Superannuation and coercion

19.24 A victim of family violence may be coerced into taking action that relinquishes some control over, or access to, his or her superannuation. This could potentially leave the victim facing a financially difficult retirement, or deprive them of assets to which they have contributed during a partnership. Such situations may involve contributions under reg 6.44 of the SIS Regulations, or a SMSF.

Spousal contributions

19.25 Since 1 January 2006, eligible superannuation members have been able to request that their superannuation contributions be split with their ‘spouse’.^[17] The payment of the split contributions to a member’s spouse is known as a ‘contributions-splitting superannuation benefit’.^[18] Maximum limits apply to the amount of superannuation that may be split in each financial year.^[19]

19.26 The SIS Regulations provide that superannuation trustees are not required to offer their members the option to split their superannuation contributions.^[20] If a superannuation fund does provide members with the option to split superannuation contributions, a member may request that the superannuation trustee roll-over, transfer or allot an amount of the member’s superannuation benefits to a spouse.^[21]

19.27 In circumstances where family violence exists, it may be possible for one spouse to coerce the other into splitting their superannuation contributions under the superannuation contributions splitting regime. For example, this may occur where both parties are under preservation age and one spouse forces the other to split their contributions so that the superannuation is in the controlling spouse’s superannuation account.

Trustee obligations to consider coercion

19.28 Superannuation trustees possess a number of duties and obligations and are subject to a range of regulatory requirements.^[22] In considering applications for contributions splitting superannuation benefits, trustees are not currently required to consider whether the member’s request to transfer any benefits to the receiving spouse was done voluntarily or as a result of coercion. In carrying out their fiduciary duty to act in the best interests of the member, it may be difficult for trustees to determine whether granting a member’s application is in the member’s best interests, or to make enquiries about the motives and circumstances in which the application was made and, where it involves family violence, refuse the application. This is made particularly difficult given both granting the application (in terms of the concerns outlined about the depletion of superannuation entitlements), or refusing the application (where that may result in the member not having the financial resources to leave the relationship or take safety measures), may affect the member’s safety.

19.29 The ALRC acknowledges concerns about the practical difficulties that an obligation to consider the possibility of coercion in superannuation splitting applications would create in terms of administrative burden and additional cost, the lack of trustee expertise to determine such matters and the possibility that this may expose decisions to legal challenge. It may also be beyond what a prudent trustee is expected to consider as part of their fiduciary duty.

19.30 In considering how a trustee or another body could consider coercion and what if any steps they could take to limit or ameliorate the effect of that on a victim of family violence, stakeholders expressed the view that, should a trustee become aware that the splitting application was made as a result of coercion, the trustee should consider this as part of implementing the decision about the splitting application.^[23] However, beyond that, while some stakeholders supported the introduction of an obligation on trustees,^[24] most stakeholders reiterated their concerns in relation to the difficulty and inappropriateness of imposing obligations of this kind on trustees.^[25] Accordingly, the ALRC does not make any recommendations with respect to the contributions splitting regime.

How could a victim of family violence recover their superannuation?

19.31 Where benefits have been transferred under a superannuation contributions splitting regime as a result of coercion, a question arises as to whether, and by what means, the benefits could be recovered by the spouse who has been coerced. While the ALRC considers that victims of family violence should be able to recover superannuation transferred in such circumstances, it is clear that any such mechanism would need to be included in the Family Law Act.

19.32 The Family Law Act permits federal family courts to make orders about the distribution of the property of parties to a marriage or de facto relationship upon the breakdown of that relationship.^[26] In making such orders, superannuation benefits transferred under the superannuation contributions splitting regime as a result of coercion cannot be ‘clawed back’, but may be taken into account in considering the contributions of the parties—to the property, including financial and non-financial contributions and contributions to the welfare of the family—and ultimately in the distribution of assets between the parties.^[27]

19.33 An overarching issue arising out of the way in which superannuation should be considered by the court, both in assessing contributions and, ultimately, in the distribution of assets between the parties, is the extent to which family violence can be taken into account. In the case of In the Marriage of Kennon the Family Court of Australia held that, when assessing a party’s contributions, the court can take into account a course of violent conduct by one party towards the other that has had a significant adverse impact on that party’s contribution or has made his or her contributions significantly more arduous than they ought to have been.^[28] In addition, when considering the future needs of a party, the consequences of family violence—for example its effect on the state of the victim’s health, or physical and mental capacity to gain appropriate employment—can be taken into account.

