With one month to go until choice of superannuation becomes mandatory, many HR professionals are concerned about what part they need to play. Ross Clare looks at potential pitfalls and presents four basic steps to getting super choice right
With one month to go until choice of superannuation becomes mandatory, many HR professionals are concerned about what part they need to play. Ross Clare looks at potential pitfalls and presents four basic steps to getting super choice right
From 1 July 2005, 5.7 million Australians will have a statutory right to choose their own super fund following the introduction of choice of fund legislation. Employers need to be aware that choice is part of the Superannuation Guarantee Act. This means that following the rules is not optional.
There are four basic steps that an employer must follow if they are to get choice right:
1. Decide for each employee whether or not choice applies.
2. If there are employees with choice then identify an acceptable default fund for each employee.
3. If an employee has choice then give that employee a standard choice form with Part A completed.
4. If the employee exercises choice then act on that choice.
Exemptions from choice
The basic rule is that every employee receiving Superannuation Guarantee (SG) has choice unless they fall into one of the exception categories. There are two main exceptions. The first covers employees covered by some of the federal industrial relations rules. In particular, an exemption applies where contributions are made “under or in accordance with” an AWA or a certified agreement made under the Workplace Relations Act 1996or the Industrial Relations Act 1988. All employees who are covered by a federal award, as distinct from an AWA or certified agreement, have choice.
The second is where a contribution, or a part of a contribution is made “under or in accordance with” a state industrial award or agreement. However, the Government has announced its intention to use its constitutional power in regard to corporations to remove the ability of state awards to specify a superannuation fund in regard to employees of corporations. If passed, and if it survives any constitutional challenge, would take effect from 1 July 2006.
“Under or in accordance with” has to be interpreted broadly when considering awards and agreements, according to the Australian Taxation Office. Basically, employers need to ask the question: Has the contribution been made under an enforceable undertaking? If the contribution has not been made in accordance with the award, can the employee or some other person take action to enforce the award provision?
There also are some other exemptions from choice, including several given to employers for certain defined benefit members of defined benefit funds. The exemptions are designed to prevent an employer from falling into a situation where they would be contributing to an employee’s chosen fund while continuing to fund the defined benefit. An employer does not have to give choice to a defined benefit member who has reached their maximum entitlement under the fund rules, or if the scheme is on a contribution holiday and meets certain specified criteria.
There is also an exemption where the employee would remain a member of the fund and they would be entitled to the same resignation, retirement or retrenchment benefit even if the employer were paying Superannuation Guarantee to another fund. Generally in these cases the member’s benefit would be expressed in terms of a multiple of salary. Details of these exemptions – which are quite technical – can be found on the ASFA website, www.superannuation.asn.au, along with a range of other fact sheets about choice of fund that have been specifically designed to assist employers.
There is also an exemption which applies to employees who are members of unfunded public sector funds. To round off all these exemptions, there is provision in the legislation to also exempt employees whose superannuation entitlements are covered by certain legislation prescribed in regulations. The Government is yet to specify what legislation is covered, but it is expected it will mostly be state and local government employees who will be covered by this exemption. There may also be some private sector employees who have their industrial conditions determined, at least in part, by legislation who will be covered as well.
Most Commonwealth Government employees will not have choice. However, the Government has announced that in the future, choice will be given to accumulation members of the PSS. Giving choice to defined benefit members as well will be considered, but the Government has already indicated this involves some rather tricky issues.
The need for a default fund
If an employee has choice, then the employer must so advise the employee and also tell them the name of the fund they will pay the SG contributions into if the employee does not choose their own fund. This fund is commonly called the default fund, but in ATO publications the term ‘employer fund’ is generally used instead.
There are some restrictions on what can pass for a default fund. These operate firstly at an employee level and then at a more general level. If an employee is employed under a federal award, and the award nominates a fund to receive contributions, then that fund will ordinarily be the employee’s default fund. However, it should be noted that the Government will likely take steps to remove superannuation from the list of allowable matters that can be dealt with by federal awards.
