The SMSF Laws too Dangerous to Ignore
The Guru’s Guide to SMSFs covers a lot of laws, regulations, Commissioners rulings and guidelines, case studies and practical flowcharts. Although it has taken me a year of intensive writing, it has been 25 years in the making. From my first submissions on the Superannuation Industry Supervision Bill 1994 to the launch of this book, my career has been filled with SMSFs and strategy.
But I wrote the Guru’s Guide not just to teach you strategy but more importantly to protect you. Protect you from two laws that you never really want to have anything to do with and if you do, I am hoping that you know the Guru’s Guide inside and out. And if you have not had the chance to read it, grab a copy of it now before it hits Amazon and the current intro price increases.
The two laws?
Section 55(3) of the SIS Act 93 for breach of the Trust Deed and section 218 of SISA 93 in relation to a breach of the SISA or SIS Regulations. These sections empower a Trustee of a Fund or a member to sue and recover losses from an accountant, auditor, financial planner or any adviser for that matter, who has breached the laws or the trust deed of the Fund.
When it comes to advising most professionals think in terms of negligence and certainly Professional Indemnity (PI) policies are limited to these lines. Negligence is an action under equity law and as defined in Tort Law is “Negligent tort means a tort committed by failure to act as a reasonable person to someone to whom s/he owes a duty, as required by law under the circumstances. Further, negligent torts are not deliberate, and there must be an injury resulting from the breach of the duty.” There is a defence to the action that the advice was reasonable or the Trustee of the Fund contributed to the negligence. But I am sure every professional is well aware of negligence and careful to ensure that there advise is reasonable and their PI policy is up to date.
For any breach the Trustee or member can take a negligence action but why bother with these two in your pocket? But they can also, and should, because it is more effective, quicker and easier to take an action under Sections 55(3) and 218. Why?
Well these sections are Federal laws and are laws of strict liability. What is strict liability? Strict liability is an offence where there is no necessity for the Commissioner of Taxation or the party to the suit, the Trustee or Member to show fault. If there is a breach, and that can be shown their the sections kick in and the only determination needed is the quantum of damages. What have the members or Trustees lost as a consequence of the breach of the laws, and breach also includes an omission of considering the laws?
To see it in action, in Dunstone v Irving  VSC, Justice Hansen addressed the fact that the Trustee of the Fund did not make a lump sum retirement payment as required under the Fund’s trust deed to Chester Irving within a reasonable period. It was held there was a breach of the Fund’s trust deed and at paragraph 143, Hansen J said that “the other aspect of relief is a claim for damages, being the loss suffered by the plaintiff as a result of not having the use of his entitlement. The plaintiff sought damages either under s. 55(3) of the SIS Act or on account of the defendant’s breach of his obligations as trustee.” The Court looked at the amount of Irving’s loss given he was deprived of his lump sum of $1,365,478 from February 1998. By the time of the action, in November 2000 it was assessed that the amount his entitlement could have earned if withdrawn at that time, in a conservative portfolio was $248,862. These damages were awarded against the Trustee.
In the case there was no negligence, simply the Trustee had breach the Trust Deed.
Can I ask you, how often would you have breached the Trust Deed of a client’s fund when advising on an action or became aware of a breach and said nothing?
Strict liability is a career breaker and guess what? Because it is a breach of a federal law and potentially a Commonwealth crime it is not covered by your PI. Check with your insurance company.
To protect yourself, at a very minimum, read the Guru’s Guide to SMSFs. Ignorance of the laws is no excuse, just ask accountant Anthony Holloway who was personally fined $280,000 for breaching the SIS Act 93 – Australian Prudential Regulation Authority v Holloway  FCA 579. Although caught and fined, I have to say he was lucky as his clients who breached the laws, could have recovered their losses from his under section 218. Very lucky.