Other areas for reform of self-managed superannuation funds

7.158  In the Discussion Paper, the ALRC considered a number of other issues that are not subject to final recommendation, such as whether the SIS Act should be amended to:

• require that all SMSFs have a corporate trustee;

• impose additional compliance obligations on trustees and directors when they are not a member of the fund; and

• give the SCT jurisdiction to resolve disputes involving SMSFs.^[149]

7.159  The ALRC also considered whether there should be restrictions as to who may provide advice on, and prepare documentation for, the establishment of SMSFs. This section considers these issues and the responses from stakeholders.

Corporate trustee or individual trustees

7.160  The majority of SMSFs have individual trustees rather than a corporate trustee.^[150] The Super System Review Panel (the Panel) noted that it is ‘widely accepted by professionals and the ATO that a corporate trustee is superior’.^[151] Benefits included:

• perpetual succession—the corporate entity cannot die, so it enables better control in the event of member death or incapacity;

• greater administrative efficiency;

• greater flexibility to pay benefits as lump sums or pensions;

• greater estate planning flexibility; and

• reduced risk of deliberate or accidental intermingling of fund and personal assets, in breach of the covenant in s 52(2)(d) of the SIS Act.^[152]

7.161The Panel concluded that it

is attracted to the potential benefits provided by the corporate trustee structure and is concerned about the large proportion of new SMSFs choosing not to use a corporate trustee. However, consistent with principle 2 regarding freedom from intervention, the Panel believes that the solution here is a better standard of advice, an aim which is addressed by other recommendations.^[153]

7.162  Given the greater protection afforded by a corporate trustee, the ALRC sought feedback from submitters as to whether there should be a change in the law requiring a corporate trustee for new SMSFs.

7.163  There was broad recognition of the benefits of a corporate trustee when compared to an individual trustee.^[154] However, there was significantly less support for mandating a corporate trustee for all SMSFs. For example:

The Law Council does not think that the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) should be amended to require that all new self-managed superannuation funds have a corporate trustee. While the Law Council considers that there are strong reasons in favour of such a structure … it does not believe that requiring this to be adopted would of itself reduce the risk of elder abuse occurring.^[155]

7.164  Other reasons put forward against mandating a corporate trustee were that it would reduce individual choice, impose additional costs and increasing complexity.^[156] The ALRC considers that a corporate trustee, when compared to individual trustees, has numerous benefits (as outlined above) and may contribute to reducing the risks of elder abuse in the context of a loss of legal capacity. However, mandating a corporate trustee would be a significant reform that would have consequences for the entire SMSF sector that cannot be justified solely on the basis of addressing elder abuse.

Improving documentation

7.165  The Panel noted some of the challenges created by the regulatory regime for SMSFs, which requires a fund to be established by private documentation rather than by legislation.^[157] Establishment by private documentation results in most individuals being reliant on professional advice for the establishment of their SMSF.^[158] Advisers are typically accountants and financial advisers. Lawyers may or may not be engaged to draft the trust deed and the constitution for the corporate trustee.

7.166  Accordingly, in the Discussion Paper, the ALRC sought views about how documentation for SMSFs could be improved to protect against poor documentation facilitating abuse in the context of a loss of decision-making ability. The ALRC also asked about how to improve the quality of professional advice provided in respect of SMSFs.

7.167  Stakeholders acknowledged that the documentation for SMSFs could be improved and that there was an overreliance on generic documents. However, there was a view that this was driven by consumer choice rather than a lack of qualifications or expertise by those preparing documentation.^[159]

7.168  In relation to the advice provided on the establishment of an SMSF, many stakeholders pointed to the recent tightening of the rules around who could provide advice on the establishment of SMSFs.^[160] Since 30 June 2016, accountants must now have an Australian Financial Services Licence in order to provide advice regarding the establishment of an SMSF. The SMSFA submitted that this has further strengthened the quality of advice surrounding the establishment of SMSFs for a large population of advisers.^[161]

7.169  As a result, many suggested no legal reforms were required. For example:

Dixon Advisory submits that the vast majority of times, a wide array of professionals are engaged to ensure that the establishment of and running of SMSFs is consistent [with the law]. Further, there are also compulsory documents for the establishment of SMSFs which need professional supervision or approval before they are valid.^[162]

7.170  The ALRC is of the view that establishing and running an SMSF is a complex undertaking and that not all those who embark on that course are necessarily sophisticated investors. The ALRC considers that Recommendation 7–2 above, to provide a ‘replaceable rule’ in relation to succession on loss of capacity will overcome many issues with documentation that is poorly prepared or not suitably tailored to the specific requirement of the SMSF members.

