Superannuation

Based on the contribution of David Kelsey-Sugg for The Law Handbook 2025 published by Fitzroy Legal Service, current to September 2024

Superannuation schemes

Introduction

The federal government encourages people to save for retirement in a variety of ways. Mainly, the government gives superannuation tax concessions.

There are three points at which tax is important to your superannuation: when money goes into the fund, while it is there, and when it comes out.

Money contributed to superannuation can be taxed at 15 per cent (or effectively zero per cent, if the contributor earns $37,000 or less and qualifies for the low-income super tax offset, which is a maximum of $500), or 30 per cent if the contributor earns over $250,000, but it can also gain the contributor a tax benefit.

Money in a superannuation fund can make income and capital gains that are taxed at concessional rates while the fund has not yet started to pay a benefit, but are not taxed, up to a maximum of $1.9 million (ignoring investment gains or losses), after the fund has started to pay a benefit. Money that comes out of the fund is not taxed, unless the money comes out before the beneficiary has turned 60 years of age, in which case a benefit for which a tax deduction has been claimed is taxed but with a 15 per cent offset (or 10 per cent if the contribution was untaxed). There may also be tax free components of a lump sum and a low rate cap concession that reduce tax on lump sums taken below age 60.

Superannuation income is not treated as income for tax purposes, meaning that other earned income benefits from a lower marginal rate.

The general explanations below are subject to a variety of exceptions, particularly in relation to defined benefit schemes, public sector superannuation schemes, and disability income streams.

What is a superannuation trust?

Virtually all private sector superannuation schemes in Australia are organised through the legal device of a trust. A trust is a form of ownership of property in which one person (the trustee) is the legal owner of the property but is under a legal obligation to use the property exclusively for the benefit of another person (the beneficiary). In the case of a superannuation trust, the rights and obligations of the trustee and beneficiaries (often called ‘members’) are set out in a document called a ‘trust deed’.

The trustee of a superannuation fund may be a company or one or more individual people. Some commercial organisations act as trustees for a large number of employers under a single trust deed.

Some public sector superannuation schemes are not set up as trusts. The rights of members of these schemes depend on the legislation governing them.

The legal principles governing the law of trusts were developed in cases concerning trustees who administered, without payment, sums of money made available to the beneficiaries through gifts and wills. As will be apparent from this chapter, these principles are, arguably, inappropriate to determine the rights of members of modern superannuation schemes, where the benefits are provided in a commercial context, frequently in substitution for wages under awards and contracts of employment.

Superannuation contributions

Superannuation guarantee

Under the Superannuation Guarantee (Administration) Act 1992 (Cth), employers must contribute 11.5 per cent of ‘ordinary time earnings’ as superannuation for its employees, for work done in Australia, into a superannuation fund. (This is scheduled to progressively increase to 12% on 1 July 2025).

This is the case unless the employee:

• holds a certain type of visa;
• is not a resident of Australia and the work is done outside Australia; or
• is under 18 and working 30 hours a week or less (ss 27, 28).

Contributions are made to ‘complying’ superannuation funds or retirement savings accounts. Contributions should be made within 28 days of the end of the relevant quarter.

The 11.5 per cent is calculated against ordinary time earnings up to a quarterly limit. In the 2024–2025 financial year, this limit is $65,070 per quarter. The Australian Taxation Office (ATO) has provided guidance about what ‘ordinary time earnings’ means in Superannuation Guarantee Ruling SGR 2009/2, which is available on its website (at www.ato.gov.au/law). ATO rulings provide guidance only and do not have the force of law.

Different rules apply to ‘defined benefit’ superannuation schemes (for an explanation of defined benefit superannuation schemes, see ‘Types of benefits’, below).

Salary sacrifice

If the employer and the fund agree, an employee may make further contributions, within strict limits, under ‘salary sacrifice’ and other arrangements. This can mean that instead of paying tax at the individual’s marginal tax rate on the amount ‘sacrificed’, tax is paid at a concessional rate of 15 per cent. This is usually a lower tax rate than the marginal rate.

Tax on concessional contributions for people with pre-tax earnings of $250,000 or more is 30 per cent. Tax on concessional contributions for people with pre-tax earnings of $37,000 or less is 15 per cent, but the person receives a refund of up to $500 as a low-income super contribution, meaning the tax is effectively 0 per cent. There might be a consequential impact on eligibility for the Medicare levy surcharge or other offsets or benefits.

From 1 July 2024, the maximum that can be contributed and attract a tax deduction is $30,000. This maximum includes employer compulsory (super guarantee) contributions, salary sacrifice, and voluntary concessional contributions.

Personal contributions

All individuals under the age of 75 can claim tax deductions for personal super contributions (voluntary concessional contributions). The maximum that can be contributed and attract a tax deduction is $30,000, subject to a work test (see below). This maximum includes employer compulsory (super guarantee) contributions, salary sacrifice, and voluntary concessional contributions (these are subject to a work test for people aged over 67 years – see ‘Age restrictions’, below).

