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1 AFcTHU9 R0:Y(Thi & HEDDT?~~S L;J~/;LiY 1993 ThE PABLIMaNT OF THE COMMONWEALTH OF AUSTRALZA HOUSE OF REPRESENTATIVES SUPERANNUATION INDUSTRY (SUPERVISION) BILL 1993 EXPLANATORY MEMORANDUM (Circulated by authority of the Treasurer, the Hon John Dawkins, HP) Cat. No

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3 SUPERANNUATION INDUSTRY (SUPERVISION) BILL 1993 GENERAL OUTLINE AND MAIN PURPOSES OF THE BILL This Bill, together with the companion Occupational Superannuation Standards Amendment Bill 1993, Superannuation (Resolution of Complaints) Bill 1993, Superannuation (Financial Assistance Funding) Levy Bill 1993, Superannuation (RolledOver Benefits) Levy Bill 1993, Superannuation Supervisory Levy Amendment Bill 1993 and Superannuation Industry (Supervision) Consequential Amendments Bill 1993, give effect to measures to substantially provided to increase the level of prudential protection the superannuation industry, and represent a substantial strengthening of the security of superannuation savings and in protecting the rights of superannuation fund members. These seven Bills give effect to the new prudential arrangements for superannuation that the Treasurer announced on 21 October This Bill contains the most important elements of the package of Sills and provides: for effective supervisory arrangements involving direct enforcement powers for the Insurance and Superannuation Commission enabling effective enforcement of the prudential requirements and obligations placed on funds and trustees; for trustees and investment managers to be made subject to adequate legislative sanctions for the proper performance of their fiduciary responsibilities and increasing their accountability to their members; clear delineation of the basic duties and responsibilities of trustees, and indicating that trustees have primary responsibility for the operation of funds; that trustees and investment managers must be suitable to act as fund trustees and to manage fund moneys respectively; for financial assistance to be provided to funds that have suffered a loss due to fraudulent conduct or theft; and mechanisms for dealing with benefits in employersponsored funds in respect of members that have left employment or who are lost, and unclaimed benefits for equal member and employer representation; certain disclosure obligations in respect of auditors and actuaries of funds; and

4 2 rules relating to interests in, invitations and offers and disclosure by, to subscribe for public offer superannuation funds, approved deposit funds and pooled superannuation trusts. FINANCIAL IMPACT STATEMENT The measures for added protection for superannuation savings and promotion of a more efficient superannuation industry, together with the measures contained in the companion Occupational Superannuation Standards Amendment Bill 1993, Superannuation (Resolution of Complaints) Bill 1993, Superannuation (Financial Assistance Funding) Levy Bill 1993, Superannuation (RolledOver Benefits) Levy Bill 1993, Superannuation Supervisory Levy Amendment Bill 1993 and Superannuation Industry (Supervision) Consequential Amendments Bill 1993, will result in additional supervisory costs being incurred by the Insurance and Superannuation Commission. The Insurance and Superannuation Commission estimates that the additional resources needed to give effect to this package of measures will be $4.831m in , $4.59lm in and $4.G3lm in These additional costs will be recovered through the superannuation supervisory levy and the imposition of a new levy on certain superannuation funds and approved deposit funds as provided in the Superannuation (RolledOver Benefits) Levy Bill 1993.

5 3 EXPLANATORY NOTES ON THE SUPERANNUATION INDUSTRY (SUPERVISION) BILL 1993 PART 1 PRELIMINARY DIVISION 1 PRELIMINARY CLAUSE 1 SHORT TITLE This clause provides the mode of citation of the Bill. CLAUSE 2 COMMENCEMENT 2. This clause provides for Part 1 (in so far as it relates to section 112) and section 112 to come into operation with effect from 21 October Parts 1, 2, 21, 27, 28, 29 and 30 of the Bill are to come into operation on the day the Bill receives Royal Assent. Parts 18, 19, 20, 22, 23 and 24 and section 336 are to come into operation with effect from 1 July The balance of the provisions are to come into operation on I December 1993 but only apply in respect of a fund s, scheme s or trust s year of income and subsequent years of income. ClAUSE 3 OBJECT OF THE ACT 3. This clause sets out the object of the Act which is to make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts, and for their supervision by the Insurance and Superannuation Commissioner. CLAUSE 4 SUMMARY OF PROVISIONS 4. This clause sets out a brief summary of the provisions contained in each Part of the Act. CLAUSE 5 OUTLINE OF KEY CONCEPTS 5. This clause outlines in diagrammatic form the key concepts underlying the framework of the Act, including the requirements for obtaining complying superannuation fund, complying approved deposit fund and pooled superannuation trust status, such status conferring eligibility for concessional taxation treatment CLAUSE 6 GENERAL ADMINISTRATION OF THE ACT 6. This clause provides for the Insurance and Superannuation Commissioner to have responsibility for the general administration of the Act, subject to any directions from the Minister as to the performance or exercise by the Commissioner of his functions or powers.

