ISAT PROTOCOL / superANNUATION providers and SUPPLIERS / october 2016 / UNCLASSIFIED
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ISAT* PROTOCOL
* Involuntary Superannuation Account Transfer
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UNCLASSIFIED ISAT PROTOCOL V4.0
TABLE OF CONTENTS
1. Introduction 4
1.1. Definitional matters 4
1.1.1. Voluntary versus involuntary transfers 4
1.1.2. Rollover versus transfer 4
1.2. Notification to members 5
1.3. Legislative change 5
3. A replacement income stream after an ISAT has proportions of taxable and tax-free components as if it were the earlier income stream [sections 307-125; 307-127 ITAA 1997]. The amendment removes the need for proportioning of a member’s pension account at the time of an ISAT. 6
These changes have had effect from 1 July 2015. Despite this, members affected by ISATs prior to that date will not be disadvantaged due to the ATO’s undertaking to extend the current concessional compliance treatment, which applied from December 2012, to the start date of new law. 7
1.4. Transfers to a MySuper product 7
1.5. Transfers to an eligible rollover fund (ERF) 8
2. Reporting 8
2.1. Reuniting Super 9
2.1.1. Lost Member Reporting 9
2.1.2. Unclaimed Super Money 10
2.1.3. Temporary resident notification 11
2.2. Member contributions statement 11
2.2.1. Amendments to MCS lodged by transferring funds 12
2.2.2. Early MCS Reporting 13
2.2.3. Provider member account numbers and provider client identifiers 13
2.3. SuperStream Data Standards: Use of the Rollover Message Implementation Guide (MIG) 15
2.3.1. Successor fund transfers 15
2.3.2. ISATs to MySuper products and Eligible Rollover Funds 16
3. Notices and authorities 16
3.1. TFN notices 17
3.2. Refund of no-TFN tax to a receiving fund 18
3.3. Notice of intent to claim or vary a deduction for personal super contributions (NOI) 18
3.4. Spouse contribution splitting 19
3.5. Authorities 19
3.5.1. Bankruptcy orders 19
3.5.2. Binding death benefit nominations (BDBNs) 20
3.5.3. Powers of Attorney and Third party authorities for advisers’ access to account information 20
3.5.4. Family law agreement/court order/consent order to split superannuation 20
3.6. Excess contributions releases and refund notices 20
4. Liabilities 21
4.1. Government superannuation payments (co-contributions (co-cons), Low Income Super Contribution (LISC), Super guarantee charge (SGC), SHA special account (SHAsa) credits, Government First Home Saver Account (FHSA), Unclaimed super money (USM) 21
4.2. Pending terminal medical condition (TMC), total and temporary disablement and death benefit payments 22
5. Pensions 23
5.1. Minimum pension payments 23
5.2. Centrelink treatment of account-based pensions 24
6. Lump sums 24
6.1. Disability modification 24
7. Fund impact 24
7.1. Fund income tax 24
7.1.1. Deeds of agreement 24
7.1.2. Administration expenses 25
7.1.3. Merger costs 25
7.1.4. Post-merger amendment of income tax returns of wound up funds 25
7.1.5. Exempt current pension income deduction 25
7.1.6. Foreign income tax offset (FITO) 26
7.1.7. Assets included in transfer 26
7.1.8. CGT and loss relief 26
8. Defined benefit and hybrid funds 27
8.1. Member Debt 27
8.1.1. Surcharge debt (relates to 1996 – 2005 income years) 27
8.1.2. Div 293 Deferred Debt 28
8.2. MCS reporting for defined benefit members 29
8.3. Reporting notional taxed contributions 29
8.3.1. Grandfathering 29
8.3.2. New entrant rate 30
9. Checklist for ISATs 30
9.1. Data included in transfer 30
9.2. Administrative obligations on transferring fund 31
9.3. Best practice in ISATs 33
10. Acknowledgments: industry participants 34
Involuntary Superannuation Account Transfer Protocol
1. Introduction
This protocol has been developed as guidance for super providers and suppliers who will be transferring member accounts, not at the members’ instigation (an involuntary superannuation account transfer - ISAT), to assist them in providing accurate and timely information for all members to the ATO.
It also provides guidance on the current ATO view on a number of technical issues related to ISATs and gives limited guidance on the information about member accounts that needs to be given by a transferring fund to a receiving fund.
