A Short Morality Play – The Triway Super Case

A recent decision of the AAT has highlighted certain basic rules when operating an SMSF.

The facts of the case are very straightforward.

A couple, at the urging of their son, established a self managed superannuation fund to which they subsequently rolled over their various super accounts.  All three were members and trustees of the fund.  Approximately $40,000 was rolled into the fund.

The son, who had addiction issues, subsequently rolled out the previously rolled in monies.  The rollouts were unauthorised by the trustees and were contrary to the SIS benefit payments standards.

The other trustees, once the rollouts were discovered and on the advice of a registered tax agent, treated the unlawful benefit payments as if they were loans to an unrelated entity.  Financial statements and regulatory returns were prepared and lodged on this basis.

Eventually, as the loans constituted over 90% of the value of the fund, the ATO took an interest in the fund.  The true situation quickly emerged upon an ATO investigation into the fund.

The ATO issued a notice of non-compliance in respect of the fund.  All three trustees referred the decision to issue the non-compliance notice to the AAT.

The AAT in a short judgment upheld the actions of the ATO and confirmed the non-compliance status of the fund.

A number of interesting comments can be made on the case.

1. The son was able to rollout monies from the fund because the bank account of the fund only required one signatory.  A basic control mechanism is that at least 2 signatories should be required.
2. Given that only about $40,000 was ever rolled into the fund and no material contributions were made to the fund, it seems the decision to set up a SMSF in this situation could not be justified on any reasonable basis.
3. Once an unlawful benefit payment has been detected, it is better not to cover up the unlawful payment.  The cover up of an issue will usually involve more reprehensible conduct than the disclosure of the issue.
4. The unlawful payments were able to be covered up as the Trustees’ adviser acted as adviser, tax agent and auditor of the fund.  Without the multiple roles, the cover up would not have been attempted, or, if attempted, would not have lasted as long as it did.
5. Be wary of being involved in any SMSF of which a member has addiction issues.

The AAT case related purely to the issuing of the notice of non-compliance.  The AAT case did not address the liability of the registered tax agent (the registered tax agent was not a party to the proceedings) or the liability of the trustees in their knowing adoption of false financial statements and the signing of false tax and regulatory returns.

It is highly likely that the registered tax agent will be the subject of other ATO enforcement actions as will the trustees.