6 CLAUSE 7 APPLICATION OF ACT NOT TO BE EXCLUDED OR MODIFIED 4 7. This clause provides for the Act to apply to all superannuation entities notwithstanding any provisions in the governing rules of the entity to the contrary. CLAUSE 8 ACT EXTENDS TO EXTERNAL TERRITORIES 8. Self explanatory. CLAUSE 9 CROWN TO BE BOUND 4 9. This clause provides for binding the Crown in right of the Commonwealth, each of the States, the Australian Capital Territory, the Northern Territory, and Norfolk Island. It further provides that the Crown is not liable to be prosecuted for an offence against or arising out of this Act. DIVISION 2 INTERPRETATION CLAUSE 10 DEFINITIONS 10. This clause sets out a number of definitions and expressions for the purposes of the Act. CLAUSE 11 APPROVALS, DETERMINATIONS ETC. BY COMMISSIONER 11. This clause provides that, notwithstanding the absence of any express provision in the Act for the Commissioner to give an approval, make a determination, or do an act or thing, the Commissioner is authorised by this clause to so do. CLAUSE 12 ASSOCIATES 12. This clause provides that the question of whether a person is an associate of another is to be determined as provided by the Corporations Law, subject to the modifying assumptions set out. in subclause (2). CLAUSE 13 SINGLE TRUSTEES AND GROUPS OF TRUSTEES 13. This clause sets out, for the purposes of the Act, the circumstances when a fund, scheme or trust is taken to have a single corporate trustee, a single individual trustee and a group of 2 or more individual trustees. CLAUSE 14 INDEFINITELY CONTINUING FUND APPLICATION OF RULES AGAINST PERPETUITIES 14. This clause provides that, notwithstanding any provision in the governing rules of a fund designed to avoid a breach of a rule of law relating to perpetuities, the fund is not prevented from being treated as an indefinitely continuing fund for the purposes of the definitions of superannuation fund and approved deposit fund in section 10.

7 CLAUSE 15 PAYMENTS FOR PURCHASE OF ANNUITIES k 15. This clause provides that, for the purposes of the V definition of approved purposes in section 10, where a beneficiary requests payment of an amount deposited with an approved deposit fund from the fund to a life insurance company or registered organisation for the purchase of an annuity in the name of the beneficiary of the fund, that payment is taken to be repayment of the amount to the beneficiary. CLAUSE 16 DEFINITIONS ASSOCIATED WITH EMPLOYERSPONSORSHIP This clause defines the terms employersponsor, standard employersponsor, employersponsored fund, standard employersponsored fund and standard employersponsored member for the purposes of this Act. CLAUSE 17 PERSONS INVOLVED IN CONTRAVENTION 17. This clause provides that, for the purposes of the Act, a person is involved in a contravention if and only if the person has done the things specified in paragraphs (a) to (d). CLAUSE 18 PUBLIC OFFER SUPERANNUATION FUND 18. This clause sets out the circumstances under which a superannuation fund is a public offer superannuation fund for the purposes of the Act. The clause provides that the trustee of a employersponsored superannuation fund may elect that the fund be treated as a public offer superannuation fund, and for the Commissioner to declare a superannuation fund to be, or not to be, a public offer superannuation fund for the purposes of the Act. CLAUSE 19 REGULATED SUPERANNUATION FUND 19. This clause sets out the conditions which must be complied with by a superannuation fund in order that it be a regulated superannuation fund for the purposes of this Act. It provides that the fund must have a trustee, that the trustee must be a constitutional corporation or, where that is not the case, that the fund has as its sole or primary purpose the provision of oldage pensions, and that the trustee of the fund must have given to the Commissioner a notice making an irrevocable election to have the provisions of the Act apply to the fund. 20. This clause also provides that where the conditions set out in paragraphs (6) (a) to (c) are met during the period commencing on the date of Royal Assent and ending on the last day of the fund s year of income, the trustee of the fund must use its best endeavours to ensure that the fund becomes a regulated superannuation fund no later than the first day of its year of income. A contravention of this provision is not an offence, but it may be grounds for an injunction pursuant to section 310.

8 CLAUSE 20 RELATED BODIES CORPORATE This clause provides that the question of whether a person is an associate of another is to be determined as provided by the Corporations Law. PART 2 APPROVAL OP TRUSTEES CLAUSE 21 OBJECT OF PART 22. Self explanatory. I CLAUSE 22 INTERPRETATION 23. Self explanatory. CLAUSE 23 APPLICATION FOR APPROVAL 24. This clause provides for the making of applications for approval as a trustee for the purposes of the Act. Subciause (2) sets out requirements relating to an application. CLAUSE 24 FURTHER INFORMATION MAY BE REQUESTED 25. Self explanatory. CLAUSE 25 PERIOD WITHIN WHICH APPLICATION FOR APPROVAL TO BE DECIDED 26. This clause specifies a 60 day time period for the Commissioner to make a decision in respect of an application for approval as a trustee. Subclause (2) provides for the Commissioner to extend this period up to a further 60 days if the extension is required to decide an application. 27. Subclause (5) provides that if decided an application within the the time Commissioner has not period (or extended period), then the application is to be taken as having been refused. CLAUSE 26 DECIDING AN APPLICATION FOR APPROVAL 28. This clause sets out requirements for the consideration of applications for approval by the Commissioner. Subclause (1) provides that approval must be granted if the Commissioner is satisfied that the applicant can be relied upon to perform in a proper manner the duties of trustee, and has access to sufficient financial resources (or suitable custody arrangements have been put in place) to provide appropriate security to beneficiaries of a relevant entity. Subclause (2) provides that if these conditions are not satisfied, the Commissioner must refuse an application. 29. Subclause (3) provides that the grant of approval may be subject to conditions.