There is no tax on voluntary contributions that did not attract a tax deduction (called ‘non-concessional contributions’).

However, only $120,000 per year may be contributed on a non-concessional basis, subject to not having more than $1.9 million in total super assets (or less if the person’s super balance cap is less) (ignoring investment gains and losses).

A person aged under 75 years with a total superannuation balance of less than $1.66 million can bring forward future contributions up to $240,000 over a two-year period (meaning a total contribution of $360,000 in one year). A person aged under 75 years with a total superannuation balance of between $1.66 million and $1.78 million can bring forward future contributions of up to $120,000 in total (meaning a total contribution of $240,000 in one year).

If a person has a superannuation balance of less than $500,000 at the end of the previous financial year, a catch-up contribution can be made if the maximum concessional contributions were not made in previous years (from 1 July 2019).

Small business owners who sell certain business assets can make a non-concessional contribution of up to $1.78 million and receive possible capital gains tax benefits.

People aged 55 and over who sell a home they have owned for 10 years or more can make a contribution of up to $300,000 even if they would otherwise be prevented by age or because their total superannuation balance is too large.

Co-contribution

Certain employees and self-employed people with an annual assessable income and reportable fringe benefits of less than $60,400 and who are aged under 71 years get a government co-contribution of up to $500 for an eligible personal contribution of up to $1000 to a complying superannuation fund or retirement savings account. The maximum 50 per cent matching contribution amount is paid if the person’s total income is $45,400 or less, reducing gradually to nil for incomes of $60,400 and above.

There are other restrictions.

Up to 85 per cent of concessional superannuation contributions made in the previous financial year can also be split with (i.e. given to) a spouse – as long as the spouse is under 65 years old, or if they are over their preservation age, they are still working.

Low-earning spouse

Taxpayers can claim a tax offset of up to $540 for contributions made on behalf of their spouse who is aged 75 or under with an income of less than $40,000. This is the case unless the spouse has a total superannuation balance of $1.9 million (or less if the person’s super balance cap is less) (ignoring investment gains and losses) or more. If the spouse is aged 67 or older, a work test must be met.

Small and inactive accounts

Fees on superannuation accounts with a balance less than $6,000 are limited to three per cent. If a superannuation account has been inactive for 16 months, insurance on that account is cancelled.

Age restrictions

The following age restrictions apply to superannuation contributions:

• Before the age of 67, a person can make concessional contributions even if they are not working.
• Between the ages of 67 and 75, a person can make concessional contributions, so long as they work for at least 40 hours in a period of 30 consecutive days – this is the ‘work test’.
• Between the ages of 67 and 74, a person whose total superannuation balance is less than $300,000 can make concessional contributions for the first year they no longer meet the work test.

Before the age of 75, up to $120,000 per year may be contributed on a non-concessional basis.

The above is subject to other restrictions, such as the amount of total superannuation balance.

There is no obligation to draw down monies from a superannuation fund at any age. However, not taking a pension when one is available means the loss of the potential benefit that a fund paying a pension is not taxed on its investment returns.

Eligible termination payments

Most eligible termination payments (known as ‘employment termination payments’) cannot be rolled over into superannuation.

Lost superannuation

When a worker changes jobs, they may be required to join a different superannuation fund. It is important that the money in the previous fund is not forgotten. The money can be moved or ‘rolled over’ to the new fund.

The ATO keeps a register of ‘lost’ money. Contact the ATO if you think you have lost track of superannuation money (see ‘Contacts’ at the end of this chapter).

An alternative for people who have many small jobs is to start a ‘retirement savings account’ with a financial institution, into which all employers can pay small amounts of superannuation.

Switching superannuation funds

There are no exit fees when a person switches from one superannuation fund to another.

Superannuation guarantee charge

If employers do not contribute 11.5 per cent as described above, a ‘superannuation guarantee charge’ has to be paid to the ATO, which then contributes the net amount to superannuation to benefit the employee. This is calculated against an employee’s ‘salary or wages’, which may be more than the employee’s ordinary time earnings. See Superannuation Guarantee Ruling SGR 2009/2, available on the ATO website (at www.ato.gov.au/law).

The charge is only payable in respect of employees, not contractors. Difficult questions arise about whether a person is a contractor. For example, the High Court has found that a bicycle courier employed as a contractor was an employee, but a motor vehicle courier was a contractor. If a contractor is paid mainly for their labour, super may be payable. The ATO website (www.ato.gov.au) has an ‘employee/contractor decision’ tool to help work out if a person is an employee or a contractor.

The employer should pay superannuation guarantee contributions at least once each quarter, on 28 October, 28 January, 28 April and 28 July in each year. The employee should be notified on a pay slip, letter or email. If these amounts are not paid, then the employee could be disadvantaged if the company becomes insolvent. If notification is not received at the appropriate time, contact the superannuation fund or the ATO.

However, the ATO is not active in enforcing payment; the charge is paid only if the employer is still solvent and the employee misses out on benefits. There may be a cause of action against the employer if insurance benefits have been lost.

