7.37 A significant portion of the wealth of older people is held in superannuation funds. Abuse of an older person may include the use of deception, threats or violence to coerce the person to contribute, withdraw or transfer superannuation funds for the benefit of the abuser. Abuse could also include making certain investment decisions that may advantage the abuser now or in the future. Other issues relating to possible elder abuse include questions about the ability of a person acting under a power of attorney to deal with superannuation.
7.38 The Australian Prudential Regulation Authority (APRA) is the prudential regulator for the superannuation industry, but it does not regulate self-managed superannuation funds (SMSFs). SMSFs are supervised by the Australian Tax Office. The Superannuation Complaints Tribunal deals with complaints about the decisions and conduct of trustees of superannuation funds (other than SMSFs).
APRA regulated funds
7.39 Stakeholders identified instances of financial abuse of older people through unauthorised access to superannuation funds. However, there appeared to be more reports of misuse of bank accounts and other financial assets than superannuation funds. This may be partly because APRA regulated funds are subject to significant access controls. This was noted by the Financial Services Council which explained that:
A rollover (when a person’s super fund is transferred to another super fund in their own personal name or to an SMSF where they are a trustee) is subject to stringent checks by the superannuation fund where funds are withdrawn from;
A transfer from a person’s super fund to another person’s super fund is only allowed in limited situations such as death or divorce, and in these events additional checks and paperwork is required; and
A withdrawal can only be made once a condition of release is met and for most Australians, this means reaching their preservation age, and even in this circumstance, withdrawals can only be transferred to the superannuation trustee’s nominated bank account.
7.40 Notwithstanding these access controls, additional protection may be afforded through the ALRC’s proposals in relation to powers of attorney in Chapter 5 and banking earlier in this chapter. The link between financial abuse of superannuation and banking was described in the case study provided by the North Australian Aboriginal Legal Service:
An older Aboriginal man who had accessed his superannuation, had his bank card stolen by his daughter who went on to withdraw a substantial amount of money from his account.
7.41 The Financial Services Council submitted that to prevent abuse of superannuation funds, ‘focus should be on reducing misuse of legal instruments such as Powers of Attorney’. The interaction between superannuation and powers of attorney in the context of elder abuse was demonstrated in the following case study provided by Advocare Inc (WA):
Enid is an elder woman who nominated her daughter Cathy as her Enduring Power of Attorney. Enid has tolerated financial abuse by Cathy for many years as she has no-one else to assist her with things she finds too difficult to do on her own. Cathy is now pressuring Enid to transfer superannuation funds into Cathy’s bank account, claiming that Enid will get a better return on investment. Enid was advised not to sign anything but is still vulnerable as she chose not to revoke her EPA.
7.42 Similarly, ASIC stressed the importance of better regulating powers of attorney, as it would be difficult for superannuation fund trustees to determine whether certain actions by an attorney under an enduring document are elder abuse. Some examples include:
…instructions to take a portion of a superannuation benefit as a lump sum rather than a pension may as much reflect the importance to the elder fund member of paying down debt, or facilitating new accommodation arrangements as action by an abuser to access superannuation money for their own beneﬁt.
… instructions to continue drawdown of only the statutory minimum amount of an account based pension may reflect the active management of the elder person’s longevity risk, rather than maximising the value of a death beneﬁt that may become payable to an abuser.
… instructions in relation to the part commutation of an elder person’s account based pension may as much reflect the need to meet a ‘lumpy expense’, such as in relation to health care, as action by an abuser to access superannuation money for their own benefit.
7.43 Accordingly it is proposed that, with respect to APRA regulated superannuation funds, the best protections against elder abuse will be achieved by enhanced protections in relation to powers of attorney.
Self-managed Superannuation Funds
Question 7–1 Should the Superannuation Industry (Supervision) Act 1993 (Cth) be amended to:
(a) require that all self-managed superannuation funds have a corporate trustee;
(b) prescribe certain arrangements for the management of self-managed superannuation funds in the event that a trustee loses capacity;
(c) impose additional compliance obligations on trustees and directors when they are not a member of the fund; and
(d) give the Superannuation Complaints Tribunal jurisdiction to resolve disputes involving self-managed superannuation funds?
