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Self Managed Super Fund (SMSF) Article
Important SMSF Court cases
By Tony Negline.
This article may be out of date.
7th November 2007
A 2007 Federal Court case has highlighted that the tax office’s supervision of Self Managed Super Funds has gone up a notch. SMSF trustees need to be careful that all their actions are allowed by the law as the ATO’s old approach of ensuring compliance via encouraging and educating has been replaced by a much tougher approach.
Principally the Court case involved the corporate trustee of a two member husband and wife super fund deliberately using super fund money to repay personal debts. Using the fund’s money in this way contravened the trust deed and the super laws because the trustees were deemed to have provided financial assistance to the fund members.
It seems reasonable to assume that the money was paid from the fund before either fund member had retired and could access their super fund monies. Under the super laws a trustee can pay money to a non-retired member who is receiving Federal Government income support and has financial difficulties. A trustee can also pay money on Compassionate Grounds which allows limited access to super fund money before retirement in a range of circumstances including paying a mortgage to forestall family home repossession. In this particular court case neither of these super rules would have been helpful.
Importantly the personal debts of the super fund members and trustees were being sought by the liquidator of a company which was also the super fund’s trustee. In order to access the money in the fund, and repay these personal debts, the trustees sold a commercial property which was owned by the fund. It was not clear from land title documents that the property was a super fund asset (as the owner was merely the company not the company as a trustee owner) and the trustees had to make special application to the liquidator before they would accept that the asset was not available to distribute to creditors.
This raises two points. Trustees should make sure all legal documentation clearly shows their fund as the legal owner. Secondly the trustee company was also being used to run a business. The intermingling of commercial activities which had gone bad and fund trusteeship created unnecessary headaches. A simpler and cleaner solution would have been to have a company whose sole activity was to be the super fund’s trustee. The only downside with this approach would have been the additional cost of establishing and running a separate company.
The judge’s notes about the case says that originally, by way of defence, the trustees alleged “that at all times they were advised by legal, financial, and accountancy professionals in relation to the fund and it was put forward that they were acting in reasonable reliance on information provided to them by their advisers, and that they were not advised that they were in breach of the rules of the fund.”
For reasons best know to themselves the trustees did not press this defence and the judge was impressed that the trustees accepted that “the primary responsibility in respect of the maintenance of a superannuation fund in accordance with the terms of the deed, and as required by the … [super laws], falls upon them.” The facts of all super fund breaches will be peculiar to each breach but it is getting harder for trustees to hide behind their real or perceived ignorance or even to hide behind the real or perceived superior knowledge of their advisers. In reality this means that more will be expected of super fund advisers. Any lack of knowledge or incompetence will be mercilessly exposed and punished.
The judge decided to impose harsher penalties on the husband trustee as he was considered more culpable. However His Honour noted that it’s “quite unacceptable for a fellow trustee to be a passive participant in a breach of trust by another trustee no matter what the matrimonial pressures might be.” A SMSF trustee is a trustee and their responsibilities have to be taken seriously.
Many trustees might be tempted to think this particular court case has little application to their arrangements because they are unlikely to use their fund’s assets for personal reasons. There are lessons in this court case for every SMSF. In any case it is very easy to use fund assets personally. Paying off credit card bills with the wrong cheque book or incorrectly ticking the super fund’s account amongst a list of bank accounts on a financial institution’s website are remarkably common mistakes.
In this particular case it would have been open to the tax office to declare the fund non-complying and thereby impose heavy penalties based on the fund’s assets. All remaining assets seem to have been moved out of the fund so making it non-complying would not have yielded any penalties.
Why were the trustees of the fund being sued personally? As the fund had been wound up there was no point suing it. In any case, the super laws allow the ATO to seek redress from anyone involved in certain breaches of the super fund rules.This Court case is a helpful reminder of a recently released draft SMSF Ruling on providing financial assistance to fund members or their relatives using the fund assets.
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