Superannuation Update

Financial Services eBulletin - 19 September 2012


In this edition of Superannuation Update, we discuss  the Productivity Commission's draft report on Default Superannuation Funds, and we look at some of the reforms proposed by the Privacy Amendment (Enhancing Privacy Protection) Bill 2012. We also review some recent Administrative Appeals Tribunal decisions, which have recently allowed two taxpayers' appeals against decisions by the Commissioner of Taxation to disallow their excess contributions tax objections.

Quick links:

Productivity Commission's draft report on Default Funds - a political hot potato

The June release of the Productivity Commission's draft report on Default Superannuation Funds in Modern Awards (Report) has sparked significant media interest as well as vigorous political debate. This is understandable, as the commercial stakes are high.

The inclusion of a superannuation fund as a 'default' fund in a modern award gives that fund a special status because employers must pay default superannuation contributions for employees covered by the award (being contributions made where the employee does not choose a specific fund) to the fund (or funds) named. This, of course, excludes other potential competitor funds which are not named in the award. The Report acknowledges that, particularly where only a small number of funds are named, the named funds are 'privileged', and have an 'almost guaranteed market share' as a result of that status.

Interestingly, the Report notes that there are 122 modern awards in total and of these, 109 list default funds whereas 13 do not. For the awards that do list default funds, the vast majority name between 2 and 10 funds, but 16 name only one fund and 13 name 11 or more funds.

Improving the governance and transparency of default superannuation products was a key focus of the Cooper Review, and the MySuper reforms which that Review recommended and which are now are in the process of being implemented. A major policy question that is central to much of the debate generated by the Report is whether, having regard to the MySuper reforms, it is necessary for the modern award system to act as a further filter on the funds which can receive default contributions. The answer given in the Report is 'yes'.

The Commission's recommendations in brief

In brief, the Report recommends that:

  • the system of naming a small number of default superannuation funds in modern awards (between 5 and 10 funds) should continue;
  • there should be new, more transparent processes for evaluating funds for inclusion in modern awards, which should take into consideration nine 'factors', including the appropriateness of the fund's investment return objective and risk profile for employees covered by the modern award, the fund's expected ability to deliver on its investment objectives and the appropriateness of the fees charged;
  • the selection process should be the subject of wholesale review every 8 years, with a 'light-handed' interim review mid-way between these reviews; and
  • employers should be allowed to choose a default fund other than one of the named funds, but only if their employees are 'no worse off' than if the employer had chosen a named fund and the employer can demonstrate that it took into account the same nine factors that are required to be taken into account when selecting the named funds.

In some ways, the Commission's conclusions are not surprising. The Commission's Terms of Reference were limited to the process for the selection and ongoing review of the funds named in modern awards and did not include the more fundamental question of whether or not funds should be named in modern awards at all.

Despite this, the Report does consider having a system where any fund with a MySuper product could receive default contributions, but rejects this approach for two main reasons, namely:

    • a concern that employers, particularly small employers, will be ill-equipped to select a default superannuation fund from the available range of MySuper products and will find this an onerous task. A further concern is expressed that employers are at risk of legal claims being made against them by their employees if they make a poor choice; and
    • a concern that there should be a system in place to determine, for the benefit of employees who are subject to a particular modern award, a small class of funds which best serve their needs. This is designed to counter the risk that when an employer chooses a default fund, the employer may be motivated by factors other than the best interests of the employees.


Concern for employers – reducing the available choices

A strong theme throughout the Report is that employers would find it onerous and costly to choose a default fund if no funds are named in modern awards (or if a large number of funds are named). The Report refers to 'large search costs' being incurred by employers. This concern is apparently based on an assumption that employers would need to investigate every available MySuper product but, as there is no legal requirement for employers to do so, this concern seems misconceived. The Report also states that most employers 'lack the expertise' to make an informed choice. Reducing the choices available to an employer by naming only a handful of funds in each modern award is proposed as a solution to these perceived problems.

