DIY super fund trustee penalised for breach of law

The temptation to access superannuation early can be great, but the superannuation laws provide some harsh penalties where this happens. A recent case before the Federal Court illustrates what can happen.

In that case, the Federal Court imposed a $12,500 civil penalty on a trustee of a self-managed superannuation fund (SMSF) for the illegal early release of superannuation benefits in breach of the sole purpose test.

The fund trustee, Mark MacLeod, established an SMSF (the MAM Superannuation Fund) in August 2005 with a rollover payment of $40,032. The governing rules of the Fund provided that its primary purpose was the provision of old age pensions. Shortly thereafter, the trustee withdrew $20,028 in order to settle legal proceedings threatened by a former client of the stockbroking business in which he worked. During 2006 and 2007, he also withdrew further amounts to meet pressing financial needs in relation to school fees and the breakdown of his marriage.

In November 2007, the auditor of the fund reported the contraventions to the Tax Office. Notwithstanding this, the trustee continued to make unauthorised withdrawals in the years ending 2008, 2009 and 2010. In total there were 41 illegal early release payments totalling $64,000 (although the Court accepted that 11 of the transactions amounting to $3,400 were refunded). In January 2010, the fund was closed and all the assets were transferred to a retail superannuation fund. The Tax Office also disqualified Mr MacLeod from acting as a trustee.

In testimony before the Court, Mr MacLeod said that “after much soul searching and finding out that the only way I could legally get access to my superannuation monies was to be unemployed and on the dole, I decided that the only course of action was to access my superannuation monies and pay my client the balance of his money”. He said he rationalised that he would either get back on his feet financially and pay back the money, or he would reach a settlement with his ex-wife and pay back the money from the settlement. Mr MacLeod said he was generally a law abiding citizen and that the contraventions were totally out of character.

The Deputy Commissioner of Taxation (Superannuation), Neil Olesen, applied to the Federal Court to impose a civil penalty on the trustee under s 196 of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The Court held that the trustee had contravened the sole purpose test under s 62(1) of the SIS Act through at least 30 unauthorised withdrawals contrary to that Act. The Court was also satisfied that the trustee breached s 65(1)(b) of the SIS Act by giving financial assistance to a fund member using the resources of the fund.

The Court imposed a civil penalty of $12,500, after finding that the contraventions were “serious” so as to warrant a monetary penalty. The Court noted that a deliberate decision was made to establish an SMSF in order to illegally access the preserved superannuation benefits. The Court also observed that the contraventions extended over several years and continued despite being reported by the auditor.

In fixing a civil penalty under s 196 (which allows for a maximum penalty of $220,000), the Court agreed to treat the numerous contraventions as a single contravening course of conduct. If not for the trustee’s admissions and cooperative conduct, the Court said that a monetary penalty of $15,000 to $17,000 would have been appropriate.

In all the circumstances, the Court considered it was “not only appropriate but also necessary that a civil penalty order be made in this case”. Justice Barker said the trustee “must be sanctioned for his conduct and a message must be sent to the community that such conduct is unacceptable”. SMEs who are trustees of self-managed super funds should take note of what the Court said.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .

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