First-home Super Saver Scheme

First-home buyers can make voluntary superannuation contributions of up to $15,000 a year – and a maximum of $50,000 over more than one year – to their superannuation account for the purpose of purchasing a first home to live in. This provides the taxation advantage that investment returns on such amounts are taxed on a concessional basis.

Choice of superannuation fund

About half of Australia’s employees can choose the superannuation fund into which their contributions are paid. The choice made could have a big effect on the type and amount of benefit available, and it is worthwhile considering the benefits available before a choice is made.

The first thing to consider is the type of benefit you currently have and the varieties of fund available. If the employee does not nominate a fund, the employer will pay the benefit into a default fund. All default funds (except ‘retirement savings account’ funds) have to offer minimum age-based death insurance and many funds provide some level of disablement insurance.

Types of benefits

There are two basic types of benefits:

• defined benefits; and
• accumulation benefits.

Defined benefits

The defined benefit fund pays a set benefit, usually a multiple of the worker’s annual salary, perhaps averaged over the three years before retirement on ceasing work. The worker has to have a considerable number of years of service before the full benefit is paid. If the worker leaves before the minimum number of years for a full benefit, the benefit is usually calculated on years of service and salary. This has the effect that the higher paid and longer serving employees benefit the most.

The investment performance of the fund does not affect the benefit paid. The employer takes the risk of the investment performance of the fund.

Public service schemes and company schemes are often of this sort. The benefits are generous in comparison to the accumulation funds discussed below, and these schemes are becoming rarer. Advice should be taken before moving funds out of this sort of scheme.

Accumulation benefits

The other sort of scheme, the accumulation fund, repays contributions together with whatever investment income has been obtained. This means that the final benefit paid depends on the amount originally contributed (less tax and administration fees) and whatever return the investment of that amount has produced, for the time it has been in the fund. Obviously, the contributor (rather than the employer) takes the risk of poor investment performance, or that (for example) the share market is depressed at the time of retirement.

Varieties of superannuation funds

General

There is a variety of superannuation providers.

For many employees, their award or other agreement used to (but in many cases no longer does) require contributions to a particular fund. Often, this fund is controlled jointly by employers and unions, a so-called ‘industry fund’ covering many employees in a particular industry. For example, the Construction and Building Unions Super fund covers workers in the building industry, although most funds are now trying to attract members outside their traditional base.

These funds are generally run on a not-for-profit basis, so administration fees are usually low. Employers and unions are represented on the board of the trustee, which makes decisions about where the contributions are invested and what benefits are available to members.

In other cases, the employer sets up or arranges a particular fund for its employees, and the employer effectively provides the administration for the fund. Increasingly, employers are turning over such funds to professional administrators that charge commercial fees for administration. These are usually referred to as ‘company schemes’.

In other cases, the employer chooses a ‘master trust’ arrangement, in which a large financial organisation (e.g. a life insurance company) sets up a commercial fund that can service many employers. Often, the fund is invested with the associated life insurer or the associated funds manager.

Employees of the Commonwealth Government have their superannuation paid into the Commonwealth Superannuation Scheme, the Public Sector Superannuation Scheme or the PSS Accumulation Plan.

Employees of state government instrumentalities have their own superannuation schemes. These have been much amalgamated and, in some cases, have had benefits reduced in recent years. Some of these schemes are controlled by an Act of parliament and administered by a board. Other schemes are controlled by a trust deed and a trustee. Access to the public service superannuation schemes of the NT were closed in 1999, but employees who were members at the time are still able to claim benefits (see below Public sector funds in the NT)

There are also superannuation schemes available to individuals outside the employment context. Most large financial institutions provide a master fund type scheme in which the individual makes contributions to provide for their retirement to a commercial trustee who invests the funds. Banks and other institutions also provide retirement savings accounts that have the same function, although they seem to produce lower returns than others.

Individuals (usually self-employed people) can also set up private superannuation funds (the so-called DIY or self-managed super funds). In such a fund, each member has to be involved in the management of the fund, and there are strict limits on what can be done with the money. Such funds are not economically feasible if the amount of funds is less than about $250,000.

Public sector funds in the NT

On 9 August 1999 the Northern Territory Government closed access to the generous public service superannuation schemes known as the Northern Territory Government and Public Authorities Superannuation Scheme (NTGPASS) and the Northern Territory Supplementary Superannuation Scheme (NTSSS).

Public sector employees who commence employment after this date must join an external superannuation fund. Newly employed public servants can choose any complying superannuation fund into which their public sector employer will pay the minimum superannuation guarantee contributions. If no fund is nominated, the NT Government will pay the superannuation guarantee contributions into AustralianSuper, the default fund selected by the NT Government.

NTGPASS covers permanent and fixed term employees who started working in the public service after 1 October 1986. NTSSS, which started on 1 January 1989 and also closed in 1999, covers most public servants including permanent, full-time, part-time, temporary or casual employees, contractors, board members and office holders.

