Australian Commercial And Corporations Law Essay

Questions:

1. In negligence law the “reasonable person” is used to assist in determining questions relating to duty of care and the relevant standard of care. Who is the “reasonable person,” meaning what are their characteristics and how does the law adapt it in differing circumstances?

2. What are “self-managed super funds” or SMSFs? Write an essay explaining their nature, benefits and risks, set up and operation.

Answers:

(1).

Under the tort of negligence, the elements required to prove negligence are that there should be a duty of care, there should be a breach of that duty and due to the breach there should be a damage caused to some person towards whom there was a duty of care. Here the duty of care is seen in terms of a “reasonable person”, i.e. in an idle circumstance what a prudent person would believed to have done and had the responsibility in doing a certain act in case of a danger or injury and would have taken due care and precaution would be the standard of care under the tort of negligence. In the landmark case of Donoghue v. Stevenson [1932] UKHL, lord Atkin had observed that one must take care and avoid circumstances that can been foreseen to may have cause any hard or danger on any other person and must take due care for such foreseeable circumstances (Nolan, 2013).

A common accidental case is separated from a negligent act because of the duty of care one has towards someone or something in a given situation. There is no specific definition of a reasonable person, the reasonableness is defined in terms of prudence that an ordinary person would show in any given situation. In order to determine that standard of care, it shall always be seen what any person would have done in the same circumstances. The test would be in reference to the standards set in case of a person with higher intelligence. Even for people with low intelligence, the standard would be that of a person with higher intelligence, who can reasonably foresee and avoid some kind of danger and not that of a near sighted person who is negligent (Gamble, Du Plessis and Neal, 2008).

The important factor under this is that the person must have a duty of care, this is applicable in case of neighbours, doctor-patient relationship, customer-manufacturer relationship (Donoghue v Stevenson [1932]) etc. in the case of Grant v Australian Knitting Mills Limited And Others, [1936], it was said that the manufacturer knew that the product that he is making would reach the consumer for his consumption and therefore there could be left no doubt with regard to a possibility left for examination to be done later and hence there was a duty of care on the part of the manufacturer towards the consumer.

The scope of duty of care is said to have been understood in terms of reasonable care not in abstract but in case where it could have been foreseen reasonably that there is danger and due to negligence damage could be caused, even in case of an unborn child, duty of care if foreseeable is acknowledged (Lynch v Lynch 1991). Duty of care is owned even to rescuers, the well acknowledged duty of care is by a doctor to his patient, which is in fact now a different field into law of tort that is tort of medical negligence, this duty is owned by any person towards any other person if it could be foreseen that a danger or injury could be caused due to the negligence of one person (Stewart and Stuhmcke, 2012).

(2).

What are “self-managed super funds” or SMSFs? Write an essay explaining their nature, benefits and risks, set up and operation.

Self Managed Super funds are an Australian term coined for pension funds that give the individuals a direct hold on their retirement assets. These pension funds are of a special nature where the members of the pension fund consists of five individuals who are trustees or directors of a corporate trustee. After the passing of the Australian legislation of Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004, the legislature made it possible for the people who will retire in the future to manage their pension funds and allot them into various pension schemes according to their convenience. Under the SMSF’s the retirees can shift their funds from anywhere into an SMSF is they want to. These are controlled and managed by the individuals themselves as they are the directors and trustees of the fund, hence, it is also known as DO-It-Yourself Fund, i.e. DIY fund (Centre for International Finance and Regulation, 2014).

These SMSF’s are growing at an alarming rate in the Australian investment sector due to the portability rules that were brought about by the implementation of the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004, due to which the investment has become easy and flexible for the people. Members of an SMSF can directly invest into the share market and on various other schemes relating to warrants, property, exotic assets such as artefacts and antiques, etc. The cost of investment is also very low as compared to other investment options under the retirement schemes, all these factors makes the SMSF’s more approachable and attractive for the people to invest into, due to which there has been witnessed a tremendous increase and a shift towards the SMSF’s from 1996 to 2013 (Asic.gov.au, 2015). Therefore it could be said that the superannuation industry is of very high importance in the Australian investment system as it involves a large amount of money.

