With the financial accountability regime (FAR) set to apply to superannuation trustees and their accountable persons from 15 March 2025 (see our publication FAR status update: FAR Bills now law), most superannuation trustees will have already begun to prepare for its commencement.

An important issue for superannuation trustees to consider is whether they have any 'significant related entities' (SREs). This is because the trustee must take reasonable steps to ensure that any such entities comply with the trustee's own obligations under FAR and identify any accountable persons of any such entities.

For superannuation trustees, the SRE concept is much broader than for other APRA-regulated entities under FAR. While an SRE for other entities is limited to certain subsidiaries of the entity, for superannuation trustees, the test includes any entity that meets the much broader 'associated entity' test in section 50AAA of the Corporations Act 2001 (Cth) (Corporations Act). The 'associated entity' test includes related bodies corporate (including holding companies and 'sister' companies), and other entities meeting certain tests of control and influence.

The FAR regulators have yet to publish any detailed guidance on the application of the SRE test for trustees.

The significant related entity test for superannuation trustees

A body corporate will be an SRE of a superannuation trustee if each of the following four 'limbs' are satisfied:

1. the body corporate is a 'connected entity' of the trustee (Connected Entity Limb) – this limb includes any entity that meets the broader 'associated entity' concept;
2. the body corporate or its business or activities have (or are likely to have) a material and substantial effect on the trustee, its business or activities (Material and Substantial Effect Limb);
3. the body corporate is a 'constitutionally covered body' (Constitutional Limb); and
4. the body corporate is not itself an accountable entity (i.e. is an authorised deposit-taking institution, a life, general or health insurer or non-operating holding company).

Only bodies corporate can be an SREs, so unincorporated bodies such as a society or an unincorporated association will not meet the test.

The types of bodies corporate that are most likely to be potential 'connected entities' of a trustee are related bodies corporate, corporations that hold an interest in the trustee and corporations in which the trustee holds an interest.

The SRE test will have different implications for trustees of different types of fund. In this article, we look at how the concept operates in the context of typical trustee structures.

Industry funds – are employer associations and trade unions SREs?

Although trade unions and employer associations typically hold the shares in industry fund trustees and have the power to nominate member representative and employer representative directors, respectively, they will not be SREs for the reason that these bodies are generally not structured as bodies corporate and as such fall outside the scope of the SRE definition.

Retail and corporate funds – which group companies will qualify as SREs?

Related bodies corporate that hold shares in the trustee or which have the same parent company

Trustees of retail funds are typically companies within a corporate group. The trustee's related bodies corporate will satisfy the Connected Entity Limb but any that are themselves APRA-regulated (such as an ADI or insurance company) will not be treated as SREs of the superannuation trustee.

If the trustee has related bodies corporate that are not APRA-regulated, the trustee will need to assess whether they qualify as SREs on a case by case basis by applying the Material and Substantial Effect Limb.

Factors to be considered in this context include:

1. the nature and scale of the body corporate's business or activities;
2. the nature and extent of any interdependency between the body corporate and the trustee;
3. any organisational, financial or administrative arrangements between the body corporate and the trustee; and
4. 'any other relevant matter'.

The Explanatory Memorandum to the FAR Bill suggests that the potential for a related body corporate's conduct to cause damage to the trustee's 'prudential reputation' may be sufficient for the related body corporate to satisfy the Material and Substantial Effect Limb:

For example, consumers often associate a wide range of financial services and activities provided by a corporate group under the accountable entity’s brand. Poor behaviour by a significant related entity can have a negative effect on the accountable entity’s brand and public standing and has the potential to adversely affect the prudential reputation of the accountable entity itself.

Assessing whether a particular group entity is an SRE of the trustee will require an analysis of the relationships between them. If the trustee outsources material business activities to the related body corporate or if the related body corporate provides resources to the trustee, it is likely that APRA will expect it to be treated as an SRE for the purposes of the trustee's FAR program.

A trustee's majority shareholder (where the shareholder is a corporation and not itself an accountable entity) will ordinarily satisfy the Connected Entity Limb and will likely be an SRE of the trustee. For large corporate groups, each successive majority shareholder, up to the ultimate holding company, may also be an SRE of the trustee. This is the case even where shareholders and ultimate holding companies are based outside of Australia – foreign corporations will satisfy the Constitutional Limb (see section 51(xx) of the Constitution).

Shareholders in the trustee that are not related bodies corporate

Particular care will need to be taken in determining which shareholders of a trustee satisfy the Connected Entity Limb because it is not only related bodies corporate that will be captured. Any corporation holding an interest in the trustee (a 'qualifying investment' under section 50AAA(8) of the Corporations Act) that is material to the corporation and where the corporation has 'significant influence' over the trustee will be caught by the Connected Entity Limb.

One example could be an employer sponsor of a corporate fund which is also a shareholder in the trustee if the employer-sponsor has significant influence over the trustee through its arrangements with the trustee and perhaps also embedded in the trust deed for the fund itself.

Companies in which the trustee holds shares (including subsidiaries)

Where:

1. a trustee holds shares in a corporation (including in its fiduciary capacity);
2. that shareholding is material to the trustee; and
3. the trustee has significant influence over the corporation,

that corporation will satisfy the Connected Entity Limb by reason of being an 'associate' of the trustee under section 50AAA(6) of the Corporations Act.

Some trustees have established wholly owned corporations to provide services related to the fund, such as administration services or the provision of financial advice to members. Such entities are almost certainly going to be SREs of the trustee.

There may also be potential for companies that comprise significant investments of a superannuation fund (i.e. large infrastructure investments held through a Pty Ltd company) to satisfy this limb. If the Connected Entity Limb is satisfied in this way – which includes the shareholding being 'material' to the trustee, it may not take much more for the Material and Substantial Effect Limb to also be satisfied. This could result in companies in which a superannuation fund holds a substantial investment being SREs of the trustee.

Will industry bodies qualify as SREs?

There are numerous industry bodies in which superannuation trustees participate. Some, like the Financial Services Council, set standards of conduct with which their members must comply. While such bodies may be quite influential among superannuation trustees, we doubt that any would qualify as an SRE of a particular superannuation trustee because the association is unlikely to satisfy the Connected Entity Limb with respect to any particular trustee.

Will fund sponsors qualify as SREs?

Some funds operate on the basis that there is a fund sponsor who typically acts as promotor and distributor and may also lend their brand to the fund. While a sponsor is likely to satisfy the Material and Substantial Effect Limb, it is unlikely that a third party sponsor would satisfy the Connected Entity Limb.

Takeaways for Trustees

Trustees should begin the initial process of identifying their SREs well in advance of the commencement of FAR to determine which entities (including shareholders and entities in which the trustee holds shares) are or might be captured. Once potential SREs have been identified, consideration should be given to the manner in which the trustee will comply (and demonstrate compliance with) its obligations in relation to those SREs. This needs to be considered on a case by case basis, particularly having regard to the nature of the relationship between the trustee and the SRE, including the extent to which the trustee controls (or does not control) the SRE.

Please reach out if you have any questions about FAR or for help identifying whether any particular entities qualify as SREs.