Question 7–2 Should there be restrictions as to who may provide advice on, and prepare documentation for, the establishment of self-managed superannuation funds?
7.44 The legal framework for SMSFs was established in 1999. SMSFs have less than five members. Importantly, all fund members are also either individual trustees for the fund or directors of the corporate trustee. As at June 2016, there were 577,236 SMSFs in Australia with a total of 1.1 million members. There are currently over $620 Billion in assets managed by SMSFs (about 29% of super assets in Australia).
7.45 Around 70% of SMSFs have two members and 22% are single member funds. The most common structure is a husband and wife super fund. While some SMSFs are established and managed by very wealthy investors, 45% of SMSFs have total balances of less than $500,000. Evidence suggests that there is a high prevalence of SMSFs being used as part of a family business structure, typically with the business premises owned by the SMSF and leased to the family business.
7.46 The ALRC received a small number of submissions raising concerns regarding financial abuse of older people involving SMSFs. This may reflect the current demographics of those with SMSFs. Only 8.8% of SMSFs have members aged over 75 years of age—the most vulnerable cohort for elder abuse. However, 55% of SMSF members are aged between 55 and 74 years of age. This suggests that, in the coming decades, a greater number of older and more vulnerable individuals will have a SMSF.
7.47 The risk of vulnerability to financial abuse in relation to a SMSF arises in part because the regulatory framework for SMSFs was designed on the premise of self-protection. This model for SMSFs supported reduced government intervention through regulation:
As members of self managed superannuation funds will able to protect their own interests these funds will be subject to a less onerous prudential regime under the [Superannuation Industry (Supervision) Act 1993 (Cth)]SIS Act.
7.48 The different regulatory framework for SMSFs and the larger industry and retail funds regulated by APRA was explained in the following terms:
APRA considers they have a responsibility for ensuring trustees [of those larger superannuation funds for which APRA is the responsible regulator] have properly formulated their investment strategies as set out in trustee documentation and that this can be demonstrated through practical implementation. … The Tax Office’s approach is, however, consistent with past Tax Office practice and the Government’s original policy intent. This intent specified that whilst SMSFs are a key vehicle in the accumulation of retirement savings, they do not require onerous prudential supervision as members should be able to protect their own interests.
7.49 A regulatory framework that relies on self protection may be problematic, as a larger number of SMSFs come under the control of older people who may have diminishing decision-making ability. The risk associated with trustee capacity was noted by Financial Services Institute of Australasia (FINSIA):
the issues of population ageing and cognitive decline are a ‘silent tsunami’ for self-managed super funds (SMSFs), exposing investors in this sector to financial abuse, including fraud and inappropriate investment advice.
What happens when a trustee loses capacity?
7.50 As set out above, each member of the SMSF must also be a trustee or a director of the corporate trustee. A key exception to this requirement is that, if a person has lost legal capacity and has appointed an enduring power of attorney, the attorney may become the trustee or director of the corporate trustee.
7.51 Importantly, the law permits an attorney to become a trustee or director of the corporate trustee for the purposes of the fund’s compliance with superannuation law. The law does not require the attorney to become the trustee nor does superannuation law override the particular terms of the trust deed and/or constitution of the corporate trustee. The trust deed and constitution of the corporate trustee must allow for the appointment of the attorney as trustee and the processes set down in the document must be followed. If the attorney becomes a trustee or director they do so in their personal capacity and not in their capacity as attorney. In that role they are bound by the general law of fiduciary duties of trustees or the Corporations Act 2001 (Cth), and not the state and territory powers of attorney legislation. Those fiduciary duties are similar to those owed by an attorney to their principal, however as outlined in Chapter 5 additional statutory obligations have been imposed on attorneys that would not apply when acting in their personal capacity in relation to SMSFs.
