Self Managed Super: Issue 45

A worrying trend: The rise in trustee disqualifications.

There is an irrefutable trend involving an increasing number of people being disqualified from performing the role of an SMSF trustee. Todd Wills explores this phenomenon and the factors driving it.

With establishment rates not abating year-on-year, SMSFs continue to enjoy a significant level of popularity as a retirement savings vehicle. However, a troubling trend has emerged recently, being a rising number of trustee disqualifications by the ATO for noncomplying behaviour.

By the end of 2023, no less than 751 SMSF trustees found themselves on the Disqualified Trustees Register, marking a 33 per cent surge from the previous year. Clearly, the intentions, conduct and behaviour of individuals choosing to establish SMSFs are increasingly coming under the regulatory microscope.

The size and scale of this trend has not gone unnoticed. SMSF Association chief executive Peter Burgess used his address at the industry body’s 2024 national conference to highlight the rising number of disqualifications as a development with significant ramifications for the integrity and reputation of the sector and issued a call to action for stakeholders to tackle the underlying causes.

“We have seen a significant increase in the number of individuals being disqualified as trustees [and] we are on track to break another record this year in terms of disqualifications. I think what these numbers are telling us is we need to do more as an industry to try to weed out these individuals to make sure they don’t end up with a self-managed super fund,” Burgess said at the conference in Brisbane in February.

Causes for concern

One observation seemingly shared within the industry is that more individuals are viewing SMSFs as a means to tap into their superannuation monies earlier than legally entitled.

ATO data released at the SMSF Association National Conference 2024 illustrated the extent of this issue, indicating a total of $637 million in superannuation savings had exited the system prematurely and illegally through SMSFs during the 2020 and 2021 financial years. Moreover, two-thirds of the total super monies that were at risk were attributed to newly established funds.

According to ATO SMSF regulatory branch assistant commissioner Justin Micale, having access to this data has shaped the regulator’s approach to addressing trustees who have illegally accessed their entitlements.

“We know from our data that the majority of SMSFs do the right thing, but we also know for those that aren’t, it does have a significant impact on the system. The growth in disqualifications does reflect the fact that we’ve scaled up our compliance actions in direct response to our concerns about increasing levels of illegal early access occurring across the sector,” Micale says.

“We see illegal early access play out in three main ways. Firstly, we see people entering the system with the sole intent of raiding their retirement savings. There’s never really any intention to actually run an SMSF.

“We also see existing trustees who stop lodging an SMSF annual return because they’ve illegally accessed some or all of their retirement savings. And the third group we see is existing trustees that lodge, but have illegally or inappropriately accessed some of their super. That is often reported to us as loans.”

However, as SMSF Association head of technical Mary Simmons points out, the desire to unlock access to super may not be the sole driver contributing to trustee disqualifications and the problem might be more widespread.

“You might have someone who’s gone bankrupt or they’ve been convicted of dishonest conduct and under the law they are a disqualified person and they can’t be a member or trustee of an SMSF. Those individuals are not part of this register that is maintained by the ATO,” Simmons notes.

“And then there’s another pocket which contributes to the spike: tax agents or auditors who have their own personal SMSF lodgement obligations outstanding, because the ATO believes that as professionals, they need to be held to a higher standard when it comes to meeting tax and regulatory obligations.”

The view from the coalface

For experienced practitioners working in the sector, the key drivers and indicators of non-complying trustee behaviour, which may possibly eventuate in a disqualification, are often varied and complex. There is a sense a combination of factors, including inexperience, a lack of technical expertise and understanding of the rules, is contributing to trustees either deliberately or unknowingly flaunting their obligations under the Superannuation Industry (Supervision) (SIS) Act.

This manifests itself in a number of ways, including a reluctance to engage with both regulators and professionals, as Heffron managing director Meg Heffron highlights.

“The biggest red flag for me is when trustees become non-responsive. Part of our job is we’ll set the fund up, we’ll set up data feeds, so we’re getting data coming into our systems on what’s going on in the bank account,” Heffron reveals.

“And because we know we’re going to be doing the accounting work at the end of the year, if we see money coming in or going out, we’ll get in touch with the client at the time to ask what the transaction is so we can get a head start on doing the work at the end of the year.

“And as soon as you ask the question and the trustee becomes non-responsive, that’s almost a dead giveaway they’ve taken the money out illegally. I think more and more, we probably should accept it’s an indicator that something’s gone wrong and to get the ATO involved straightaway rather than waiting until the lodgement deadlines.”

This has also been the experience of Sonas Wealth managing director Liam Shorte, who notes a lack of sound investment knowledge can often lead to the breakdown of a fund.

“I tend to pick up trustees after they’ve made a mistake and have gone into an investment such as cryptocurrency, property development or international shares and they’re trying to pick a winner and the investment has fallen apart,” Shorte explains.

“What we’re finding is trustees put their head in the sand and they don’t do their annual financials. Then the ATO, after 18 or 24 months, is just deregistering the SMSF and disqualifying them as trustees.