Although the Report refers to the risk of an employer being sued by its employees for making a poor choice of fund, this concern is not analysed in any detail. No case law or legal analysis is provided to support the proposition that an employer who chooses a fund that underperforms other publicly offered funds would be exposed to liability of this kind.

From a regulatory perspective, imposing a legally enforceable obligation on employers to contribute to particular funds seems a rather heavy handed way of helping employers to deal with these concerns. This approach puts employers at risk of incurring heavy penalties if they inadvertently (or otherwise) contribute to a fund other than one of the named funds. Surprisingly, however, a number of employer associations strongly advocated that employers continue to be subject to this additional layer of regulation.

Concern for employees – looking after their best interests

Adopting a primary aim of promoting the best interests of employees is uncontroversial. How best to achieve this aim is where views differ.

Another underlying theme of the Report is that the interests of the employer are not necessarily consistent with the interests of its employees and, for this reason, there should be a system which involves a decision-maker other than the employer. While it is true that the interests of the employer on the one hand and the employees on the other may diverge, the Report focuses on the potential for conflict and does not consider the many ways in which those interests are aligned.

Although some would argue that our current system encourages a 'lowest common denominator' approach to superannuation, employers do nonetheless have an interest in providing default superannuation arrangements that are attractive and competitive. After all, when an employer evaluates a superannuation offering, the people undertaking the task will themselves be employees with an interest in trying to secure an attractive offering. It is a pity that the Report does not give more credit to the important role that can be played by employers in seeking to negotiate a superior superannuation offering for their employees. Adopting a system where employers are effectively prevented from playing this role is likely to result in reduced employer engagement than currently exists.

Designing a process to select funds with the primary objective of promoting the best interests of employees also raises many practical issues. How will the body responsible for evaluating the funds determine the 'demographics' of the population that is covered by a particular modern award, for the purpose of assessing which funds are best suited to meeting the needs of those employees? At its most basic, the assessment would require a determination of which fund is likely to produce the best (ie, highest) future investment returns, net of fees and costs. As we all know, 'past performance is no indication of future performance', and future performance is impossible to predict with any degree of accuracy. Of course, this assessment also raises issues about the trade off between risk and return and the time horizon against which this prediction should be made. When considering what level of risk would be appropriate for the affected employees, it is not clear whether the assessment should be based on the level of risk that is appropriate for the actual employees concerned or the level that a hypothetical 'typical' employee would, if asked, consider acceptable.

Another key consideration is death and disability insurance. This is very much an individual matter, since a person's insurance needs reflect the person's family and financial situation more than the particular industry in which the person happens to be working. Given the wide variation in individual circumstances of employees potentially covered by a particular award, it is not clear how the insurance offerings of different funds would be evaluated and compared.

The Report refers to the likelihood of 'flipping' as a specific factor that should be taken into account when selecting default funds. 'Flipping' refers to members who participate in an employer sub-plan of a master fund being switched (or 'flipped') to a different sub-plan when they cease employment with that employer, and incurring higher fees and charges as a result. Under the MySuper reforms, an employee will only be able to be switched from a specific MySuper product (for a particular employer) to the fund's standard MySuper product. When being assessed for possible inclusion as a named fund in a modern award, it is the standard MySuper product (with its fees and charges) that will be assessed for suitability. Accordingly, the concern that an employee loses the benefit of discounted fees seems misplaced, given that the employee will (at worst) end up in the standard MySuper product which has already been assessed as being suitable for inclusion as a named fund in the modern award.

Legal basis for naming funds in modern awards

The naming of default funds in modern awards has been carried forward from previous legislative regimes; however, modern awards are creatures of new "fair work" legislation, (namely the Workplace Relations Amendment (Transition to Forward with Fairness) Act 2008, Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 and the Fair Work Act 2009). Although there is case law supporting the naming of default funds in awards, the relevant cases were decided under previous legislative regimes and the point has not been tested in the context of the "fair work" legislation.

Section 134 of the Fair Work Act 2009 specifies, as an overarching objective (called the "modern awards objective") that modern awards must "provide a fair and relevant minimum safety net of  terms and conditions"  taking into account a range of matters, including "the likely impact......on business, including on productivity, employment costs and the regulatory burden".

