Its all a matter of Trust

My first encounter with the concept of a Trustee happened over 30 years ago when, as a business student, I started working part time in my father’s accounting practice.

This was in the heady days when family trusts were all the rage and thousands of  family businesses and assets were transferred into them in order to play a sort of “ping pong” with distributions year to year in order to minimise provisional tax.

While clerking for him one day I came across the Lock family trust.  Casting my eyes over the loan accounts in the trust I noticed that yours truly had a significant credit balance in the trust along with each of my three sisters and my Mother.  Armed with this information I wondered into Dads office and asked him “what does this loan account mean Dad?” to which he replied “that’s when you trust your father”.

Come forward 30 years and I realise now that Dad had inadvertently described the essence of what it means to be a Trustee…

...where the beneficiaries of a trust rely on the honesty,

  knowledge and ability of the Trustee to act in their best interest and to never profit at their expense.

At some time in our lives most of us will become a Trustee of perhaps a family trust or even as a Trustee of your deceased parent’s estate.

These days of course the most common way to become a Trustee is as the Trustee of your self managed super fund or SMSF.

The latest government figures estimate that in Australia there are over 450,000 SMSFs controlled by over 850,000 Trustees.  These Trustees manage over 30% of the $1.3tril currently invested in super making SMSFs the largest and fastest growing segment of the super industry.

Many of you will already have your SMSF in place and you will either be a Trustee of your fund or you will be a director of a company that is acting as the Trustee of your fund.  In either case, I would bet a nice lunch at a posh hotel that most of you would be relying on you accountant to look after you in your role as Trustee and be blissfully unaware of your responsibilities under the Trustee Act 1925.  

In addition, I would be pretty safe in waging that many of you think that being a Trustee is like being a director of a company and that the legal protections afforded to a company director apply to you as a Trustee.

I’m sorry to say…this is not the case.

A trust is not a separate legal entity like a company.  If at anytime you breach or neglect your responsibilities as a Trustee you are personally liable to the beneficiaries of the trust and laws are in place to hold you personally accountable.

One area where wide spread breaches of Trustee responsibilities are suspected is in the preparing, documenting and implementation of an investment strategy for your SMSF.

In its guide  entitled “Running a Self Managed Super Fund” the Australian Taxation Office (ATO) states:

“The investment rules are one of the most important requirements of the super laws.  Failure to comply with the rules can result in your fund losing its complying status and you as Trustee of the fund being either:

  •  Disqualified;

  •  Removed; or

  •  Prosecuted, which may result in you being fined or

       imprisoned.”

The ATO then goes onto state that the Investment Strategy of your fund must consider:

  • How to maximise the returns for members within the context

       of the risk associated with the funds investments;

  • The benefits of diversification of investments across a number

      of asset classes such as cash, property and shares;

  • The funds ability to meet to pay accrued benefits to members

      as and when they fall due at retirement; and

  • The needs of members with regard to their age, income and

      retirement needs.

Its interesting to note that its not just the ATO that insist that Trustees invest prudently and implement rigorous investment processes in managing the investments in their charge.

The ATOs requirements could have almost been lifted straight from sections 14A and 14B of the Trustees Act 1925.  

Various commentators have estimated that over 50% of the 450,000 SMSFs do not have a documented investment strategy at all and that those that do are so broadly stated as to make them incapable of guiding Trustees in their investment decisions.

Typical investment strategies are one page specials which include a three line description of an investment objective which is attached to an “approved” percentage range for each investment class that is so wide as to render them meaningless.

As with any so called compliance “short cuts” this type of Investment Strategy is just fine until something goes wrong and that’s when things can get very awkward for the trustees.

And how can things go wrong?

Principally they can tend to go off the rails when mum and dad who started the fund bring their two children into the fund as members and Trustees.  The last three bullet points above bring this type of situation sharply into focus when for example:

 • Mum and dad in their early 60s are looking to retire and

     receive their super in around 5 years time.

 •   They decide to bring their two children aged in their 30s into

     the fund.  The children have at least 30 more years as

     members of the fund;

 •   The children are proposing that 80% of the funds total assets

     be used to buy the factory that houses the family business.

You can see the inherent conflicts here.  

How do the Trustees balance the competing needs and interests of all members given the timelines for each of them and the looming liquidity issues that would emerge if they proceeded with the investment?

Our message to Trustees of Self-Managed Super Funds…

…Take your role seriously and seek advice.