CHOICE AND FUND AND SMSFS

From 1 July 2005, most employers will be required to offer their employees choice of superannuation fund. The choice regime will only apply to superannuation guarantee (‘SG’) contributions.

Employees will be able to have their SG contributions paid to a fund of their choice, including a self managed superannuation fund (‘SMSF’).

Standard choice form

Employers will need to provide their employees with a standard choice form. Generally, a choice form will need to be given to existing employees by 28 July 2005, to new employees within 28 days of commencing work and within 28 days of a request (unless a standard choice form has been provided to the employee in the last 12 months).

How can an employee exercise choice?

Employees can only exercise choice once every 12 months by giving their employer written notice of the details of their chosen fund. An employer must effect a choice request within two months.

The ATO’s draft standard choice form requires members of SMSFs to attach a letter from the ATO confirming that their SMSF is a complying fund. Professional bodies are seeking to have this onerous requirement dispensed with.

When can an employer refuse to accept an employee’s chosen fund?

An employer may refuse to accept the fund chosen by an employee if the fund cannot accept contributions from the employer. One example is where the trust deed requires the employer to become a ‘participating employer’ (ie, agree to be bound by the terms of the deed) before it will accept contributions.

Members of SMSFs should review their deed to ensure it does not require an employer to become a participating employer who is bound by the terms of the deed. Note, unintended in-house asset issues may arise if the fund is an employer sponsored fund. In our opinion, it is generally preferable for deeds not to require contributing employers to become participating employers.

What is a default fund?

Employers will need to select a default fund if an employee does not make a choice. The default fund will need to offer a minimum level of death cover insurance.

Substantial Penalties

Substantial penalties apply to employers who do not comply with the choice rules. A penalty of $500 per employee applies per quarter or notice period. An employer with 10 employees, eg, could potentially be hit with a $5,000 penalty per quarter or $20,000 p.a.

Financial Advice

Employers cannot provide financial advice unless they hold an Australian Financial Services Licence (‘AFSL’), so they will need to exercise extreme caution. Merely advising an employee of more appropriate choices may constitute the provision of financial advice. Advisers who do not hold an AFSL also need to be careful. Certain ‘recognised’ accountants only have limited relief if they provide financial product advice in relation to SMSFs (but not other funds).

Conclusions

Employers should review their current systems and procedures for any changes that need to be made. Many contracts of employment and HR policies will need to be revised. Likewise, members of SMSFs should review their deeds to ensure they do not require a contributing employer to become a participating employer or contain onerous obligations for employers. Note the draft choice regulations still have to be finalised.

CHOICE OF FUND CHECKLIST