Commonwealth Numbered Regulations - Explanatory Statements Commonwealth Numbered Regulations - Explanatory Statements[Index] [Search] [Download] [Related Items] [Help]
OCCUPATIONAL SUPERANNUATION STANDARDS REGULATIONS (AMENDMENT) 1993 NO. 149
EXPLANATORY STATEMENTSTATUTORY RULES 1993 No. 149
ISSUED BY THE AUTHORITY OF THE TREASURER
Occupational Superannuation standards Act 1987
Occupational Superannuation Standards Regulations (Amendment)
The Occupational Superannuation Standards Act 1987 (the Act) provides operating standards and other relevant conditions with which superannuation funds, approved deposit funds and pooled superannuation trusts are required to comply to be eligible for taxation concessions under the Income Tax Assessment Act 1936 (the Tax Act).
Section 15D of the Act empowers the Insurance and Superannuation Commissioner (the Commissioner) to approve applications for funding credits, prescribe appropriate amounts as funding credits, and to approve the transfer of funding credits from one fund to another.
Section 22 of the Act provides that the Governor-General may make Regulations for the purposes of the Act.
BACKGROUND
What is a funding credit?
Funding credits are tax deductible amounts granted to eligible superannuation funds to prevent the retrospective application of the 15 per cent contributions tax which was introduced on 1 July 1988. Funding credits will be approved for liabilities which accrued prior to 1 July 1988 to be met by contributions made after that date.
A funding credit may occur either as a result of a late payment of contributions that are for service prior to 1 July 1988 and/or, for defined benefit funds, from a shortfall in fund assets needed to meet a liability which accrued prior to 1 July 1988.
History
In his economic statement of May 1988 the then Treasurer announced significant changes to the tax treatment of superannuation funds, effective from 1 July 1988. One of the changes was the introduction of a 15 per cent tax on deductible contributions made to a fund with a corresponding 15 per cent reduction in the tax on benefits when they emerge from the fund. This had the effect of bringing forward 15 per cent of the tax on superannuation.
To avoid retrospective application of the newly introduced contributions tax, the Treasurer made special provision for funds which had an outstanding liability for superannuation contributions when the tax was introduced. In the Treasurer's Press Release No. 82 of 11 August 1988 he announced his intention:
'...to permit after 30 June 1988, without liability to the tax on contributions, the funding of benefits accrued in relation to pre 1 July 1988 service subject to the following conditions:
(a) the option to be available only to funds or schemes existing at 30 June 1988;
(b) the amount of contributions to be
(i) the difference between the contributions actually made by the sponsoring employer before 1 July 1988 and a specified rate or amount of contributions which the employer was legally required to have made before that date under the terms of the trust deed, by a constituent document or by an industrial agreement or award executed before 1 July 1988; plus
(ii) in the case of a defined benefit fund, the amount of any additional outstanding past service liabilities at 30 June 1988 not provided for by the amount described in (i) and which is based on the assumptions and methods used in the last actuarial investigation before 1 July 1988.
For contributions to be exempt from tax, satisfactory evidence must be provided to the Insurance and Superannuation Commissioner. The evidence is to include a statement from the fund's auditor and, in the case of a defined benefit fund, a statement from the fund's actuary...'.
Amounts of contributions exempted from tax are known as pre-1 July 1988 funding credits. Sections 275A and 275B of the Tax Act allow funds to use the funding credits to exempt employer contributions from tax, subject to limits in any income year. The amount of funding credits to be granted has been estimated to be in the vicinity of $80 billion, which, given a contributions tax rate of 15 per cent, represents $12 billion in tax deductions.
The Administration of Funding Credits
The Actuarial Group of the Insurance and Superannuation Commission (the ISC) will administer the funding credit function on a cost recovery basis under subsection 35(3) of the Public Audit Act 1901.
For efficiency and cost control, applications will be processed on a self assessment basis, supported by a thorough audit program.
