Choosing the right DIY super fund

GIVEN the extremely strong growth in numbers and assets held in DIY superannuation funds, particularly self-managed superannuation funds (SMSF), it is surprising that so little comment has been made in regard to the impact of the changes introduced in the Finance Sector Legislation Amendment Act.

These changes, which came into force from December 21, 2000, impose a ‘strict-liability’ regime on the trustees of superannuation funds. This means that trustees can no longer argue that a breach of the rules was unintentional, which in the past generally meant that they could avoid prosecution. As a result, Australians who choose to be a trustee of a DIY super fund could face heavy personal fines of up to $5,500 for minor offences such as failing to keep minutes of meetings for 10 years, or failing to appoint an investment manager in writing.

If the trustee of the fund is an incorporated body, including a private company, the penalties may be up to five-times greater.

If the regulators are able to prove the trustees were reckless and intentionally failed to take an action, the penalties for individuals can increase to up to $11,000, and trustees can even face jail sentences of up to two years.

In the past, the only penalties that were applied to superannuation funds affected member benefits rather than the trustees of the fund. The recent changes have shifted the penalties to the people actually responsible for operating the fund. Although, in spite of the increased trustee penalties, it is still possible for a fund to lose its concessionally taxed status and potentially up to 47 per cent of its assets and income.

The Superannuation Industry Supervision Act now also contains a range of civil penalty provisions. If a trustee contravenes a civil penalty provision, the regulators may apply to the court for a civil penalty order to be made against the trustee. If the contravention is serious, the court can impose a fine of up to $200,000.

A contravention of a civil penalty provision may also lead to criminal prosecution if the person contravenes the provision dishonestly, and intending to gain an advantage, or intending to deceive or defraud someone. In such a case, the penalty upon conviction is a term of imprisonment of up to five years.

All of these rules are a significant risk for SMSFs, where every member of the fund must be a trustee and every trustee must be a member (there are special rules for single member funds).

The rules also pose a significant risk to advisers. Although the trustees legally carry all of the responsibility and liability, they are likely to take legal action against their advisers, if they believe they were receiving advice that should have highlighted some of the compliance issues they failed to address. This could include action against their accountant, solicitor and financial advisers.

Where a civil penalty provision is breached, a professional adviser could also be the subject of a civil penalty order.

In an environment where professional indemnity premiums are soaring and insurers are focused on risk management, reducing the risk involved in advising is an important consideration for planning groups.

So advisers should consider recommending that their clients do not use an SMSF, but instead choose a Small APRA Fund (SAF). This type of DIY fund offers almost all the benefits of an SMSF, but without the risks to clients and advisers. The major difference between the two structures is the appointment of the fund’s trustee. In the case of an SAF the fund must appoint an approved trustee (such as a trustee company); no member can be a trustee.

There is no risk of a member being fined for failing to meet their obligations as a trustee. It is the professional trustee company that is at risk. In fact, if there is a problem and the fund loses its concessional tax status, the members of this type of fund can sue the approved trustee — they carry the liability for any errors made in the operation of the fund.

As well as eliminating the risk of incurring penalties, another benefit of an approved trustee via an SAF is the ability to deal with the changing circumstances of fund members including incapacity, divorce and death. For example, if the member/trustee of an SMSF fund loses capacity and is unable to manage their own affairs, who will take over operation of the fund to ensure the member’s interests are looked after?

Adopting the SAF approach and appointing an approved trustee for their fund frees clients from the ongoing worry of the paperwork, the added risk of financial loss and penalties, and the risk of being unable to properly manage their fund as their personal circumstances change.

For DIY members this will add up to greater peace of mind and a secure retirement. For advisers it means a significant reduction in professional risk.

Steve Davis is nationalmanager of FinancialPlanning for PerpetualPrivate Clients.