9 CLAUSE 27 WHEN AN APPROVAL IS IN FORCE This clause provides that an approval may come into force either when it is granted, or at a later time if such a tine is specified in the instrument of approval. The approval remains in force until it is revoked. CLAUSE 28 REVOCATION OF APPROVAL ~ 31. This clause provides that the Commissioner may revoke an ~ approval of an approved trustee. Subclause (2) sets out some of the grounds on which an approval may be revoked. CLAUSE 29 NOTIFICAT1ON OF CHANGE IN CIRCUMSTANCES OR BREACH OF CONDITIONS 32. This clause places a requirement on approved trustees to notify the Commissioner as soon as possible after becoming aware of the events specified in subclause (2). PART 3 OPERATING STANDARDS FOR SUPERANNUATION ENTITIES CLAUSE 30 OBJECT OF PART 33. Self explanatory. CLAUSE 31 OPERATING STANDARDS FOR REGULATED SUPERANNUATION FUNDS 34. This clause provides that standards applicable to the operation of regulated superannuation funds may be prescribed. Subclause (2) specifies particular matters in respect of which operating standards may be prescribed. CLAUSE 32 OPERATING STANDARDS FOR APPROVED DEPOSIT FUNDS 35. This clause provides that standards applicable to the operation of approved deposit funds may be prescribed. Subclause (2) specifies particular matters in respect of which operating standards may be prescribed. CLAUSE 33 OPERATING STANDARDS FOR POOLED SUPERA1~1NUATIONTRUSTS 36. This clause provides that standards applicable to the operation of pooled superannuation trusts may be prescribed. Subclause (2) specifies particular matters in respect of which operating standards may be prescribed. CLAUSE 34 PRESCRIBED OPERATING STANDARDS MUST BE COMPLIED WITH 37. This clause provides that the trustee of a superannuation entity must ensure that the entity complies at all times with the applicable operating standards. Subclauses (2) and (3) provide that where a trustee intentionally or recklessly fails to ensure that the applicable operating standards are complied with at all times, the trustee is guilty of an offence, but that such a contravention does not affect the validity of a transaction.

10 PART 4 8 TRUSTEE OF SUPERANNUATION ENTITY TO LODGE ANNUAL RETURNS WITH THE COMMISSIONER CLAUSE 35 OBJECT OF PART 38. Self explanatory. CLAUSE 36 TRUSTEE TO LODGE ANNUAL RETURNS 39. This clause provides that the trustee of a superannuation entity, in respect of each year of income, and within the prescribed period, must provide to the Commissioner, in the approved form, a return, a certificate, and a certificate by the approved auditor. 40. Subclauses (3) and (4) provide that the return may be provided in electronic form, and that, where the return is provided other than in electronic form, the respective certificates nay be endorsed on the return. 41. Subclause (2) provides that an intentional or reckless contravention of subclause (1) is an offence. PART S NOTICES ABOUT COMPLYING FUND STATUS DIVISION 1 OBJECT AND INTERPRETATION CLAUSE 37 OBJECTS OF PART 42. Self explanatory. CLAUSE 38 MEANING OF ENTITY 43. Self explanatory. DIVISION 2 COMMISSIONER MAY GIVE NOTICES ABOUT COMPLYING FUND STATUS CLAUSE 39 NOTICES BY COMMISSIONER TO TRUSTEE 44. Subclause (1) provides that the Commissioner may give written notice to the trustee of a superannuation entity stating whether the entity is, in respect of a particular year of income, a complying or noncomplying superannuation fund, a complying or non complying approved deposit fund, or a pooled superannuation trust. 45. Subclause (2) provides that, where the Commissioner gives a notice of non compliance in relation to a particular year of income, the notice must also set out the reasons for that notice. 46. Subclause (3) provides for the Commissioner of Taxation to be given particulars of all notices given under this clause.

11 9 47. Subclause (4) provides that, where the Commissioner gives P aparticular noncompliance yearnotice inof relation income, under and tothis that subsequently section year ofingives income, relationa notice the tonon compliance notice is taken to have revoked the original ofa compliance notice. CLAUSE 40 WHEN COMMISSIONER OBLIGED TO GIVE NOTICE OF COMPLIANCE ~ 48. This clause sets out when the Commissioner is required to give a notice of compliance to the trustee of an entity. If the entity is a complying superannuation fund, a complying approved deposit fund, or a pooled superannuation trust, as the case requires, in relation to the current year of income and, either, the entity has not received a compliance notice in respect of a previous year of income or, the most recent notice the entity has received in relation to a previous year of income is a notice of F noncompliance, the Commissioner must give a notice of compliance under section 39 in respect of the current year of income. 49. The Commissioner is not required to give a notice under section 39 except as provided by subclause (2) of this clause. It follows that, if a notice of compliance has not been given under section 39 to the trustee of an entity in relation to a particular year of income, the entity is not a complying superannuation fund, a complying approved deposit fund, or a pooled superannuation trust, as the case requires, in respect of that year of income. 50. Subclause (3) provides that a reference to a previous year of income may be a reference to a year of income before However, notwithstanding section 47, if the fund was not a regulated superannuation fund at all times during the current year of income when the fund was in existence, paragraph (2) (b) does not apply unless the previous year of income is the year of income or a later year of income. 51. Subclause (4) provides that, for the purposes~ of this section, a notice given under section 39 that is revoked is taken to have never been given. CLAUSE 41 COMPLYING SUPERANNUATION FUND 52. This clause provides out when an entity is a complying superannuation fund in a relation to a particular year of income for the purposes of this Division. It follows that, if an entity does not satisfy the requirements set out in paragraph (1) (a) and subparagraphs (1) (b) (i) to (iii), and the Commissioner does not P think, after considering all relevant circumstances, that a notice of compliance should be given in relation to that year of income, the entity is not a complying superannuation fund in respect of that year of income.

