Superannuation trustees & failing the sole purpose test
The Superannuation Industry (Supervision) Act 1993 (SIS) Act has been successfully used to undertake a prosecution relating to a self-managed superannuation fund. Recently, the Australian Securities and Investments Commission (ASIC) together with the Australian Taxation Office has broken new ground by successfully pursuing criminal action against two self-managed superannuation fund trustees under the SIS Act for breach of the sole purpose test.
On 4 January 2007, ASIC initiated civil proceedings against a Sydney man, Atan Ona Kassongo, following allegations he was involved in the operation of an unlicensed financial services business offering people early access to their superannuation funds. On 5 August 2008, Mr Kassongo, was further charged with a criminal offence of dishonestly failing to ensure a self-managed superannuation fund (SMSF) known as the Kassongo Superannuation Fund (KSF) was maintained in accordance with the sole purpose test. Mr Kassongo was trustee of the fund at the time of the alleged offence. This is the first time criminal charges have been laid against a trustee of a self-managed superannuation fund under the SIS Act. This criminal charge followed an investigation conducted with the assistance of the Australian Taxation Office and was the first, and not expected to be the last, to be laid against a trustee of a self-managed superannuation fund under the SIS Act.
ASIC said that it had pursued the action against Kassongo on the basis that he had allegedly dishonestly failed to ensure that the KSF was maintained in accordance with the sole purpose test. Under the SIS Act, SMSF trustees must operate their fund for the sole purpose of providing retirement savings for the fund's members. ASIC alleged that the preserved superannuation benefits of 192 superannuates totalling $4,055,043 were deposited into the bank accounts of KSF. It was alleged that these funds were rolled over from 56 complying superannuation funds and that Kassongo then used KSF to obtain early access to these benefits by withdrawing and distributing the funds to the superannuants and agents engaged by him to assist in the early release scheme. ASIC also alleged that, at the time the KSF received the superannuation benefits from the complying superannuation funds, Mr Kassongo was aware that he had an obligation to preserve these benefits until the superannuants had satisfied a condition of release but had no intention of doing so. For his service, Kassongo had retained over $600,000 for himself by way of commission.
Mr Kassongo pleaded guilty to the criminal charges brought by the regulator and pursued by the Director of Public Prosecutions, he will be sentenced on 10 July 2009.
The Kassongo prosecution was closely followed by the identical scenario of the Little case. This action is the second such case where ASIC has used a breach of the sole purpose test to prosecute an SMSF trustee. ASIC brought charges against Gerard Little, a SMSF trustee for a breach of the SIS Act. Little was charged under sections 62 and 202 of the SIS Act for failing to ensure his SMSF, called Little Super Fund (LSF), was maintained in a manner that satisfied the sole purpose test.
The regulator alleges Little, as trustee of LSF, accepted the preserved benefits of 121 superannuants, worth $3.5 million, into the bank account of the fund. These monies were then rolled over into 11 other complying superannuation funds.
ASIC claims Little breached the SIS Act when he used LSF to access these funds illegally, withdrawing a portion and distributing it among the original superannuants. It is also alleged that from this transaction Little retained $685,000 for himself as a commission for his services. The corporate watchdog has alleged Little knew the rolled over super benefits had to be preserved until retirement age, but had no intention of abiding by the conditions.
On 24 March 2009, Mr Gerard Little pleaded guilty in the Downing Centre Local Court to criminal charges under section 62 and 202 of the SIS Act.
The above cases highlight and serve as a warning to trustees of SMSF to maintain strict adherence to the sole purpose test when administering their SMSF. Failure to do so would expose SMSF trustees to criminal charges. The ATO has issued a Taxpayer Alert 2009/1 warning people against entering into early release schemes.
The above cases show that, where the SMSF trustees have knowledge of their duty and intentionally violate the sole purpose test, ASIC and ATO have shown that they will bring criminal charges against them.
As the popularity of SMSF increases, ASIC and ATO are increasingly targeting SMSF trustees to ensure that funds are compliant with the SIS Act. Particularly during these distressed times some members of SMSF’s may be tempted to try to gain access to the funds in their SMSF to ease their financial stresses. There are very limited circumstances (hardship is one such circumstance) in which member can access their superannuation entitlements prior to retirement. Financial hardship is not easy to demonstrate and advice should be sought prior to taking any action in that regard.
Author: Raymond Lim