Treasury has released for consultation an exposure draft of the Your Future, Your Super package with looks at the following key areas:
- Best Financial Interests Duty
- Single Default Accounts; and
The Government’s Your Future, Your Super package – announced in the 2020-21 Budget – is targeting reforms to the superannuation system that intends on delivering better outcomes for members.
Whilst much of these proposed reforms do not impact self-managed super funds, the Best Financial Interests Duty (BFI Duty) does, where the SIS Act is to be amended to require each trustee (or director of a corporate trustee) of a SMSF to perform the trustee’s duties and exercise the trustee’s powers in the best financial interests of the beneficiaries.
These reforms ensure that trustees are focused on members’ financial interests when they undertake the many actions in operating a superannuation entity. These actions include incurring day-to-day essential operational expenditure and investing members’ money, to less frequent strategic decisions and discretionary expenditures.
Section 52B of the SIS Act sets out a number of covenants that are taken to be included in the governing rules of SMSFs. This includes the covenant that each trustee of the fund must perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries.
Contraventions of covenants for SMSF trustees are not civil penalty provisions, but trustees found to have breached the duty may face a number of other consequences including:
- Issuance of a notice of non-compliance
- Rectification direction
- Education direction; or
Under the new laws, it will require trustees to perform their trustee duties and exercise their powers in the best financial interests of the beneficiaries.
What does this mean for trustees of SMSFs?
The amendment is intended to clarify the existing best interest duty, which similarly applies to APRA regulated funds and requires trustees to ensure that they are acting in the best financial interests of their beneficiaries.
For example if the fund is undertaking improvements to a property (whether undertaken by a related party or not), it is obtaining multiple quotes to ensure that the best financial outcome is obtained for the members. It’s not to say that trustees must consider the cheapest alternative, but would need to demonstrate that the decisions surrounding the development activities represented the best financial interests of the beneficiaries.
No changes to penalties
It should be noted that no change will apply to penalties imposed where a breach of the covenants within s.52B of the SIS Act occur. It should be noted however that trustees no acting in the best financial interests of the beneficiaries could be penalised under other regulatory provisions in the SIS Act such as:
- Section 62 – Sole purpose test
- Section 65 – Providing financial assistance
In addition, where trustees are in breach of covenants, the Regulator may also consider disqualifying the individual(s) under s.126 of the SIS Act as not being a ‘fit and proper person’.
Prohibition of certain payments & investments
The SIS Act will also be amended to specify that certain payments or investments made by trustees (incl. SMSFs) are prohibited, or prohibited unless certain conditions are met.
For the avoidance of doubt, this prohibition would apply to payments where the trustees have used a third party intermediary to procure the prohibited expenditure or investment on their behalf.
The amendments allow regulations to be made to specify that directors of the corporate trustee are prohibited from causing the corporate trustee to make a payment or investment. This reflects the fact that directors do not make payments and investments themselves.
Consultation is available until 24 December 2020: