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(August-2002) Trustee update
Judges and super surcharge
The battle against the superannuation surcharge is being fought on several fronts. In addition to the various submissions to the Senate Select Committee’s inquiry into superannuation and standards of living in retirement, judges and magistrates have now joined the battle — at least in relation to the surcharge’s unique application to them.
A High Court challenge has now been launched as to the constitutional validity of the application of the surcharge to new state judges. A decision in this matter is expected later in the year.
In addition to the High Court challenge, another recent decision by the Administrative Appeals Tribunal has highlighted the degree of complexity involved in the super surcharge system. In AAT Case AATA 376, Re Brown (2002) 50 ATR 1001, the tribunal upheld a superannuation contributions surcharge assessment in relation to a Western Australian stipendiary magistrate.
The applicant, Mr Brown, was appointed as a stipendiary magistrate in 1987. He elected to remain a member of the WA Government Employees Superannuation Fund (GESF), which is a declared constitutionally protected fund. Brown was issued with a surcharge assessment to which he objected, arguing that he was excluded from the surcharge regime as “a judge of a court of a State” by s 7 of the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997 (the Act).
The tribunal took the view that the word ‘judge’ in the act has a technical meaning that does not include magistrates, stipendiary magistrates or others who do not carry the technical title ‘judge’, but exercise judicial authority. The tribunal also dismissed Brown’s claim that the calculation of the assessment was flawed or excessive. For a defined benefits super fund, s 9 of the Act explains the calculation of the surchargeable contributions using an actuarial value of the benefits. The benefit is worked out using a formula composing the ‘annual salary’ and the ‘notional surchargeable contributions factor’ and calculated under a method in Superannuation Contributions Ruling SCR 97/1.
The tribunal noted that the formula and operation of s 9(5) was flawed and could produce an absurd result if strictly complied with. However, the tribunal found that, although the strictures of s 9(5) of the Act had not been complied with in a literal sense, there was no evidence that the assessment was excessive. As a result, the tribunal upheld the surcharge assessment.
This case highlights the overly complex nature of the super surcharge regime, especially for defined benefits super fund members. Although the Government should be open to persist with the underlying objectives of the surcharge regime, the system of achieving those objectives could do with a serious rethink.
Shareholder discount cards
Investors seeking to gain access to shareholder discount cards via their superannuation fund need to consider whether the provision of such shareholder benefits breach the superannuation investment rules of their fund.
Importantly, the Australian Prudential and Regulation Authority (APRA) and the Australian Taxation Office (ATO) have confirmed their view that the investment of super fund money in particular schemes providing shareholder benefits, at the expense of fund income, breach the superannuation investment rules. The particular schemes that fail the ‘sole purpose test’ offer non-superannuation shareholder benefits where the cost of the scheme is borne by the fund.
In a media release from May 13, 2002, APRA and the ATO contend that the provision of benefits (such as shareholder discount cards) to members, if some or all of the cost (like membership fees or service charges) is met, directly or indirectly, out of the income of the fund is inconsistent with the ‘sole purpose test’ under s 62 of the SIS Act.
According to APRA, the object of the sole purpose test is to ensure that regulated super funds are maintained for the purpose of providing benefits to members when they retire, or to their dependants if they die before retirement.
APRA and the ATO have also indicated they will not take action against trustees in relation to such schemes, provided the trustees agree not to participate in future schemes. The regulators will accept the assurance if it is documented in a trustee minute. Concerned funds do not need to seek specific ‘no action’ letters from APRA or the ATO, but this treatment will only apply for past breaches.
However, the number of companies offering such discounts appears to be decreasing due to the cost of administering such schemes (for example, Coles Myer has announced that it is phasing-out its popular shareholder discount card by July 2004). Nevertheless, trustees should be mindful of the underlying principals and requirements governing investments by super funds in respect of any variations of discount cards that may emerge.
— Stuart Jones is a tax and superannuation writer at Australian Tax Practice. Email: [email protected]
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