For the moment at least, if the federal award nominates more than one fund then each of the nominated funds will meet the default fund requirements. Note, however, that one of those funds must be used as the default fund; the employer cannot choose a fund that is not specified by the award.
Because choice operates at the individual employee level, it is possible for an employer to have multiple default funds. The default fund can be the fund receiving the employer Superannuation Guarantee contributions before 1 July 2005. Employers may, however, choose a different fund to be the default fund from 1 July.
If the employer changes their default fund after 1 July 2005, they will have to issue a new Standard Choice Form to each employee whose fund has changed. Where the default fund is not specified in a federal award, the default fund must: offer minimum insurance cover (the fund can tell an employer whether this is the case), or be an RSA or capital guaranteed fund, or the employer must be contributing to the fund prior to 1 July 2005 (three years grace), or the employer must arrange separate insurance cover.
The Standard Choice Form
Every employee who has choice must be given a Standard Choice Form (SCF) unless the employee has advised details of their chosen fund before the time by which the Standard Choice Form must be given.
The Standard Choice Form is a prescribed form from the Australian Taxation Office. Generally the form can be used as is, or it can be reproduced in a different form but must include ALL of the information on the prescribed form. This means that an employer could customise the form to include their logo, for example. They could also include the employer’s and the employee’s name on the form, with the form providing spaces for these. Filling in such details might prove essential when there is a large number of employees and there may be a range of default funds because of the various awards the employees are on.
There are rules around when a Standard Choice Form must be given to an employee. The basic rules that apply are that the SCF must be given to all existing employees by 28 July 2005 and to all new employees within 28 days of their starting work. There is nothing to stop an employer giving out the SCF before 1 July this year, or before an employee actually starts work.
Employers will need to be able to demonstrate to the ATO that forms have been given to employees, and will need to keep records of how and when these forms were given out.
Acting on an employee’s choice
If an employee wishes to choose a fund, they must give the employer notice to that effect. An employer must accept the notice from the employee if it contains all of the necessary information and must then put arrangements in place to contribute to the fund. This is to ensure the employer has enough information to be able to successfully contribute to the chosen fund. The employee must also provide a statement from their chosen fund indicating it can receive contributions from the employer. This avoids contributions failing where the fund concerned cannot accept contributions other than from a specific employer, or where the fund requires an employer to sign up as a contributing employer but they have not done so.
Two months after they have received the notice, the employer is able to contribute only to the chosen fund. If they contribute to any other fund after this date then the contribution will not be in accordance with the choice rules and penalties will apply.
An employer may, but does not have to accept a notice if the employee has chosen a fund in the previous 12 months. They may, however, act on a notice even if it does not contain all the required information.
Employers should put in place systems to ensure valid exercises of choice are acted upon. They might also want to keep a record of when an employee exercises choice if the employer wants to limit choices to no more than once in a twelve month period.
Top super choice tips for employers
• Work out which of your employees will need to be offered choice under the legislation
• Ensure that your firm complies with the choice legislation rather than introducing your own version, such as by only offering choice of a few funds
• Check to see whether individual employees have already exercised choice, and whether there is sufficient documentation to rely on that exercise of choice
• Select a default fund that meets the requirements of the legislation (this may or may not be the fund currently used by your company)
• Develop systems to enable the correct forms to be distributed on a personalised basis to employees that need them, and to ensure an audit trail is maintained
• Develop and document protocols to stop HR staff from venturing into providing advice (for which you have to be licensed) rather than just providing facts about choice and the default fund
• Develop a process for processing the choice forms when they are returned and inputting them into the company’s system
• Ensure your company has the systems and software to enable contributions to be paid to multiple funds in a cost-effective way.
Ross Clare is principal researcher with The Association of Superannuation Funds of Australia (ASFA).
