Tax & Super Article 2

PEOPLE who invested money in Trio Capital through self-managed superannuation funds and were denied compensation should be treated on the same basis as those in larger funds because the legislation was never designed to exclude them, a financial planners group said yesterday.

The executive director of the Association of Independently Owned Financial Planners, Peter Johnston, said the law recognised that SMSFs could make riskier investments or inappropriate loans, strategies not available to members of larger funds.

Therefore they were excluded from the compensation provisions to discourage them from deliberately taking excessive risks in the expectation that they would be compensated if things went wrong.

But Mr Johnston, head of the largest independent planner network, said the SMSFs investing in Trio were investing in what they thought was a legitimate retail funds manager which had received positive assessments from the major funds rating companies.

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The government announced on Tuesday that people who were invested in the Albury-based fund manager through super funds regulated by the Australian Prudential Regulation Authority would receive a total of $55 million in compensation, the largest bailout in the industry’s history.

The compensation will be paid for by a levy on all APRA-regulated funds under a long-running statutory scheme.

The exclusion of SMSFs from the scheme under section 23 of the Superannuation Industry (Supervision) Act was last reviewed by the Howard government in 2003 and retained by the incoming Labor government.

Mr Johnston also disputed Assistant Treasurer Bill Shorten’s suggestion that members of APRA-regulated funds which invested in Trio were more deserving of compensation than DIY funds because the latter had control over what companies they invested with and members of APRA funds did not.

He said about half of all self-managed super funds were set up on the recommendation of accountants as a tax-effective way of investing in often a single asset.

Many of the SMSFs invested in Trio had that as their only asset.

Accountants were also attracted to setting up SMSFs by the fees associated with maintaining them. “Fifty per cent of all SMSFs have been set up by bean counters to get the cashflow,” Mr Johnston said.

It was thus wrong to categorise all SMSF trustees as sophisticated investors who were less vulnerable than those in larger funds.

The peak body for SMSF professionals, the Self Managed Super Fund Professionals’ Association, yesterday called on the government to implement a compensation scheme for the $420 billion SMSF sector.

“We recognise and accept that SMSF members are also trustees, which means they have responsibility and control over their super fund investments in a way that large super fund members do not,” SPAA chairman Sharyn Long said.

“However, this does not mean SMSF members should be forced to turn to a potentially protracted and expensive court process to seek redress in cases of fraud, where they have lost money through no fault of their own.”