19.34 As outlined above, detailed consideration of, and proposals to amend, the Family Law Act goes beyond the Terms of Reference for this Inquiry. The ALRC therefore considers the most appropriate approach to this issue is to refer to the recommendation in Family Violence—A National Legal Response, that the Australian Government should initiate an inquiry into the manner in which federal family courts consider family violence in property proceedings.^[29]

19.35 Such an inquiry could consider, for example:

whether the Family Law Act should refer expressly to the impact of violence on past contributions and on future needs; the form that any such legislative provisions should take; and the definition of family violence that should apply for the purposes of the property proceedings under the Family Law Act.^[30]

19.36 In particular, the ALRC recommends that any such inquiry should include consideration of the treatment of superannuation in property proceedings involving family violence. This was supported by stakeholders in this Inquiry.^[31]

Self-managed superannuation funds

19.37 SMSFs are funds where the trustees are the only members of the fund. That is, all members are natural persons who are trustees or directors of a body corporate trustee. However, most SMSFs do not have a corporate trustee.^[32] SMSFs are restricted to a maximum of four members.

19.38 The majority of SMSFs—more than 90%—are funds with two members^[33] and ‘most of these would be spouses’.^[34] SMSFs constitute the largest sector within Australia’s superannuation sector by both number of assets and asset size.^[35] At 30 March 2010, there were approximately 423,000 SMSFs, representing 99% of all superannuation funds, and comprising over 30% of total superannuation assets.^[36] The SMSF sector has grown rapidly: in the five years to 30 June 2009, it has experienced an annualised growth rate of 20%.^[37]

19.39 The Super System Review concluded that ‘the SMSF sector is largely a successful and well‐functioning part of the system’.^[38] However, because all members are considered to be directly involved in the management of the fund and are therefore considered to be able to protect their own interests sufficiently, SMSFs are subject to a less onerous regulatory regime than some other forms of superannuation funds.^[39]

SMSFs and family violence

19.40 In circumstances of family violence involving the trustees of a SMSF, there is greater potential for one partner or family member to coerce another into making decisions or managing the SMSF in a certain way, and less external regulatory involvement or oversight to prevent that from occurring. In light of this, and the large and increasing share of the superannuation landscape now occupied by SMSFs, it is important to consider the potential for misuse of SMSFs in situations of family violence, particularly where economic abuse is a component of this violence.^[40]

19.41 However, many of the possible amendments to the regulation of the SMSF sector would involve sector-wide amendment and have a more systemic impact than only in relation to those experiencing family violence. Consideration of the adequacy of regulation or guidance more broadly, or the obligations owed by professionals in the financial services sector are systemic issues and wider than the Terms of Reference for this Inquiry. The ALRC notes that, in line with the guiding principles articulated earlier in the chapter, systemic changes of this nature must be the product of coherent regulation and flexible and continual improvement focused on long-term change.

19.42 The ALRC recognises the importance of individual choice, as outlined in Chapter 2 and in the guiding principles for this chapter. This individual choice includes, for example, the choice to become a trustee in a SMSF. While with such choice comes increased responsibility for the consequence of these choices, the ALRC considers that family violence, in many cases, creates an exception to this principle and that victims of family violence who are also trustees of SMSF require additional protection. This was reinforced by stakeholders who emphasised that many SMSFs ‘have a combination of active and passive trustees’ and that ‘a feature of SMSF trusteeship today, be it proper or not, is that not all trustees are equal’.^[41]

19.43 As a result, the ALRC makes a number of suggestions and recommendations for reform to the regulation of SMSFs and associated guidance material to protect the safety of trustees experiencing family violence.

ATO guidance material

19.44 SMSFs are regulated by the ATO, which publishes a range of material which is designed to assist SMSF trustees. This includes a SMSF Newsletter; guidance material on winding-up a SMSF; as well as a SMSF specific advice process through which a trustee can write to the ATO and request advice about how superannuation law applies to a particular transaction or arrangement for a SMSF. The ATO legal database and electronic super-audit tool also contain material relevant to SMSFs.^[42]

19.45 Ensuring such material provides individuals establishing SMSFs with sufficient information about the following matters may go some way to protecting SMSF trustees experiencing family violence:

• setting up a SMSF—including creating appropriate safeguards, for example ‘joint signatories on bank accounts’;^[43]
• managing a SMSF—the importance of being actively involved in managing investments, accepting contributions as well as reporting and record keeping;
• trustee obligations, including compliance with relevant laws as well as possible compliance action by the ATO; and
• winding up a SMSF.