This document represents the ATO’s view of best practice in ISATs, significantly informed by industry practice.
A guiding principle for the ATO in its approach to merging funds is, wherever possible, to interpret the relevant taxation legislation it administers consistently with the funds’ duty to confer on members equivalent rights to the rights that the member had under the original fund in respect of their benefits.[1] This is of particular importance because such transfers are generally without member consent.
This document is current at date of publication. There may be future refinement in response to ongoing industry feedback and future government legislative and administrative measures.
1.1. Definitional matters
1.1.1. Voluntary versus involuntary transfers
Rollovers and transfers generally require a member’s consent, but there are exceptions at law, notably successor fund transfers,[2] transfers to MySuper products[3] and transfers to eligible rollover funds[4]. If the member’s consent has not been given for the rollover or transfer of their account, it will constitute an ISAT.
1.1.2. Rollover versus transfer
The terms rolled-over and transferred are distinguished by definition in the Superannuation Industry (Supervision) Regulations 1994 (SISR).[5]
However for the purposes of this Protocol, the terms roll-over and transfer will be referred to collectively as ‘transfers’. For consistency, the terms ‘transferring’[6] and ‘receiving’[7] fund are used throughout this document.
Where a fund moves a specific product (or multiple products) from one fund to another fund (there is no whole-of-fund merger) we are assuming this is not to be regarded as an involuntary transfer. Depending on the circumstances this may constitute an internal rollover.
If the member’s account is moved from one registrable superannuation entity (RSE) to another RSE (with a different Australian Business Number) without their consent, an involuntary transfer has occurred. However, when the same entity is trustee for more than one fund, an ISAT can also occur when the account is moved from one fund to another.
ISATs may occur in fund mergers[8], restructures, successor fund transfers or changes to Trustees/service providers.
A member’s account can also be transferred to the ATO in accordance with the Superannuation (Unclaimed Money and Lost Members) Act 1999. However, this type of transfer is not covered as part of this Protocol.
This Protocol deals primarily with federal taxation matters. State government taxes payable upon transfer of dutiable property are out of scope.1.2. Notification to members
The Corporations Act 2001 requires trustees to notify members of ‘significant events’ including transferring member benefits to a different fund, to an eligible rollover fund (ERF), or MySuper account, before the transfer of benefits takes place [9].Whether a transfer of a member’s account is voluntary or involuntary does not depend upon whether the member has been given the opportunity to ‘opt out’ of the transfer. If they have ‘opted out’ and transferred their interest to another fund of their own choice, that will constitute a voluntary transfer. There is no legislative requirement that members be given an option to opt out of a transfer, however members can often do so by advising the transferring fund in a specified method.[10] If they have not ‘opted out’ the subsequent transfer is to be treated as involuntary.
The Government has announced that from 1 July 2015 employers will no longer be obligated to give a standard choice of fund form to employees when their superannuation funds merge. Draft legislation to achieve this change is undergoing consultation.[11]
1.3. Legislative change
For the purposes of this Protocol, we treat an Involuntary superannuation account transfer as equivalent to the new definition of Involuntary rollover superannuation benefit contained in the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015 (the Act) which received Royal Assent March 19, 2015.The Act amends parts of Division 306 and 307 of the Income Tax Assessment Act 1997 (ITAA 1997), with effect from 1 July 2015, and applies to the involuntary transfer of superannuation benefits from one superannuation fund to another fund without members’ request or consent. The Act makes the following changes:
1. Section 306-12 of the ITAA 1997 defines a rollover superannuation benefit as an involuntary rollover superannuation benefit if it is:
(a) a payment transferring a superannuation interest of:
(i) a member of a superannuation fund; or
(ii) a depositor with an approved deposit fund; or
(iii) a holder of an RSA;
to a successor fund (other than a self-managed superannuation fund) without the consent of the member, depositor or holder; or
(b) a payment transferring an accrued default amount of a member (within the meaning of the Superannuation Industry (Supervision) Act 1993) of a complying superannuation fund to another complying superannuation fund:
(i) as a result of an election under paragraph29SAA(1)(b) of that Act; or
(ii) under section388 of that Act;
if:
(iii) that member becomes a member (within the meaning of that Act) of the other fund immediately after the transfer; and
(iv) the transfer happens during the period beginning on 1July 2015 and ending on 1July 2017; or
(c) a payment of consideration for the issue to a person of a beneficial interest in an eligible rollover fund (within the meaning of the Superannuation Industry (Supervision) Act 1993) in accordance with an application on behalf of that person under section243 of that Act.