Unless the named fund produces a pre-determined rate of return, it is difficult to see how a clause which simply names a fund to which contributions must be made could be considered to provide for a 'minimum safety net' for employees. Also, since there is separate Commonwealth legislation (namely the Superannuation Guarantee (Administration) Act 1992) which specifies minimum standards for funds to which superannuation guarantee contributions are to be made, specifying particular superannuation funds in a modern award has the effect of requiring employers to meet two sets of requirements: those set out in that legislative regime as well as the specific, additional conditions set out in the modern award. This arguably increases the regulatory burden on business, without providing a minimum safety net, contrary to the modern awards objective.

Employer choice allowed – so long as employees are 'no worse off'

The Report recommends that employers be given an option of contributing to a fund other than one of the named funds, but only if the employer can demonstrate that its employees will be 'no worse off' than if contributions had been made to one of the named funds. This is an extremely onerous test, as it has been framed in absolute terms rather than the employer 'reasonably considering that' its employees will be no worse off.

If the strict 'no worse off' test is applied, employers may be unwilling to take up this option because of the risk that the chosen fund achieves an investment performance which is less than that achieved by one of the named funds, with the result that the 'no worse off' test cannot be met.

The Report also recommends that the existing 'grandfathering' mechanisms be removed, with employers having to justify any departure from contributing to a named fund on the basis of the 'no worse off' test. This limits an employer's ability to move to an alternative arrangement if problems emerge with its current provider.

What next?

The final report is due for release in October.


Business of being a trustee: privacy update

It is a busy time in superannuation at the moment: Stronger Super, the Future of Financial Advice and Superannuation Guarantee reforms are all demanding trustees' time and attention.

However, trustees should be mindful of the much-less publicised privacy reforms, which will also have implications for super fund operations. According to the Attorney General, Nicola Roxon, these are some of the "most significant developments in privacy reform since [the introduction of] the Privacy Act in 1988".

By way of background, the reforms proposed by the Privacy Amendment (Enhancing Privacy Protection) Bill 2012 have been years in the making. The process commenced on 31 January 2006 when the Australian Law Reform Commission received terms of reference from the then - Australian Attorney-General for an:

inquiry into the extent to which the [Privacy Act] and related laws continue to provide an effective framework for the protection of privacy in Australia.

A final report was provided by the Law Reform Commission to the Attorney-General in August 2008 and the Government released a response to the report in October 2009. Draft legislation was released for public comment in 2010 and 2011 and, finally, the Bill was introduced into Parliament on 23 May 2012.

The reforms proposed by the Bill are, among other things, designed to enhance the powers of the Australian Information Commissioner (formerly the Privacy Commissioner) (Commissioner) to promote compliance with privacy obligations by, most notably, introducing for the first time a civil penalty regime for serious or repeated interferences with an individual's privacy. Also relevant to trustees are the proposed changes to the National Privacy Principles (NPPs).

Current privacy obligations – the NPPs

Under the current Privacy Act 1988, private sector 'organisations' (which includes super fund trustees) are required to comply with the NPPs in their handling of an individual's 'personal information'.

Section 6 of the Act gives 'personal information' a broad definition which encompasses:

information or an opinion (including information or an opinion forming part of a database), whether true or not, and whether recorded in a material form or not, about an individual whose identity is apparent, or can reasonably be ascertained, from the information or opinion.

Of particular relevance to superannuation fund trustees are the duties under NPP 1 and NPP 2.

  • NPP 1 imposes obligations in relation to the collection of personal information and requires certain disclosures to be made to an individual from whom personal information is being collected.
  • NPP 2 regulates the use and disclosure of personal information which has been collected and, importantly, places limitations on the use and disclosure of that personal information.

What's changing?


In addition to the NPPs, the Privacy Act currently also contains 'Information Privacy Principles' (IPPs) which apply to 'agencies'. In essence, agencies are government bodies.

