Australia: Super nest egg - maybe not in one basket!

Taxation & Superannuation Update
Last Updated: 30 September 2012
Article by Andrew O'Bryan and Mark Payne

The Government has introduced the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012, which sets out covenants to be included in the governing rules of self managed superannuation funds from 1 July 2013. Section 52B of the Superannuation Industry (Supervision) Act 1993 (SIS Act) largely mirrors the existing covenants in section 52 of the SIS Act. The key addition clarifies the expectation that trustees will regularly review the investment strategy of the fund and the maintenance of reserves (if any).

New section 52C of the SIS Act will insert provisions relating to directors to be included in the governing rules of self managed superannuation funds. This section provides that the covenants applying to trustees in section 52B of the SIS Act also apply to each director of a corporate trustee. These provisions are novel in that obligations are imposed on directors personally, thus piercing the corporate veil and with it, the risk that disgruntled members could bring an action against directors for a breach of the section 52C covenants.

In our view, given each member is a director and required to be active in the management and operation of a self managed superannuation fund, the better approach is not to rely on the trustee-director covenants but to take steps to avoid any potential issues from the outset.

While the members are also the directors, it is not uncommon for family disputes on divorce or death to spill over into the management and operation of the self managed superannuation fund. These provisions are likely to give rise to disagreements without any mechanism for dispute resolution in the self managed superannuation fund context. The outcome is that section 52C will be largely inappropriate and unnecessary for family operated self managed superannuation funds.

It is crucial that members consider how they structure the fund and in particular, whether the next generation should be added to the existing fund or a separate superannuation fund established. While multiple funds will increase administrative expenses, the benefit is avoiding a costly dispute down the track. Disgruntled beneficiaries of self managed superannuation funds do not have the option of bringing a complaint regarding superannuation death benefits to the Superannuation Complaints Tribunal, but instead must bring an often costly and time consuming action in the Supreme Court.

This could be important in a blended family context for example, where Dad would like to leave his superannuation death benefits in the form of an income stream to his second wife for her life and any remaining capital is to be distributed to his children. However, the benefits vest in the second spouse who is generally not bound to receive an income stream, but can elect to take a lump sum payment of the total benefit. In addition, the second spouse is not obliged to leave the remaining capital to the step children or may not be able to as the step-children will no longer be eligible dependants of the second spouse for superannuation purposes on the death of the father.

Another potential issue arises where the step-children are members of the fund and outnumber the second spouse, effectively controlling the operation and management of the fund.

These situations are likely to provide ample ammunition for claims against directors of the corporate trustee. In this instance, maintaining separate funds, preparing binding death benefit nominations and ensuring control of the fund passes to the right person will be important in avoiding disputes.

Directors should consider how they hold their assets, who will control the fund on the death of one or more members and their estate planning more broadly.

The concept of a trustee-director was recommended by the Government's review into the governance, efficiency, structure and operation of Australia's superannuation system headed up by Jeremy Cooper (Cooper Review). In particular, the Cooper Review recommended that the:

SIS Act should be amended to create a distinct new office of 'trustee-director' with all statutory duties (including those which would otherwise be in the Corporations Act) to be fully set out in the SIS Act, along with re-focused duties for trustees.

In the Cooper Review 'Super System Review: Final Report' (Final Report), the Cooper Review panel noted the:

value in creating a distinct new office under statute, that of 'trustee-director'. The duties, powers and standards required of this office would be recorded clearly in the SIS Act and nowhere else. These statutory duties would enhance, expand and clarify the duties set out in section 52(2) of the SIS Act as well as appropriately adapt the chapter 2D directors' duties from the Corporations Act. The identification and management of conflicts of interest and of duties are a particular priority. Though conflicts are covered under the general law pertaining to trustees, it is clear from the Review's analysis that there is a need for greater clarity of what is required of superannuation fund trustees and trustee-directors in this regard.1

In light of the new obligations imposed on the directors of corporate trustees, it is an opportune time for members to consider the structure of their fund and how the fund is being operated and maintained. For example, have the members recently reviewed the fund deed and the investment strategy? Does the investment strategy deal with risk and return, liquidity, diversity and the cash flow requirements of the fund, including paying benefits to members?

Have members considered who will receive their superannuation death benefits, are enduring powers of attorney are in place if members lose capacity and have mechanisms been put in place to pass control of the fund? Are the decisions of the trustee being recorded and are the resolutions kept in a secure location with the fund deed and any binding death benefit nominations?

Putting in place strategies to address these questions will go a long way in preventing disputes and potential claims against directors from disgruntled members.

Investment strategy and insurance

The Government has introduced the Superannuation Industry (Supervision) Amendment Regulation 2012 (No 2), which amends the Superannuation Industry (Supervision) Regulations 1994 in three key respects:

  1. a trustee is required to consider whether the trustee should hold a contract of insurance that provides insurance cover on one or more members as part of the fund's investment strategy. This is particularly important where a substantial proportion of the fund's assets are illiquid, such as the business premises;
  2. a trustee is required to keep the fund assets separate from any assets held by the trustee personally or from any assets of an employer-sponsor or an associate of an employer-sponsor; and
  3. for the 2013 income year and onwards, the trustee must value assets at market value when preparing the fund's accounts and statements.

These requirements are now operating requirements for trustees and can be enforced by the Commissioner of Taxation.

The amendments are a direct response to the recommendations of the Cooper Review into superannuation and the Government's Stronger Super reforms.

The Explanatory Memorandum to the amending act explains that the valuation methods used by trustees, such as historical valuations, impact on members' ability to ascertain their current superannuation benefits.

'Market value' is defined in section 10(1) of the SIS Act as the amount a willing buyer could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

  1. the buyer and seller dealt with each other at arm's length in relation to the sale;
  2. the sale occurred after the proper marketing of the asset; and
  3. the buyer and seller acted knowledgeably and prudently in relation to the sale.
  4. The valuation should be based on objective and supportable data.

A valuation will be required from a qualified independent valuer where the trustee invests in collectibles and personal use assets and is selling the asset to a related party. A valuation from a qualified independent valuer is also recommended where the asset comprises a significant proportion of the fund's value.

In other circumstances, the valuation should be based on objective and quantifiable data, such as an appraisal from a licensed real estate agent for property. Listed securities should generally be valued as at the closing price to determine their market value.

The requirement that assets be transferred on market where an underlying market exists is currently not law, but is expected to apply from 1 July 2013 subject to the Commissioner of Taxation ensuring that the provisions do not contravene the prohibition on 'wash sales' in the Corporations Act 2001. We will keep you updated on the progress of this proposed amendment.


1 The Cooper Review 'Super System Review: Final Report – Part One: Overview and Recommendations', Chapter 2 at 5.2: Trustee Governance at page 2

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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