12 Subclause (2) provides that, for the purposes of subclause (1), where a fund does not comply with the equal representation rules in Part 9 at any time during a year of income, the trustee is taken to have contravened this Act in relation to the fund in respect of that year of income. CLAUSE 42 COMPLYING APPROVED DEPOSIT FUND 54. This clause sets out when an entity is a complying approved deposit fund in relation to a particular year of income for the purposes of this Division. It follows that, if an entity does not satisfy the requirements set out in paragraph (a) and subparagraphs (b) (i) to (iii), and the Commissioner does not think, after considering all relevant circumstances, that a notice of compliance should be given in relation to that year of income, the entity is not a complying approved deposit fund in respect of that year of income. CLAUSE 43. POOLED SUPERANNUATION TRUST 55. This clause sets out when an entity is a pooled superannuation trust in relation to a particular year of income for the purposes of this Division. It follows that, if an entity does not satisfy the requirements set out in paragraph (a) and subparagraphs (b) (i) to (iii), and the Commissioner does not think, after considering all relevant circumstances, that a notice should be given in relation to that year of income that the entity is a pooled superannuation trust, the entity is not a pooled superannuation trust in respect of that year of income. DIVISION 3 COMPLYING FUND STATUS FOR TAX PURPOSES CLAUSE 44 COMPLYING SUPERANNUATION FUND 56. This clause provides that a fund is a complying superannuation fund for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to a particular year of income (and therefore eligible for concessional taxation treatment under that Act) if and only if the Commissioner has given a notice of compliance in relation to that year of income under section 39 of this Act or the most recent notice the fund has received in relation to a previous year of income is a notice of compliance. If the Commissioner has not given a notice of compliance in relation to that year of income and the most recent notice the fund has received in relation to a previous year of income is a notice of noncompliance, the fund is a noncomplying superannuation fund in relation to that year of income. 57. Subclause (2) provides that a reference to a previous year of income may be a reference to a year of income before However, notwithstanding section 47, if the fund was not a regulated superannuation fund at all times during the current year of income when the fund was in existence, paragraph (1) (b) does not apply unless the previous year of income is the year of income or a later year of income.

13 58. Subclause (3) provides that, for the purposes of this P section, a notice given under section 39 that is revoked is taken to have never been given. CLAUSE 45 COMPLYING APPROVED DEPOS1T FUND 59. This clause provides that an approved deposit fund is a complying approved deposit fund for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to a particular S year of income (and therefore eligible for concessional taxation V treatment under that Act) if and only if the Commissioner has given a notice of compliance in relation to that year of income pursuant to section 39 of this Act or the most recent notice the fund has received in relation to a previous year of income is a notice of compliance. If the Commissioner has not given a notice of compliance in relation to that year of income and the most recent notice the fund has received in relation to a previous year of income is a notice of non compliance, the fund is a noncomplying approved deposit fund in relation to that year of income Subclause (2) provides that a reference to a previous year of income may be a reference to a year of income before Subclause (3) provides that, for the purposes of this section, a notice given under section 39 that is revoked is taken to have never been given. CLAUSE 46 POOLED SUPERANNUATION TRUST 62. This clause provides that a unit trust is a pooled superannuation trust for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to a particular year of income (and therefore eligible for concessional taxation treatment under that Act) if and only if the Commissioner has gigen a notice to that effect in relation to that year of income pursuant to section 39 of this Act or the most recent notice the trust has received in relation to a previous year of income is a notice that the trust is a pooled superannuation trust. If the Commissioner has not given a notice that the trust is a pooled superannuation trust in relation to that year of income and the most recent notice the fund has received in relation to a previous year of income is a notice that the trust is not a pooled superannuation trust, the trust is a not a pooled superannuation trust in relation to that year of income. 63. Subclause (2) provides that a reference to a previous year of income may be a reference to a year of income before Subclause (3) provides that, for the purposes of this section, a notice given under section 39 that is revoked is taken to have never been given.

14 12 CLAUSE 47 TRANSITIONAL NOTICES UNDER THE REPEALED PROVISIONS OF THE OCCUPATIONAL SCJPERANNUATION STANDARDS ACT This clause provides for certain notices under the repealed provisions of the Occupational Superannuation Standards Act 1987 to have effect for the purposes of paragraph 40(2) (b) and this Division. 66. Subclause (1) provides that a positive (complying) notice under repealed sections 12. or 13 of the Occupational Superannuation Standards Act 1987 in relation to a superannuation fund in respect of its year of income or an earlier year of income, has effect as if it were a notice under section 39 of this Act stating that the fund is a complying superannuation fund in relation to that year of income. 67. Subclause (2) provides that a positive (complying) notice under repealed sections 14 or 15 of the Occupational Superannuation Standards Act 1987 in relation to an approved deposit fund in respect of its year of income or an earlier year of income, has effect as if it were a notice under section 39 of this Act stating that the fund is a complying approved deposit fund in relation to that year of income. 68. Subclause (3) provides that a positive (complying) notice under repealed sections 155 or 15C of the Occupational Superannuation Standards Act 1987 in relation to a pooled superannuation trust in respect of its year of income or an earlier year of income, has effect as if it were a notice under section 39 of this Act stating that the trust is a pooled superannuation trust in relation to that year of income. 69. Subclause (4) provides that a negative (noncomplying) notice under repealed sections 12 or 13 of the Occupational Superannuation Standards Act 1987 in relation to a superannuation fund in respect of its year of income or an earlier year of income, has effect as if it were a notice under section 39 of this Act stating that the fund is not a complying superannuation fund in relation to that year of income. 70. Subclause (5) provides that a negative (noncomplying) notice under repealed sections 14 or 15 of the Occupational Superannuation Standards Act 1987 in relation to an approved deposit fund in respect of its year of income or an earlier year of income, has effect as if it were a notice under section 39 of this Act stating that the fund is not a complying approved deposit fund in relation to that year of income. 71. Subclause (6) provides that a negative (noncomplying) notice under repealed sections 155 or 15C of the Occupational Superannuation Standards Act 1987 in relation to a pooled superannuation trust in respect of its year of income or an earlier year of income, has effect as if it were a notice under section 39 of this Act stating that the trust is not a pooled superannuation trust in relation to that year of income.