7.52 If the attorney does not take over the management of the SMSF, the fund is likely to become non-compliant, unless the principal’s interest in the fund can be paid out, the fund is able to be wound up, or the management transferred to an APRA licensed trustee.
7.53 The Office of Public Guardian (Qld) (OPG) provided a case study that highlights the risk of financial abuse in the context of SMSFs and the particular complexities that arise where a trustee loses decision-making ability. The case study concerned a man in his 80s named ‘Peter’:
Among Peter’s many financial assets was a self-managed superannuation fund (SMSF), of which Peter had been appointed director of the trustee company of the fund. A couple of years after moving in care, Peter was diagnosed with dementia, at which time Peter’s attorneys, appointed under an enduring power of attorney, assumed control of Peter’s financial affairs. A complaint was made to the OPG that the attorneys were financially mismanaging Peter’s funds. Peter was aged in the late 80s at the time of the complaint.
The [OPG] investigated the matter and identified … that the attorneys were not competent to manage Peter’s financial affairs due to the complexity, and their lack of understanding of the laws regulating SMSFs.
The investigation identified that, following Peter’s loss of capacity to make decisions, no changes had been made to the SMSF and Peter remained the director of the trustee company. The accountant, who had managed the accounting for Peter’s business for years, was transacting on the SMSF after Peter lost capacity. … The attorneys did not take any action to ensure that the SMSF was compliant after Peter lost capacity, and were allowing the accountant to make decisions in relation to the SMSF when he had no authority to do so.
Super System Review
7.54 In 2009, the Australian Government established a review into the ‘governance, efficiency, structure and operation of Australia’s superannuation system’, known as the Super System Review Panel (the Panel). The Panel identified a number of policy principles that it suggested should guide regulation of SMSFs. The first three principles focused on the importance of SMSFs as a vehicle for self-directed retirement planning:
Principle 1 — Ultimate responsibility
Principle 2 — Freedom from intervention
Principle 3 — … but not complete absence of intervention.
7.55 In its Issues Paper the Panel raised a number of issues for discussion with respect to the regulation of SMSFs. In their final report, there were a number of these issues that were not the subject of a recommendation on the basis of the policy principles. Principally, in those cases, the Panel was of the view that SMSF members had chosen to take responsibility for the management of their retirement savings and on that basis should not be subject to further regulatory intervention.
7.56 Notwithstanding the thorough examination of the SMSF sector by the Panel, the ALRC considers that there are a number of specific issues that may be re-examined from the perspective of reducing elder abuse, particularly among those older people who may have impaired decision-making ability. Alzheimer’s Australia has submitted that approximately 20% of people over 65 years may develop dementia. Accordingly, what happens when a SMSF trustee loses decision-making ability is of critical concern in managing the risk of elder abuse.
7.57 In particular, the ALRC is interested to hear from stakeholders as to whether it would be appropriate and effective to amend the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) to set out in legislation the steps that are to be taken when a trustee or director of the corporate trustee has lost legal capacity. These legislative parameters could provide a safety net in the event that the trustee has not themselves put in place an effective succession plan.
Corporate trustee or individual trustees
7.58 The majority of SMSFs have individual trustees rather than a corporate trustee. The Panel noted that it is ‘widely accepted by professionals and the ATO that a corporate trustee is superior’. Benefits included:
perpetual succession—the corporate entity cannot die, so it enables better control in the event of member death or incapacity;
greater administrative efficiency;
greater flexibility to pay benefits as lump sums or pensions;
greater estate planning flexibility; and
reduced risk of deliberate or accidental intermingling of fund and personal assets, in breach of the covenant in s 52(2)(d) of the SIS Act.
7.59 The Panel concluded that it:
is attracted to the potential benefits provided by the corporate trustee structure and is concerned about the large proportion of new SMSFs choosing not to use a corporate trustee. However, consistent with principle 2 regarding freedom from intervention, the Panel believes that the solution here is a better standard of advice, an aim which is addressed by other recommendations.
