Superannuation Salary Fraud

This is one of the most popular frauds used by dishonest Trustees of final salary Defined Benefit Funds.

The corporate Trustee and the Employer-Sponsor are two separate and supposedly “independent” legal entities (legal persons).

The Directors of the corporate Trustee have a legal obligation to ensure that the Trustee pays benefits when they fall due strictly in accordance with the Governing Rules of the Fund. The Employer-Sponsor in the case of a final salary Defined Benefit Fund has a legal obligation to ensure the solvency of the Employer-Sponsored Superannuation Fund and thus is required to make Employer Contributions on a periodic basis as recommended by the Fund’s Actuary.

Many long established final salary Defined Benefit Funds at various times have built up large Fund Surpluses which allow the Employer-Sponsor to enjoy extended “Contribution Holidays“.

If the Management of the Employer-Sponsor seeks to extend the “Contribution Holiday“, especially at times when the Employer-Sponsor may be in some financial difficulties, the the Superannuation Salary Fraud can come to the rescue.

The Trustee is a separate and supposedly “independent” legal entity to the Employer-Sponsor. Both have their own accountants and auditors.

However the Trustee is reliant on the Employer-Sponsor for the provision of “salary” information which is to be used by the Trustee or the Fund Administrator (an agent of the Trustee) to calculate the final salary Defined Benefit.

This provides an opportunity for the Employer-Sponsor two run “two sets of books” in relation to Employee salaries.

The Employees’ real salaries as reported to the Australian Tax Office by way of the Employees’ Payment Summaries (Group Certificates) are recorded in one set of books and a bogus “Superannuation Salary” is recorded in another set of books. The auditor of the Employer-Sponsor is only ever shown the first set of books which balances with the Employer’s audited accounts.

The Employer-Sponsor however provides the data in the second set of books to the Trustee of the Government Regulated Superannuation Fund.

The Trustee then accepts this salary information on a “no questions asked basis“.

This bogus “salary” information is then used to determine the members’ final salary Defined Benefit, causing a substantial loss that can run into the tens or hundreds of thousands of dollars for each Member.

If a Member questions the Trustee about the use of the much lower “Superannuation Salary“, the Trustee will just claim that their is nothing the Trustee can do, since that is the only “salary” information provided by the Employer.

However this is all pure bluff.

A Trustee of a Government Regulated Superannuation Fund has important legal obligations:

  • To act at all times in the best interests of the Members and Beneficiaries of the Fund, and
  • To act strictly in accordance with the Trust Deed Governing Rules of the Fund.

The Trustee should therefore use the “higher” salary amount, unless the Governing Rules empower the Trustee to make prescribed deductions from a Member’s “real” salary.

For example the Trust Deed and Rules will often contain an “exclusions list” where any “overtime payments” are to be excluded by the Trustee in determining the “final salary” for the determination of the final salary Defined Benefit.

However “Superannuation Salary”  will contain deductions that appear no where in the Governing Rules of the Fund.

If the Trustee uses “Superannuation Salary” to determine a final salary Defined Benefit, then the Trustee will commit a Breach of Trust.

The Trustee will also be unlawfully acting “under the dictation” of the HR Department of the Employer-Sponsor in contravention of Section 58 of the Superannuation Industry (Supervision) Act 1993 and Regulation 4.03 of the Superannuation Industry (Supervision) Regulations 1994.

What should a Trustee do if the Employer will only provide “Superannuation Salary” data to the Trustee?

A superannuation fund is a “trust“. A ‘trust” is not a company or a “legal person“. A “trust” is a creation of the courts and is a “set of equitable obligations between the Trustee and the Beneficiaries” (including Members) and as such the Courts have always had an inherent jurisdiction in the administration of “trusts” of any sort.

The set of equitable obligations are to be found in the Trust  Instrument and the general laws of trusts.

If a Trustee finds itself in a position where it might be forced to commit a Breach of Trust, the Trustee can at any time seek a “Direction” from the Supreme Court of the State in which the Trust was established as to how the Trustee should interpret the Trust Instrument or otherwise administer the Trust. If the Employer-Sponsor is providing bogus “salary” information to the Trustee, then the Trustee can seek an order from the Supreme Court to force the Employer-Sponsor to provide the correct salary information.