15 PART 6 PROVISIONS RELATING TO GOVERNING RULES OF SUPERANNUATION P ENTITIES CLAUSE 48 OBJECT OF PART 72. Self explanatory. 13 P 73. CLAUSE 49 COVENANTS TO BE INCLUDED IN GOVERNING RULES Subclause (I) provides that where the governing rules of a superannuation entity do not contain covenants binding the trustee as specified in paragraphs (2) (a) to (h), the governing rules are taken to contain covenants to that effect. 74. Subclause (3) provides that paragraph (2) (e) does not prevent the trustee from engaging or authorising agents to do acts or things on the trustee s behalf. 75. Subclause (4) provides that the investment strategy covenant in paragraph (2) (f) may allow for the giving of directions to the trustee by individual beneficiaries or a class of beneficiaries in relation to investments to be undertaken in respect of that beneficiary or class of beneficiaries. 76. Subclause (5) deems the effect of any covenant prescribed by regulation to be contained in the governing rules of all superannuation entities. 77. Subclause (6) provides that, without limiting the generality of subclause (5), the regulations may prescribe a covenant that elaborates, supplements or otherwise deals with any aspect of a matter referred to in subclause (2) or a matter to which this Act relates. Subclause (7) provides that a prescribed covenant, when contained in the governing rules, must be capable of operating concurrently with this Act and all the covenants already contained in the rules by virtue of this clause. 78. Subclause (8) provides for each of the directors of a corporate trustee to be bound by the covenants in subclause (2) in the same way as the trustee itself is bound, as if the directors were party to the governing rules. CLAUSE 50 COVENANTS TO REPAY AMOUNTS TO BENEFICIARIES IN APPROVED DEPOSIT FUNDS 79. This clause requires that the governing rules of large approved deposit funds must contain a covenant binding the trustee to repay an interest in the fund, where written notice has been given by a beneficiary, within such period not exceeding 12 months as is determined by the trustee, and that where the covenant is not expressly contained in the rules, it is deemed to be included. 80. Subclause (3) provides for each of the directors of a corporate trustee to be bound by the covenant in paragraph (2) (b) as if they were a party to the governing rules.

16 Subclause (5) provides that a redemption period determined by the trustee can only be varied where the Commissioner has consented in writing to the variation, or the requirements in section 28 have been complied with. CLAUSE 51 PREREQUISITES TO VARIATION OF REPAYMENT PERIOD 82. This clause sets out the requirements referred to in paragraph 50(5) (b) for varying the period set by the trustee for redeeming an interest in a large approved deposit fund. I CLAUSE 52 CONSEQUENCES OF CONTRAVENTION OF COVENANT 83. This clause provides that a person must not contravene a covenant contained in or deemed to be contained in the governing rules of a superannuation entity. However, any such contravention is not an offence, and any contravention does not result in invalidity of a transaction. 84. Subclauses (3) and (4) provide that a person who suffers loss or damage as a result of conduct of another person that was engaged in, in contravention of subclause (I), may recover the amount of the loss or damage by action, within 6 years of the date of cause of the action, against that person or any other person engaged in the contravention. 85. for Subclause (5) provides grounds loss or damage by a person as a for a defence result of the to an action making of an investment by or on behalf of the trustee of a superannuation entity. 86. Subclause (6) provides grounds for a defence to an action for loss or damage by a person as a result of the management of any reserves by the trustee of the entity. Subclause (7) provides that the defences specified under subclauses (5) and (6) apply to an action for loss or damage, whether brought under subclause (3) or otherwise. CLAUSE 53 INDEMNIFICATION OF TRUSTEE FROM ASSETS OF ENTITY 87. Subclause (1) renders void any provision in the governing rules of a superannuation entity that precludes the trustee from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee. 88. Subclause (2) renders void any provision in the governing rules of a superannuation entity that exempts the trustee from, or indemnifies the trustee against, liability for breach of trust in the circumstances set out in paragraph (a) or liability for a monetary penalty under a civil penalty order.

