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SMSF governance: reminder of obligations
Liz Gibbs • May 19, 2021

A recent case decided by the Administrative Appeals Tribunal contains important reminders for anyone who has a self-managed super fund. First, the fund must have accounting systems in place which ensure that proper records are kept and that the fund's business is always kept separate from the business of any related parties. Second, trustees must be prepared to seek, and take, qualified independent advice. But the case contained good news – it is possible to implement measures to fix problems so as to maintain the complying status of the fund.

A company carrying on an accountancy practice set up a self-managed superannuation fund way back in 1975. The practitioner was the sole director and sole shareholder of the company, and was the trustee and sole beneficiary of the fund. He ran into troubles in 2018, when the ATO investigated alleged flaws and misdemeanours.

The AAT said that the trustee fell down in 2 key areas. First, there was a mixture of activity between the 2 entities – the fund did not keep its affairs separate from the business of the accountancy practice, and vice versa. For example, the trustee could not explain why the fund advanced funds to him and received extended credit from him, and why he banked in his own account significant funds that were paid to the fund. He tried to argue that all had been properly accounted for by the use of a suspense account, but this was not accepted by the AAT.

This failure to maintain proper records was to cost the fund dearly.

The other failing was what the AAT termed a "flawed" governance model. The trustee ran a one-man show. The fund auditor was his daughter. This meant that there was no input from any other professionals. The trustee read technical material, but seemingly didn't always understand what he read. The AAT said he appeared to read things as he wanted them to be, not as they were.

This governance model meant that there was no opportunity for an independent review of decisions and no review of accounting processes. The outcome was that the fund received a notice of non-compliance from the ATO, which meant it lost access to the beneficial tax treatment that complying super funds receive (eg reduced tax rate on earnings etc). The cost to the fund was significant.

But the case shows that there is no situation that cannot be fixed. The ATO had initially disqualified the trustee from acting as a trustee. The AAT overturned this, on the proviso that the trust had to change its governance. This involved ensuring that there were adequate accounting systems to produce reliable fund accounts, a clear separation between fund operations and any other business activity, appointing independent auditors and seeking independent advice about investment decisions. These changes had to be enforceable, ie properly documented and readily confirmed.

For the AAT, the issue lay in the assessment of a future compliance risk. The ATO agrees, and sets out its views in PS LA 2006/17. With changed governance, the trustee was "highly likely to comply going forward".

The case also highlights how easy it is to breach the myriad of provisions that apply superannuation and self-managed super funds. It was alleged here that there were contraventions of 8 sections of the relevant legislation on 17 separate occasions – some 45 alleged contraventions were examined! This involving a trustee who had shown himself to have a good understanding of business over a long period.

Need help?

We have the expertise to handle the complexity of the superannuation laws. We can give your SMSF a quick "health check" to ensure that it is doing all that is necessary to ensure its complying status.

Email us at Robert Goodman Accountants at 
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