One of the primary goals of the reforms is to replace the 2 existing sets of principles (ie, the NPPs and IPPs) with one streamlined set of principles, to be known as the Australian Privacy Principles (APPs) which will apply to both public and government 'entities'.

APP 3 and APP 5 broadly contain equivalent obligations with respect to the collection of personal information as existing NPP 1. However, there are some differences and the relevant APPs appear to go somewhat further in terms of the obligations imposed.

Similarly, APP 6 and APP 7 broadly contain equivalent obligations with respect to the use and disclosure of personal information as existing NPP 2. However, again, there are some differences and the relevant APPs appear to go somewhat further in terms of the obligations imposed.

Also worth noting are the new express obligations under APP 1 with respect to privacy policies, including the requirement to have such a policy and the minimum content requirements for that policy.

Definition of 'personal information'

The Bill proposes to amend the definition of personal information; however the changes do not alter the definition in substance.

Consequences for breach

Under section 13A of the Privacy Act, an organisation commits an 'interference' with the privacy of an individual where it engages in an act or practice which breaches an NPP in relation to personal information of the individual.

However, to date, the Commissioner has arguably been a 'toothless tiger' when it comes to enforcement of obligations under the Privacy Act. The Commissioner is empowered to investigate an entity for alleged or suspected interference with the privacy of an individual when the individual complains. The Commissioner may then make a determination either dismissing the complaint or finding that the complaint is substantiated. If the complaint is substantiated, the Commissioner's determination is presently not legally enforceable without an order from the Federal Magistrate's Court or the Federal Court of Australia. This seems a fairly arduous way of pursuing a breach of the Privacy Act.

The Bill proposes significant changes in this regard, including enhancement of the Commissioner's powers so as to enable the Commissioner to: 

  • accept written enforceable undertakings by entities to ensure compliance with the Act;
  • recognise external dispute resolution schemes; and
  • conciliate complaints.

More significantly, the Bill proposes to introduce a civil penalty regime when there have been serious and repeated interferences with the privacy of an individual by an entity. The amount of the penalty could be up to $1.1 million.


The Bill's reforms are significant and have implications for superannuation fund trustees. We suggest that trustees monitor developments with the Bill over the coming months to ensure that they understand and are able to comply with their new obligations.


Case Note: Bornstein and Comissioner of Taxation [2012] AATA 424 and Longcake and Comissioner of Taxation [2012] AATA 576

In a rare outcome, the Administrative Appeals Tribunal (AAT) has recently allowed two taxpayers' appeals against decisions by the Commissioner of Taxation (Commissioner) to disallow their excess contributions tax objections.

The decision in Bornstein's case

In Bornstein and Commissioner of Taxation [2012] AATA 424, the AAT set aside the Commissioner's decision and decided, in substitution, that Mr Benjamin Bornstein's contributions to his superannuation fund on 10 July 2007 should be attributed to the financial year ended 30 June 2007 pursuant to section 292-465 of the Income Tax Assessment Act 1997 (Cth) (ITAA).

Mr Bornstein was employed by a company of which he was the sole director, sole shareholder, and also managed its affairs (Employer) . On 10 July 2007, Mr Bornstein caused the Employer to make a contribution to his super fund (July Contribution) on the understanding that it could properly be backdated to the previous financial year, pursuant to the Superannuation Guarantee (Administration) Act 1992 (SG Act). In fact, under the SG Act, this backdating only applied to the Employer's obligation to make SG Act contributions. Mr Bornstein failed to realise that, in his capacity as an employee, he faced an absolute deadline of 30 June in respect of his concessional contributions under the ITAA. In acting further on his misunderstanding, Mr Bornstein made an additional contribution on 26 June 2008 which, at first appearance, caused him to exceed the limit on concessional contributions and to be liable to pay excess contributions tax in respect of the 2007/08 financial year.