Access to the Superannuation Complaints Tribunal

7.171  If a member of an APRA-regulated superannuation fund has a dispute with the fund, the member may access the SCT for dispute resolution.^[163] There is no access to the SCT for members of SMSFs. Essentially, this is because members are also trustees and therefore a dispute between a member and the fund is circular. In its Issues Paper, the Panel raised the potential of extending the jurisdiction the SCT to SMSFs,^[164] but decided against it. This conclusion was based on a view that a large proportion of disputes would relate to individuals who were dissatisfied with an SMSF trustee decision regarding a BDBNs and otherwise in relation to complex family law disputes.^[165]

7.172  In the Discussion Paper, the ALRC suggested that, where an SMSF member is no longer a trustee because they have a legal disability, there may be a role for the SCT in providing a low-cost forum for disputes. There may also be a role for the SCT in providing advice to trustees on request, and in approving conflict of interest transactions similar to the role played by state civil and administrative tribunals in relation to enduring powers of attorney.^[166] The ALRC sought stakeholder views on this issue.

7.173  There was some support in submissions for the SCT having such a role.^[167] However, the majority of submissions were opposed to expanding the jurisdiction of the SCT to SMSFs. For example, the Law Council of Australia considered

it would not be appropriate to involve the SCT in disputes that are ultimately disputes between family members or associates and are private in nature. … The SCT is set up to support individuals in dispute with third party trustees who may be disadvantaged by other legal avenues. It is not equipped to deal with related party disputes.^[168]

7.174  Additionally, it was noted that the SCT is self-funded, and expanding its jurisdiction would increase costs which would have to be borne by all superannuation fund members. It was also suggested that SMSF disputes were unlikely to be limited to superannuation matters and that the tribunal would therefore only be able to address part of a dispute relating to superannuation law and not matters relating to corporations law or family law.^[169]

7.175  Stakeholders also drew attention to the fact that the SCT is currently under review. On 5 May 2016, the Australian Government established an independent expert panel to review the financial system’s external dispute resolution and complaints framework. On 6 December 2016, the expert panel released an interim report making a number of findings with respect to the SCT—including that it was subject to significant delay in resolving complaints, that it is under resourced and its governance arrangements need to be reformed with a need for greater transparency in operations.^[170] The interim view of the expert panel is that the SCT should be replaced with an ombudsman type model.

7.176  The ALRC considers that SMSF members do need access to a low-cost forum for dispute resolution. In light of the expert panel’s ongoing review of dispute resolution in the financial sector, further consideration of the SMSF sector’s need for dispute resolution forums should be considered as part of the work of the expert panel.

Additional obligations on trustees and directors

7.177  There are now a range of statutory obligations imposed on attorneys under state and territory powers of attorney legislation, in addition to general law fiduciary duties owed to the principal. However, when an attorney becomes a director or trustee in relation to an SMSF, they do so in their personal capacity and not in their capacity as attorney.^[171] Accordingly, they would not be bound by the additional statutory obligations that have been imposed on attorneys under state and territory powers of attorney legislation.^[172] In that role they are bound by the general law of fiduciary duties of trustees or the Corporations Act, and not the state and territory powers of attorney legislation. The ALRC sought submissions on whether these protections are sufficient.

7.178  Submissions were generally of the view that the existing obligations and protections were sufficient.^[173] For example, Dixon Advisory submitted that

the wide array of responsibilities imposed on trustees are sufficient to ensure a regulated approach in managing the affairs of the member. The imposition of further requirements would not only create confusion and overlap in the operation of the laws, but may potentially create obligations that infringe and restrict the way that a large majority of bona fide trustees operate.^[174]

7.179  The Association of Financial Advisers (AFA) noted that an enduring attorney stepping into replace a trustee who has lost decision-making ability is not the only time that the law permits trustees/directors not to be members of an SMSF. When an SMSF has a corporate trustee it can have additional non-member directors and the AFA submitted that differentiating between directors that are members and those that are non-members in terms of legal duties and obligations would be problematic.^[175]

7.180  The Law Council of Australia also suggested that

[t]o impose additional compliance obligations in respect of what is already a highly regulated and onerous role may simply make it difficult for older persons to find an individual willing to take on the role (noting that this must be unpaid).^[176]

7.181  Accordingly, the ALRC considers that at this time no additional obligations on trustees and directors should be imposed where they are appointed as a result of being an enduring power of attorney for a trustee/director that has suffered a legal disability.