Most Australian superannuation schemes are constituted by trust deeds, and thus are most often characterised as funds in which a member is interested. However, it is still necessary to determine what is the true nature of a member’s interest in a superannuation scheme, because:
- a member may have no interest (in a technical sense) in the fund
- not every superannuation scheme is actually a fund
- not every member who has an interest in a fund has the same kind of interest as every other member of every other fund.
The question whether an interest in a superannuation fund is an interest in property may arise in varied contexts, including when determining:
- whether stamp duty is payable after a member transfers or agrees to transfer their interest in the fund, or declares a trust of that interest
- whether there is a taxable capital gain under the income tax acts arising from a taxable event
- whether the member has a right to approach a Court for relief for example in the event of non-payment of a benefit, or to compel the due administration of the fund
- adjustment of property interests between separating married or de-facto couples
- whether the interest becomes an asset in the member’s bankruptcy.
Because superannuation trusts are express trusts, the existence of the fiduciary relationship is unambiguous, so attention is rather directed towards the content of the relationship. The trust instrument will define the rights, obligations and expectations. This can lead to some complex issues of attribution of responsibility where members are offered a role in investment choice. Most defined contribution superannuation funds offer their members a choice of alternative sub-funds into which their contributions can be placed; those alternatives may differ by risk level (conservative/balanced/aggressive), or by investment strategy (sustainable/ethical or passive/active/multi-manager). APRA has weighed in on the attribution of responsibility in that decision making, reminding trustees that a member’s investment direction does not relieve the trustee of the requirement to act prudently, nor divest the trustee of its duty to have regard to diversification, risk, liquidity and other factors when setting investment strategies.
Generally speaking, an employee’s interest in a superannuation scheme, whether the scheme be contributory or non-contributory, accumulation or defined end benefit, will be a beneficial interest in a trust estate governed wholly by the law of trusts, subject only to legislative intervention or administration action (see further The Hon. Justice Graham Hill, “The True Nature of a Member’s Interest in a Superannuation Fund” (2002) 5(1) Journal of Australian Taxation 1).
That is not to say that the member has any direct interest in the underlying assets of the trust fund. Usually each employee intended to benefit from a fund is neither the legal nor the beneficial owner of the amount that stands to the credit of his or her account from time to time with the fund until the happening of a prescribed event, such as retirement or death, that will crystallise the member’s “account” into an actual beneficial entitlement. (Re Coram; Ex parte Official Trustee in Bankruptcy v Inglis (1992) 32 FCR 250). This in turn proves problematic in the event of the fund itself (or a division of it) becoming insolvent.
Even where the member’s interest in the fund is properly to be characterised as an equitable interest, the member may also have a contractual right in relation to the scheme, particularly where the member is an employee. For example, provision of superannuation benefits may be a term of the contract of employment, although it is unusual for employees to be parties to the actual superannuation scheme deed. The status of members as employees generates “interesting wrinkles” in the regulatory framework (see eg Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004 (Cth) which permits most employees to choose a more suitable fund, although the Cooper Review revealed that the initiative has achieved only partial success).
In addition to the characterisation of the fund member as beneficiary or employee, they may also be characterised as a consumer or an investor, with superannuation funds only recently routinely exercising their voting rights.
Others go so far as to characterise them as a “financial citizen”, noting that a typical member is all of these at once (see further M Scott Donald, “What’s in a Name? Examining the Consequences of Inter-legality in Australia’s Superannuation System” (2011) 33 Sydney Law Review 295 at 298).
Superannuation is increasingly a privatised version of social security. Members have an individual and collective interest in ensuring that the compulsory superannuation system secures the financial benefits they expect will flow from their fund’s investments. Self-managed superannuation funds are on the rise, but with no assurance that financial literacy rates will keep apace.
Unfortunately, the notion of members becoming the engaged financial consumer of the type assumed in the Wallis reforms, responsible for contributing to the governance of the systems in which they participate, still seems a long way off. Until then, the trustee’s central role as decision maker and communicator within the system will have the regulatory supervision of APRA and ASIC, and presumably the ever present spectre of (political) legislative intervention.
5 May 2013
Dominique Hogan-Doran is an Australian barrister specialising in commercial litigation, regulatory investigations and public inquiries. As part of her practice, she has advised superannuation trustees in relation to their equitable and statutory obligations, and assisted them in relation to investigations by APRA and ASIC. All opinions expressed are her own.
Liability limited pursuant to a scheme approved under professional standards legislation.