In deciding that the Commissioner should have exercised his discretion under ITAA section 292-465 to reallocate the July Contribution to the 2006/07 financial year, the AAT found the following 'special circumstances':

  • evidence that Mr Bornstein attempted to secure advice from his accountant demonstrated he was being diligent in attempting to comply with his obligations;
  • Mr Bornstein visited an ATO website page which dealt with the Employer's obligations to make super contributions under the SG Act and that website created ambiguity and confusion in that it did not distinguish the Employer's SG Act obligations and his obligations as an employee in respect of concessional contributions; and
  • neither the Commissioner nor Mr Bornstein's superannuation fund did anything to give him any reason to question what he had done, thereby denying Mr Bornstein any opportunity to fix his error.

Importantly, the AAT stressed that:

While [the AAT] would not ordinarily accept a mere misunderstanding of one's obligations is enough to constitute special circumstances, there was what might be described as a "perfect storm" of events, miscommunications and misunderstandings that combined to leave the taxpayer in an unusual and unfortunate position. (our emphasis)

The decision in Longcake’s case

In Longcake and Commissioner of Taxation [2012] AATA 576 (30 August 2012), the AAT set aside the Commissioner's decision and decided, in substitution, that Mr David Longcake's concessional contributions on 7 and 8 July 2009 (July Contributions) should be attributed to the financial year ended 30 June 2009 pursuant to section 292-465 of the ITAA.

In this decision, the AAT adopted an approach to special circumstances consistent with Bornstein’s case, and agreed with the following expression by AAT member Dr Hughes:

The prime determinant is not the extent of the taxpayer’s misfortune but rather the uniqueness of events which has given rise to that misfortune. It has consistently been observed that an innocent mistake or ignorance of the law does not, in itself, constitute special circumstances.

Mr Longcake was employed by SED Shellfish Equipment Pty Ltd (SED) and had entered into arrangements with SED for salary sacrifice as well as ordinary superannuation contributions. Relevantly, Mr Longcake had entered into agreements with SED whereby on 30 June 2009 contributions were to cease being paid to his AMP super fund and, from 1 July 2009, his contributions were to be paid to Tasplan (SED Agreements).

Despite the SED Agreements, the AAT found that the July Contributions were paid to AMP. Even though there was SED documentation indicating that contributions were made to AMP by electronic funds transfer on 30 June 2009, the AAT found that it was more likely that the July Contributions were paid to AMP very early in July in contravention of the terms of the SED Agreements. There was also in evidence a letter from SED dated 1 July 2009 which stated that super contributions were to be paid 'on a monthly basis' which, in practice, did not always happen. Furthermore, a 2008/2009 PAYG Payment Summary appeared to include all contributions to AMP, including the July Contributions.

In deciding that the Commissioner should have exercised his discretion to reallocate the July Contributions to the 2008/09 financial year, the AAT had regard to the following 'special circumstances':

  • Mr Longcake sought to make arrangements so that his concessional contribution cap was not exceeded and genuinely believed he had done so;
  • Mr Longcake had made a deliberate decision to switch his contributions from AMP to Tasplan in the 2009/10 financial year;
  • the SED Agreements required SED to cease payments to AMP by 30 June 2009 and commence payments to Tasplan from 1 July 2009, which indicates that the July Contributions to AMP were intended for the previous financial year;
  • it was not reasonably foreseeable by Mr Longcake that the concessional contributions cap would be exceeded because the SED Agreements required contributions paid to AMP to cease on 30 June 2009;
  • the evidence showed Mr Longcake relied entirely on the terms of the SED Agreements as the only control he exercised over contribution payments and that he expected contributions to be paid in a timely manner; and
  • Mr Longcake was not aware of the irregularity in the payments made in respect of him nor was he aware that the July Contributions to AMP had overrun into 2009/2010.


The AAT has, time and again, underscored that a mere misunderstanding of one's obligations will not be enough to constitute special circumstances that will enliven the Commissioner's discretion under section 292-465 of the ITAA. It is somewhat surprising, then, that Mr Bornstein was successful in what appears to be quite unremarkable circumstances.

On the other hand, the decision in Longcake’s case provides practical guidance as to when the circumstances surrounding a taxpayer’s arrangement with his employer could give rise to special circumstances . The taxpayer’s intentions, knowledge and control over the timing of contributions will be important considerations.


Further information

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.