In a submission to a consultation into combatting financial abuse perpetrated through coerced directorships, the SMSF Association said this can occur in an SMSF that is established with a corporate trustee, and the perpetrator and victim-survivors become directors of the corporate trustee, as well as a member of the SMSF.
“Once the SMSF is established, the perpetrator can coerce or even fraudulently rollover the victim-survivor’s superannuation to the SMSF and illegally access the funds, with or without the victim-survivor’s knowledge,” the association stated.
“The prevalence of this occurring within the SMSF sector is unknown, but even one occurrence is too many and the effects on a victim-survivor can be lifelong.”
In an SMSF an individual is required to consent in writing to being appointed to try and ensure that they understand their obligations as an SMSF trustee under the law.
However, the association said that as highlighted in the consultation paper, the victim-survivor’s appointment may be fraudulent, coerced, or they may have initially consented to their appointment only for the perpetrator to cause harm at a later stage.
“The perpetrator may illegally access the victim-survivor’s superannuation by withdrawing it from the SMSF’s bank account. This could be with or without the victim-survivor’s knowledge,” it continued.
“Should this occur, the victim-survivor could be at risk of losing their retirement savings. They may also face additional financial consequences as the amount illegally accessed will be included as income in their tax return. This may result in additional income tax and tax shortfall penalties for the unpaid tax.”
The submission continued that while the SMSFA is aware of isolated cases where this specific form of coercive financial abuse has occurred, it is not aware of any data, which can be used to quantify how prevalent this financial abuse is within the SMSF sector.
“While requiring full and informed consent to be appointed as a director may strengthen the current safeguards, it is difficult to assess how effective this measure may be if the individual is being coerced,” the submission added.
“Professional advice can support the implementation of full and informed consent being sought before an individual is appointed as a director of the corporate trustees. It can assist them to understand their obligations before appointment and potentially support a victim-survivor if the professional suspects they are being coerced into being appointed.”
However, the submission continued only 24 per cent of SMSFs use a financial adviser and, over the past few years, the vast majority of new SMSFs have been established without first seeking professional financial advice.
“We support new mechanisms being explored to prevent or mitigate the risk of coerced directorships; however, we note that it is important that any new measures considered do not unintentionally impact the vast majority of individuals who legitimately and purposefully choose to set up an SMSFs with a corporate trustee structure for the benefit of their retirement,” it stated.
“To enhance levels of education and awareness of the risks of financial abuse involving SMSFs, the association is in the process of developing a best practice standard for SMSF establishments. It is envisaged that this voluntary standard will apply to service providers in the SMSF sector who are responsible for establishing SMSFs.”
The standard will stipulate minimum levels of pre-vetting and require service providers to take active steps to educate prospective SMSF members on the risks of financial abuse. It may also require service providers to undertake minimum levels of training on how to identify signs of coercive financial abuse.
The submission also stated that there are additional considerations where the individual is a director of a corporate trustee of an SMSF and there are a number of steps an individual must complete to cease being a director of the corporate trustee of the SMSF.
“There are also additional steps that must also be undertaken if the individual is also winding up the SMSF. This process can be complex and difficult to navigate if the individual does not have the requisite knowledge or access to the professional advice and support they need to navigate this process,” it stated.
“We agree with the comments in the consultation paper that any expansion of the existing director removal process requires careful consideration, including to the impact on third parties and also where the individual is a corporate trustee of an SMSF.”
Additionally, the SMSFA stated it supports the proposal to strengthen defences for directors who did not take part in the management of the company (or did not take part at the relevant time) because they were experiencing coercive control.
“However, we reiterate our comments that this may be difficult for the victim-survivor to prove, and it could also be exploited by the perpetrator to their own advantage, given their ability to control and manipulate the circumstances,” it stated.
“Further, the proposed relief of liability should be limited to the period where the victim-survivor experienced coercive control, not the whole period they were a director.”
Finally, the submission stated that while new criminal and civil penalties may act as a deterrent, they are unlikely to be as effective given the circumstances and the nature of the offences being committed.
“However, even if they do not substantially deter wrongdoing, such penalties remain important to ensure that appropriate consequences can be applied to perpetrators,” it added.
“Intermediaries, such as professional advisers, can play an important role in identifying and supporting victim-survivors. Where an intermediary clearly ignored their obligations or acted carelessly, they should be held to account for their role in supporting financial abuse through coerced directorships.”
The association said it recommends the government work with experts and groups who focus on preventing family and domestic violence to build an awareness campaign and education to train intermediaries how to identify signs of financial abuse and steps they should take to prevent outcomes like coercive directorship, that importantly support and protect the victim-survivor.
“Consideration should also be given to how intermediaries can notify relevant regulators like the ATO and ASIC if they identify such circumstances, outside of common engagement channels like the ATO registered phone line.”