7.60 Beyond the noted benefits of a corporate trustee, there are also a number of particular challenges with individual trustees in the context of an older person who is a trustee and member of a SMSF, losing decision-making ability. These situations may facilitate elder financial abuse.
7.61 Where there are individual trustees of a SMSF, a succession event will require a transfer of all property to the new trustee. Assuming the trust deed allows for the succession, there are complex legal questions as to how the transition on loss of legal capacity will be managed, particularly who will sign the transfer of property from the trustee who has lost legal capacity. The outgoing trustee will be unable to sign the transfer as they do not have legal capacity. In addition, their attorney may not sign on their behalf because the principal’s role as trustee is personal and not capable of being delegated to their attorney under a power of attorney.
7.62 There may also be unintended consequences in terms of who become individual trustees, particularly in the cases of single member funds which require two individual trustees (in the absence of a corporate trustee). There is also a greater risk of fraud. The transfer of property in the name of individual trustees may enable, in situations where there is a loss of decision making ability, the sale of property and the fraudulent retention of the funds by the trustee.
7.63 Given the greater protection afforded by a corporate trustee, the ALRC is interested to hear from stakeholders whether there should be a change in the law requiring a corporate trustee for new SMSFs.
Improving the documentation for SMSFs
7.64 The Panel noted some of the challenges created by the regulatory regime for SMSFs which requires a fund to be established by private documentation rather than by legislation. Establishment by private documentation results in most individuals being reliant on professional advice for the establishment of their SMSF. Advisers are typically accountants and financial advisers. Lawyers may or may not be engaged to draft the trust deed and the constitution for the corporate trustee.
7.65 It has been suggested by a number of advisers in the SMSF sector that most documentation for the establishment of SMSFs are off-the-shelf products, including standard trust deeds and corporate constitutions. Many of these documents do not properly provide for succession events on loss of capacity by a trustee. This creates a number of problems as outlined above, which heighten an older person’s risk of financial abuse. The adequacy and currency of SMSF trust deeds is currently not scrutinised at all, either by the ATO, or the approved auditor.
7.66 Accordingly, the ALRC is interested to hear from stakeholders about how documentation for SMSF could be improved to protect against poor documentation facilitating abuse in the context of loss of decision-making ability. In particular, the ALRC is interested to hear from stakeholders as to whether there should be restrictions on who may provide advice on, and prepare documentation for, the establishment of SMSFs.
Access to the Superannuation Complaints Tribunal
7.67 If a member of an APRA regulated superannuation fund has a dispute with the fund, the member may access the Superannuation Complaints Tribunal (SCT) for dispute resolution. There is no access to the SCT for members of SMSFs. Essentially this is because members are also trustees and therefore a dispute between a member and the fund is essentially circular. In its Issues Paper, the Panel raised the potential of extending the jurisdiction the SCT to SMSFs, but concluded against it. This conclusion was based on a view that a large proportion of disputes would relate to individuals who were displeased with a SMSF trustee decision regarding a binding death nomination and otherwise in relation to complex family law disputes.
7.68 Where a SMSF member is no longer a trustee because they have lost decision-making ability, there may be a role for the SCT in providing a low-cost forum for disputes. There may be also a role for the SCT in providing advice to trustees on request, and in approving conflict of interest transactions similar to the role played by state civil and administrative tribunals in relation to enduring powers of attorney. The ALRC is interested in stakeholder views about whether the jurisdiction of the SCT should be extended to SMSFs.
Additional obligations on trustees and directors
7.69 As outlined in Chapter 5, there are now a range of statutory obligations imposed on attorneys under state and territory powers of attorney legislation, in addition to general law fiduciary duties owed to the principal. The ALRC is proposing additional safeguards. However, as noted at paragraph 7.51, when an attorney becomes a director or trustee in relation to a SMSF, they do so in their personal capacity and not in their capacity as attorney. Accordingly, they would not be bound by the additional statutory obligations that have been imposed on attorneys under state and territory powers of attorney legislation.
