The Federal Government is empowered to compensate super funds for losses as a result of fraud or theft under Part 23 of the Superannuation Industry (Supervision) Act 1993. However s229 excludes SMSFs from this compensation.
It is important to note that this compensation is not automatic, the fund must apply for compensation to apply and it is at the discretion of the Minister, with a key part of the test is whether providing the compensation is in the public interest.
It was this scheme that provided compensation to large super funds after the Trio collapse, however this compensation didn’t come from government revenue, but was paid by other super fund members.
The Superannuation (Financial Assistance Funding) Levy Act 1993 give the Federal Government the power to impose a levy on superannuation funds in order to offset the cost of providing compensation. The $55 million in Trio collapse compensation was recovered by imposing a levy of 0.0001347% of APRA funds assets, with a maximum of $750,000 per fund.
Though it is questionable to what extent SMSF trustees were aware of the compensation scheme, and that SMSFs are not eligible, before such collapses there are now more warnings that this is the case. This includes the following warning as part of the ATOs Trustee Declaration:
“I do not have access to the government’s financial assistance program that is available to trustees of Australian Prudential Regulation Authority (APRA) regulated funds in the case of financial loss due to fraudulent conduct or theft.”
The following was also added to the ATOs Key Messages for Trustees:
“PROTECTION OF SUPER IN YOUR SMSF
Super laws allow for financial assistance to be granted to Australian prudential regulation Authority (APRA) regulated funds that suffer losses as a result of fraudulent conduct or theft. under existing super laws, there is no government or industry compensation available for members of SMSFs, as they operate outside the regulation of APRA. If you want your super to be covered by the financial assistance program, you can choose to either:
- join an AprA-regulated fund
- appoint a registrable super entity licensee as trustee (that is, become a small APRA fund).”
In a recent consolation paper ASIC raised the issue of better disclosure of the lack of access to the compensation scheme in Statements of Advice – although this would only apply to people seeking financial advice regarding setting up a SMSF. In the parliamentary inquiry ASIC also raised the idea of SMSF Trustees signing a declaration stating that they understand they are not covered by the compensation scheme for fraud and theft. It is unclear if this will proceed given the changes to the Trustee Declaration, though only new trustees would likely see this warning (and trustees having to re-sign the declaration due to the new admin penalties). An alternative would be to add a notice to the annual return, or consideration of fraud and loss added as a requirement of the Investment Strategy.
In SMSFs options for compensation under SIS we discuss the options available under the SIS act for SMSFs to seek compensation.
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