Overview of the Method of Calculating Funding Credit Amounts
After extensive industry consultation it was decided that a 'snapshot' approach should be taken to determine funding credit amounts. This means that funding credits will be determined as at 30 June 1988 and no adjustments (pre-1 July 1988 funding debits) made for subsequent experience, except in the rare event of benefits accrued prior to 1 July 1988 being reduced as a result of a change in the rules of the fund (this is known as a prescribed event and, under the Occupational Superannuation Standard Regulations, would require the approval of all of the members of the fund or the ISC).
The reasons for adopting this approach are:
- it is simple;
- it does not involve continual recalculations by the fund to monitor for changing levels of funding liabilities and is therefore less costly;
- it prevents reapplications from funds that have already received funding credits but subsequently suffer a shortfall in fund assets due to adverse investment experience;
- it is consistent with the treatment of funds that had a funding surplus as at 30 June 1988, and therefore were not eligible for a funding credit, that is subsequently more than eliminated by adverse experience; such funds are not able to apply for a funding credit for the funding of the pre l-July 1988 funding surplus that is lost; and
- it will give greater certainty to future decision making, for both the Government and the funds which receive funding credits, as the amount of credits will not alter in the future (apart from the yearly indexation of unused balances of funding credits).
However, this approach places great importance on the actuarial basis adopted in determining the amount of the funding credits for defined benefit funds. Since there will be no adjustments in the light of actual experience, a very conservative actuarial basis would result in unreasonably large tax concessions being granted. Therefore, restrictions are to be placed on the actuarial basis adopted. These restrictions are:
(i) the method of determining the amount of benefits that are to be regarded as having accrued prior to 1 July 1988 is prescribed;
(ii) the actuarial assumptions are not prescribed, but are expected to be those used for the fund prior to 25 May 1988. Variations will be allowed, subject to the approval of the ISC; and,
(iii) the method and assumptions adopted must not result in a greater amount of funding credit than that which is derived using the prescribed method set of control assumptions.
The Transfer of a Funding Credit
The transfer of part or all of a funding credit amount from one superannuation fund to another may be necessary following a scheme reconstruction or for other reasons. For control purposes, the Regulations provide that funds wishing to transfer a funding credit need to notify the ISC of the details of the transfer and seek the ISC's approval for the transfer.
The regulations were developed in consultation with representatives of the superannuation industry and related professional organisations.
Details of the regulations are in the attachment.
The regulations commenced on gazettal.
ATTACHMENT
Occupational Superannuation Standards Regulations (Amendment)
The regulations deal with complex actuarial calculations and associated legal matters. As they have been drafted in the most legally effective manner, the order in which they appear does not always follow the logical sequence that the provisions would be dealt with. For instance, in dealing with a formula which has many variables, the regulations may define the variables before presenting the formula whereas, in practice, the formula would appear first.
For ease of reference the regulations will be dealt with in chronological order but, for simplicity, some of the paragraphs will be explained out of sequence to present them in the correct context.
References in the following paragraphs are to provisions of the amending regulations. References to the 'principal regulations' are references to the Occupational Superannuation Standards Regulations.
Regulation 1
Regulation 1 specifies that the principal regulations are amended as set out in these regulations.
Regulation 2 - Principal Regulation 17 (Financial Reports and disclosure of information standards).
Subregulation 17(2) is amended to require the triannual actuarial report of private sector defined benefit funds or fully funded public sector funds to include a statement as to whether or not a prescribed event has occurred which will result in the reduction of the fund's funding credit balance.
Regulation 3 - PART 3B: PRE-1 JULY 1988 FUNDING CREDITS AND DEBITS
Regulation 3 inserts after regulation 23P a new Part 3B Pre-1 July 1988 Funding Credits and Debits, comprising regulations 23PA to 23PT.
Regulation 23PA
(Interpretation)
Regulation 23PA defines a number of words and expressions for the purpose of the regulations.
It defines a 'reviewable decision' as a decision made by the Commissioner to refuse to give a notice of approval, or to revoke a notice of approval, to transfer a funding credit. A decision to disapprove an application for a funding credit or debit is not defined as reviewable because such decisions are reviewable under section 3(1) of the Act.
Regulation 23PB
(Pre-1 July 1988 funding amounts)
Subregulation 23PB(2) states that a funding credit may occur either as a result of a late payment of contributions that are for service prior to 1 July 1988 and/or, from a shortfall in fund assets needed to meet a liability which accrued prior to 1 July 1988.