The NT Superannuation Office, a branch of the NT Treasury, administers NTGPASS, NTSSS and certain other NT public sector funds, namely the Legislative Assembly Members Superannuation Scheme (closed 2005), the NT Police Supplementary Benefit Scheme (closed 1986) and the NT Administrators Pension Scheme (closed 2006).

NTGPASS is a lump sum or defined benefit scheme with compulsory member contributions. NTGPASS's lump sum benefits consist of the accrued accumulation account balance and the accrued employer component determined by a formula based on salary, years of service and status on retirement. Death and invalidity benefits, which may be payable even if a member is on leave without pay, are supplemented by an additional employer financed benefit if a member has dependants at time of death or invalidity. This benefit is equivalent to 17.5% of benefit salary foregone to maximum retirement age.

'Benefit salary' is arrived at by a formula set out in the NT Government and Public Authorities Superannuation Scheme Rules. Subject to certain adjustments, benefit salary is the average of the last three contribution salaries before the exit date. 'Contribution salary' means the actual annual rate of salary and approved allowances.

By definition NTGPASS members are also members of NTSSS. NTSSS is a non-contributory lump sum or defined benefit scheme which provides an employer-financed benefit based on 3% of salary for each year of service since 1 October 1988. The NTSS was altered in 1992 to take account of the introduction of the Commonwealth superannuation guarantee contribution legislation. NTSS is not a fund and therefore there are no member contributions or rollover provisions. Benefits are paid to a member when they leave the job.

NT public sector funds are governed by the Superannuation Act ,the Northern Territory Superannuation Regulations, the Northern Territory Superannuation Rules, the Northern Territory Superannuation Guarantee (Safety Net) Act and the Northern Territory Supplementary Superannuation Scheme in the form of an Instrument. The SA establishes a Superannuation Commissioner and an appeal process from decisions of the Commissioner to the Northern Territory Civil and Administrative Tribunal.

NT public sector funds are specified under the Superannuation Industry (Supervision) Act 1993 (SISA) and its regulations as being an exempt public sector superannuation schemes and therefore not subject to the degree of regulation under the Federal Government regime as are private sector superannuation funds. The NT public sector superannuation funds are managed within the NT Treasury office and subject to the transparent accounting, auditing, budgeting and reporting requirements of government. The political accountability of government and the effective government guarantee attaching to these funds means that they are far less risk adverse and more transparent than private sector funds.

Features of superannuation funds

Usually, defined benefit schemes are much more generous than accumulation type schemes. Therefore, a person in a defined benefit scheme will usually be better off staying in such a scheme than shifting to any type of accumulation scheme.

If a person is already in an accumulation type fund, then there are probably four main things to consider before either deciding to stay in the current fund or shift to a new fund.

1. Fund’s performance: The first thing to consider is the fund’s investment performance. The main job of a superannuation trustee is to invest your money to generate strong, consistent returns. Do not judge a fund only on its performance in the past year; look at the trustee’s investment performance over the past 5–10 years. Take into account that a variety of investment options is usually available to fund members. You should consider how you want your money invested by the super fund. If you do not make a choice, you will be placed in the default investment option, which is usually a balanced investment option.
2. Fees and charges: The second thing to consider is the trustee’s fees and charges. An average superannuation fund charges about 1.3 per cent (of the funds under management) for investing and administering the fund. Some public sector funds charge less than 0.5 per cent. Some funds charge three per cent. Because ‘industry’ funds and public sector funds are not-for-profit, the fees charged by these funds should be lower than the fees charged by the funds run for profit.
3. Insurance benefits: The third thing to consider is the insurance benefits available. Death, disability and sometimes income protection benefits are some of the most significant benefits available in superannuation. It is generally cheaper to buy insurance through the superannuation fund because the fund can negotiate a cheaper price for volume. Often, insurance is available without reference to previous medical history. Look very carefully at the definition of ‘disability’ in the insurance policy as this can be the difference between obtaining an insurance payout and the benefit being refused. Also, moving from one insurance policy to another can mean that the new insurer may require a health check or a health disclosure.
4. Services and benefits: The fourth thing to consider is the other type of services or benefits available. Some funds offer financial products or discounts.

The ATO’s YourSuper comparison tool compares a range of MySuper products – see www.ato.gov.au/Calculators-and-tools/YourSuper-comparison-tool.

Taxation

Money in the fund

Superannuation funds have the advantage that they pay tax in the accumulation phase of 15 per cent on their income and 10 per cent on their capital gains on assets held for 12 months. This means that money in superannuation should grow more quickly than money invested in a person’s own name, so long as the person is paying a marginal rate of tax above 15 per cent.

A person’s tax file number must now be given to the superannuation fund in order to avoid being taxed at the top marginal rate.

A maximum amount can be held in the retirement phase (in which earnings and capital gains are not taxed). That figure is now $1.9 million (or less if the person’s super balance cap is less) (ignoring investment gains and losses). Any excess must be held in the accumulation phase (where earnings and capital gains are taxed, but on a concessional basis).

