Heffron's Blog is a collection of comments related to the latest superannuation comings and goings.
Why do people question the payment of lump sums from funds with individual trustees?
by Meg Heffron
This old chestnut popped up in a newspaper article this week, prompting several anxious emails from clients asking whether their fund could pay lump sums. While I actually think this is an esoteric and largely irrelevant issue (as in “of course all funds can pay lump sums unless their trust deed prohibits it”), I wondered if there might be some interest in why that question even arises. In fact, more broadly, why do we have this somewhat funny requirement that super funds must either have a trustee that is a company OR the primary purpose of providing pensions? Surely those two things don’t have anything in common?
It stems from our Constitution.
The Constitution sets out not only how our system of Government should work but also lists the various issues on which Parliament can make laws. Not surprisingly (given that the document is over 100 years old), it doesn’t refer specifically to superannuation funds. So if you were the Government and wanted to make laws in relation to the prudential supervision of superannuation funds (otherwise known as the Superannuation Industry (Supervision) Act 1993), what would you do?
Well, you could rely on paragraph 51(ii) which allows the making of laws in relation to taxation. In fact, that’s what used to happen – superannuation used to be a small slice of the Income Tax Assessment Act 1936.
Alternatively, you could try to shoehorn the superannuation system into one or more of the other items listed in paragraph 51. It’s difficult to see how you could regulate the system by relying on the Government’s powers to make laws in relation to lighthouses, astronomical observations, postal services, weights and measures, aliens or marriage (just some of the entertaining items listed in paragraph 51). However, you might start to feel you were making progress when you noticed paragraph 51(xx) (which includes corporations formed within the limits of the Commonwealth of Australia) or paragraph 51(xxiii) ( which includes “old-age pensions”).
Essentially what the Government did in 1993 (when the current Act was introduced) was regulate the system as follows:
- to receive the generous tax concessions that apply to superannuation funds, all funds at the time (and new funds ever since) had to first become “regulated” superannuation funds. In other words, they had to deliberately and voluntarily opt in to the regulatory framework;
- to become regulated, they had to promise that they would be structured in a manner that permitted the Government to make laws that affected them – both now and indefinitely into the future;
- one of these ways was to have a deed that required the fund to have a corporate trustee (ie, a trustee that was a corporation formed within the Commonwealth);
- another was to have “governing rules [that] provide that the sole or primary purpose of the fund is the provision of old-age pensions” (not specifically defined but also obviously not specifically limited to those administered by Centrelink); and then
- they had to actually comply with the laws made by the Government to be a “complying” superannuation fund and secure those tax concessions.
(Note that a fund could actually fall under both paragraphs of the Constitution – it could both have a corporate trustee AND provide pensions.)
Obviously many funds did not want to change to a corporate trustee and therefore needed to provide old-age pensions to be allowed into the system.
This is where the question mark comes from – if the “sole or primary purpose” is to provide pensions, can you ever pay lump sums? If you can pay lump sums, how often and how much before you stop being considered true to your purpose?
I guess one day someone might challenge the constitutional validity of the superannuation system by arguing that funds which are ostensibly regulated under the “pensions power” are not actually providing old-age pensions and therefore are not affected by any of the superannuation laws. In the meantime, however, it would be a widely held (and practical) view that even “pension funds” can pay lump sums without necessarily threatening the argument that their primary purpose was to pay old-age pensions.
Certainly the regulator has no great appetite for arguing otherwise since it might find then that a large number of the 300,000 or so SMSFs with individual trustees are suddenly outside the prudential framework!
A cynic would argue that no-one actually wants to know the answer to this question because at the end of the day the whole thing was just a device to excuse making laws about something not specifically covered under the Constitution.
But still, it’s a quirky little story that should definitely be included in the Australian version of Trivial Pursuit.