7.70 The ALRC is interested to hear from stakeholders as to whether these protections are sufficient. For example, SMSFs are commonly used as part of family business structures and there may be situations where a child runs the family business and is also trustee of their parents’ SMSF which has an interest in that business. This raises potential for conflicts of interest to arise which may be treated differently under general trust law than the state and territory powers of attorney legislation (eg, under state and territory enduring power of attorney legislation, such as Victoria, entering into a transaction where the attorney has a conflict of interest requires prior approval by the principal or tribunal).
Consistency in language around decision-making ability
Different language is used to describe a lack of decision-making ability across commonwealth legislation. For example, the SIS Act uses the term ‘legal disability’ and the Corporations Act 2001 (Cth) uses the term ‘mental incapacity’. Moreover, decision-making ability (legal capacity) is defined in subtly different ways across the states and territories, as set out above in Chapter 5. Differences in terminology can have practical consequences in terms of whether there is an authority to act. The ALRC reiterates its past recommendation for consistent terminology for decision-making ability.
Australian Bureau of Statistics, Household Income and Wealth, Australia, 2013-14: Superannuation in Australia, 2003-04 to 2013-14, Cat No 6523.0 (2016).
Townsville Community Legal Service Inc, Submission 141.
Seniors Rights Victoria, Submission 171.
Financial Services Council, Submission 78.
North Australian Aboriginal Legal Service, Submission 116.
Financial Services Council, Submission 78.
Advocare Inc (WA), Submission 86.
Australian Securities and Investments Commission, Submission 125.
Superannuation Legislation Amendment Act (No. 3) 1999. SMSF were previously known as excluded funds.
The only exception is single member funds with individual trustees where there must be two trustees one of whom is the member.
Australian Taxation Office, Annual SMSF Population Analysis Tables (2016).
Australian Prudential Regulation Authority (APRA), Statistics: Quarterly Superannuation Performance June 2016 (2016).
Australian Taxation Office, above n 49.
Julie Castillo, ‘The SMSFs Trustee-Members’ (2012) 40(3) Australian Business Law Review 177, 178.
Office of the Public Guardian (Qld), Submission 173; Financial Services Institute of Australasia, Submission 137.
Australian Taxation Office, above n 49.
Explanatory Memorandum, Superannuation Legislation Amendment Act (No. 3) 1999.
Australian National Audit Office, ‘The Australian Taxation Office’s Approach to Regulating and Registering Self Managed Superannuation Funds Report No. 52, 2006-7’ (Text, 2007).
Financial Services Institute of Australasia, Submission 137.
With single member SMSF, the sole member must be either the director of the corporate trustee or one of two individual trustees (see SIS Act, s 17A)
Superannuation Industry (Supervision) Act 1993 (Cth) s 17A.
Australian Tax Office, Self-Managed Superannuation Funds Ruling, SMSFR 2010/2, 21 April 2010 2.
Office of the Public Guardian (Qld), Submission 173.
Super System Review Panel, Super System Review Final Report (2010).
See, eg, Ibid 225.
Alzheimer’s Australia, Submission 80.
Australian Taxation Office, above n 49.
Super System Review Panel, above n 65, 223–224.
Therese Catanzariti, ‘“There in Spirit” Powers of Attorney in the SME Context’ (13 Wentworth Chambers, 2012) 3.
Super System Review Panel, ‘Phase Three: Structure (Including SMSFs) Issues Paper ’ (14 December 2014) 19.
Super System Review Panel, above n 65, 270.
Castillo, above n 53, 181.
Grant Abbott, Guide to Self Managed Super Funds (CCH, 3rd ed, 2006) 83.
Superannuation (Resolution of Complaints) Act 1993 (Cth)
Super System Review Panel, above n 74.
Super System Review Panel, above n 65.
Catanzariti, above n 73. The relevant duties include: Corporations Act 2001 (Cth) ss 180–182
See Australian Law Reform Commission, Equality, Capacity and Disability in Commonwealth Laws, Report No 124 (2014).