The earnings from assets supporting a transition to the retirement income stream are taxed. However, the income stream remains tax free for people over 60 years. Generally, benefits paid are only taxed if the beneficiary is below 60 years. However, the tax on benefits paid is payable only on retirement or earlier payout of benefits.

Benefits

If the beneficiary is aged 60 or more, all pensions paid from a taxed source are tax free. If the beneficiary is over 60 and retired, or over 65, lump sums paid from a taxed source are tax free. If the pension is not paid from a taxed source (e.g. certain government pensions) certain elements of the pension are taxed at a concessional rate.

If the beneficiary is between their preservation age (see ‘Preservation’, below) and 60, or below their preservation age, taxation is complicated. For people between their preservation age and 60, a lump sum of up to $245,000 of the taxable component is tax free. Further details are available in Withholding Schedule 12, ‘Tax Table for Superannuation Lump Sums’, available at www.ato.gov.au/rates.

It is no longer possible to access the concessional and non-concessional components other than in the proportion they bear to the whole of the fund (unless the fund is split into two funds).

The taxation of benefits can also be delayed by ‘rolling over’ the benefit into a particular type of fund, and letting it accumulate, rather than taking the benefit as soon as it is available.

Pensions and lump sums

If an individual takes benefits before they turn 60, a portion is taxable at the marginal rate, less a 15 per cent tax offset if aged 55 or over. Any pension is allowed that meets certain minimum standards relating to minimum annual payments (e.g. the annual payment for a beneficiary aged 55–64 must be at least four per cent and no more than 10 per cent of the account balance).

Superannuation is not counted in the Centrelink assets or income test until a superannuation pension is paid. It is important to get professional advice about this complex area.

Regulation of funds

Almost all private sector superannuation funds are regulated by the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SIS Act’). These are called regulated funds. Funds operated by Commonwealth, state and local government bodies, and by public sector bodies established by statute, are often not regulated. Funds with less than five members (exempt funds) are exempt from many of the regulatory requirements.

The SIS Act (and many statutes controlling public sector bodies) controls the way in which trustees exercise their power. For example, it ensures that each regulated fund trustee must covenant to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries.

Superannuation benefits

Introduction

Trust deeds provide for benefits to be paid to members and their dependants in different circumstances. These may include resignation, retirement, total and permanent disability, total and temporary disability, and death benefits.

Trustees normally have no discretion regarding the payment of resignation or retirement benefits. Disputes concerning these benefits are usually about the calculation of the amount of the benefit.

At age 65, a person can take their superannuation benefits. Before that age, a person must satisfy a ‘condition of release’ (or transition to the retirement stream) to take superannuation benefits. Between ages 60 and 65, resigning from a job is a condition of release. If the person has reached ‘preservation age’ (ages 55 to 60, depending on the person’s birth date), a condition of release is that the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either full-time or part-time (at least 10 hours per week).

Preservation

Most superannuation benefits are ‘preserved’ and cannot normally be paid to a person until they retire after a certain age (see ‘Access to benefits’, below), reach age 65, become permanently incapacitated, permanently depart from Australia, suffer severe financial hardship, or suffer temporary incapacity, or on compassionate grounds.

Benefits contributed before 1986 or 1990 (depending on the fund involved) are generally not preserved. Undeducted contributions (that is, those on which a tax deduction was not claimed) were generally not preserved until 1 July 1999. Since that date, all contributions are preserved (or, more accurately, restricted).

Access to benefits

There may be some unpreserved benefits that can be accessed before retirement and some preserved benefits can be accessed in an emergency. The relevant age for the retirement of a person born before 1 July 1960 is 55 years. This increases to 60 for those born after 30 June 1964, with transitional ages for those born between those dates.

However, if a person has received an income support payment (a list of eligible income support payments can be obtained by telephoning Centrelink on 13 23 00) for a continuous period of 26 weeks and is unable to meet reasonable and immediate family living expenses, and if the fund’s trust deed allows early release, up to $10,000, less applicable tax, a year can be released early. A letter confirming the period and nature of the payment (obtainable by telephoning 13 23 00) must be attached to an application form (obtainable from the trustee of the fund) and forwarded to the trustee of the fund. A person who has been on income support payments for 39 weeks after reaching preservation age can also obtain an early release.

Funds can also be released early for medical treatment, medical transport, modification of a house or car for a disabled person, death, funeral, burial or palliative care expenses, or for mortgage payments to stop a mortgagee from selling the person’s home. The application is made to Centrelink.

Some credit providers encourage debtors to access superannuation funds to pay a mortgage, even though the mortgage may not be viable in the longer term, meaning that both the house and the superannuation are eventually lost.

Information from funds

A member of a regulated fund is entitled to certain information which should be provided automatically by the fund. This includes:

• an annual member statement showing the amount of the benefit at the start and end of the year (generally 1 July to the next 30 June), the preserved amount and fund contact details, and the value of the benefit on resignation or retirement, including death and disability benefits;
• an annual fund report showing the fund’s financial position and performance; and
• notice of any changes that affect the member, such as any change to the fund rules.

