In The Tax Institute’s weekly TaxVine email (No.6, 1.3.23), Kym Bailey, CTA, Technical Services Manager at JBWere, and Chair of their National Superannuation Technical Committee, discusses the recent Government consultation on legislating a statement of the ‘objective’ of superannuation. Superannuation appears to be in the sights, of the Treasurer, with a clear indication, that he wants to limit the tax concessions, afforded to larger balance members (an extreme example being, SMSF’s with, apparently, $100m or more, in the Fund, held for the members’ retirement benefits). He believes that the ‘ground-rules’ need setting, to enable changes to superannuation (to further cap benefits). ‘Ground rules’ may provide the excuse for change, as there was no electoral mandate, for wholesale changes to superannuation. Indeed, there was an outright assurance, that there would be no changes to superannuation, during the current parliamentary term. We have been told the proposed anchor, for future changes to superannuation, would be achieved, if an objective of superannuation, is legislated.
Consultation Paper – proposing a draft ‘objective’
On the 20 February 2023, the Treasurer released a consultation paper on possible legislative changes to enshrine the objective of superannuation. Page 9 of the consultation paper suggests the following wording for the proposed legislation:
‘The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.’
Will the proposed ‘objective’ provide the necessary anchor?
The complexity of the proposed objective is likely to cause difficulties, as will the lack of clarity on where this new legislative provision would be housed. Page 12 of the consultation paper muses that it ‘could be in a new stand-alone Act or in existing superannuation legislation such as the SIS Act 1993’.
This uncertainty suggests there isn’t a continuity of rigour and understanding of the development of superannuation law, with the paper concentrating on the previous attempt to legislate a purpose of superannuation following the 2014 Financial System Inquiry (FSI) – (p6) and the acknowledgment that the 2020 Retirement Income Review ‘broadly agreed with the findings of the FSI’. While these references may have been included to remind us all that this is not a new proposal, the consultation paper does not posit an explanation for why an objective for superannuation has not been legislated and why it is considered this is the only way to ‘provide clarity on the role of superannuation’.
Although correctly positioning superannuation as one of the three pillars of the retirement income system — (1) comprising compulsory superannuation, (2) the Age Pension and (3) private savings — the consultation paper then attempts to roll all the pillars into an objective for superannuation. If this is the aim, perhaps this could be better achieved by revising the wording:
As one of the three pillars of the retirement income system, the objective of superannuation is to preserve savings to deliver income for a dignified retirement.
The other retirement income pillars are supported by a strong superannuation system.
The existing legislated ‘sole purpose’ for superannuation
More broadly, to argue that superannuation does not have an objective, ignores the existing legislation setting out the ‘sole purpose’ for which a complying superannuation fund may operate (section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA) – the sole ‘purpose’ test. Since the beginning of modern superannuation, the sole purpose test has made it abundantly clear that a superannuation fund must be maintained for at least one of the legislated core purposes and for one or more of the ancillary purposes. A fund breaches the sole purpose test if it is maintained solely for one or more of the ancillary purposes.
- The core purposes are essentially the provision of benefits on or after a member’s retirement, reaching age 65 or, death.
- The ancillary purposes cover employment termination insurance, salary continuance for employment cessation due to ill health, as well as reversionary payment of these benefits in the event of the member’s death.
The provision also includes subparagraph 62(b)(v) of the SISA, ‘the provision of such other benefits as the Regulator approves in writing’. APRA, as regulator of large funds, has used this provision over time to provide additional ancillary purposes for superannuation and it seems that this may be a legislative ‘loop-hole’ that enabled the COVID-19 early release payments.
‘Objective’ versus ‘purpose’
So, is an objective of superannuation different to the purpose of superannuation? They both entail goals, but it could be argued purpose is the ‘why’ and longer-term, whereas objective represents the ‘how’ and by extension, a shorter time frame. If viewed from this perspective, should the sole purpose test be the basis for framing the objective, with the purpose being a tight set of criteria (vision for) superannuation, and the objective being the shorter-term goals to fulfill the purpose(s)?
The answer to where this proposed legislation should sit is easily answered if it becomes a companion to the sole purpose test.
More work needs to be done to understand how present day benefits, such as the First Home Super Saver Scheme (FHSSS), were legislated via the tax law without reference to the superannuation law or the sole purpose test. At its core, the FHSSS is a tax effective way to save a nominal amount toward a first home deposit using superannuation. Could the outcome be achieved via other investment structures such as special purpose savings accounts? It is not either a core or ancillary purpose of superannuation so this policy should have failed, regardless of there being no legislated objective for superannuation.
COVID-19 early release also appears to be a legislative over-reach when viewed from the perspective of the sole purpose test. It even looks like over-reach when compared to the ‘compassionate grounds’ release regulation in reg 6.19A of the SISA. For this reason, subparagraph 62(b)(v) of the SISA, ‘the provision of such other benefits as the Regulator approves in writing’, needs reviewing to determine how it sits against any objective of superannuation, otherwise the legislative framework is unlikely to be any further ahead than it is now.
So why hasn’t the objective of superannuation been legislated to date? Is it that the current sole purpose test provision is not well understood, or indeed, is it that the connection between purpose and objective is well understood and therefore previous suggestions are not in line as they effectively restate the sole purpose test?
As for the current consultation paper, the sole purpose test receives a passing mention, however, is consigned to a trustee ‘fiduciary duty’. The sole purpose test is therefore able to be dismissed as irrelevant ‘as the objective is not intended to guide the regulation of trustee conduct (and) it would not change trustee obligations’. I think this misses the point somewhat and brings into question: is the SISA solely for the purpose of superannuation fund compliance? If so, it would seem to answer the question, regarding where not to house any legislated objective of superannuation.
Closing comments
The Tax Institute’s Associate, Amanda Donald, has posted in Community about this preamble. Join the conversation and share your thoughts and ideas on Government’s current consultation regarding the objective of superannuation.
[Tax Month – March 2023, last month] 22.4.23