 25(2) 1.55

Schedule 2: Sustaining the superannuation contribution concession: consequential amendments for Defence Force superannuation

Bill reference Paragraph number
Item 1, definition of 'benefit' in subsection 3(1) of the DFRDB Act 2.7
Item 2, definition of 'release authority lump sum' in subsection 3(1) of the DFRDB Act 2.8
Items 3 and 4, note in subsections 24(2A) and 32A(4) of the DFRBD Act 2.9
Item 5, subsection 48(5) of the DFRBD Act 2.10
Item 6, section 49K of the DFRDB Act 2.12
Item 6, section 49L of the DFRDB Act and item 7, subsection 124(3) of the DFRDB Act 2.14
Item 6, section 49M of the DFRDB Act 2.15
Item 6, section 49N of the DFRDB Act 2.17
Item 6, section 49P of the DFRDB Act 2.18
Item 6, section 49Q of the DFRDB Act 2.19

Schedule 3: Default superannuation

Bill reference Paragraph number
Items 1 and 5 3.2
Items 4, 5, 7, 8, 12, 15-20, 22, 23, 25, 27 and 31 3.45
Item 10 3.47
Item 11, new subsection 149D(1A) 3.7, 3.12
Items 24, 26 and 28, new paragraph 156H(1)(b), note to new subsection 156H(1) and new subsection 156H(3) 3.37
Item 30 3.9
Item 30, new subsections 156L(3) and (4) 3.17
Item 30, new section 156M and new paragraph 156N(2)(a) 3.15
Item 30, new paragraph 156N(2)(b) 3.16
Item 30, new subsection 156N(3) 3.18
Item 30, new subsections 156N(4)-(6) 3.19
Item 30, new subsection 156N(7) 3.20
Item 30, new subsection 156P(1) 3.21
Item 30, new subsection 156P(2) 3.24, 3.31
Item 30, new section 156Q 3.25
Item 30, new subsection 156R(1) 3.28
Item 30, new subsection 156R(2) 3.29
Item 30, new subsection 156R(3) 3.30
Item 30, new section 156S 3.32
Item 30, new subsection 156T(1) 3.33
Item 30, new subsection 156T(2) 3.34
Item 30, new subsection 156T(3) 3.35
Item 30, new Subdivision E, new section 156U 3.44
Item 30, new subsection 156L(1) 3.11
Item 30, new subsection 156N(1) 3.14
Item 32, new subsections 617(4) and (5)) 3.10, 3.22
Item 33, new subsection 620(1A) 3.23
Item 34, new clause 2A of Schedule 3 to the FW Act 3.8, 3.40
Item 34, new clause 2B of Schedule 3 to the FW Act 3.43


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