Many individuals establish an SMSF because they like the control and flexibility it gives them over their retirement savings.
But great responsibility comes with the move from a compliance perspective and if things go pear-shaped, the buck stops with you as a trustee.
A judgment handed down in a case heard in the Federal Court just before Christmas stands as a timely reminder of this fact.
The case I’m referring to is Deputy Commissioner of Taxation v Lyons and involved the use of loans from the SMSF to a related party in order to illegally access money from the fund.
In summary, Mr Lyons, as trustee of the Lyons Family Superannuation Fund, lent money from the fund to his brother-in-law, Paul Ellis, who in turn immediately transferred the funds to Mr and Mrs Lyons’ struggling retail business.
In the end, six loans totalling $190,000 were made to Ellis, none of which were required to be repaid, representing 97.96 per cent of the super fund’s assets.
Justice Annabelle Bennett found Mr Lyons had breached several sections of the Superannuation Industry (Supervision) Act, including the sole purpose rule and the in-house asset rule, and ruled in favour of the Deputy Commissioner of Taxation.
The decision resulted in the fund being made non-complying and Mr Lyons being fined $32,500 and ordered to pay costs incurred by the Deputy Commissioner of Taxation of $5000.
Of course, so many important lessons for trustees arise from these proceedings.
Firstly, individuals must set up an SMSF for the right reason, namely to provide for the retirement income needs of the fund members. In the case of the Lyons Family Superannuation Fund, it would appear the fund had been set up purely for illegal early access to member entitlements, considering the SMSF was established only one month before the first loan was made.
The case also illustrated how quickly an SMSF can unravel when established for the wrong purpose. The Lyons Family Superannuation Fund came to being in 2008 and was made non-complying in 2012, resulting in the worst consequences of all for the members, that being the entire amount of retirement savings squandered with one of the fund trustees having to pay a fine of $32,500 and costs of $5000.
Trustees can also take note that Justice Bennett chose not to hit Mr Lyons with a large fine as he engaged the services of an auditor, which led to the discovery of the fund’s compliance breaches, and gave his full cooperation to the Deputy Commissioner of Taxation during the investigation.
It demonstrates leniency can be exercised if genuine contrition and remorse are shown by the trustee in these circumstances.
But perhaps most importantly it shows the ultimate responsibility always lies at the feet of the fund trustees.
As difficult as it may be to believe, both Mr and Mrs Lyons sought and implemented the advice of a financial planner who told them they could withdraw funds from the SMSF in the manner they did without informing them it was against the law to do so.
To his credit Mr Lyons accepted responsibility for his actions without trying to apportion blame to the financial adviser in question.
However, it is doubtful the court would have abrogated any of Mr Lyons’ responsibility just because he received financial advice.
Again, even if other mitigating circumstances may be present, ultimately the trustee will bear responsibility for the actions of the fund.
Perhaps Justice Bennett best summed up the magnitude of duty individuals take on when they establish an SMSF in saying: “Responsible officers of trustees of self-managed superannuation funds are placed in a special position of trust because they can allocate a fund’s assets without supervision and without seeking another’s authority to do so.”''