Subregulation 23PB(1) defines 'late payment' funding credits for both accumulation funds and defined benefit funds as any unpaid employer contributions which, under the terms of the governing rules of the fund, were owing as at 30 June 1988. To avoid potential abuse of this tax concession within non arms length arrangements. late payment amounts are not to include any contribution whose payment is at the discretion of the employer-contributor.
Subregulation 23PB(3) provides that amounts claimed as a late payment amount should not also be claimed as a shortfall-inasset amount. This is to prevent double counting.
Regulation 23PC
(Shortfall-in-assets amount calculation)
Subregulation 23PC(1) imposes a cap on the amount of funding credit that a defined benefit fund is able to claim. The claimable amount will be the lesser of two amounts derived from two prescribed calculations; one uses the assumptions made by the fund prior to the announcement of the contributions tax. and the other being a control calculation which effectively caps the funding credit amount. The control calculation is to prevent funds that adopt a conservative actuarial basis from receiving unreasonably large tax concessions.
Subregulation 23PC(2) defines, or cross-references to more detailed definitions of the variables used in the calculations set out in subregulation 23PC(l). This is necessary to achieve consistency throughout, and control over. applications from a large number of funds which vary in benefit design and actuarial assumptions. It also provides that three of the variables - 'net market value of fund assets', 'Value A of accrued benefits' and 'Value B of accrued benefits' are defined in greater detail in regulations 23PD, 23PE and 23PF respectively.
Paragraph 23PC(3)(a) provides that any alteration to the governing rules of the fund after 30 June 1988, apart from one which is a prescribed event, should be ignored to ensure that funding credits are only given to genuine pre-1 July 1988 funding liabilities.
Paragraph 23PC(3)(b) provides that any accrued asset shortfall amount is ignored if it results from a benefit whose payment to a non arms length member is at the discretion of the employercontributor.
Regulation 23PD
(Estimation of net market value of fund assets)
Regulation 23PD prescribes, for the purpose of determining the shortfall-in-assets amount under subregulation 23PC(2), a detailed definition for the net market value of fund assets. This definition is detailed to prevent subjective and unrealistic valuations which may artificially increase the size of the funding credit.
Regulation 23PE
(Value A of accrued benefits)
Regulation 23PE prescribes, for the purpose of calculating the shortfall-in-assets amount under subregulation 23PC(2) the assumptions that a fund's actuary is to use to determine the accrued liabilities of the fund as at 30 June 1988.
Value A allows the fund to use the assumptions that it used prior to the announcement of the contributions tax, subject to certain restrictions which are mostly to control assumptions which the trustees have the discretion to vary.
Regulation 23PF
(Value B of accrued benefits)
Regulation 23PF prescribes, for the purpose of calculating the shortfall-in-assets amount under subregulation 23PC(2) the assumptions that a fund's actuary is to use to determine the accrued liabilities of the fund as at 30 June 1988
The assumptions used for Value B of accrued benefits are designed to cap the funding credit amount.
Regulation 23PG
(Calculation of Value A or Value B of accrued benefits)
Regulation 23PG prescribes the method that a fund's actuary is to use to calculate Value A and Value B. Essentially, the prescribed method determines the aggregate present values of the pre-1 July 1988 component of each benefit to which a member may become entitled on future exit from the fund, calculated in the case of Value A, on the basis used by the fund's actuary prior to the announcement of the contribution tax and in the case of Value B, on a proportionate basis, using completed fund membership as at 30 June 1988 divided by total fund membership to date of exit.
The method is largely prescribed to enable the efficient approval and auditing of applications. Without a prescribed method it would be difficult and costly to ensure the validity of funding credit amounts.
Regulation 23PH
(Date before which applications must be made)
This regulation prescribes a closing date for funding credit applications of 30 June 1994.
Regulation 23PI
(Application fees)
To facilitate the recovery of costs under subsection 35(3) of the Public Audit Act 1901 funds will pay an application fee to cover the cost of processing their return.
