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Elder abuse reforms: A guide for SMSFs

Anthony Fensom  |  19 Jul 2017Text size  Decrease  Increase  |  

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Launched on World Elder Abuse Awareness Day, 28 June, the Australian Law Reform Commission's (ALRC) final report on elder abuse was generally welcomed by the self-managed super fund (SMSF) sector. However, SMSF trustees and advisers still have plenty of work to address this potential "silent tsunami".


As highlighted previously by Morningstar, the SMSF sector is considered vulnerable to elder financial abuse, which according to the ALRC can include "using deception, threats, or violence to coerce someone to contribute, withdraw, or transfer superannuation funds," as well as inappropriate investment advice.

Examples of such abuse provided to the ALRC included the daughter of a dementia sufferer who used her father's signature to withdraw "a large sum in three instalments from a fund". Other cases concerned abuse of the powers of attorney, such as where a trustee loses decision-making ability.

Fortunately, the ALRC reported that submissions to its inquiry "generally identified fewer concerns with financial abuse in the context of superannuation than with respect to bank accounts and other financial assets". This was due to super funds already being subject to significant access controls, as argued by the Financial Services Council.

Binding death benefit nominations

However, the commission flagged concerns relating to such matters as binding death benefit nominations (BDBNs), as well as SMSFs, "which are subject to less regulatory oversight than retail and industry superannuation funds".

It suggested elder abuse could occur through BDBNs, either by having an older person make or alter such nominations in the abuser's favour, or making such a nomination under the supposed authority of a power of attorney.

As a result, the ALRC said BDBNs should be considered "will-like" in nature and treated similarly.

"There is much uncertainty and ambiguity concerning BDBNs of superannuation funds, particularly whether an enduring attorney may sign a BDBN on behalf of a member," it argued.

The commission therefore recommended that these issues be resolved through "a focused review of the provisions," with the key legal issue concerning "the ability of fund members to direct trustees with respect to the payment of funds on the member's death".

SMSF reforms

Concerning SMSFs, the ALRC said the current regulatory framework based on self-protection "may be problematic, as a larger number of SMSFs come under the control of older people who may require increasing decision-making support".

The ALRC recommended the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) be amended to include a mechanism for an enduring attorney to become a trustee or director where provided for in the enduring document, "notwithstanding the terms of the trust deed and constitution of the corporate trustee or the actions of the other trustees/directors".

This measure is seen providing a "safety net" where a trustee has not already put in place an effective succession plan. It also argued it would allow an enduring attorney to step in, overcoming any deficiencies in the trust deed and company constitution while preventing any remaining trustees or directors from thwarting such a move.

Another recommendation was for SMSF trustees to be required to "consider the suitability of the investment plan where an individual trustee or director of the corporate trustee becomes 'under a legal disability'". This measure is seen ensuring that the asset mix of an SMSF is "consistent with proposed succession plans".

The ALRC also recommended that individuals be required to notify the Australian Taxation Office (ATO) when becoming a trustee or director of a SMSF "as a consequence of being an attorney under an enduring document". This is seen reinforcing to the new trustee or director their obligations to the ATO, it said.

However, the commission ruled out mandating a corporate trustee structure for SMSFs, suggesting such a change "would have consequences for the entire SMSF sector that cannot be justified solely on the basis of addressing elder abuse".

It also rejected providing SMSFs access to the Superannuation Complaints Tribunal, although backing calls for "access to a low-cost forum for dispute resolution".

Industry response

Industry response to the ALRC's proposals was generally favourable, with the SMSF Association welcoming the commission's "measured approach" to the issue.

"In our opinion, the ALRC has found the right balance with its suggested reforms between mitigating this emerging risk without placing overly draconian restrictions on how the SMSF sector is regulated," SMSF Association chief executive John Maroney said.

"The investment strategy recommendation will ensure SMSF trustees and their specialist advisers can give greater thought to planning for loss of capacity and ensuring that the right people are assisting SMSF trustees with their fund as they age," he added.

He also backed reforms concerning BDBNs, acknowledging that "this is an area of law that is seeing more disputes among a deceased's beneficiaries and relatives".

SMSF specialist adviser Liam Shorte also welcomed the recommendation for greater planning for loss of capacity as part of a fund's investment strategy.

"SMSF trustees and their specialist advisers should give greater thought on a regular basis to planning for loss of capacity and ensuring that the right people are in place and will have the requisite powers under the SMSF trust deed to assist SMSF trustees with their fund as they age," said Shorte, a director of Verante.

However, Shorte said he was disappointed by the ALRC's recommendation opposing mandatory corporate trustee structures.

"I am one of those people who have to regularly deal with the consequences and just last year sat in front of a grieving widow to sign over 45 documents relating to a SMSF deed amendment to add a corporate trustee, change the name on shares, managed funds, and direct property to reflect the name of the new trustee because they had used individual trustees with the deceased as one of the trustees," Shorte said.

"I had to ask the widow to make out cheques for various stamp duty offices, approve statements of advice for the sale of minor holdings to reduce paperwork, and answer questions from her and her children about why this had not been better organised while their father was in charge of the fund.

"They had come to me as the online SMSF administrator was not licenced to provide advice, which was fine while the father was alive and on top of things, but left his widow and children in the lurch when picking up the pieces afterwards."

The government is weighing its response to the ALRC's report, with Attorney-General George Brandis stating it is "carefully considering the recommendations and will work across portfolios to develop our response".

Yet with Australia now facing its "inescapable demographic destiny" of an ageing population, the SMSF sector has been given a timely wake-up call.

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

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