Good governance and SMSFs

Coronica Part 2

There is a high level of awareness around the importance of strong corporate governance through many aspects of our society. Whilst the SMSF industry is aware of its significance, governance at the SMSF level is a concept that is not often talked about. 

With the word 'governance' being used 14 times in the decision of Coronica and Commissioner of Taxation (Taxation) [2021] AATA 745 (1 April 2021), I turned to thinking about what good governance means for SMSFs and the lessons which can be learnt from this case.

The governance issues in Mr Coronica's SMSF

There were many governance issues highlighted by the tribunal throughout the case including:

• The trustees were Mr Coronica and his personal assistant with it being clear from the case that she was a trustee in name only.
• Mr Coronica:

           o   Did his own reading on SMSF matters and never appeared to seek a second opinion.

           o   Ignored the requirements of the trust deed.

           o   Used systems of accounting which did not have the necessary controls.

           o   Drafted legal documents, with the Tribunal noting "the Fund’s governance arrangements are now further complicated with Mr Coronica assuming the role of unqualified drafter of legal documents."

In essence, with the way he operated his Fund, there was a lot that could go wrong and a lot did go wrong.

The independent auditor's role in the governance of the SMSF

An independent, robust audit is a mechanism that can address some of the governance failures such as those above.  Interestingly, part of Mr Coronica' s defence was that unqualified audit opinions had been issued so he thought all was in order.  However, the Tribunal effectively dismissed the work of the Fund's auditor as the following comments show:

"The unqualified Part A and Part B statements in the Audit report are not accepted as being appropriately made and the Tribunal rejects the submission that reliance should be placed upon them."

"While the auditor was not called as a witness to explain her audit there is little to suggest she examined the workpapers at an appropriate level."

So what went wrong with the audit in this instance?  It's probably no surprise there were long-standing auditor independence issues, as from 1975 to 2008 Mr Coronica was the Fund's auditor, and then from 2009 he was replaced by his 25-year-old daughter.

It's cases like this that highlight the importance of an SMSF auditor's independence and it's no wonder the ATO considers auditor independence to be a vital part of an SMSF's governance.

The solution - the Tribunal dictates changes in governance

Considering the governance failings and the resulting compliance breaches, it was very interesting that the Tribunal set aside the decision of the ATO to disqualify Mr Coronica in Coronica and Commissioner of Taxation (Taxation) [2021] AATA 1225 (11 May 2021).  However, a key reasoning for their decision to allow Mr Coronica to continue as a trustee was "the Tribunal is of the opinion that with appropriate enforceable undertakings which include a commitment to adopting appropriate governance arrangements, Mr Coronica is highly likely to comply going forward."  The governance arrangements the Tribunal enforced included the following:

• All financial activities of the fund will be transacted through the fund's own bank account rather than those of its members or related parties.
• The fund will appoint and continue to engage an independent accountant and tax agent.
• The fund will appoint and continue to engage an independent auditor.
• The fund will engage a firm of lawyers and licensed investment adviser to advise that all existing and (prior to them being entered into) new investments, other than investments in listed securities, comply with the Act and these undertakings.

Most advisers will consider the points above to be non-negotiable components of the governance structure of their clients' SMSFs.  The fact the Tribunal thought it was necessary to have them included in the enforceable undertaking speaks volumes for Mr Coronica’s track record when it came to governance matters.

Tips for governance

After considering the Coronica case and my own observations from two decades in the industry, my five tips for SMSF trustees are:

1. Know the super rules and take an interest in the performance of your fund.
2. Surround yourself with good, ethical advisers with a strong knowledge of SMSF compliance.
3. If there is any course of action of which you are uncertain, contact your adviser before proceeding.
4. Plan your investment strategy and avoid emotional, irrational decisions.
5. Ensure you have a knowledgeable SMSF auditor who is truly independent.

The retirement benefits of Australians are too important to be left to chance.  Therefore, it is imperative that the appropriate checks and balances are put in place.  If you have any concerns about SMSF governance or have some observations you would like to share, please feel free to give me a call on 1300 04 SMSF (1300 047 673).

Related reading: The dangers of maintaining an expense account in an SMSF — Coronica Part 1