Note that this definition is applicable only to the above three types of ISAT, not to any type of ISAT not specified, nor to intra-fund transfers.
2. The definition of successor fund is expanded to include transfer of a deposit in an approved deposit fund to a fund or RSA [section 995-1 ITAA 1997]
3. A replacement income stream after an ISAT has proportions of taxable and tax-free components as if it were the earlier income stream [sections 307-125; 307-127 ITAA 1997]. The amendment removes the need for proportioning of a member’s pension account at the time of an ISAT.
4. For an interest that is not an income stream, the crystallised segment becomes part of the contributions segment – that is, the tax free component recorded and reported in the successor fund [section 307-220 ITAA 1997]5. The crystallised segment of an interest will be reduced by the tax-free component of benefits paid. Once the crystallised segment has been reduced to zero, the contributions segment is reduced by any remainder of the benefit’s tax-free component [section 307-210 ITAA 1997]
6. There is no requirement for a Rollover Benefit Statement to be given to the member because of the transfer of their accrued default amount, or their balance to an ERF or a successor fund in an ISAT [paragraph 390.10(2)(b) of Schedule 1 to the Taxation Administration Act 1953 (TAA)]. However, a Rollover Benefit Statement must still be given to the receiving fund if the trustee differs from that of the transferring fund.
These changes have had effect from 1 July 2015. Despite this, members affected by ISATs prior to that date will not be disadvantaged due to the ATO’s undertaking to extend the current concessional compliance treatment, which applied from December 2012, to the start date of new law.
1.4. Transfers to a MySuper product
An accrued default amount (ADA) in relation to a MySuper transfer is one for which the member:· Has given no investment option direction, or
· Is invested in the fund’s (pre-MySuper) new member default option.[12]
Many employer-sponsored (usually corporate) funds that are centred on one employer do not have a MySuper option, so can be expected to be transferring members with an ADA.
An ADA cannot apply to an ERF, a defined benefit member, a member in pension phase or a receiving fund member who gave a direction to an earlier fund, and certain other exclusions specified in SISA s 20B.
The measure outlined above will apply only to ADA transfers occurring during the period 1 July 2015 to 30 June 2017.
The Superannuation Regulations require that members are notified of the proposed ADA transfer at least 90 days before it is planned, unless there will be no resulting detriment or change in the investment strategy that relates to the amount.[13]
In contrast to a successor fund transfer which involves movement of an entire interest, this is not necessarily the case for ADAs.[14] A MySuper transfer may involve only the amount that is the accrued default amount within a super interest, therefore a particular interest may not end as a result of the transfer of an amount to a MySuper product due to exclusions from ADA, such as amounts invested in cash and life policies. The measure refers only to a payment transferring the accrued default amount as that term is defined in the SISA.
In the case of transfers to a MySuper product, the accrued default amount cannot include any amount supporting a superannuation income stream. Consequently, the normal rules apply for calculating the proportions of the amount paid.
1.5. Transfers to an eligible rollover fund (ERF)
Transfer to an ERF can be without member authority[15] and may not require the member to be notified, although the potential for such a transfer should have been disclosed in the original product disclosure statement.
Because transfers of balances to an ERF typically involve small amounts for a relatively small number of fund members, ERF transfers are generally completed without any particular arrangement or agreement being implemented between the trustees beforehand, as is necessary for a merger. Consequently it is unlikely that the preferred approaches outlined below for reporting, notices and authorities would be appropriate.
2. Reporting
Member Contributions Statements (MCS)[16] and Rollover Benefits Statements (RBS)[17] are required to be provided by APRA-regulated funds including exempt public sector superannuation schemes, constitutionally protected funds, approved deposit funds and retirement savings account (RSA) providers.
Pooled superannuation trusts, non-regulated superannuation funds and life insurance companies are not required to provide MCSs and RBSs, although the latter do sometimes use the MCS and RBS in practice.
Required use of the SuperStream Data Standards and Fund Validation Service (FVS) is essentially the same as for MCS, except that life companies may not use FVS.