The application of the best financial interest duty (BFID) to SMSFs remains unclear where the fund is subject to the non-arm’s-length expenditure (NALE) provisions and trustees are at fault, according to Chartered Accountants Australia and New Zealand (CAANZ).
CAANZ superannuation leader Tony Negline said the introduction of BFID for superannuation trustees as part of the Your Super, Your Future reforms – which commenced on 1 July – did not give consideration to NALE events despite those being relevant to all types of super funds.
“Trustees were required to act in the past in the best interests of all beneficiaries and had to make a judgment as to what might be in their best interests, and that has been extended to best financial interests and to make judgments accordingly,” Negline said at the recent CAANZ SMSF Conference 2021.
“One of the issues that needs to be addressed [in regards to BFID] is where NALE fits into this piece.
“Let’s say a fund has NALE applied to it and that taints the whole income of the fund and there is now a large tax liability. It could be argued those actions were not in the best financial interests of the members who will be required to pay the tax penalty.”
He added sections 56 and 57 of the Superannuation Industry (Supervision) (SIS) Act, which cover individual trustees and corporate trustees, respectively, do not allow the use of assets of a fund to indemnify a trustee or trustee director if they have acted recklessly, inappropriately or been fined by a regulator.
“If the trustees of the fund are considered personally liable, they can’t use the assets of the fund [to address the NALE provisions], under the SIS Act if they are deemed to have acted recklessly,” he said.
“This is a great conundrum that we are trying to sort out and is one of the issues we are asking the ATO as to what they think.”
In the same presentation, he said CAANZ was working with another 11 industry bodies to present a range of NALE concerns to Treasury and the ATO as part of a collective push to make changes or get clarity on the application of the provisions.