“In my experience, many trustees think they’re going to get in trouble for losing their money. The ATO doesn’t care that they’ve lost their money. The ATO just wants them to do their financials and show that the super fund has lost funds.

“That’s the nature of investing. But they seem to put their head in the sand and are afraid to admit it, and then they get one, two or three years behind and suddenly they get themselves in trouble.”

Another common theme that has emerged is of trustees who feel they are capable of managing the affairs of their SMSF independently and without consulting professional advice or support. ASF Audits head of education Shelley Banton cautions against this approach as the increasingly rapid changes within the regulatory environment of the sector in addition to the technical knowledge demands could see trustees left behind.

“It’s not compulsory to have an SMSF. There are other retirement vehicle choices out there, but if you are going to have one, you have to obviously swim within the flags of compliance, because as the ATO says: ‘It is your money, but just not yet,’” Banton says.

“There’s a segment of trustees who may be getting into SMSFs for the right reasons, but then find themselves in difficult economic and financial circumstances. They begin looking at their SMSFs and they believe they can dip their hands into that SMSF cookie jar, which is non-complying behaviour.

“Once you start the fund, if there are things you want to do and you’re not too sure those actions are allowable under the SIS Act , that’s where having the experience of a trusted adviser, auditor or a professional team is going to help you the most.

“Because once that horse is bolted, it’s really hard to try and put it back into the corral. You’ve really got to be able to work within the SIS rules, which often have long tentacles in terms of how they interact.

“All the rules interact with each other, which means that you’re not just breaching one aspect of the SIS Act, you’re usually breaching several areas. If you’re not experienced, you’ve got to then try and get your fund back to complying status and even those actions can often result in breaches.”

It’s also evident SMSFs, as a relatively sophisticated retirement savings vehicle, carry with them a substantial administrative, regulatory and technical burden, which may be too much to bear for some individuals entering the system.

For SMSF Alliance principal David Busoli, the surge in disqualified trustees could also stem from a deficiency in knowledge or competency on the part of the trustee, particularly in cases where individuals are entering the sector from an unadvised environment or failing to seek appropriate support.

“I imagine many disqualifications are related to illegal early access, but not all. I’ve dealt with trustees before where they’ve just been quite hopeless in running their own fund, in particular where there are related unit trusts and companies involved and they’ve mixed them up so much that in the end it’s just become too difficult to distinguish what’s an SMSF property and what’s not. And very simply, their funds end up becoming non-complying and those trustees are disqualified,” Busoli says.

What’s next for the industry?

As some trustees face disqualification and continue to disregard their obligations, it’s natural to wonder about the future regulatory landscape for this sector. Over the past decade, the environment in which SMSFs operate has undergone significant changes, largely due to compliance challenges.

“When we’re talking about additional measures in the future, what I would say is that our programs never really stand still. We’re always looking for ways to continually evolve them, whether that’s our strategies or the risk detection mechanisms we have in place. Those programs have been ramped up and are definitely becoming more sophisticated, and they will continuously evolve,” Micale states.

“Professionals in the SMSF sector do have a key role to play in helping us address this issue. Whether that involves helping to bust myths about when you can and can’t take your money out, educating their clients about the consequences of doing the wrong thing or warning people about the dangers of scheme promoters, they play a very important role.”

According to Banton, all options to address consistently illegal behaviour by trustees will be on the regulator’s table.

“Anything’s possible. I think we’ve seen a lot of change to SMSFs over the last 12 to 24 months and if this sort of trend does continue, anything could be possible. I would imagine the ATO will be looking at anything and everything to try and reduce the amount of money that’s been illegally accessed through super down to zero,” she notes.

“Certainly they’ve got an education program that they’re about to roll out. For new trustees looking to establish a fund, will that become compulsory education?

“There’s no education directions that are being given out at the moment. There’s only rectification directions. So we don’t know how that education program is going to be pieced together and placed within their compliance basket.”

While she stresses the need for targeted action to address compliance issues in order to maintain the integrity and strength of the sector, Heffron cautions against a blanket approach, as an ill-thought-out resolution is likely to impact the large majority of participating trustees who seem to have no problems maintaining the compliance of their funds.

“The trouble with anything designed to stamp out an undesirable practice, like increased prevention measures from the regulator or increased legislation, is you can’t just target the bad guys,” she says.

“Anything of that nature affects everybody, so we run the risk if we don’t get on board and be part of a solution, that the natural behaviour of the regulator will be to put more and more barriers to people setting SMSFs up. And that hurts all the people who are doing the right thing.

“If we’re not part of the solution, we’ll end up getting what we deserve.”

It’s clearly evident the industry needs to address the behaviour of a problematic minority of trustees within the system. However, as long as the misconceived perception exists that SMSFs are the key to accessing the super treasure chest in any circumstance, finding a solution to the matter may still take some considerable time.