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A. What to consider as an employer

Inactive account

Section: 1.12

New legislation was passed in 2019 introducing a number of initiatives  to cap fees and prevent unnecessary insurance premiums from eroding the account balances of super fund members who have 'inactive' low-balance superannuation accounts.

Young members and low income earners can sometimes get a rough deal out of superannuation. Their low account balances means that they pay higher than normal fees, and because many people in this situation earn lower incomes, they sometimes pay higher tax on their superannuation than they do on their regular wages.

To address this, new laws were introduced in 2019 as part of the 'protecting their super' package reforms. The core provisions are:

  • Administration and investment fees are capped at 3% for account balances under $6000
  • exit fees are banned
  • inactive low-balance accounts will be transferred to the ATO for consolidation with their active accounts where possible.

'Inactive' accounts are those where the accounts balance is less than $6,000 and the members has either not paid a contributions in the past 16 months or has not signed up for their fund's insurance offer.

Fee caps

Capping fees at 3% may seem unnecessary as very few super funds charge percentage fees anywhere near that high. However, the fee cap was introduced to protect young people and low income earners who are disproportionately impacted by, say, high membership fees. For example, if a member pays $100 in member fees on a $1000 account balance, this converts to 10% - more than triple the cap.

The new law comes into play if the account balance is less than $6000, but only members with less than $3000 in their account are likely to be impacted. If a member does pay more than 3% in fees, their super fund will refund this money to the member at the end of each financial year.

Reducing insurance premiums on inactive accounts

In response to concerns that there are thousands of fund members with inactive superannuation accounts who are still paying hundreds of dollars in compulsory insurance premiums, the new law requires funds to identify low-balance inactive accounts and transfer them to the Australian Taxation Office.

Tip: An inactive super fund member might receive a letter from their super fund asking if they want to continue being insured. If the member doesn't respond, their fund most likely will switch off their insurance. If the member wants to the insurance to re-commence they will need to contact the fund immediately.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

Last modified: Tuesday, October 27, 2020