Self-managed super funds – the risks for individual trustees

Shail Superannuation Fund and Commissioner of Tax involved a $3.5 million self-managed super fund operated by a husband and wife. Following a break down in the couples’ relationship the husband illegally withdrew the majority of the funds from the Fund’s bank account and left the country. It was accepted that the wife had no knowledge of, and did not consent to, the actions of the husband. At the time of the withdrawals neither member was entitled to draw any benefits from the Fund and hence the ATO declared the Fund non-complying with the result being tax payable by the Fund of $1,583,873.68, with additional penalties of $1,475,322.50. 

While the AAT was sympathetic to the wife’s situation they affirmed the ATO’s decision. It was held that the wife, as a trustee of the fund, had allowed the illegal withdrawal to occur. She was personally responsible for the Fund’s tax liability, even though it arose from events which she had no knowledge of or involvement in. The tribunal made the point that “any appearance of unfairness to (the wife) as an individual should not obscure the nature of the fund, the role of trustees or the regulatory regime within which they function”. The Commissioner referred to the purpose of all members being trustees of a fund, namely, the opportunity this gives to fund members “to participate equally in the decision making processes of the fund”.Although this is an extreme case there have been similar instances. For example in Triway Superannuation Fund and Commissioner of Taxation a trustee and member withdrew almost all the money from the Fund. Again the AAT upheld the notice of non-compliance, with the effect that the other trustees remained liable for the tax. The clear message of this case is that every trustee should be fully informed and involved in the running of their self-managed super fund since every trustee is legally responsible for the actions of their fellow trustees and has a fiduciary obligation to ensure the fund meets its legal requirements.

Although it is likely to involve extra costs, outsourcing the running of the fund can offer protection to individual trustees. There are several outsourcing options including public officer super funds which control the fund though still allowing you to choose between a number of different investment options. Another alternative is to convert to or set up an Australian Prudential Regulation Authority fund where you still have your own fund but it has an external registered trustee which takes on all the fiduciary duties involved in running the fund and complying with the law. Appointing a corporate trustee for self-managed super funds is another option. Although the appointment of a corporate trustee does not extinguish all liability situations, for example as a director you may still be held personally liable if negligence is involved, it assists in protecting the personal assets of trustees.