explanatory statement
Issued by the authority of the Minister for Finance and Administration
Superannuation Act 1976
Orders under subsection 146MH(1)
The Superannuation Act 1976 (the Act) makes provision for and in relation to the Commonwealth Superannuation Scheme (CSS) for Australian Government employees and for certain other persons.
Part IXB of the Act makes specific provision for the splitting of a superannuation interest under the Act when the CSS Board is served with an agreement or order in relation to that interest as a result of actions taken under the Family Law Act 1975 (the Family Law Act). Part IXB allows for a separate interest to be created in the CSS for the former spouse of a CSS member who has been allocated a part of the member's interest in the CSS under such an agreement or order.
Subsection 146MH(1) of the Act provides that the Minister may make Orders prescribing matters required or permitted to be prescribed by Part IXB. The Superannuation (Family Law – Superannuation Act 1976) Orders 2004 (the Principal Orders) prescribe the matters required or permitted by Part IXB of the Act to be prescribed.
Section 146MA of the Act defines a number of terms used in Part IXB, including the term scheme value. The definition of scheme value refers to the amount determined under the Orders. The Principal Orders provide methods and/or factors that are to be used to calculate the relevant amounts in relation to this definition.
Scheme value is one of the items taken into account in the calculation of the separate interest for a former spouse and the reduction of the member's benefits as a result of the splitting of the interest.
The principal purpose of the Superannuation (Family Law – Superannuation Act 1976) Amendment Orders 2005 (No. 1) (the amending Orders) is to amend the Principal Orders to take into account the existence of a surcharge debt in respect of a CSS member when calculating the scheme value in respect of the member’s interest in the scheme.
The Superannuation Contributions Tax (Assessment and Collection) Act 1997 provides for a superannuation surcharge regime in relation to the employer superannuation contributions for high-income earners. In the CSS the superannuation surcharge is usually accumulated in the member’s surcharge debt account until the member’s benefit is paid. It is then paid to the Australian Taxation Office by the CSS Board and the member’s benefits are reduced to have regard to that payment.
An order or agreement to split a superannuation interest considers the interest net of surcharge and therefore does not allocate the surcharge debt between the parties. The Principal Orders do not adequately take this into account with the effect that, in respect of the interest for a CSS member with a debit in their surcharge debt account the separate interest transferred to the former spouse may be greater than it should be and the consequent reduction of the member's interest may be greater than it should be. Further details of the operation of the surcharge regime and the effect of the Principal Orders are included in Attachment A.
The amending Orders amend the Principal Orders to ensure that the process of creating the separate interest for a former spouse and subsequent reduction of the member's interest works equitably from the date of effect of these Orders when the member is a contributing member with a debit in his or her surcharge debt account.
The amending Orders also ensure that where a case has already been dealt with prior to the making of these Orders, there will be no impact on any separate interest set up for the former spouse but there will be a recalculation of the reduction of the member's interest to ensure that reduction is not higher than intended.
The amending Orders also make technical amendments to a table included in Schedule 3 to the Principal Orders.
The details of the Orders are explained in Attachment B.
Section 167AB of the Act provides that the Minister may make Orders under the Act without the agreement of the CSS Board in certain circumstances. Subparagraph 167AB(b)(i) of the Act provides that amendments that relate to a payment by an employer-sponsor (within the meaning of the Superannuation Industry (Supervision) Act 1993) that will, after the making of the amendment, be required or permitted to be made under the Act do not require that agreement. These Orders affect benefits that are payable under the Act and are paid by the Australian Government (the employer sponsor) and therefore do not require the consent of the Board.
The amending Orders have been prepared in consultation with an actuary, ComSuper who administer the CSS for the Board and the Office of Legislative Drafting and Publishing.
The instrument is a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The amending Orders will commence on the day after they are registered on the Federal Register of Legislative Instruments.
Attachment A
the surcharge debt account and interest splitting
As a result of the surcharge regime the Act provides for the reduction of benefits available to certain CSS members who have a debit in their surcharge debt account on cessation of membership.
That regime, in relation to unfunded defined benefit schemes like the CSS, requires the Australian Taxation Office (the ATO) to advise the CSS Board of surcharge assessments in relation to members. Those assessments are accumulated in a surcharge debt account for the affected member, who may make payments to reduce or eliminate that account at any time, until benefits become payable. At that point the Board pays the amount in the surcharge debt account to the ATO and reduces the member's benefit accordingly.