The applications will be processed on a self-assessment basis supported by a thorough audit program. This is less costly than the alternative of examining all applications in full prior to approval. As auditing costs are an integral part of the selfassessment approach the fee for each application reflects the cost of processing the application p1111 an amount to cover the auditing costs associated with the class of application.
Paragraph 23PI(1)(a) prescribes a flat fee for late payment applications.
Paragraph 23PI(1)(b) prescribes a scaled fee for shortfall-inassets applications. The fee is on a sliding scale commencing at $500 and increasing according to the size of the amount claimed. This is because larger cases will require more specialised actuarial resources. The maximum fee will be $5,000 which will be attracted by any application which is for an amount greater than $2,500,000.
Paragraph 23PI(l)(c) prevents the double charging of fees where a fund applies for a funding credit for both late payment and a shortfall-in-asset amounts. In this case the fee for the shortfall-in-assets amount will apply.
Regulation 23PJ
(Prescribed events for the purposes of paragraph 15D(4)(a) of the Act)
This regulation provides that a prescribed event will occur if benefits accrued prior to 1 July 1988 are reduced as a result of a change in the rules of the fund. Under the principal regulations this would require the approval of all of the members of the fund or the ISC and is therefore unlikely to be a common occurrence.
If a prescribed event occurs the Commissioner may give to the trustees of the fund a notice in writing granting the trustees of the fund a pre-1 July funding debit to reduce their funding credit balance appropriately. The formula set out in regulation 23PJ provides that, in testing for the occurrence of a prescribed event, the actuaries of the fund should consider the effect that transfers to and from the fund may have had on the fund's funding credit balance.
Regulation 23P
(Time and manner in which prescribed events must be notified to the Commissioner)
Paragraphs 23PK(1)(a) and (b) provide that trustees must notify the ISC of a prescribed event within three months of its occurrence or by 30 June 1994 if later.
Paragraph 23PK(2)(a) requires that notification of a prescribed event should be accompanied by a statement from an actuary certifying the amount by which the event reduces the funding credit; and
Paragraph 23PK(2)(b) requires that notification of a prescribed event should be accompanied by a statement from the trustees detailing the alteration of the fund's governing rules which gives rise to the prescribed event.
Subregulation 23PK(3) provides that the Commissioner may extend the time in which notice must be given of the prescribed event.
Regulation 23PL
(Transfer of PJFCs - trustees of transferor funds)
The transfer of a funding credit may be necessary following a scheme reconstruction or for other reasons. Funds wishing to transfer a funding credit amount will be required to notify the ISC of the details of the transfer and seek the Commissioner's approval. This approval process is necessary to prevent the abuse of funding credits and to ensure that transferring members are treated equitably.
Subregulation 23PL(1) provides that the trustees of a defined benefit fund who wish to transfer a funding credit amount to another fund may apply to the Commissioner for approval.
Paragraphs 23PL(2)(a) and (b) respectively provide that transfers will only be approved if the criteria set out in regulation 23P0 are satisfied, or, the Commissioner is satisfied that special circumstances exist.
Paragraph 23PL(3)(a) provides a control against the commercial trading of funding credit amounts by ensuring that they can not be transferred unless a corresponding pre-1 July 1988 funding liability is also transferred.
Paragraph 23PL(3)(b) provides a check to ensure that the fund's indexed funding credit balance is sufficient to accommodate the transfer.
Subregulation 23PL(4) provides that the Commissioner must, as soon as practicable, notify the trustee of the transferor and transferee funds of the approval of the application to transfer a funding credit
Regulation 23PM
(Transfer of PFFCs - trustees of transferee funds)
There will be situations where a fund which had a funding liability as at 30 June 1988 has since been reconstituted or merged with another fund. In such cases, it will be necessary for the trustees of the newly constituted fund or the fund which has resulted from the merger to apply for a funding credit to offset the accrued pre-1 July 1988 funding liability of the original fund.
Subregulation 23PM(1) and paragraphs 23PM(1)(a) and (b) make provision for such cases.
Paragraph 23PM(1)(c) provides that a transferee fund constituted on or after 1 July 1988 may apply for a transfer where that fund has taken on the liabilities, but not all the assets, in respect of pre-1 July 1988 Contributions to a transferor fund.