Superannuation and bankruptcy

Some superannuation entitlements are protected if a person goes bankrupt, meaning that the creditors cannot take the superannuation savings. The bankrupt retains the benefit of monies in a regulated (and certain other types of) superannuation fund subject to some exceptions.

However, a payment to a superannuation fund may be caught by the relation back or avoidance provisions of the Bankruptcy Act 1966 (Cth), even though that payment gives rise to the interest in the fund, which is protected.

Superannuation benefit disputes

Death benefit disputes

Disputes about death benefits are common. In addition to the benefits which have accumulated in the fund at the date of death, many funds provide substantial life insurance benefits, which are added to the accumulated benefit.

However, the death benefit is usually not paid according to the will of the deceased but is paid according to the discretion of the trustee of the fund in accordance with the trust deed. The trust deed usually sets out a description of the class of people to whom the benefit can be paid; typically, the immediate family of the deceased or those wholly or partially dependent on the deceased.

A member can nominate the recipient of a death benefit in such a way as to make the nomination binding and avoid having the trustee make a decision and possibly begin a dispute. It must be renewed every three years to remain binding, unless the fund is self-managed.

Disputes can arise between possible beneficiaries about whether, for example, a particular person is wholly or partially dependent on the deceased; or, if more than one person satisfies the description of the class of beneficiaries, whether the trustee should exercise its discretion to determine how the benefit should be divided between the claimants. These problems become acute when the deceased was involved in more than one family during life.

Factors taken into account by trustees include:

• whether the deceased nominated a preferred beneficiary and, if so, whether any event has occurred since the nomination which might have invalidated the nomination;
• the comparative financial need of the claimants;
• any amount to which a claimant is entitled from the estate of the deceased;
• the extent of the financial dependency of the competing claimants on the deceased; and
• the closeness of the relationship between the competing claimants and the deceased.

A potential beneficiary who is dissatisfied with a decision made by a trustee can complain to the Australian Financial Complaints Authority (see ‘Review by the Australian Financial Complaints Authority’, below).

Superannuation and family law

A person’s superannuation entitlements can be divided between married and de facto couples. The division can be voluntary or ordered by the court.

Regulations set out the methods of valuing superannuation interests. Whether a benefit is a defined benefit or an accumulation benefit makes a difference to the valuation method. The regulations also set out the way in which the payment split is to be put into effect and also the information that the trustees have to provide to the parties.

The valuation and splitting of a benefit can be postponed. This can be useful if a defined benefit or a partially vested accumulation interest is involved. A superannuation benefit may be subject to a ‘caveat’ to prevent it being paid out until the non-entitled partner’s interest is determined and paid. The starting point for splitting superannuation is an equal division of benefits accumulated during the relationship, but certain factors (e.g. responsibilities for children under 18 and preserving farms) may be taken into account.

A new interest can be created for the non-member partner in funds regulated by Commonwealth superannuation laws, or the amount can be rolled over into a new fund. The amount will be preserved as if it had not been divided.

Couples can make binding superannuation agreements about how the superannuation will be divided if their relationship fails.

Further useful information about superannuation and family law is available on the Federal Circuit and Family Court of Australia website (www.fcfcoa.gov.au).

Disability benefit disputes

Disputes about total and permanent disability benefits are also common, since a determination of whether the member is disabled as defined by the trust deed must be made. Such benefits are often provided by way of an insurance policy between the trustee and an insurance company. So, a dispute can also arise as to whether the person is disabled as defined in the insurance contract.

Other disputes can arise about whether a person is covered by insurance at a particular time, and by which insurance company. These disputes occur because the trustee has changed insurer. The questions of when incapacity occurs, and which insurer is liable at that time, can also arise.

Structure of disability benefits

The definition of ‘total and permanent disability’ varies. A common definition requires the person to have been absent from work due to sickness or injury for at least six months and is unlikely, in the opinion of the trustee or insurer, to ever work again in any profession, trade or occupation for which the person is reasonably suited by education, training or experience.

Work for which the person is ‘reasonably suited by education, training or experience’ is work for which the person is neither overqualified nor unqualified. For example, a carpenter who could work as a clerk might be regarded as totally and permanently disabled within this definition because such work is not suitable, given his carpentry experience.

Other common definitions require the person to have been absent from work due to sickness or injury for at least six months and to be unlikely, in the trustee’s opinion, to ever again work in their usual occupation (an easier test for the member to satisfy), or unlikely to engage in any gainful occupation for which they are qualified by education, training or experience or could be qualified by retraining (a more difficult test). While the ‘unlikely to’ test takes into account the question of whether the person could attract an employer, some insurance policies only insure against the person being ‘unable to engage’ in a gainful occupation for which they are qualified by education, training or experience. This is a more difficult definition to satisfy because it arguably does not take into account the question of whether the person could attract an employer.

Some insurers only provide an ‘Activities of daily living’ definition, which the Australian Securities and Investments Commission has called ‘essentially junk insurance’. It is worthwhile checking what form of definition the insurer applies to you.