17 P of P Subclause (3) provides that nothing in the governing rules a superannuation entity may prohibit the trustee from seeking advice in respect of the performance of the duties or the exercise of the powers of the trustee, and renders void any provision that precludes the trustee from indemnification out of the assets of the entity for the cost of obtaining such advice. CLAUSE 54 TRUSTEE NOT TO BE SUBJECT TO DIRECTION This clause provides that, except as provided in subclause (2), the governing rules of a large superannuation entity must not permit the trustee, in the exercise of any of the trustee s powers, to be subject to the direction of any other person, and renders void any provision in the governing rules that does so. This clause does not preclude the concurrent exercise of power by the trustee and the employersponsor in the case of an employersponsored fund. CLAUSE 55 EXERCISE OF DISCRETION BY PERSON OTHER THAN TRUSTEE 91. This clause provides that the governing rules of a large superannuation entity must not permit the exercise of a discretion under those rules that is exercisable other than by the trustee to be exercised without the consent of the trustee, except as provided in paragraph (1) (b), and renders void any provision in the governing rules that does so. CLAUSE 56 AMENDMENT OF GOVERNING RULES 92. Subclause Cl) provides that the governing rules of a large superannuation entity must not permit the rules to be amended except as provided in paragraphs (a), (b) or (c). Subclause (2) provides that the governing rules of a regulated superannuation fund must not permit the rules to be amended except as provided in paragraphs (a) or (b) 93. Subclause (3) provides that, where the governing rules are inconsistent with subsections (1) or (2), the subsection concerned prevails, and the governing rules are, to the extent of the inconsistency, invalid. PART 7 PROVISIONS APPLYING ONLY TO REGULATED SUPERANNUATION FUNDS CLAUSE 57 OBJECT OF PART 94. Self explanatory.

18 16 CLAUSE 58 SOLE PURPOSE TEST 95. This clause sets out the purposes for which the trustee of a regulated superannuation fund must ensure that the fund is maintained. The purposes are essentially the types of benefits to be provided to, or in respect of, each member of the fund. Paragraph (1) (a) sets out the core purposes for which a fund must be maintained, while paragraph (1) (b) sets out the ancillary purposes for which a fund may be maintained (in addition to the core purposes). 96. Subclause (2) provides that subclause (1) is a civil penalty provision, pursuant to Part 21 of the Act, attracting civil and criminal consequences for contravention, or being involved in a contravention. 97. Subclause (3) provides that an approval by the Commissioner of the provision of other benefits pursuant to subparagraph (1) (b) (v) may be specified to relate to a fund or a class of funds. CLAUSE 59 COMMISSIONER MAY DIRECT TRUSTEES OF CERTAIN REGULATED SUPERANNUATION FUNDS NOT TO ACCEPT EMPLOYER CONTRIBUTIONS 98. Subclause (1) provides that the Commissioner may direct the trustee of a regulated superannuation fund not to accept any contributions made by an employersponsor of the fund. 99. Subclause (2) provides that the Commissioner may only give directions to the trustee under this section prior to the commencement of the fund s year of income where the direction does not take effect until the start of that year of income and the fund did not comply with any or all of the standards applicable to it under the Occupational superannuation Standards Act 1987 during the period from Royal Assent to the day before the start of the fund s year of income Subclause (3) provides that the Commissioner cannot give a direction to the trustee under this section in respect of the fund s 1994~~95and subsequent years of income unless the conditions in paragraphs (a) and (b) are satisfied Subclause (4) provides that a statement of reasons for the direction must accompany the direction. Subclause (5) provides that the Commissioner may revoke a direction where he is satisfied as to the matters specified. Subclause (6) provides that, for the purposes of subclauses (3) and (5), the trustee of the fund is taken to have contravened this Act in relation to any noncompliance on the part of the fund with the equal representation rules.

19 102. Subclauses (7) and (8) provide that a contravention of a ~ direction under this section by the trustee, without reasonable ~ excuse, is an offence, but that such a contravention does not affect the validity of a transaction. A contribution accepted by the trustee in contravention of this section must be refunded within 28 days or such further period as the Commissioner allows Subclause (9) provides that the trustee must take all reasonable steps to notify receipt of a direction under this ft section to all employersponsors of the fund. Subclause (10) W provides that a contravention of subsections (8) or (91, without reasonable excuse, is an offence Subclause (11) provides that refunded contributions are to be ignored for the purposes of income tax and the superannuation guarantee charge. Subclause (12) provides that any shortfall component in relation to the superannuation guarantee charge is to be treated as an employer contribution. CLAUSE 60 SUPERANNUATION CONTRIBUTIONS DEDUCIIONS FROM SALARY OR WAGES TO BE REMITTED PROMPTLY 105. Subclauses (1) and (2) provide that an employer must promptly remit to the trustee of the superannuation fund authorised deductions (being superannuation contributions) by that employer from the salary or wages of employees. Subclause (3) provides that an intentional or reckless contravention of subclause (2) is an offence Subclauses (4) and (5) define the term salary or wages for the purposes of this section. CLAUSE 61 LENDING TO MEMBERS 01 REGULATED SUPERANNUATION FUND PROHIBITED 107. This clause prohibits any lending or provision of other financial assistance by the trustee or investment manager of a regulated superannuation fund to any member or relative of a member of the fund Subclauses (2) and (3) set out exceptions to this prohibition in relation to, respectively, private sector funds established before 16 December 1985, and public sector funds before 25 May Subclause (4) provides that, in cases where subclauses (2) and (3) apply, from the beginning of the fund s year of income, any variation in a provision contained in the fund s governing rules that authorises lending to members is void unless the variation satisfies the requirements contained in paragraphs (c) and (d) Subclause (5) provides that subclause provision, pursuant to Part 21 of the Act, (1) is a civil penalty attracting civil and criminal consequences for contravention, or being involved in a contravention.

