Superannuation fund trustees are bound by the Superannuation Industry (Supervision) Legislation (SIS) and are regulated by the Australian Prudential Regulation Authority (APRA), except for Self Managed Superannuation Funds (SMSFs), which are now regulated by the Australian Tax Office (ATO).

There are literally thousands of superannuation funds, official estimates based on 1998-99 numbers indicate that there are well over 200,000 of them, most (98%) of them SMSFs but corporate plans, industry plans, unions, bank RSAs, boutique funds and public sector operations make up many thousands.

APRA, which was embarrassed recently by the implosion of HIH and some other scandals knows that it can not hope to catch all trustees who don't comply with SIS rules, and so SIS legislation now requires all funds undergo regular compliance (legal) and financial audits, placing responsibility on the auditors.

Contrary to popular belief, the government does not bail out investors who have invested with funds that have been annihilated by incautious or fraudulent trustees. When the smoke clears all parties find themselves in court suing the trustees as well as the auditors, but unfortunately there is no guarantee that your money will be refunded. The government's only last resort retirement plan is the age pension and Newstart Allowance.

APRA is responsible for:

APRA is not responsible for checking up on investment strategies to see that the trustees are picking the right stocks and investing in the right markets. SIS does state a number of restrictions related to making sure there is an arms length basis between the investment strategies and the trustees (restrictions on trustees using the fund to invest in their own businesses or those of associates), but ultimately no judgement is passed on the trustees ability to invest (or speculate) in publicly listed securities. This puts some of the onus on investors and financial advisers to make sure money is invested in a way you are comfortable with.

Complying superannuation funds

A fund can apply to be a regulated complying superannuation fund, if the fund is able to comply with regulations it is entitled to a concessional taxation rate of 15%. Once the election is made it is irrevocable.

A notice of complying fund status is issued each year for the fund. This notice continues to have effect until revoked by a notice of non-compliance from the regulator.

A super fund is not a legal entity, it is a type of trust. This means that it must have trustees. The trustees (or trustee) are responsible for holding the superannuation assets on behalf of members.

There must also be a trust deed which sets out the rules of the fund. The trust deed can be amended, but only within the guidelines set out in the previous trust deed for that fund. The trust deed can set out additional restrictions on the running of the fund in addition to SIS regulations, but is not permitted to contain clauses that breach the SIS act.

If a notice of non-compliance is given, the fund will lose compliant status and lose its concessional 15% tax rate. It will also no longer be able to accept compulsory Superannuation Guarantee Contributions (SGC) - that 8 or 9% employers put in. Although it probably doesn't affect the trustees much it certainly does affect the members who now have to pay high taxes. The result then is indirectly harmful to the manager who will probably see his funds under management dwindle as members put their money elsewhere.

Investment restrictions

Superannuation has been designed for a specific purpose. It is meant to fund people's retirement or provide for dependents. It has attracted a lot of attention from creative accountants who have sought to make it a vehicle for tax avoidance or to provide other benefits. Since 1999 a new set of rules have been in place which restrict the ways super funds can be used, apparently too many people were find ways of using super as a tax-dodge or as a means to exploit other benefits.

There are six main types of restriction:

APRA and the ATO are slightly different in how rigorously they enforce the rules. While APRA is likely to send cautions and give notice with timetables to achieve compliance, the ATO has a reputation for being jack-boot wearing thugs who very closely monitor funds and bang heads at the slightest sign of insolence. If you have a self-managed super fund make sure that you comply with the letter of the law because the ATO are not people you want to cross.