When a separate interest is created under the Act for the former spouse of a member as a result of a superannuation split in a property settlement, that interest is based on a transfer amount. The term transfer amount is defined in section 146MA of the Act. The amount arises from the splitting agreement or order which may require the transfer of a percentage of the member’s interest or a specified (base) amount or a method of calculating such an amount. The definition requires that, where the order or agreement specifies a percentage, that percentage must be applied to the greater of the family law value or the scheme value. Where the order or agreement specifies, or provides a method of calculating, a base amount then the member interest must be valued. In such cases if the family law value is greater than the scheme value the transfer amount is the base amount. Alternatively if the scheme value is greater than the family law value then the transfer amount is calculated by applying to the scheme value the proportion that the base amount is to the family law value.
The term family law value is defined in section 146MA of the Act to be the amount that is the value of a superannuation interest as determined under the Family Law Act 1975 and regulations under that Act (FLA). The FLA values an interest in the CSS as net of any amount in the member's surcharge debt account, that is, FLA value is net of surcharge. That debt is therefore not split between the member and their former spouse.
The term scheme value is defined in section 146MA of the Act to be the amount determined under the Orders. The methods and factors provided by the Principal Orders to calculate the scheme value do not contain any reference to the member's surcharge debt account and therefore provide a value that includes the amount in the surcharge debt account, that is, scheme value is gross of surcharge.
The member's interest is reduced by the application of a transfer factor to the various components of the interest. The term transfer factor is defined in section 146MA of the Act to be the number calculated by dividing the transfer amount by the scheme value.
Actuarial advice received by the Department of Finance and Administration is that to achieve equity between the member and the former spouse where the member has a surcharge debt, it is necessary to use the scheme value net of surcharge to calculate the transfer amount and the scheme value gross of surcharge to calculate the transfer factor. The Principal Orders do not provide for the use of net and gross scheme values in this way.
The operation of the Principal Orders can be demonstrated through considering the following case:
A member has an interest in the CSS that has a value of $110,000 and has a surcharge debt of $10,000. This interest has an FLA value of $100,000 being the net value.
All things being equal the Principal Orders would provide that the scheme value of that interest, being a gross value, is $110,000 which is higher than the FLA value.
An agreement or court order specifies that a base amount of $100,000, being 100% of the FLA value, should be transferred to the former spouse.
Under the definition of transfer amount, used in the calculation of the former spouse’s separate interest, the amount transferred to the former spouse would be recalculated as 100% of the scheme value giving the former spouse an interest of $110,000.
The transfer factor used to reduce the member's benefits would be 100% which would reduce the member's benefit to zero. As a result of the split of the interest there would be no money left in the member’s account to pay the surcharge debt of $10,000.
In respect of the case above, if the operative time of the agreement or order is after the commencement of the amending Orders the amended provisions will operate as follows:
The FLA value of the member’s interest would remain at $100,000 (ie, net of the member’s surcharge debt of $10,000)
The scheme value used to calculate the transfer amount would be net of the surcharge debt, that is $100,000, the same value as the FLA value. The amount transferred to the former spouse would be 100% of that value or $100,000.
The scheme value used to calculate the transfer factor for the purposes of reducing the member's interest would be the gross amount giving a transfer factor of 90% reducing the interest by $100,000, making the member's benefit immediately after the interest split $10,000. If the member’s benefit was to become payable to the member at that time it would be sufficient to pay the surcharge debt attached to the interest that has been split between the member and the member’s former spouse.
In cases where the operative time is before the commencement of the amending Orders the provisions inserted by the amending Orders will operate to ensure that no amounts transferred to a former spouse will be subject to retrospective reduction. However where the member's interest has been overly reduced, the provisions will allow for a recalculation.
Attachment B
Superannuation (Family Law – Superannuation Act 1976) amendment Orders 2005 (No. 1)
Section 1 – Name of Orders
This section provides that the name of the instrument is the Superannuation (Family Law – Superannuation Act 1976) Amendment Orders 2005 (No. 1) (the Orders).
Section 2 - Commencement
This section provides that the Orders commence on the day after they are registered on the Federal Register of Legislative Instruments.
Section 3 – Amendment of Superannuation (Family Law – Superannuation Act 1976) Orders 2004
This section provides that Schedule 1 amends the Principal Orders, that is, the Superannuation (Family Law – Superannuation Act 1976) Orders 2004.
Schedule 1 – amendments
Item 1 – Definition
Item 1 inserts a definition of family law commencement day into subsection 1.03(1). That day is 18 May 2004 being the day on which the Superannuation Legislation Amendment (Family Law and Other Matters) Act 2004 took effect. That Act amended the Superannuation Act 1976 (the Act) to provide for the creation of a separate interest for a former spouse of a CSS member and the subsequent reduction of a member’s interest where a splitting order or agreement is served on the CSS Board.