20 18 CLAUSE 62 ACQUISITION OF ASSETS FROM MEMBERS OF REGULATED SUPERANNUATION FUND PROHIBITED 111. Subclause (1) provides that a trustee or an investment manager of a regulated superannuation fund must not intentionally acquire an asset from any member, or relative of a member, of the fund Subclause (2) prohibits schemes the intention of which is to avoid application of subclause (1) Subclause (3) provides that a person who contravenes subclauses (1) or (2) is guilty of an offence. CLAUSE 63 BORROWING 114. This clause provides that the trustee of a regulated superannuation fund must not borrow money or maintain an existing borrowing of money Subclauses (2), (3) and (4) set out exceptions to this prohibition in relation to, respectively, temporary borrowings in order to pay beneficiaries, maintenance of moneys borrowed by private sector funds before 12 June 1986, and maintenance of moneys borrowed by public sector funds before 2 July Subclause (5) provides that subciause (1) is a civil penalty, pursuant to Part 21 of the Act, attracting civil and criminal consequences for contravention, or being involved in a contravention. CLAUSE 64 VICTIMISATION OF TRUSTEES ETC This clause provides that a person must not intentionally or recklessly commit an act of victimisation against the trustee, or a responsible officer of a corporate trustee, of an employer sponsored fund Subclauses (2) and (3) set out, for the purposes of this section, the circumstances when a person is taken to have committed an act of victimisation against, respectively, the trustee or a responsible officer of a corporate trustee Subclause (4) sets out the circumstances when, for the purposes of this section, an employer is taken to have subjected an employee to detriment. It also provides that an employer is not taken to subject an employee to detriment where the employer permanently ceases to make contributions to the superannuation fund of which the employee is a member Subclause (5) sets out matters relating to the reason for an alleged action in relation to civil proceedings arising out of this section, and sets out grounds for a defence.

21 Subclauses (6) and (7) clarify the meaning of an obligation imposed on, and the powers of, a trustee or a responsible officer for the purposes of this section Subclause (8) provides that a trustee or responsible officer who suffers loss or damage as a result of an act of victimisation may recover the amount of loss or damage by civil action Subclause (9) clarifies the meaning of employee and employer for the purposes of this section. PART B INHOUSE ASSET RULES APPLYING TO REGULATED SUPERAmWATION FUNDS DIVISION 1 OBJECT AND INTERPRETATION CLAUSE 65 OBJECT OF PART 124. Self explanatory. CLAUSE 66 ASSOCIATE OF EMPLOYERSPONSOR 125. Paragraph (a) provides that, for the purposes of this Part, an associate of an employersponsor of a private sector superannuation fund is defined in terms of subsection 26AAAB(14) of the Income Tax Assessment Act Paragraph (b) provides that, for the purposes of this Part, an associate of an employersponsor of a public sector superannuation fund is defined in terns of subparagraphs (i) and (ii) CLAUSE 67 MEANING OF INHOUSE ASSET 127. This clause defines, for the purposes of this Part, an inhouse asset. Paragraphs (1) (a) to (1) (d) set out certain exclusions to the basic meaning of the tern, while paragraph (1) (e) also excludes such other assets as are determined by the Commissioner not to be inhouse assets Subclause (2) provides that certain assets arising out of the entering into or carrying out of certain agreements are inhouse assets for the purposes of this Part Subclause (3) provides that the Commissioner may determine that certain assets that would otherwise not be inhouse assets are inhouse assets for the purposes of this Part. CLAUSE 68 COST OP IN HOUSE ASSET 130. This clause provides that, in the circumstances specified in paragraphs (1) (a) and (b), the cost of an in house asset is the arm s length value of the asset when it was acquired.

22 CLAUSE 69 HISTORICAL COST RATIO OF FUND S INHOUSE ASSETS This clauses specifies the formula for working out the historical cost of a fund s inhouse assets. CLAUSE 70 MARKET VALUE RATIO OF FUND S INHOUSE ASSETS 132. This clauses specifies the formula for working out the market value of a fund s inhouse assets. DIVISION 2 HISTORICAL COST RATIO OF FUND S IN HOUSE ASSETS 4 CLAUSE 71 PRIVATE SECTOR FUNDS ESTABLISHED ON OR AFTER 12 MARCH 1985 HISTORICAL COST RATIO FOR THE YEAR OF INCOME 133. This clause provides that, at all times during the year of income of a private sector regulated superannuation fund established on or after 12 March 1985, the historical cost of its inhouse assets must not exceed 10 per cent of all its assets. CLAUSE 72 PRIVATE SECTOR FUNDS ESTABLISHED BEFORE 12 MARCH 1985 HISTORICAL COST RATIO FOR THE YEAR OF INCOME 134. This clause provides that, at all times during the year of income of a private sector regulated superannuation fund established before 12 March 1985, the historical cost of its inhouse assets must not excped the greater of the percentages of all its assets specified in paragraphs (2) (a) and (2) (b). CLAUSE 73 PUBLIC SECTOR FUNDS ESTABLISHED ON OR AFTER 1 JULY 1990 HISTORICAL COST RATIO FOR THE YEAR OF INCOME 135. This clause provides that, at all times during the year of income of a public sector regulated superannuation fund established on or after 1 July 1990, the historical cost of its inhouse assets must not exceed 10 per cent of all its assets. CLAUSE 74 PUBLIC SECTOR FUNDS ESTABLISHED BEFORE 1 JULY 1990 HISTORICAL COST RATIO FOR THE YEAR OF INCOME 136. This clause provides that, at all times during the year of income of a public sector regulated superannuation fund established before 1 July 1990, the historical cost of its inhouse assets must not exceed the greater of the percentages of all its assets specified in paragraphs (2) (a) and (2) (b)