SMSF’s are self controlled and managed instrument of investment under which the investors manage their own investments according to their choices, where they also have a number of options to invest into. As they make you handle the investment on your own they are also called do it yourself funds. SMSFs came into use from 8th October 1999, when they were formally introduced by the legislature while amending the Superannuation Industry Supervision (SIS) Act. The act was amended in order to make changes to the regulatory regime in Australia wherein the superannuation funds were governed under the Australian Prudential Regulation Authority (APRA), which had various funds where the total number of members could not go beyond five; rather they were less than five. The amendment made the new superannuation funds, i.e. the SMSF is governed under the Australian Tax Office. The earlier funds were provided a chance to become SMSF which were a small fund under the APRA which were known as SAF. Under the SAF, the members do not have the same amount of power as in the SMSF, as they do not manage and control the investments directly (SY, 2008).

There are various benefits of SMSF’s due to which the Australian retirees are getting attracted towards these funds and not any other scheme, as discussed above one of the major reasons is its flexibility and the number of alternatives that it provides to the investors. Also the control and management of the SMSF is in the hands of the investors as they are the members and the trustees as well as the directors of the SMSF themselves. The investment in the SMSF is easier as compared to other superannuation schemes in the industry. It is also said that since pension schemes have the capacity to negotiate more and at a lower cost as to the fee of managers, therefore they have an upper edge in terms of bargaining in the market, hence, they benefit more from the economies of scale (Coleman, Esho and Wong, 2006).

Another benefit is the ease of the SMSF in between the complicated superannuation industry, which involves a typical auditing system SMSF’s are therefore easier to maintain as the auditing system is not at all complex and only involves balance sheet with three types of records related to cash, shares and investments related to property, the other financial statement is the preparing of the profit and loss account without the provisions of receivables, payables, prepayments, accruals, etc, thereby making it simple and easy to manage (Vermeulen and Haan, 2012). The other aspect is that the retirees are not interested into large investments as the mind set is that since there are retirement funds, therefore investors are interested into discounts and are interested in returns on the investments.


Due to increase in the people getting attracted towards the superannuation industry, due to the ease and monetary benefits, it is important that the people involved in the industry are aware of the norms and regulations that need to be followed. The literacy rate in Australia with regard to SMSF’s is not good; people are unaware of the laws that govern the superannuation industry. The risks involved in the SMSF’s are as follows (Smsf-westpac.com.au, 2016):1. People are illiterate because of which they end up not complying with the laws related to SMSF’s. This results into criminal activities and fraudulent transactions.2. Since the members are also the trustees they are responsible for its management, hence the liability of the SMSF is personal.3. In case there is a fraud or any other criminal activity in a SMSF, then neither of the members can claim any kind of scheme related to any compensation under APRA.4. The members are entitled to the profits of the SMSF as well as all the risks that are accrued by any member are shared and accrued by all the members.5. Inflation can also have adverse effects on SMSF, as people will not invest in case of inflation.6. Interest rates can also change with time and change in policies, which can create a great impact on the returns that, an investor gets on his investment.7. The structure of an SMSF is simple, but still internal changes due to external or internal environmental factors can have an adverse effect on the members, such as change in taxation laws.8. Diversification can increase the chances of a higher return, but as these are retirement funds, hence the investment is small and therefore the chances of diversification is very less, which in result does not provide with greater benefits.

It is therefore necessary that the relevant laws and regulations are made aware to the people so as to inform them of the risks and the benefits of setting up an SMSF. It is necessary to act in the best interest of the clients as per Section 961B, and also disclose accurate personal advice according to Section 961G. If in case the advice given to the client is dependent on an information which is not complete or the advisors are not sure about the information then the clients must be told about that too, in order to give them the first preference and work in their interest. It is also required under Section 946 A, that the clients are given a personal advice SOA as soon as possible, before the client acts on the advice of the person. In fact advice regarding the alternatives in case the client wants to change or switch the product must also be contained in the SOA as per Section 947 D (Asic.gov.au, 2015).

SMSF’s can be setup by applying online, just like a company is registered. It is a kind of a trust that is registered with the superannuation industry that requires a simple name of the SMSF that a person needs to set up. The fee is too low to set up a SMSF, and any person can easily set up his own SMSF. The requirement of setting up depend on the number of members, i.e. whether the members are a corporate Trustee, individual Trustees or a Single Member (Abbott, 2008).

In case of Individual trustee the fund has (Newnham, 2009):

  • It has four or less members.
  • Each member is a trustee.
  • No Member is an employee of another member, unless they're related.
  • No trustee is paid for their duties or services as a trustee.

