In the wake of the $176 million collapse of Trio Capital, a myriad of concerns relating to the protection of superannuation savings – and in particular SMSFs – have been uncovered.
You’re not protected
There were more than 6,000 victims of Trio and 5,400 were in Australian Prudential Regulation Authority (APRA) regulated super funds and therefore eligible for compensation. The 285 SMSF investors were not.
A parliamentary report has identified that a large number of SMSF investors were genuinely surprised that SMSFs are not entitled to the same protection from theft and fraud as APRA regulated funds. Warning bells are now ringing to increase awareness for SMSFs that they are not eligible to receive compensation in these circumstances.
Sign on the dotted line
The Australian Securities and Investments Commission (ASIC) has recently called for SMSFs to sign a written agreement whereby they heed warnings around issues of compensation for theft or fraud. Further, a new acknowledgement should be signed every two or three years to ensure Trustees are aware of risks.
Industry bodies have backed ASIC with the Self Managed Super Fund Professionals’ Association of Australia (SPAA) and Financial Planning Association of Australia (FPA) both supporting the need for signed acknowledgements by SMSFs. But is this the best way forward, or are we opening up a can of worms for all investment, market, tax and regulatory risks to be separately identified and flagged? What makes one area of SMSF risk more potent than another, and can we assume SMSF trustees are aware of all other risks, specific to SMSFs or otherwise?
Understanding risks
SMSF trustees are currently required to sign a Trustee Declaration stating that by law, amongst other responsibilities, they are to exercise skill, care and diligence in managing the fund and act in the best interests of all the members of the fund. Without knowing real investment risks, it is questionable whether one can exercise these responsibilities, and in particular without understanding the absence of compensation when faced with fraud or theft. It therefore makes sense that the SMSF Trustee Declaration should include a clause requiring an acknowledgement of this lack of protection.
While many SMSF trustees may have been unaware of compensatory restrictions, there are arguably other risks that could have substantial impacts on SMSFs.
All trustees are equally responsible for managing the fund and making sure it complies with the law. This is the case even if one trustee is more actively involved in the day-to-day running of the fund than the others. Numerous cases have shown that even with these warnings highlighted for trustees, many are still caught out when fraud, embezzlement or theft occur from within the fund.
In the case of Shail Superannuation Fund v Commissioner of Taxation, Mr Shail illegally withdrew the majority of the $3.5 million super balance, fled the country and left his estranged wife to deal with the consequences. The ATO penalised the fund with a $3 million fine in tax, penalties and interest due to non-compliance, and as Mrs Shail was the sole remaining trustee, she was liable to pay the bill.
In instances where SMSFs are family SMSFs, where perhaps a greater degree of trust is implied, each trustee is still responsible to ensure the integrity of the fund regardless of how the contravention occurred. While this responsibility is detailed in ‘Self-managed super funds – Key messages for trustees’, which is pre-requisite reading before signing the Trustee Declaration, it has failed many trustees in protecting themselves and their fund from theft, leaving a trail of serious repercussions.
How far do we go?
So the question remains: How far do we go to ensure SMSF risks are mitigated, if detailing the warnings is not enough to prevent serious risks?
The acknowledgement of lack of compensation may be insufficient to ensure that SMSFs are better protected going forward, but it may be adequate for the interim. A more effective remedy is pre-emptive prudential attention to these concerns before they erupt, which will prove far more effective in ensuring that Trio doesn’t re-occur.
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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.