For example for a Trust established in:

  • the State of Victoria Section 54 of the Supreme Court (General Civil Procedure) Rules 2005
  • the State of NSW Section 63 of the Trustee Act 1925
  • the State of Queensland Section 96 of the Trusts Act 1973
  • the State of Western Australia Section 92 of the Trustees Act 1962
  • the State of South Australia Section 63 of the Trustee Act 1936
  • the ACT Section 63 of the Trustee Act 1925

In Tasmania and the Northern Territory the recourse to the Court under the general law remains.

If the Employer insists that the Trustee use “Superannuation Salary” to determine final salary Defined Benefits in Breach of Trust, then the Trustee should immediately seek a “Direction” from the Supreme Court instructing the Employer to provide the Trustee with the correct salary information as prescribed in the Governing Rules of the Fund.

A prudent Trustee would always seek a Direction from the Court in any circumstance that might possibly lead the Trustee into committing a Breach of Trust, even an inadvertent Breach of Trust.

However half the Directors on the Board of a corporate Trustee will be Employer-nominated Directors who are either senior executives or the appointees of those senior executives. So would these Directors seek an order from the Supreme Court against their own company?

It should be obvious as to why the Superannuation Salary Fraud is a very popular fraud to be employed by dishonest Trustees and those who engage them.

If your Trustee or Employer uses the term “Superannuation Salary“, then the alarm bells should be ringing.

Demand that you Trustee provide you with a Reconciliation Statement reconciling the amounts reported to the Australian Tax Office with the amount used to determine your “final average salary“, with deduction prescribed by the Governing Rules of the Fund clearly shown.

A typical arrangement to implement Superannuation Salary Fraud is shown in the following diagram.

The Principal Employer will induce the Breach of Trust by providing bogus “salary” information to the Fund Administrator who acts as an agent for the Trustee. Both the Trustee and the Fund Administrator turn a “blind eye” to the bogus “salary” information and then proceeds to release substantially reduced benefit payments in Breach of Trust.

When queries by the Members the Trustee and the Fund Administrator just claim there is nothing they can do and the Member should direct his or her complaints to the Employer.

If a third party induces a Trustee (and the Trustee’s agents) to commit a Breach of Trust, then the Law treats that party as a “knowing inducer” {Fyler v Flyer (1841) 3 Beav 550; 49 ER 216; Alleyne v Darcy (1854) 4 I Ch R 199; Eaves v Hickson (1861) 30 Beav  136; 54 ER 840; Midgley v Midgley (1893) 3 Ch 282;  Re Elders Trustee and Executor Company Limited v EG Reeves Pty Limited [1987] FCA 332; Farah Constructions v Say-Dee (2007) 230 CLR 89, 159 [2007] HCA 22 at [162](Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ)}

Knowing Inducement” is a form of accessorial liability that is generally termed the second limb of Barnes v Addy.

If the Employer knowingly induces an innocent Breach of Trust the Employer is liable for the Breach ahead of the innocent Trustee. Where the Trustee is induced to commit a dishonest Breach of Trust by the Employer, the Trustee and the Employer are jointly and severally liable {Refer to Harum “The Stranger as a Constructive Trustee” 102 L.Q.R 114 at 144n}.

It is immaterial that the Employer’s object in inducing the Trustee was something other than to obtain some benefit for the Employer; the Employer’s motive is irrelevant to the question of liability { Eaves V Hickson (1861) 30 Beav. 136; 54 ER 840; Midgley v Midgley [1893] 3 Ch 282}

Refer Gurr, Alison — “Accessory Liability and Contribution, Release and Apportionment” [2010] MelbULawRw 16; (2010) 34(2) Melbourne University Law Review 481


If a third party attempts to induce a Breach of Trust, the Trustee can at any time seek the assistance of the Supreme Court {In Victoria under Order 54.02 of the Supreme Court (Civil Procedure Rules) 2005}  to protect the Trustee and its agents from a committing a Breach of Trust and thereby being exposed to a subsequent Breach of Trust action by the beneficiaries.

Those who induce or assist a Trustee in the commission of a Breach of Trust are equally and severely liable as the Trustee for the Breach of Trust.

Join Australian Guardians to find out how you can determine how large your claim for a Breach of Trust might be.

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