Item 2 – Scheme value
Part IXB of the Act provides for two separate valuations of a member's interest in the CSS for the purposes of determining the transfer amount. (The transfer amount is a relevant matter in the calculation of the separate interest for the former spouse and the related reduction of the member's interest.) The first of these is the family law value which is the amount determined under the FLA. The other valuation is the scheme value that is defined to mean the amount determined under the Orders. The transfer amount will be based on whichever is the greater of these two valuations.
The FLA provides default methods and factors for determining the value of a defined benefit interest such as is available to members of the CSS. However, on 2 March 2004, the Attorney-General approved specific methods and factors to determine the value of an interest that a person has in the CSS for the purposes of the FLA.
Both the default and the scheme specific methods and factors ensure, where there is a debit in the member's surcharge debt account at the time of valuation, that the family law value of a member's interest is net of the amount of the debit. This is necessary to ensure that the member is left with sufficient interest in the CSS to allow for a reduction in respect of surcharge when a benefit becomes payable. Otherwise it would be possible for the member to be left with insufficient funds in the CSS to reimburse the Board for the payment of the surcharge if, for example, the splitting order or agreement required the transfer of 100% of the interest to the former spouse.
Prior to the amendments section 2.04 provided for the calculation of the scheme value in a number of circumstances. Paragraph 2.04(a) provided that if the operative time of an agreement or order served on the CSS Board is before the commencement of Part IXB of the Act, the scheme value is the family law value.
Subparagraph 2.04(b)(i) provided that, if the operative time is on or after the commencement of Part IXB of the Act, the scheme value is to be determined by using the methods and factors set out in Schedule 1 to the Principal Orders. The methods are the same as those used to obtain the family law value under the specific process approved by the Attorney-General on 2 March 2004 however they do not provide for the reduction of the amount where there is a debit in the member's surcharge debt account. The factors provided in Schedule 1 to the Principal Orders reflect the different actuarial assumptions that apply to the CSS. (In this respect they differ from any factors determined under the FLA which are based on general assumptions.)
Subparagraph 2.04(b)(ii) provided that, in the case where the operative time is on or after the commencement of Part IXB of the Act, the scheme value is to be determined by an actuary if it is not able to be determined under subparagraph 2.04(b)(i).
Item 2 substitutes section 2.04 with new subsections 2.04 and 2.04A. New section 2.04 applies for the calculations of the scheme value where the member does not have a debit in his or her surcharge debt account and essentially replicates the effects of subsection 2.04 as previously drafted.
New subsection 2.04A(1) applies where the member does have a debit in his or her surcharge debt account. New subsection 2.04A(2) is similar in effect to subsection 2.04(2) but is subject to the following subsections.
New subsection 2.04A(3) provides that, for cases that occur after the commencement of these Orders, where scheme value is to be used to calculate the transfer amount it should be reduced by the amount in the surcharge debt account. This ensures that the amount transferred to the former spouse does not include the amount by which the member's benefit will be reduced as a result of the surcharge debt.
New subsection 2.04A(4) provides that, for cases that occur after the commencement of these Orders, where scheme value is to be used to calculate the transfer factor it should not be reduced by the amount in the surcharge debt account. This ensures that the member's benefit will not be over reduced.
New subsection 2.04A(5) applies to cases that were finalised before the family law commencement day and provides for the recalculation of the transfer factor to ensure that the reduction of the member benefit reflects the provisions in new subsection 2.04A(4). Although there will be no recalculation of the amount transferred to the former spouse, the member's reduction will be less than previously calculated.
New subsection 2.04A(6) applies to cases that were finalised after the family law commencement day but before the commencement of these Orders. This provision will also recalculate the transfer factor for the member to ensure that the reduction of their benefit will be less than previously calculated. There will also be no impact on the amount transferred to the former spouse.
Item 3 – Headings
Item 3 amends the heading of column 2 of table 1 in Schedule 3 to the Principal Orders to correct a drafting omission. The change confirms that the column is intended to apply to male persons in receipt of invalidity pension as well as those persons already mentioned in the heading. Step 1 in subsection 2.13(4) requires the use of a factor in that table for the valuation of standard pensions including invalidity pensions. The factors provided by the actuary for invalidity pensions in payment are the same as for aged pensions with a 67% reversion, as already mentioned in the heading.
Item 4 – Headings
Item 4 amends the heading of column 3 of table 1 in Schedule 3 to the Principal Orders to correct a drafting omission. The change confirms that the column is intended to apply to female persons in receipt of invalidity pension as well as those persons already mentioned in the heading. The factors provided by the actuary for invalidity pensions in payment are the same as for aged pensions with a 67% reversion, as already mentioned in the heading.