In case of a corporate trustee:

  • It has four or less members.
  • Each member of the fund is a director of the company.
  • Each director of the corporate trustee is a member, unless they're related.
  • The corporate trustee or director is not paid for its services as a trustee.

There is not too much research data available on SMSF, however there are various Australian case studies with regard to SMSF. The case studies are as follows (Basu and Andrews, 2014):

The Swiss Chalet case: this is the most common case wherein the members were given access to a golf club, and the purpose of it was to provide the facilities to the members for their retirement. However the only purpose of the club failed, as the members had breached the purpose of the access provided to the club.

Montgomery Wools Case: this case involved whether the member was in non-compliance of the rules of SMSF. The ATT stated that the funds must comply with the sole purpose test and in order to determine that test the facts of each case would be examined, as the test is not subjective in nature and is to be examined objectively based on the facts of the case and not on the views/ opinion of the members.

Deputy Commissioner of Taxation (Superannuation) v Graham Family Superannuation: in this case the Federal Court of Australia held that the sole purpose test was breached by the member where the SMSF had rented a property for the retirement of the members but instead one of the member gave it to his son for his personal use without any payment of rent.


Pabian Park Pty Ltd Superannuation Benefits Fund and FCT: in order to make the compliance compulsory and the rules strict, the members must engage into activities such as winding up in case of non-compliance, tax penalties, rectification of contraventions with penalties imposed on those who had been in non-compliance of the rules. It was held that a proactive approach needs to be adopted by the members themselves in order to make the people follow with the compliances and make people aware of the risks and the consequences involved in non-compliance.

In Re The Trustee for the R Ali Superannuation Fund and FCT: in this case, which is also known as the Ali case, the court again emphasised on the need for a proactive role of the members and that the members must engage in practices for rectification of the contraventions and also make sure that there the records and the procedure is all documented in relation to all the transactions between all the parties.

SMSF’s are the currently most famous Australian investing instruments in the field of retirement schemes that provided the highest available options to the investors in the field of retirement funds which are easy to form and regulate. Due to its simple structure its demand is also high, even the fee that is levied is too less for setting it up so people focus on investing in SMSF’s more than any other investment schemes. Even the auditing is too easy with a simple balance sheet and a profit and loss statement which makes it more convenient and attractive to retirees. The trustees along with all other members hold a relationship of trust with the fund. Therefore it is the duty of the members to comply with the rules of SIS and work for the betterment and optimum benefit of the funds, as it is one of the most advantageous funds or investment option in case of a retirement scheme (Smith, 2011). It is therefore necessary that strict measures are taken in case of non-compliance and a proactive role is needed from the member’s side to ensure that the purpose of these funds remains intact.

References

Abbott, G. (2008). Self managed superannuation funds strategy guide. Sydney: CCH Australia.

Asic.gov.au. (2015). Advice on self-managed superannuation funds: Disclosure of costs | ASIC - Australian Securities and Investments Commission.

Basu, A. and Andrews, S. (2014). Asset Allocation Policy, Returns and Expenses of Superannuation Funds: Recent Evidence Based on Default Options. Australian Economic Review, 47(1), pp.63-77.

Centre for International Finance and Regulation, (2014). The size, cost and asset allocation of Australian self-managed superannuation funds. Research working paper series.

Coleman, A., Esho, N. and Wong, M. (2006). The impact of agency costs on the investment performance of Australian pension funds. Journal of Pension Economics and Finance, 5(03), pp.299-324.

Doris, M. (2013). Promising options, dead ends and the reform of Australian contract law. The Journal of Society of Legal Scholars, 34(1), pp.24-46.

Gamble, R., Du Plessis, J. and Neal, L. (2008). Principles of business law. Pyrmont, N.S.W.: Lawbook Co.

Gooley, J., Radan, P. and Vickovich, I. (2007). Principles of Australian contract law. Chatswood, NSW: LexisNexis Butterworths.

Newnham, M. (2009). Self-managed superannuation funds. Milton, Qld.: John Wiley & Sons Australia.

Nolan, D. (2013). Damage in the English Law of Negligence. Journal of European Tort Law, 4(3).

Smith, B. (2011). Self Managed Superannuation Fund Handbook. Hoboken: John Wiley & Sons.

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