23 21 CLAUSE 75 ALL FUNDS HISTORICAL COST RATIO FOR THE YEAR OF INCOME, THE YEAR OF INCOME AND THE YEAR OF INCOME 137. This clause provides that, at all times during the , and years of income of a regulated superannuation fund, the historical cost of its inhouse assets must not exceed 10 per cent of all its assets. DIVISION 3 MARKET VALUE RATIO OF FUND S INHOUSE ASSETS CLAUSE 76 ALL FUNDS MARKET VALUE RATIO FOR THE YEAR OF INCOME AND THE YEAR OF INCOME 138. This clause provides that, at the end of each of the and years of income of a regulated superannuation fund, the market value of its inhouse assets must not exceed 10 per cent of all its assets. CLAUSE 77 ALL FUNDS MARKET VALUE RATIO FOR TEE YEAR OF INCOME AND LATER YEARS OF INCOME 139. This clause provides that, if at the end of the year of income or a subsequent year of income of a regulated superannuation fund, the market value of its inhouse assets exceeds 5 per cent of all of its assets, the fund must dispose of at least the amount of the excess over 5 per cent before the end of the next following year of income. CLAUSE 78 CERTAIN NEW INHOUSE ASSET INVESTMENTS PROHIBITED 140. This clause provides that, if at any time the market value of a regulated superannuation fund s inhouse assets exceeds 5 per cent of all of its assets, the fund is prohibited from any acquisitions of inhouse assets. Further, where the market value does not exceed 5 per cent, any acquisition that would take the market value over 5 per cent is prohibited. DIVISION 4 ENFORCEMENT CLAUSE 79 INHOUSE ASSET RULES MUST BE COMPLIED WITH 141. Subolause (1) provides that the trustee of a regulated superannuation fund must take all reasonable steps to comply with the inhouse asset rules Subclause (2) provides that subclause (1) is a civil penalty ) provision, pursuant to Part 21 of the Act, attracting civil and criminal consequences for contravention, or being involved in a contravention, and subclause (3) provides that a contravention of subclause (1) does not affect the validity of a transaction.

24 22 DIVISION 5 ANTIAVOIDANCE CLAUSE 80 PROHIBITION OF AVOIDANCE SCHEMES Subclause (1) prohibits schemes the intention of which is to avoid application of any provision of this Part to a superannuation fund. Subclause (2) provides that subclause (1) is a civil penalty provision, pursuant to Part 21 of the Act, attracting civil and criminal consequences for contravention, or being involved in a contravention, and subciause (3) provides that a contravention of subclause (1) does not affect the validity of a transaction. PART 9 EQUAL REPRESENTATION OF EMPLOYERS MID MEMBERS EMPLOYERSPONSORED SUPERANNUATION FUNDS CLAUSE 81 OBJECT OF PART 144. Self explanatory. CLAUSE 82 CONSEQUENCES OF NONCOMPLIANCE WITH THIS PART 145. This clause provides that a contravention of this Part is not an offence and does not result in the invalidity of a transaction, but such a contravention may result in an employer sponsored fund not being a complying fund for the purposes of Part IX of the Income Tax Assessment Act CLAUSE 83 THIS PART DOES NOT APPLY 1FF ACTING TRUSTEE APPOINTED UNDER PART Self expianatory. CLAUSE 84 BASIC EQUAL REPRESENTATION RULES 147. Subclause (1) sets out the basic equal representation rules with which a fund must comply for the purposes of this Part Subclause (2) provides that it is not a breach of the basic equal representation rules where a group of trustees or the board of a corporate trustee includes an additional independent trustee or an additional independent director, as the case may be, and the requirements set out in paragraphs (b) to (d) are met Subclause (3) provides that, if the rules specified for the filling of vacancies are met, the fund is taken to have complied with the basic equal representation rules during the period of the vacancy.

25 CLAUSE 85 PREl JULY 1995 RULES FUNDS WITH FEWER THAN 200 MEMBERS This clause sets out rules for the equal representation of employers and members in the trustee arrangements of certain private sector and public sector employersponsored superannuation funds with less than 200 members, for the period up to and including 30 June ap basic 151. Subclause equal representation (3) provides that rules the or fund the must alternative comply with agreed the representation rule set out in subclause (4). CLAUSE 86 PRE1 JULY 1995 RULES FUNDS WITH 200 OR MORE MEMBERS 152. This clause sets out rules for the equal representation of employers and members in the trustee arrangements of certain private sector and public sector employersponsored superannuation funds with 200 or more members, for the period up to and including 30 June Subclause (3) provides that public offer funds must comply with the requirements specified in paragraphs (a) to (c), while subclause (4) provides that nonpublic offer funds must comply with the basic equal representation rules Subclause (5) sets out rules relating to the transition in a fund s membership size from less than 200 members to 200 or more members. CLAUSE 87 POST30 JUNE 1995 RULES FUNDS WITH MORE THAN 4, BUT FEWER THAN 50, MEMBERS 155. This clause sets out rules for the equal representation of employers and members in the trustee arrangements of employer sponsored superannuation funds with more than 4, but fewer than 50 members, from 1 July Subclause (3) provides that public offer funds must comply with the requirements specified in paragraphs (a) to (c), while subclause (4) provides that nonpublic offer funds must comply with the basic equal representation rules or the alternative agreed representation rule set out in subclause (5) 157. Subclauses (6) to (12) set out provisions relating to the approval of the trustee for the purposes of the agreed alternative equal representation rule. CLAUSE 88 POST3D JUNE 1995 RULES FIJNDS WITH MORE THAN 49 MEMBERS 158. This clause sets out rules for the equal representation of employers and members in the trustee arrangements of employer sponsored superannuation funds with more than 49 members, from 1 July 1995.