19.46 As a result, the ALRC recommends that the ATO amend existing guidance material designed to assist SMSF trustees to equip trustees generally and, in particular, those experiencing family violence, with ‘greater knowledge of how to protect their interests’.^[44] Guidance material could, for example, include case studies illustrating the potential impact family violence may have in the context of establishing, managing and winding up a SMSF as well as ‘suggestions and examples of best practice’.^[45] In addition, the ALRC considers that the inclusion of general information about the potential effect of family violence on superannuation savings and SMSFs would be useful.^[46]

Determining appropriate compliance action

19.47 In circumstances where a person using family violence is a SMSF trustee, and they fail to comply with superannuation or taxation law and are therefore the subject of compliance action, it is important to avoid that action exacerbating the harm or disadvantage suffered by the trustee experiencing family violence who is not the subject of compliance action. In order to ensure that the ATO is able to consider family violence in determining the most appropriate compliance action in such circumstances, the ALRC suggests that the ATO consider the impact of compliance action and provide trustees with the additional guidance material recommended in Recommendation 19–2.

19.48 The following ATO example outlines a circumstance in which a dispute may arise between trustees—potentially involving family violence—and the negative consequences that may follow from such a dispute.^[47]

19.49 In dealing with circumstances in which a fund may be non-compliant, such as in the case study above, there are a range of enforcement and compliance actions available to the ATO, including:

• accepting an undertaking to rectify the breach;
• making the fund a non-complying fund;
• disqualification of trustees; and
• in serious cases, civil prosecution of trustees.^[48]

19.50 In determining the appropriate action, the ATO sends fund trustees a letter, outlining the basis for their non-compliance and providing them with an opportunity to provide any additional information. The letter outlines that the ATO will consider the tax consequences of treating the fund as a non-complying fund, the seriousness of the contravention and all other relevant circumstances.^[49]

19.51 ‘Differentiated compliance treatments’ are a feature of the Stronger Super SMSF reforms,^[50] and there is an increasing move away from making a fund non-compliant.^[51] However, in its submission, AIST expressed the view that the ATO should not be required to consider family violence when determining appropriate compliance action, except where the ATO is alerted to the fact that family violence ‘is a key component’ of the conduct.^[52]

19.52 In light of ATO moves towards a more nuanced approach to compliance, and stakeholder views, the ALRC does not consider it is necessary to make a recommendation in this respect. However, the ALRC emphasises that in exercising its discretion in compliance matters the ATO should ensure, as far as possible, compliance action does not have a negative impact on the victim, for example by way of non-complying fund status or forced sale of assets that may have adverse capital and tax consequences.^[53] The ALRC suggests, in line with the views of stakeholders, that the ATO, in determining the appropriate compliance action, should consider all available material and ‘grade each breach and determine whether the contravention occurred intentionally or accidentally based on [a] reasonably arguable position’.^[54] In doing so, there appears to be a need for the ATO to take into account that ‘not all trustees are equal’^[55] and the potential impact of family violence.

19.53 In addition, the ALRC also suggests that amended ATO material, as set out in Recommendation 19–2, should be provided to trustees with the compliance letter referred to above, to ensure they are aware that circumstances such as family violence, where relevant, can be considered by the ATO should the trustee provide the ATO with relevant material. Where material is provided which indicates family violence is a key component of the conduct, the ATO then has discretion to consider such material in determining the appropriate compliance action.

SMSF professionals

19.54 There is no formal requirement to be a licensed SMSF adviser.^[56] Stakeholders have expressed the view that advice regarding the establishment and operation of SMSFs, received from accountants, tax agents, fund administrators, lawyers and financial advisers, can be inconsistent and in some cases may not adequately explain the full implications of membership of such a fund, or the procedures involved in exiting a SMSF. As a result, in consultations, some stakeholders suggested that requiring these professionals to provide additional information to individuals establishing a SMSF may go some way to protecting trustees experiencing family violence.

19.55 Developments such as the Future of Financial Advice reforms, among others, will be important in reviewing existing professional standards and training requirements as well as licensing exemptions.^[57] As a result, the ALRC suggests that, in this context, the Australian Government (including the ATO, ASIC, and Treasury) and relevant professional bodies, should consider the extent to which SMSF adviser and professional obligations or training could be amended, where possible and appropriate, to protect individuals experiencing family violence.

19.56 Stakeholders have also suggested that guidance material, developed in accordance with Recommendation 19–2, should be made available to SMSF professionals ‘so that they can begin to advise and implement such best practice’.^[58]