Subregulations 23PM(2) (3) and (4) impose the same requirements on the transferee fund , as if the transfer were happening under the provisions of regulation 23PL.
Regulation 23PN
(Transfer of PJFCs-revocation of approval)
It may be necessary for the Commissioner to revoke the approval of a transfer if new information becomes available which results in the transfer failing to meet the prescribed criteria.
Regulation 23PN provides the Commissioner with the power to revoke the approval of a transfer if new information provided after a decision does not satisfy the requirements of 23P0 or makes previously existing special circumstances void.
Regulation 23PO
(Transfer of PJFCs-requirements to be satisfied)
This regulation sets out the requirements that must be satisfied for a transfer to be approved under subregulation 23PL(2) and 23PM(2).
Paragraph 23PO(a) requires actuarial certification that the transfer is 'reasonable' with regard to the unfunded liability being transferred from the transferor fund, the amount of unfunded liability which remains with the transferor fund and the amount of benefits that have accrued prior to 1 July 1988. Certification of reasonableness is a common actuarial practice used for dealing with complex matters that are difficult to quantify and which may have much wider implications. In assessing whether a transfer is reasonable within the context of this subparagraph, the Commissioner will be primarily concerned in assuring that the transferring and remaining members in respect of whom the funding credit relates are treated equitably.
Paragraph 23PO(b) provides that, for a transfer to be approved, the transferor fund must have, by notice, approval of the funding credit under subsection 15D(2) of the Act.
Paragraph 23PO(c) provides that the funding credit balance must be sufficient to accommodate the transfer.
Paragraph 23PO(d) provides that the fund to which the funding credits are being transferred must be a complying fund under either subsection 12(3) or subsection 13(1) of the Act.
Paragraph 23PO(e) requires actuarial certification that sufficient information about the transfer is available to enable future calculations to monitor for the occurrence of a prescribed event.
Regulation 23PP
(Notice of reviewable decisions and reasons for those decisions)
Subregulation 23PP(1) provides that the Commissioner must give notice of reviewable decisions and reasons for the decisions to the interested party as soon as practicable.
Subregulation 23PP(2) provides that the notification must contain reasons for the Commissioner's decision.
Paragraphs 23PP(3)(a) and (b) respectively provide that the notice must state that the trustees may request reconsideration of the non-approval of an application for a funding credit transfer and that if dissatisfied with the reconsideration may apply to the Administrative Appeals Tribunal.
Subregulation 23PP(4) provides that the validity of the Commissioner's decision on a transfer is not affected by any non-compliance with subregulation 23PP(3).
Regulation 23PQ
(Reconsideration of certain decisions)
Subregulation 23PQ(1) provides that within 21 days from receiving notice of a decision, or such time as the Commissioner allows, the trustees may give notice requesting the Commissioner to reconsider the decision.
Subregulation 23PQ(2) provides that the trustees must set out the reasons for a request.
Paragraphs 23PQ(3)(a) and (b) respectively provide that, subject to subregulation 23PQ(4) described below, the Commissioner must reconsider the decision and may confirm or revoke it.
Subregulation 23PQ(4) provides that if the Commissioner does not confirm or revoke the decision within 21 days he will be taken to have confirmed the decision.
Subregulation 23PQ(5) provides that if the Commissioner varies or revokes the decision then he or she must provide the Commissioner of Taxation the details of the decision.
Regulation 23PR
(Review by Tribunal of reconsidered decisions)
Regulation 23PR provides that application may be made to the Administrative Appeals Tribunal for review of the Commissioner's decision to vary or confirm a decision.
Regulation 23PS
(Actuaries to Certify in relation to Determinations)
Regulation 23PS provides that an actuary who makes a determination under the Part must certify that the determination is in accordance with the Part and any professional standards imposed by the Institute of Actuaries of Australia.
Regulation 23PT
(Substituted Accounting Periods)
Regulation 23PT provides that superannuation funds who use a 'substituted accounting period' and therefore do not balance their books on 30 June, may elect to use their substitute balancing date for funding credit purposes.