B54/1994 MANAGED INVESTMENTS IOOF OF VICTORIA FRIENDLY SOCIETY

DATE OF ISSUE:  15 NOVEMBER 1994

MANAGED INVESTMENTS IOOF OF VICTORIA FRIENDLY SOCIETY

Introduction

The purpose of this instruction is to advise on the treatment, for service pension purposes, of investments held in the Independent Order of Odd Fellows of Victoria Friendly Society (IOOF) Supersaver Flexible Insurance Policy No. 1 Fund (the Policy).

Background

2.On 13 September 1994, the directors of IOOF passed a resolution to amend the rules which govern the Policy to establish four more benefit funds, which will be unitised.  It is intended that establishing these new benefit funds will provide for more flexible investment opportunities for Policy holders by permitting Policy holders to switch Policy contributions and other amounts between the different benefit funds.  The new investment options and switching facilities are only available to existing policyholders.  Except for policyholders who have been making add-on contributions to the Policy each year, no new investments to the Policy can be made.

3.The Policy will now include the existing Capital Guaranteed Portfolio and the following new investment options:

• Balanced Portfolio;

• Capital Stable Portfolio;

• Fixed Interest Portfolio; and

• Australian Equities Portfolio

Issue

4.The issue is whether the switching of Policy contributions, and other amounts between benefit funds, is a realisation of the Policy for the purposes of subsection 5J(7) of the Veterans' Entitlements Act 1986 (VEA), and consequently become subject to  treatment under different investment rules of the VEA.

5.For example, switched "Saved" Accruing Return Investments (ARI's) and Market Linked Investments (MLI's), acquired prior to 9 September 1988, become subject to the investment rules in accordance with sections 46AD-AE, rather than section 46B of the VEA.

6.For the definition and treatment of "saved" ARI's, MLI's, and Switching Investments, refer to the following topics in the Assets & Income chapter of the GOSP:

• Managed Investments/Types of Managed Investments; and

• Income Assessment/Assessment on Realisation/Switching Investments.

7.The Department of Social Security (DSS) recently sought advice from the Attorney General's Department on the legislative effect upon "saved" clients of the IOOF's proposed restructure.  The Attorney-General's advice was that the IOOF's action to restructure the Policy does not constitute a termination of the Policy and therefore does not cause a person to realise their IOOF investment.

8.As a result, DSS staff have been advised that the restructuring of the IOOF Policy does not constitute a realisation for  the purposes of the Social Security Act 1991, and that the "saved" status of their clients would be maintained.

How does the restructure affect service pension?

9.              The restructure of the IOOF policy does not constitute a realisation for the purposes of the VEA.  Therefore, the 'saved' status of these investments is maintained.  The reasons for this outcome are as follows:

(i)Subsection 5J(7) does not apply to existing investments in the restructure of the Policy, and in particular, paragraph 5J(7)(b) only applies if the benefit funds are trust funds or in a body corporate (the proposal does not involve transferring an investment to another body corporate).  The Attorney-General's Department have advised that Policy contributions are governed by contract only, rather than a trust, and that the IOOF, and not the policy holders, held the beneficial interest in money in the benefit funds.

The benefit funds of the IOOF are not trust funds because policy holders do not have a beneficial interest in these monies.  Therefore, subsection 5J(b) does not apply to any switching of Policy contributions between benefit funds.

(ii)Paragraph 5J(7)(d) refers to the investment maturing.  By definition, an investment matures when it becomes due for payment.  The proposal does not give Policy holders an option to withdraw contributions at the time of switching, so the policy is not payable (and has not matured) at this time.  However, paragraph 5J(7)(d) may apply should benefits under the Policy be fully or partially surrendered.

(iii)The Attorney-General's Department also advised that the proposal may involve the maturing of an investment if the effect of switching benefit funds was to extinguish the old Policy and create a new Policy.  The opinion is, however, that the IOOF proposal is merely varying the existing Policy, rather than creating a new Policy.  Therefore, the proposal does not involve the maturing of an investment for the purposes of paragraph 5J(7)(d).

10.The contact officer for this departmental instruction is John Fely on 06 289 6440.

Kay Grimsley

Assistant Secretary

Income Support Branch