Insurance

Trustees often, but not always, finance the provision of death and total and permanent disability benefits through a group life insurance policy. Where the trustee is a commercial organisation, the insurer is usually a related company.

Where the benefit is insurance-funded, sometimes the member is only entitled to the benefit if the insurer pays the insured benefit to the trustee. But there are still two decisions to be made. The insurer must decide whether the member is entitled to the insured benefit, and the trustee must decide whether the member is entitled to a disability benefit.

The trustee must not allow the insurer to dictate their decision. If the trustee considers that the insurer should pay the benefit, the trustee may have a duty to press the insurer for payment.

Reviewing a trustee’s decision

How trustees should make decisions

Trustees are required by law to make decisions solely with the interests of the beneficiaries in mind. They must exercise any powers and discretions under the trust deed in good faith, and for the purpose for which the powers were granted. Trustees must also give real and genuine consideration to the exercise of their discretion. They must not simply rely on the opinion of another person; for example, the opinion of the insurer or of the insurer’s medical practitioner.

Even where the trust deed gives the trustee the power to delegate the making of decisions, the decision has to be made within the delegation given. It may be possible to argue, depending on the terms of the trust deed, that a decision has been improperly delegated.

A trustee will also fail to give a matter real and genuine consideration if the trustee asks itself the wrong question. One example would be a trustee refusing to pay a total and permanent disability benefit on the ground that the member could be retrained for a different job, when the definition required the trustee to ask itself whether the member was capable of carrying on a suitable occupation without retraining. In some circumstances, there may be a duty to make further enquiries.

However, in many cases judges have stated that trustees’ decisions are not required to be correct, in accordance with the weight of the evidence, or even fair. Trustees are not required to give reasons for their decisions. However, if a trustee’s conduct is sufficiently unreasonable or unfair, it may suggest that they are not acting in good faith.

Although trustees cannot be required to give reasons for their decisions, if they do so voluntarily the reasons must be sound. If they are not, a court may set aside the decision.

Trustees and insurers ought to provide a claimant with information about material adverse to the claim and with an opportunity of addressing those matters before dismissing a claim. If this is not done, a court may set aside the decision.

Internal review

The first step in challenging a trustee’s decision about a benefit is to request reconsideration of the decision. Section 101 of the SIS Act requires regulated funds to ensure that enquiries or complaints made by beneficiaries are properly dealt with within 90 days.

Before requesting reconsideration, ask the trustee to provide a copy of the trust deed, a copy of any relevant insurance policy, an up-to-date statement of benefits, reasons for its decision, and copies of any documents it used in making its decision.

A member or other beneficiary is entitled to copies of the first three documents, according to both the law of trusts and the Superannuation Industry (Supervision) Regulations 1994 (Cth) but cannot force the trustee to provide the last two.

The next step is to write to the trustee requesting reconsideration, setting out the reasons why you believe the original decision is wrong. In the case of a total and permanent disability benefit, you should mention any factors that limit your employment prospects, including your age, extent of educational and vocational qualifications, and your experience and ability to speak and write English. You should include copies of any supporting medical reports. It would be prudent to obtain legal advice at this stage.

Review by the courts

If internal review is unsuccessful, the next step to consider is legal action. It is essential to obtain advice from a solicitor experienced in acting for members of superannuation funds before undertaking this step. Some firms of solicitors will act in these matters without payment until the matter is resolved. Nevertheless, substantial costs may be incurred and, if unsuccessful, a member may have to pay the legal costs of both parties to the dispute.

A court will only review a decision of a trustee on the basis of the principles set out in the section ‘How trustees should make decisions’, above. This means that if the trustee has not voluntarily given reasons for its decision, you will have to show that the trustee failed to give the matter real and genuine consideration, acted in bad faith or acted for an improper purpose. If the trustee gave reasons for its decision, it will be set aside if the court accepts that the reasons were not sound.

Statements by trustees that ‘the medical evidence does not establish that you are disabled within the meaning of the trust deed’, or that ‘in our opinion you are not disabled within the meaning of the trust deed’ have been held to be reasons by the courts. However, a court will not set aside a trustee’s decision simply because the judge would have made a different decision.

Even if the court does set aside the decision, it may not always substitute its own decision for that of the trustee. It may instead allow the trustee to make the decision again.

In practice, very few of these cases go as far as a court hearing. Almost all are settled by agreement before trial. An experienced solicitor can advise you on the likelihood of your case being settled.

Review by the Australian Financial Complaints Authority

Complaints about superannuation and insurance can be made to the Australian Financial Complaints Authority (AFCA). There are some exclusions. AFCA can only deal with complaints about certain types of general insurance policies.

AFCA cannot deal with complaints about:

• workers’ compensation insurance;
• the level of an insurance fee, premium, charge, rebate or interest rate – unless the complaint concerns the non-disclosure, misrepresentation or incorrect application of a fee, or a breach of any legal obligation or duty by the insurance firm;
• decisions to refuse to provide insurance cover; except where:
  • the complaint is that a decision was made indiscriminately, maliciously or on the basis of incorrect information,
  • the complaint is that the complainant was misinformed about the insurance cover, or
  • the complaint relates to a medical indemnity insurance product;
  • underwriting or actuarial factors leading to an offer of a life insurance policy on non-standard terms;
  • rating factors and weightings an insurer applies to a general insurance policy to determine the insured person’s (or proposed insured person’s) base premium that is commercially sensitive information.

AFCA can deal with claims up to $1,263,000.

For claims relating to an income stream (e.g. income protection insurance), AFCA can deal with claims relating to policies paying up to $16,900 per month.

AFCA has a compensation limit of $631,500 per claim (except for superannuation and some other matters), plus interest and limited costs.

For a complaint relating to superannuation, AFCA must affirm a decision, if it is satisfied that the decision is fair and reasonable in all the circumstances.

Other AFCA decisions are based on what is fair in all the circumstances, considering:

• legal principles;
• applicable industry codes or guidelines;
• good industry practice; and
• previous relevant decisions made by AFCA or its predecessors (e.g. the Superannuation Complaints Tribunal).

This is different to the approach applied in a court.

If AFCA decides in favour of the financial firm, the complainant is not bound by the decision. The complainant retains the right to take the complaint to court. For information about how to prepare to submit a complaint, see AFCA’s website at www.afca.org.au/make-a-complaint/complain.

If a financial firm becomes insolvent before, during or after the AFCA process, you may be able to make a claim for a compensation payment from the Compensation Scheme of Last Resort.

Reviewing an insurer’s decision

Some funds provide insured benefits to members. Whether a member is entitled to the insured benefit depends both on the terms of the trust deed and on the terms of the insurance policy. The definition of ‘total and permanent disablement benefit’ or ‘total disablement’ (for income protection or salary continuance benefits) differs from fund to fund and policy to policy. It is vital to look at the definition in question, as noted above. Often, a total disablement benefit is payable if a member is unable to do the member’s own job from month to month, but a total and permanent disablement benefit is payable only if the insurer determines that the member is unlikely to return to employment. In these cases, the trustee has no power to determine whether a member is entitled to the insured total and permanent disability benefit.

If the insurer’s decision is challenged in court, the court must decide whether the insurer, in deciding whether a member is entitled to a total and permanent disability benefit, has acted reasonably, in good faith, and with due regard for the interests of the member. If the insurer has so acted, the court cannot set aside the decision of the insurer even if it considers that, if the court were to make the decision, it would have found that the member was entitled to disability benefits.

On the other hand, if the insurance contract provides for benefits to be paid if the member is unlikely to return to employment (and not only if the insurer ‘considers’ or ‘is satisfied’ that the member is unlikely to return to employment) then the court can set aside the decision of the insurer if it considers that the member was entitled to disability benefits.

The trustee is under an obligation to consider whether an insurer that has rejected a claim has acted properly and, if it has not, to take action, including suing the insurer, if necessary, in order to protect the rights of the member. In practice, trustees rarely, if ever, sue insurers.

The member may sue the insurer on the ground that it has failed to act in good faith, reasonably and with due regard to the interests of the member or, if the insurance contract does not require the payment of benefits only if the insurer ‘considers’ or ‘is satisfied’ that benefits ought to be paid, on the simple ground that the member is disabled as defined in the insurance contract. The member can do this, even though not a party to the contract of insurance, because the trustee (which is a party) holds its rights under the contract on trust for the members. It is also necessary for the trustee to be party to the legal action. The trustee may agree to join the member in suing the insurer or, more usually, may be sued by the member for failing to act against the insurer to protect the member’s rights.

Trustees and insurers ought to provide a claimant with information about material adverse to the claim and with an opportunity of addressing those matters before dismissing a claim. If this is not done, a court may set aside the decision.

If the court decides the insurer breached its duty to act honestly and reasonably, it will usually not allow the insurer to make the decision again but will substitute the court’s decision.

Alternatively, a complaint can be made to AFCA about the insurer’s decision. AFCA has the same powers to review the decisions of insurers concerning payment of disability benefits under superannuation trusts as it has to review the decisions of trustees.

In particular, AFCA is not limited to looking at the process whereby the insurer made its decision and can look at whether the decision was fair.

Contacts

Australian Financial Complaints Authority (AFCA)

www.afca.org.au

On 1 November 2018, AFCA replaced the Financial Ombudsman Service, the Superannuation Complaints Tribunal (SCT), and the Credit and Investments Ombudsman. Complaints made to the SCT before that date will remain with the SCT.

Compensation Scheme of Last Resort

www.cslr.org.au

Australian Taxation Office (ATO)

www.ato.gov.au/individuals/super

Centrelink

Tel (superannuation): 13 23 00

www.servicesaustralia.gov.au

Financial Ombudsman Service (FOS) see Australian Financial Complaints Authority (AFCA)

Superannuation Complaints Tribunal (SCT) see Australian Financial Complaints Authority (AFCA)